The Value Investor’s Options Secret: Focus on Outcomes, Not Greeks

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed The Value Investor’s Options Secret: Focus on Outcomes, Not Greeks. Here’s an excerpt from the episode:

[Tobias] Right. So the two things that we consider are volatility, higher volatility, all else being equal will mean a greater option premium and a longer time period will also mean a greater option value. But we don’t worry too much about most of the other Greeks because what we’re really thinking about are the two binary outcomes of an option.

Either the underlying stock gets put to you, which is why all of the analysis that goes into the value investing aspect of it is important. We want to make sure that it’s a stock that we already want to own at this price or at the slightly improved price that we get with the option. Or the option expires, in which case we keep the premium.

But because these are cash secured and we have to put the cash up in order to generate the option premium, we want to make sure that we’re getting enough return on the cash that we’re putting up to justify putting the position on. And when those two conditions are met and only when those two conditions are met do we put the position on. What happens in the interim is less interesting and that’s where the option traders are more interested in the Greeks.

For us, we’re looking at those binary outcomes and that’s one of the advantages of approaching these positions from the perspective of a value investor. You’re less worried about what happens to the option in the interim. You’re more worried about what happens at the conclusion.

And if both outcomes are acceptable outcomes, then it’s good position.

[Tim] That’s so well said. It was funny. I was at the gym earlier today and I was talking with one of my good friends, Aaron.

We play pickleball together. He runs a successful pest extermination business out here in Arizona. He does well for himself.

But as for many people, investing and the compounding of the money is the hurdle. That’s a problem for a lot of people. They’re just not necessarily savvy or they’re scared.

They’re scared of the markets. Look, every valuation metric almost is at the highest levels in history in many respects. So one’s right to be semi-cautious on that.

But the problem is if you’re just waiting for that dip and that’s what he’s saying, well, do you get a feel for how the market’s going to be on the short term? It’s like, not really. You just kind of buy undervalued securities.