| Most people think that investing in the stock market is | | | | index that relates to your portfolio. Many times this will |
| incredibly risky. After all, they think, if you make just | | | | be the S&P 500 index or something similar. |
| one or two bad moves then suddenly you can see a | | | | If the market does decline and therefore drags your |
| lifetime of very careful savings evaporate in the blink | | | | portfolio down with it, you will make a profit on the put |
| of an eye. | | | | that hopefully will offset any losses. If, on the other |
| Fortunately there are steps you can take to make | | | | hand, the stock market increases, then that very |
| sure this sort of thing doesn't happen and that's what I | | | | increase should more than offset the minimal price you |
| want talk about in this article today. I'm going to talk | | | | paid for the put option. I call this a win-win situation! |
| about how you can use options to hedge against the | | | | Of course, if you think that the market is going to |
| possibility of losing most of your money and stock | | | | decrease then your other option is to simply sell all |
| market. | | | | your stocks right now and wait for the market to drop |
| One popular way to protect yourself is to use options | | | | and then by back in. Of course this may be unrealistic |
| on market indexes to hedge against your portfolio's | | | | depending on the size of your portfolio because the |
| market risk. As I'm sure you know, stocks have two | | | | transaction costs for selling all that stock, and then |
| main types of risks involved with owning them; their | | | | buying it all back, may be prohibitively expensive even |
| own company risk and the market risk. | | | | if you use a cheap online stockbroker. |
| By company risk, I mean things that affect the specific | | | | Another risk to this strategy is market correlation. Most |
| company such as quarterly earnings, lawsuits against | | | | stocks are correlated to the market, which I alluded to |
| the company, upcoming patents, research and | | | | earlier and which means that if the broad market |
| development, etc. | | | | drops your stocks will drop to. But there are instances |
| By market risk I mean things that affect the overall | | | | where certain stocks aren't tightly correlated to the |
| market as a whole that will always affect individual | | | | market and if your portfolio is made up of stocks such |
| stocks no matter what industry they are in to some | | | | as these, then hedging using a put on the S&P |
| degree or another. For instance, when there is a | | | | 500 may not be the best strategy for you to engage |
| recession in the broader economy, it will hurt your | | | | in. |
| specific stocks, yet that recession may not affect the | | | | I hope this short article will help enlighten you a little bit |
| specific company itself. | | | | towards the benefits of investing with stock options |
| This particular strategy is good to use when you're not | | | | and hopefully in taking away some of the fear that |
| quite sure what the future market has in store. If you | | | | many investors feel when you so much as mention |
| don't know what the market has in store, then | | | | stock options. As with all investing opportunities, be |
| chances are that you don't know what the market risk | | | | sure to do your own homework before engaging in |
| to your own portfolio will be. In this circumstance you | | | | any strategies that may affect your portfolio returns. |
| would buy a put option on the most standard market | | | | |