Why Larry Fink Is Wrong About Options
Jon "DRJ" Najarian | [email protected]
I respect Larry Fink and what he has built over at BlackRock. I am only posting the contra to what he said this morning on CNBC because he seemingly lashed out at options in the following response to Becky Quick:
"MOST PLAYERS IN THE MARKETS MAKE MONEY ON THE VELOCITY OF MONEY. AND SO THEY ARE TRYING TO TALK ABOUT QUICK TRADES, AND OPTIONS TRADES AND ALL THESE OTHER THINGS WHICH ALL STUDIES SHOW HAVE NEGATIVE OUTCOMES FOR MOST PEOPLE, AND YET WE PERPETUATE IDEAS LIKE THAT."
What I'd offer to refute what Mr Fink said is the following, gleaned from five independent studies performed by firms ranging from Ibboson, Duke University, Hewitt EnnisKnupp, University of Massachusetts and Russell Investments:
Standard Devation of a covered call on the S&P 500 is 11.2% vs 15.1% for the S&P 500 over past 20 years. In simple terms means less volatility in covered call (selling calls against asset) versus holding the asset without the covered write.
Annualized returns of covered writes versus S&P 500 over 20 years shows 9.7% for buy write vs 8.8% for S&P 500
Roughly the same is true for IWM (Russell 2000) buy write index vs buy and hold
Tracking returns from 2007 - 2011 an independent study found that a 2% out-of-money SPY collar returned over 22% while the long SPY experienced a loss of over 9%
The collar earned its superior returns with less than half the risk as measured by the standard deviation (8.4% for the collar versus 19.5% for SPY).
Options investors are more educated, affluent and strategic than those not using options