Seeking Alpha

Thomsett's  Instablog

Thomsett
Send Message
Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
My company:
Michael C. Thomsett, author
My blog:
Thomsett Options
My book:
Getting Started in Stock Investing and Trading
  • Options As Conservative Strategic Tools 0 comments
    Feb 1, 2013 9:48 AM
    Can options work in a conservative way and actually help protect your portfolio?

    Most conservative investors traditionally have seen options as high-risk, speculative plays on short-term market swings. This is appropriate when you think of the many high-risk option strategies available. But increasingly, options are going mainstream as even the most risk-averse investors are finding ways to use option contracts to lower risks and protect their long stock positions.

    Three basic ways this is accomplished:

    1. Covered call writing. The covered call has two parts: Ownership of 100 shares of stock, offset by the sale of a call. When you sell, you grant someone else the right (but not the obligation) to buy your 100 shares at a fixed strike price, on or before a specific expiration date. You keep the cash you get for selling the call and all dividends you earn before exercise. If that doesn't happen, you still own your shares and after expiration of the short call, you can repeat the strategy. Two important qualifications: You must be willing to give up your 100 shares at the strike price (which should be higher than your basis in the stock), and you must also be willing to give up any appreciation above the strike if and when the stock's price takes off.

    2. Long puts for insurance. Let's say you bought stock you want to keep for the long haul and its value has soared very high and very quickly. You expect some degree of reversal because prices went up so quickly. So you're tempted to sell and take profits while you have them; but you still want to hold onto the stock for the long term. The alternative is to buy one put for each 100 shares. If the stock price declines, the put's intrinsic value will rise for each point you lose in the stock. This eliminates your downside risk for the period the put is alive, and the premium you pay for the put is the cost of protection, the insurance you gain with this strategy.

    3. Long LEAPS calls for contingent purchase. A LEAPS is a long-term option. The acronym stands for Long-term equity anticipation securities, a fancy name for options that may exist as far out as 30 months. So if you like a company's stock today but you can't afford to buy 100 shares, investing in a LEAPS call is one choice. This creates a type of "contingent purchase." You control 100 shares but your risk is limited to the cost of the LEAPS call. You can exercise it any time you want before expiration. So months later when you have the cash but the stock's price has risen well above the strike, exercising the call fixes your price no matter how high it has moved since then, for much less money than it would have cost to buy shares.

    There are many additional ways options can be used to conservatively protect portfolio positions and also to increase cash profits. The point is, options are not only for the high-risk strategy and they no longer are used only by speculators. Investors can also put options to work in conservative strategies.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

Back To Thomsett's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.