When faced with the possibility of catastrophic outcomes, some investors conclude options are inherently dangerous instruments and should be avoided altogether.
We believe this line of reasoning is far too simplistic. Used correctly, options can create just about any risk/return profile desirable. Options are simply a tool. It is not the options themselves that are risky; it is how they are used that matters.
There are lessons to be learned from the mistakes of others. It is an unfortunate truth that the investment landscape is littered with strategies that blew up spectacularly over the last few decades. Rather than discard these experiences entirely, we should seek to learn from them. We explore a few “common threads” or themes that emerge to learn from them in this paper.