The fundamental trader is an investor in businesses, their models, and their management. He/she looks at a business’s market capitalization, trends in revenues, growth prospects, dividends, profits, book value, and other business-related statistics. Because these positions are buying businesses, they are susceptible to market risk because they are always long businesses, never short. These investment decisions are based on business statistics and the stock price usually follows those statistics, so the successful fundamental trader will realize consistent gains.
From an options standpoint, there are several different strategies that the fundamental trader uses. The most popular is a put hedge. The manager buys a stock, then buys a put to hedge that investment. This is not a strategy you will find in this newsletter because the fundamental analysis needs to be so good that it not only must be correct, but must also outperform the hedge.
The strategies you will see in the Fundamental Trader newsletter are:
●Cash-Secured Puts: When an undervalued stock is identified, a put is sold at the price you would have purchased your stock anyway. This allows you to collect premium on the money you have held aside to purchase this stock even if the stock never reaches your target price. If your stock reaches your target price, the option is exercised, and you get the stock at the price you wanted.
●Covered Call: When you own a stock and want to sell it at a certain price, you sell a call at that price. This gives premium in exchange for the guarantee you will sell at that price. Again, this outperforms your typical stock purchase by the premium collected every month.
●Bullish Credit Vertical: This has the same effect as the Cash-Secured Put, except you purchase a put at your stop price. This strategy is ideal if there are earnings or a catalyst that introduces a measure of risk that you are not comfortable with, or your value price is far enough away from the current price that you are sure the option will not be exercised. This strategy also lowers the amount of capital required to do a trade, so you need to remain disciplined to keep the appropriate capital on the side for your trade.