Investment Vehicles Part 2: Daily Driver

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The daily driver is the most robust of the investment vehicles.

Typically this vehicle is extremely boring and not an attractive choice to most novice traders. Even though this vehicle is not the most exciting or fun way of investing, it is the type of vehicle that will create the passive income.

Passive meaning it will create income that you will not have to actively work for, therefore it can be used in the pursuit of other ventures including the building of a race car.

What are the Types of Daily Drivers?

Below are some examples of some of the financial tools that are considered daily drivers and their corresponding vehicle:

  • Savings Account (A Big Wheel)
  • Money Market Account (A bicycle)
  • Certificate of Deposit or CD (A mountain bike)
  • Mutual Funds (Public Bus)
  • Stocks (Sedan)

The daily drivers are designed to make you a living if something were to happen to your earned income. They require significantly less maintenance than a race car, and are much more reliable. A daily driver is not designed to make you a fortune; they are designed to free up resources to allow the building of a race car.

If you missed the first part in this investment vehicle series please take the time to read this awesome article. If you already did that, then just continue on partner!

Choose Something Reliable and Proven to Perform

The daily driver we are going to discuss is the sedan. This is a basic car, it has 4 wheels, an engine, a body, but not much else. It is not designed to make you 500% next week; instead it will produce a small percentage of income with very minimal effort.

This type of income is crucial if building a race car is one of your goals in investing. Start small and work your way up.

What About Options?

Many people have asked me about options. What type of vehicle would an option, spread, condor and various other option combinations fall under. I consider all options a form of leverage, and when leverage is applied to a vehicle it is typically forced induction in the form of a turbo or a supercharger.

I believe this holds true in most examples because the option is for a given vehicle. Options can be purchased for everything from stocks to commodities to futures. Can you put a turbo on a race car (options on futures)? Of course, but it is very easy to break something if everything isn’t set just right.

If something does break, inevitably something always does, you must have the funds to fix or risk not racing in the next race (the next market move). This should not affect your ability to eat or to keep a roof over your head. These funds should be discretionary for lack of a better word. The result of adding leverage to any vehicle is going to be an increase in performance and drop in reliability of the vehicle.

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Do Credit Spreads Really Reduce Risk?

Many people will also argue that a spread is a safer than a naked option. Honestly one is just less restricted than the other, but both are using leverage. Here's a quick video tutorial on how credit spreads work.

[youtube]http://www.youtube.com/watch?v=r9xG4PaDmho[/youtube]

A spread is designed to limit your loss, so if the trade doesn’t work out then you are limited to lose a specific amount of money. A naked option is unlimited risk to the broker. Brokers prefer to have a hard number on the amount of risk they have in each account.

This is why a broker will let you trade spread before they will let you trade naked. A Naked Put has a limited risk because a stock can not fall below zero. A Naked Call is truly unlimited in the eyes of the broker.

Use Different Vehicles to Adjust Risk

All investing requires an evaluation of risk and reward. I believe that every type of leverage has a certain degree of risk associated with it. A naked option can move much more quickly than an option spread but has a higher level of risk. The higher level of risk makes the naked option much more profitable to an able user.

At the point at which you start adding modifications (options) to any vehicle, you are creating a type of race car. We could classify all the different types of trades and position combination just like there are different classification and requirements for racing.

Guest Post by John Pierce

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.