The other day, the family and I were at a burger joint here in Austin called Mighty Fine.
It’s a great place to eat. The food is delicious, the restaurant is clean, and they are open and transparent about how the food is prepared.
There’s even a glass window in front of the kitchen, so you can actually watch them making the food.
Usually, I love that…
This day, however, there was a guy slicing up an onion for onion rings.
About To Cry
Actually…“slicing” is too polite.
This guy was HACKING at the onion like his knife was a machete.
And the knife had to be as blunt as a spoon. It just was NOT going to cut easily through that onion.
On every cut the guy would push to make the knife slice through, and the onion would wobble and pitch under his hand.
His fingers were RIGHT THERE holding the onion.
After a few seconds, I was cringing. I just couldn’t watch anymore.
I was sure this was going to be a batch of pink onion rings.
It was like watching a squirrel try to run across a busy street.
You’re whole body goes tense, and you just don’t want to watch what’s going to happen next.
I do quite a bit of cooking at our house, so I have some experience with the situation this guy was in.
The solution to his problem is…a sharper knife.
It seems counter-intuitive, but it’s true.
A sharper knife seems more dangerous because it seems like he could cut himself more easily.
But a sharper knife would mean that he would use less force and use a more controlled slice.
He wouldn’t have to whack at the onion. He could just pick his place, slide the knife along with an easy smooth motion, and avoid the wobble.
The sharper knife is actually safer overall.
I know this cringing feeling pretty well.
It’s the same feeling I get when someone tells me they are investing in mutual funds, index funds, bond funds, or straight stocks.
I just don’t want to watch.
These investments are the same as using a blunt knife to slice an onion.
You have to put your “full force” behind the investment to make it work.
You end up risking so much of your savings on the investment that when the market wobbles…
…and rolls off the counter…
…there’s going to be BLOOD everywhere.
Like I said, I just can’t watch.
So if the solution to a dull knife is a sharp knife…
…and if those investments are the dull knives
…then what’s the sharp knife investment?
Yes, I am explicitly saying that options are SAFER than mutual funds, index funds, bond funds, and stocks…IF USED CORRECTLY!
If you grab that sharp knife and start hacking away at the onion, and putting your full force behind each slice, yeah, that’s going to be dangerous!
You’re probably going to cut something off.
But that’s not how you use a sharp knife.
To use a sharp knife, you place the blade precisely where you want to slice, and then you use only enough force to keep the blade moving smoothly through the onion.
It’s the same with options.
You don’t put all your savings into options. You use a barbell investment strategy.
Only a small portion of your savings, your “force”, goes into options.
The rest of your savings goes into actual safe investments, like FDIC-insured CDs, T-Bills, or just a straight bank account.
Then when the market wobbles, you can’t lose any more than the small portion that you’ve risked.
And you have the bulk of your money safe and ready to invest…
…while everyone else is dashing for the bandages to staunch the bleeding.
Same Game Better Tools
Often you can even use the same investment strategy.
If you’re buying stocks, you can just buy call options on those stocks instead.
The cost of the premium is like paying for insurance on your house. It costs a little, but if disaster strikes, you are protected.
And in the stock market “IF disaster strikes” is more like “WHEN disaster strikes”.
Same for index funds. Most have an ETF that is tracking the same investment index, and you can usually buy call options on those as well.
Of course, you could also try out Dividendium’s Options Trading Service.
That service is focused on looking for under priced options and waiting for a positive surprise to create a big payoff.
Don’t Cut Yourself
If you’re using a “blunt knife” for your investing, consider switching it out for the “sharp knife” of options investing.
If used correctly, options are safer overall than the alternatives.
And you won’t be in danger of lopping something off when the next market drop comes to shake the table.