Options to Leverage and Manage Your Portfolio

Most investors and traders start out with two assumptions. First, their stock market activities are going to involve buying and selling shares of stock (either directly or through a mutual fund). Second, the sequence of trades is buy-hold-sell.

Both of these assumptions can be challenged and the stock market universe expanded by also taking a look at the option as an alternative. This may work purely for speculation or as a highly conservative strategy, and can even be used to protect your portfolio from loss.

The advantage in using options is that they can be designed to suit any risk level and any market strategy.
Most people have heard that options are complicated and high-risk, but that is only true for some advanced strategies.

Key Point

Options are quite fl exible so they can be designed to suit any situation and any risk tolerance level.

The two beginning assumptions about entering the market can be expanded to the point of view that there is much more than simply buying and selling stock, and options open up a world of new possibilities. Options also provide a means for going short without the high risks of selling stock short. In a short position, the sequence of trades is sell-hold-buy (or with options, it is also possible to have the sequence sell-hold-expire). Using options is not always a high-risk approach; it can be designed to be exceptionally conservative.
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2016. Content published with author's permission.

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