There are a lot of ways that you can use options to leverage your current portfolio, or for a new investment all together. It is important to remember that, although options can be complex, they are able to be used in almost any risk environment, which can make them a great play to any portfolio.
Using Options in Your Current Portfolio
The most common way to use options in your current portfolio is to write what is known as a covered call. This is when you are currently long a position, and you write a call option on that asset in an attempt to generate income from the asset. The income you receive from this strategy is the option premium.
Many people employ this strategy when they have a short-term view of the asset that is neutral. They will write a call just above the price they think it will reach, and collect the premium. The only downside to this is if there is a major price movement and you are forced to sell your position.
You can also do what is known as an insurance put. This is designed to protect paper profits on a stock, without actually selling the stock. The idea is that this is preferable to selling shares because you could lose on future gains if the stock goes up.
You employ this strategy by purchasing a put below the price of the current asset (out of the money). You do this because an out of the money put is usually pretty cheap, but if the stock does move below the strike price, your put’s value will increase.
Adding in Options to Your Portfolio
If you want to add in options, you can do this in a variety of ways. Many accounts will let you trade stocks and options together in a single account. We show you the best online brokerages for trading options in our list of the best online brokerages. One of these is OptionsXpress, but there are others as well.
It is important that you do your homework before you get started trading real options. The great thing about OptionsXpress is that it has a virtual trade account, which allows you to use virtual money to place trades. The benefits of this are that it allows you to test out your options strategies before investing real money. That way, you can get used to how options work, without risking your actual portfolio.
A second great feature is the “All-in-One Trade Ticket”. As you get into more complex trades – such as spreads – you will want to place multiple trades at once. A common example is buying a call and put together, or two calls with different strike prices. Since there are actually two trades, it could get complex, but OptionsXpress makes it easy.
So, if you are looking for a way to supercharge your portfolio, look into adding options.
Readers, what are your thoughts on adding in options to your portfolio?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.