When it comes to investing in volatile markets, especially one such as the metals and mining space, limiting risk exposure is many times more critical than the potential for outsized gains. Fortunately for investors, there are ways to participate in potential major upswings without having to allocate a large portion of their portfolio. This can be done by strategically buying options contracts as opposed to owning the underlying asset outright. While options are generally more focused on in the equity markets, investors of commodities and currencies can also utilize these financial instruments as well.
Lindsay Hall, Chief Market Strategist of Rutsen Meier Belmont (RMB) Group, has been a major proponent of educating and informing investors on the topic of incorporating a more comprehensive strategy when managing their portfolios. Hall has been active in just about every financial market ranging from stocks, to Forex, to options on futures, commodities and so on. Equities.com had the opportunity to speak with Lindsay Hall to discuss how incorporating an options strategy could help investors achieve their goals.
Hall will be joining a roster of notable and influential speakers and attendees at the upcoming San Francisco Hard Assets Investment Conference on November 16-17, 2012 at The San Francisco Marriott Marquis.
EQ: Your experience and expertise in the financial industry covers a wide range of investment types. Can you tell us more about your background?
Hall: I started off as a stockbroker for a few years with a couple big name firms. I then went into the spot Forex side, teaching people how to trade for themselves in the currency market. Now I have moved into the market of options on futures and commodities with the RMB Group which was founded in 1984.
Our firm offers services on the retail side for individuals who want to be involved and want to have the final say in what they trade in and out of and we also have a managed accounts division for those who prefer. Options on futures and commodities provide a very unique aspect of the marketplace because they’re something that on a broad spectrum, most people don’t utilize. In addition, they provide an opportunity to take advantage of the commodities realm without having to spend what one would spend on commodities outright. People don’t necessarily think about options on futures and options on commodities as they do with other types of asset classes. Let’s just say that for the most part it’s not the first thing that comes to mind when someone mentions financial markets. It’s definitely an area that needs more education in the market place and I think it’s a great place for people to be during times of volatility and uncertainty, which seems the case today. Options provide investors with lesser capital exposure and for most of our strategies with limited risk as well. At the same time they provide the opportunity to take part in the true play of an entity, whether that’s trading an option on the Dow Jones Industrial Average, crude oil, or whatever else the play may be.
At the RMB Group, we want to make sure that people understand what they’re looking at when they’re considering what trades and investments to make as well as the strategy behind them. We are a full service firm brokerage firm, so for any trade that we would do for an investor; we hold their hand through everything. So if there’s something we like, we’ll actually call them to ask if they’d like to participate. Likewise, they can contact us if there’s something that they want to trade. We’re a little old school in that we believe that there should be a relationship between the individual and their broker and we strive to achieve that in addition to educating as much as possible along the way.
EQ: For most investors, options are considered more sophisticated investment vehicles and in many cases, that may intimidate more people from using them. What are some of the advantages and risks of utilizing options that investors should know about?
Hall: A lot of people get scared of options because they either may have had a bad experience with them in the past, potentially because of lack of guidance, or they might simply not understand them. I know when I first became a stockbroker, I know a lot of fellow brokers steered their clients away from options. There are a lot of people out there that have been taught to be wary of options either because of fear of the unknown or misinformation. To be clear, there are definitely ways to use options to your detriment because you can risk a lot of money with certain strategies, but those strategies are not the way we direct our clients. For the most part we favor buying options which provides you with a limited risk scenario.
The most you have at risk at any given moment is what you paid on that option premium. So you know outright what your risk is from the start. Usually, that amount is going to be significantly lesser than what you would have to put out in terms of cash on the table for a contract in the futures market itself, or the equivalent in the market through an ETF or specific stock. You’d have to pay a lot more on the stock side of things than you would if you entered the options side of things.
For instance, with crude oil sitting at about $85, it would cost you $85,000 for one full contract value futures contract, but we can get you into an options spread for around $3,000. So you could play the same potential move on crude oil, but with less exposure. That would be the most you’d have on the table at risk at any one moment in time. You can build in years’ worth of opportunity in some of these contracts too. So as an investor, you have to ask yourself where you want your capital and if you really want to have it all allocated into one area based on the hope that it works out. With options, you wouldn’t have to put all your capital into one area. Utilizing options in the futures market is just like utilizing options in the stock market. Basically, you’re trying to buy something that you wouldn’t want to put all your capital in outright. It allows you to use a little bit of money and take on a little bit of risk to be able to take part in the true play of the actual asset itself. You don’t miss the move and you use less capital for your speculation. In addition, it lets you hold onto more of the cash that you have so that you still have access to it if and when you need it. That’s a very big piece, especially when you talk about the volatility of these markets today. So to be able to get the pure play of the underlying entity—whether its crude oil, gold, sugar, corn or whatever the case may be—by utilizing less capital and limiting risk, you still have the ability to seek the percentage gain that you seek, but with a smart money perspective.
