Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Investing Option You Shouldn't Go Without

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Millions of investors never bother to take their investing strategies beyond owning stocks and mutual funds. Although that simple method is enough for many to reach their financial goals, using it will make you miss out on a tool that can not only enhance your profits but also help you control the risk level in your investment portfolio.

The key tool is the stock option. Options have gotten a bad name over the years, thanks to some questionable practices in the boardrooms of some of the top companies in the nation. But many investors misunderstand just how useful options can be not only for letting you get more bang for your buck but also by helping you protect your stocks from unexpected losses.

Throughout the week, I'll be taking a close look at options and the strategies you can use with them. First, though, let's take a look at why many investors avoid options and get some of the basics under our belts.

Why everyone hates options
Options have a bad reputation because they're inevitably wrapped up in the larger story of executive compensation. Whenever you hear about CEOs who receive huge pay packages from their employers, odds are good that much of that money came from grants of stock options. Last year, Ford's (NYSE: F  ) Alan Mulally, Mel Karmazin of Sirius XM Radio (Nasdaq: SIRI  ) , and Starbucks (Nasdaq: SBUX  ) CEO Howard Schultz were among those called out for massive stock option grants in 2009 that had skyrocketed in value in the ensuing months.

As if that weren't enough, some companies faced allegations that they adjusted their options grants to increase profits for executives even further. The practice of options backdating involved companies resetting options grants to reduce the price that executives would eventually have to pay for shares. In the scandal, companies as diverse as Apple (Nasdaq: AAPL  ) , Home Depot (NYSE: HD  ) , and KB Home (NYSE: KBH  ) faced questions about whether their executive stock options were proper. Former Brocade (Nasdaq: BRCD  ) CEO Greg Reyes received an 18-month jail sentence after a court found him guilty of charges arising from options backdating.

Conversely, the other way that investors see options is as a way to make high-risk bets on share movements. Options can rise and fall dramatically even with relatively small percentage moves on the underlying stock. That makes options a favored play for speculators.

The smarter way to use options
But options aren't inherently sinister, nor are they only useful for speculators. You can use them for a variety of ordinary, legitimate purposes, including the following:

Later in the week, we'll get into more detail about the ins and outs of the strategies behind these goals and how to put them to good use.

But for now, your key takeaway should be that options are only as risky as you make them. It's definitely true that options are risky and typically involve the potential loss of most or all of what you invest in them. But if you use options in moderation, you can minimize those risks while still putting you in the best position to profit if the markets move your way.

Keep your options open
So before you dismiss options as only a wealth-making opportunity for rich CEOs, take a closer look. Once you understand all the ways that ordinary investors like you can use options to your advantage, you'll realize that having a whole new set of investing tools can help you enhance your long-term returns without nearly as much risk as you might think.

To learn even more about options, be sure to check out our Options Center. You'll find a tutorial on options and much more.

Fool contributor Dan Caplinger loves the mathematical challenge of options. He doesn't own shares of the companies mentioned in this article. Home Depot is a Motley Fool Inside Value pick. Apple, Ford Motor, and Starbucks are Motley Fool Stock Advisor choices. The Fool has written puts on Apple. The Fool owns shares of Apple, Ford Motor, and Starbucks. Motley Fool Alpha owns shares of KB Home, which is a Motley Fool Big Short short-sale selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you all the best options.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1453788, ~/Articles/ArticleHandler.aspx, 5/29/2016 5:45:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 17,873.22 44.93 0.25%
S&P 500 2,099.06 8.96 0.43%
NASD 4,933.51 31.74 0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/27/2016 4:00 PM
AAPL $100.35 Down -0.06 -0.06%
Apple CAPS Rating: ****
BRCD $8.60 Up +0.02 +0.23%
Brocade Communicat… CAPS Rating: *****
F $13.45 Down -0.01 -0.07%
Ford CAPS Rating: ****
HD $133.94 Down -0.11 -0.08%
Home Depot CAPS Rating: ****
KBH $13.79 Up +0.15 +1.10%
KB Home CAPS Rating: **
SBUX $55.15 Down -0.14 -0.25%
Starbucks CAPS Rating: ****
SIRI $3.96 Down -0.02 -0.50%
Sirius XM Radio CAPS Rating: **