The Skinny on Options: Abstract Applications

Net Present Value

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In today’s Skinny, we borrow a classical technique from capital budgeting to use for our own purposes. Specifically, we take a look at Net Present Value (NPV), a method that is traditionally used for project evaluation. NPV effectively measures the incremental value that some course of action might yield, given the risk that is assumed with that action. Rather than trying to determine which building to buy or what machinery to acquire, we apply this concept to the investing landscape.

What we learn is that passive investing will always produce an expected NPV of zero over the long-term. In other words, by simply holding “the market”, we will earn a fair return on that investment, but we can never hope to outperform. However, by actively trading the market's mathematics and exploiting the exaggerated volatility that exists in the market, our expectation over time is for a positive NPV. Put another way, as tastytraders, we fully expect that over time, we will outperform.

The Skinny on Options: Abstract Applications More installments

See All »

Latest tastytrade Videos As of October 20

Most Shared From the last 30 days