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How a Conservative Investor Uses Options to Reduce Risk


Here, some options strategies that even the most conservative investors can use to lower risk and protect the value of long-term holdings.

Using Puts for Insurance:

You might use this strategy with a stock that has increased in value rapidly, but which you expect may suffer a reversal in the short-term. Because of its fundamentals, you prefer to keep the stock for the long-term and do not want to sell your position just to reap current profits.

A Put will go up in value if the underlying stock goes down in value. If purchase Put contracts against shares that you own and the stock's price goes down, you can sell the Put at a higher price than you paid for it and reap a profit while the stock's price is declining. If the stock's price does not decrease over the term of the Put contract, the premium that you paid for the option is insurance, i.e., the cost of protection for that period.

Using LEAPS® for a Future Purchase at a Price That You Select:

LEAPS are option contracts that last for as long as 30 months. Use this type of option when you have a company with fundamentals that meet your investment criteria, but you want to wait for a period of time before making the purchase. Perhaps you don't have the current liquidity to make a purchase now. Or, maybe you just want to wait for a while and time your purchase of the stock at a more desirable price.

However, you are concerned about waiting too long to make the purchase. You think that the company's stock price may increase to a level that could be higher than would give you an acceptable return on investment.

If you purchase a LEAPS® Call option, you can purchase the stock months later at the strike price of your option - even if the stock is then selling at a higher price. If you were wrong about the expected increase in the stock's price and the stock price never goes above the option's strike price, the premium that you paid for the option is lost. But, the loss is probably significantly less than what you would have incurred if you had purchased the stock and then sold it at a loss.

Cash Secured Put:

Let's say that you have researched a company that meets your investment criteria for a mid-term to long-term investment. However, you expect that in the short-term the stock's price may drop. With this approach, you hold sufficient funds in cash to make the purchase of the stock at a specific price that you determine. If the stock drops down to your predetermined price, your Put option will have the stock 'put' to you at the price that you selected.


There are a wide variety of Options strategies. These Options trades are not for only short-term speculators. A number of options strategies fulfill the objectives of a Conservative investor. There are specific options strategies that can be used to protect the value of a portfolio. There are also ways to use Options that can increase a portfolio's value and income without increasing risk.

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No positions in stocks mentioned.
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