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Page 46

BY ADRIAN KEMPTON-CUMBER

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Covered Call Writing

How Pension Funds Boost Growth I think options tend to scare a lot of investors, probably in the main because they don't understand them. Really they're not that complicated and there's something that options can do that is a very neat trick that pension funds use to increase their income – and we can do it too. After any market crash you'll hear all sorts of nonsense about how shorting caused it. Utter rubbish, of course. You can't make money shorting something which hasn't already been over-priced by aggressive buying, usually when the public get involved and jump on the bandwagon after the last genuine price rally. This is then followed by the familiar spike up which provides liquidity for the rest of us to cash out. Thanks to this final frenzy of greed we make a little bit extra profit, which suits me fine. It's the natural order of things: a fool and his money should be quickly parted. As we know, pensions funds must stay largely invested and not in cash too much or too often. Given each pension fund is limited as to what instruments it can invest in (UK Blue Chip for example), then if the market goes down they are reluctant passengers for sure, but they can't cash out completely. The phrase "we're all in this together" applies for real in

pension funds. In turn this provides the chance for the rest of us to cash out of stocks in a bear market before the pension funds close their posi-

tions, which will tank the price. This time it's not thanks to the idiots, but because they have little choice but to be sitting ducks.

“A CALL OPTION GIVES THE BUYER THE RIGHT BUT NOT THE OBLIGATION TO BUY THE UNDERLYING SECURITY AT A GIVEN PRICE ON A GIVEN DATE. A PUT IS THE SAME BUT GIVES THE RIGHT TO SELL THE UNDERLYING SECURITY.”

Enter options. For readers who aren't quite familiar with options here's how they work in a nutshell. There are two types of options: CALLS and PUTS. A Call option gives the buyer the right but not the obligation to buy the underlying security at a given price on a given date. A Put is the same but gives the right to sell the underlying security. As you may have guessed there is a premium to buy such a right, and the person who is on the other side of the contract gets paid that premium when the contract is created. This works quite nicely for them as a vast majority of options expire either worthless (i.e. the underlying security can be bought/sold more cheaply on the open market), or are simply not exercised. Some option holders will choose not to exercise their rights under the option contract for

46 | ISSUE 17 – AUGUST 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk

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