With stock markets having set multiyear highs just over a week ago, some anxious investors want to pursue ways to help them lock in their gains from the past three years. For many, certain strategies using options would potentially let them protect their gains while still giving them some upside exposure.
Unfortunately, many stocks traditionally haven't worked well with options strategies unless you have tens of thousands of dollars invested in them. A recently announced plan to create some innovative new options products could open the door to mainstream investors being able to use these strategies much more effectively.
Later in the article, I'll talk about this new innovation. But first, let's take a quick look at the general options strategies currently available and why they don't always work as well as they should.
Buying crash insurance
Many people associate options with highly risky strategies that resemble playing the lottery. Certainly, some options strategies give you the chance to use leverage to turn small investments into huge windfalls -- but usually with a much larger chance of losing every penny you invest.
By contrast, some protective options strategies let you reduce the total risk of your portfolio. If you buy a put option on shares you already own, for instance, you'll have the right to sell your shares at the option's specified strike price anytime between now and when the option expires. If the share price falls below that strike price, then you can exercise your option and effectively avoid any further loss. And if the stock goes up, then you simply let the option expire, losing what you paid for the option but pocketing the extra gain from your shares.
The problem, though, is that each options contract covers a 100-share position. That works fine when you own some multiple of 100 shares in your account -- you simply buy one put option for every 100 shares you own. But for Apple
To address that problem, options exchanges -- including NYSE Euronext's
The move could even have an impact beyond traditional stocks. As a Bloomberg report on the proposal pointed out, the SPDR Gold Shares
Preliminary drafts of the proposal would have mini-options available only for stocks with minimum prices of around $100 to $150 per share. Obviously, the high-profile nature of Apple, Google, and Priceline make them ideal candidates from the exchanges' standpoint, as they're only interested in products that investors will actually use.
Even if they eventually come in smaller packages, buying put options can still be expensive. But as a way to avoid losses from short-term moves, put options can be useful in certain situations. As they become more readily available to investors, you should consider taking a closer look at whether put options could be helpful in your portfolio.
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