Leveraging options is an excellent way to shift portfolios to manage risk. Option trading strategies can be used to generate additional revenue, hedge against an unexpected downturn, or possibly to speculate on stock prices the investor believes will go up. Covered calls that are written against the holdings of a portfolio can be used when an investor feels that stocks will either go down or remain stable. Eventually the call will either expire or the price of the stock will go up and the investor can exercise the call.
There are often times in portfolio planning when risk profiles can change. While there are many ways to reconfigure a portfolio, one of the more effective strategies is leveraging options in various forms to meet specific investment goals.
“Lots of industries have been using options for decades,” says Paul Taylor, chief investment officer for BMO Asset Management in Toronto. “How you leverage them depends on your level of sophistication and needs.”
In basic terms, a stock option is a contract between two parties in which a buyer has the right to buy (call) or sell (put) a stock at an agreed upon price (also know as a strike price) within a certain period of time. Each option contract represents 100 shares. To finish reading Calls and puts sound strategy for investing click here.
Investors can buy puts on long equity positions in order to appropriately hedge their risks. When doing this, the investor secures the right to sell the stock when it hits a certain price. Options are especially effective in particularly volatile stocks because they allow the investors to reduce risk.