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How a Conservative Investor Uses Options to Reduce Risk

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A look at options strategies that even the most conservative investors can use to lower risk and protect the value of long-term holdings.

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For many investors, options are seen as a speculative tool for short-term swing trades that may have a very high risk component. However, there are specific options strategies that have always been used by very conservative investors and institutions.

In this article, we'll discuss options strategies that even the most conservative investors can use to lower risk and protect the value of long-term holdings. These guidelines will illustrate some of the safest ways to use options without incurring high risk exposure.

Follow the 'Fundamentals' on Stock Selection

Perhaps the most important consideration for a conservative investor is to not change your selection criteria to accommodate options. Continue to select stocks that meet your long-term objectives. Do not be distracted into creating a strategy that will lead you to purchasing stocks that have a higher risk profile just so you can invest with options. Those traders who purchase a stock primarily for the options that are available on that stock are likely ignoring fundamentals. That approach is probably more speculative than the risk tolerance a conservative investor will allow.

Some options strategies are specifically designed for stocks that are, in the short-term, expected to stay relatively flat or temporarily drop in value. Other options strategies are designed to take advantage of short-term price volatility. These different approaches assist a conservative investor in making additional profits without selling the stocks held in their portfolio and without increasing risk.

Options Have No 'Fundamental' Aspects

Options are only contacts. They do not have Balance Sheets, Income Statements, P/E ratings, analyst opinions, etc. Options are derivatives which have value based upon the price movements of their underlying stock. Therefore, for the conservative investor, the stock's fundamentals are paramount.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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