Value Investing with Options

Value investing with options - or using options to acquire superior businesses at an extremely low cost basis - is, for me, the best and smartest way to invest.

That's because it solves the primary problems and drawbacks of what I consider to be the three most sound investing approaches out there - value investing, dividend growth investing, and high yield current income investing.

In this article, I'm going to explain how options can solve the primary challenge of value investing.

The Problem with Value Investing

If you can see through all the value traps Mr. Market sets, and you have the rare patience to wait for years for a truly great business to stumble so you can get its shares seriously cheap - think McDonald's back in 2003 and Starbucks in 2008-2009 - you get it all - capital appreciation, income growth, and the long term safety of a low cost basis on your investments.

But the truth is those opportunities are rare.

There are basically only two times when you can get a great business at a truly exceptional price - when the "great" company in question is having serious problems, or when the entire market is crashing.

From personal experience, I can tell you this - it takes a lot of guts to buy in either one of those situations.

That's why so many would-be value investors resort to becoming value traders.

Value Investing vs. Value Trading

Value investors like Warren Buffett find the value in the quality of the business itself - and not paying too high of a price for it.

There's a big difference between a "great price" and a "not too high of a price" when it comes to owning a great business.

Because great business don't go on sale unless something goes terribly wrong, "value traders" look elsewhere for their "value" - which they identify as the difference between what they think an asset (of any quality) is worth compared to its current open market price.

The idea is that at some price, even the worst business or asset is a bargain.

If you time it right, and if Mr. Market gets ahead of himself, and you're knowledgeable enough about an industry or situation, you can find short term opportunities to turn some quick profits.

But don't kid yourself - it's a lot of work, and in the event that you're wrong and Mr. Market is the one who has it right, the results can be costly.

And how fun is it owning crappy businesses anyway? Even at bargain prices?

Just what you need at the end of the day - ownership in a struggling, debt-laden enterprise to lull you to sleep.

The Value Investor's Dream

The value investor's dream is to acquire exceptional businesses at exceptional prices.

Duh.

But it's not a dream that comes true very often.

So the choice often becomes -

A.) Acquire exceptional businesses at (hopefully) reasonable prices . . .

OR

B.) Temporarily own crappy businesses at (hopefully) oversold prices.

Unless . . .

You can find some way to stack the deck in your favor.

Some alternative that will actually allow you to synthetically replicate the process of acquiring those exceptional businesses at exceptional prices.

Synthetically replicate?

Sounds like bioengineering was involved, doesn't it?

Basically, I use customized, structurally advantaged option strategies to get the job done.

If you're a value investor at heart, then you know the power of a low cost basis. And you no doubt also understand the power of a quality asset.

And if you want to learn how to use options to bridge the gap between quality and price, I invite you to join The Leveraged Investing Club the next time enrollment for the program opens.

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