Many investors are scared of options, given their level of risk and the potential to lose your entire investment. But there are strategies that can help you make better use of options while reducing your risk.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at a safer way to use options by implementing spreads. Dan notes that options work well when investments move sharply in one direction, pointing to the value of put options on plunging stocks SodaStream (NASDAQ:SODA) and lululemon athletica (NASDAQ:LULU) as well as the value of call options on the SPDR Diamonds (NYSEMKT:DIA) and Vanguard Total Stock (NYSEMKT:VTI) in 2013. But Dan points out that in ordinary markets, spreads -- combining the purchase of an option with the sale of another -- can reduce your total loss exposure without giving up too much of your upside potential.