EQ: Another benefit of using options is to be able to hedge your other positions. How can investors do that?
Hall: Here’s a great example that we’re looking at now and moving forward potentially for years. The bond market is a focus here. If you look at how people flee to bonds as a flight to safety, with interest rates where they sit right now, there’s not a lot of opportunity for rates to continue to go lower. Of course, the flip side is when interest rates do rise, those prices will come down and if you’re in bonds, you could be in trouble. We have a campaign in play now that offers a strategy to potentially assist in countering this kind of exposure on the Fixed Income side of the house. It’s important to look at things from a big picture perspective and analyze your portfolio outright. Figure out where you can keep some cash safe and take a little exposure here and there for growth potential, but also for protection. Another example with regard to hedging potential is your 401k. If for instance, you have a 401k and you’re heavily invested in the stock market, and you feel like the market is going to fail, you could look at options to short the Dow or use a little bit of your money to hedge your investments. There are ways to structure things to help people take advantage of the big picture perspective and how they allocate their investments.
EQ: Speaking of interest rates, what are your thoughts on the dollar’s prospects as a safety play for investors? How does that affect your sentiment towards precious metals like gold?
Hall: I don’t see the dollar as a flight to safety, but we’re working with a couple of unique situations here. Gold has been bullish for a really long time, and it’s taken a nice little retracement right now. So I do like gold’s opportunity here to retrace and push it up higher again. Of course, gold and the U.S. dollar have an inverse relationship. It’s not always going to be constant, but typically speaking; if the dollar is weaker then gold is higher and vice versa. Should interest rates start to rise, the dollar’s value should technically also start to strengthen. But when you add into the mix that we still have QE3 to Infinity and beyond, then you have this massive money supply that is growing steadily, which continues to weaken the dollar. So the dollar is in the mix in a lot of different ways. The question, ultimately, is what it will do, and if you look at it over time, it’s lost about 80 percent of its value, so I don’t think the dollar will be super strong. But it’s important to keep in mind that the dollar is going to be compared to other currencies as well, and these other nations globally speaking are also weaker. It ultimately becomes a question of who’s the weakest of the weak. It’s a very interesting dynamic. I will say that there’s one thing that I feel a little bit more solid about, and that’s the potential for the Japanese Yen to weaken. This is something that I will continue to keep an eye on for the next few years.
EQ: The upcoming San Francisco Hard Assets Conference will be a good platform for investors to get together with industry experts and companies operating in the space to share these thoughts and ideas. Can you tell us more about what investors can learn from these events?
Hall: he conference gives you a great perspective, especially if you’re interested in commodities and hard assets like metals. It’s a great opportunity for you to get exposure and education about what’s out there as an investor at different levels of the industry. So if you’re looking at gold, you might look at different ways to invest such as through stocks, junior mining companies, private placements outright, options plays, or gold funds to name a few. There are a lot of different ways to approach even just one hard line scenario. Even if you’re only interested in gold, there are still a lot of ways to look at how you can diversify your investment in that one entity. It’s a great way to get exposure to the industry and a good way to keep a pulse on the market to know what’s going on at the core of it. For example, I will be doing a workshop on black gold, which is crude oil. We’re going to talk about specific strategies that you can put to work in your portfolio right now.
EQ: You, along with Bryce Bradley of Euro Pacific, will be speaking on the pros and cons of junior mining companies in a session that is exclusively for women. Can you tell us more about ?
Hall: I believe Bryce will be looking at investments from the junior mining aspect, and I’ll hit it from an overall perspective of utilizing options to capitalize on the physical aspect of assets and also for hedging purposes as well. The key thing we’re addressing in that specific timeslot is the need, desire and opportunity for women to become more involved in investing, whether it is on a personal level or maybe even an institutional level. We feel that women involved in the financial realm can add immensely to their own well-being as well as generations to come. We’ve seen a growing number of women that have become interested and have become successful investors in their own right, but it’s important to continue to reach out to people and let them know that they can do it, how to do it, and how they can do it well. It’s a niche that hasn’t been invested in as much as it should, so this is a good opportunity to bring people into the fold that may not have had the chance to participate at this level in the past.
It’s interesting because if you look at the investment conferences that go on around the world, it’s still a place where you don’t hear from a lot of women in the industry. So being able to reach out to individuals that either want to jump into the field for themselves or that just really want to learn to invest but no one has taken the time to enable them to do it well, these are the pieces we want to bring to the table.
So my advice for attendees of the conference would be to learn as much as you can and ask as many questions as you can so that as an investor and an individual, you can sit down and look at what you have and where your cash is. You need to really dissect it and give it an analysis of where you might be overloaded and how to protect what you have. You need to keep some cash handy as well because liquidity never goes out of style.
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