For long-term investors, the past 15 months have been harder than anything we've faced before. No matter how much you may believe the 50% haircut that the stock market has suffered represents a good time to buy stocks, that doesn't change the fact that you've likely seen big losses on all the money you've put into the market since late 2007. And with all the dire economic news we've seen lately, there's no end in sight to those losses.

Given the conflict between your long-term beliefs and the short-term reality of the bear market, you may be struggling with whether you should continue to put more of your hard-earned money into stocks. If you're looking for a reasonable middle ground that will let you reap some profits from an eventual recovery while not putting all your money at risk, there's one choice you may find especially attractive.

The magic of options
Many stock investors look at options as an unnecessarily complicated investment vehicle that all too often leads to total losses. Frequently seen as a way to magnify profits and gain leverage, some options strategies are simply gambles on short-term stock movements -- something that investors with a longer time horizon have no interest in pursuing.

Nowadays, though, options are becoming commonplace. Most brokers let you buy options in your regular trading account. And used properly, options can help you make money in volatile markets without risking nearly as much as you would buying stock outright. By picking the right strategy, you can reduce your risk while keeping open the possibility of huge profits if the market moves the way you expect it to over time.

A bullish strategy
One strategy that's especially appealing right now involves using so-called out-of-the-money call options. Calls give you the right to purchase shares at a certain price (the strike price); the out-of-the-money aspect means that the price you'd pay with those options is far greater than what you could buy the shares for on the open market.

Because these options have a high strike price, they don't have much value right now -- you'd never exercise such an option since you could just pay the lower current share price to buy the stock. Take a look at the current prices to purchase out-of-the-money options on some popular companies:


Current Price

Call Option

Option Price



July 125


Research In Motion(NASDAQ:RIMM)


March 45




January 2010 70


Johnson & Johnson(NYSE:JNJ)


October 65




July 65


Intuitive Surgical(NASDAQ:ISRG)


April 160




January 2010 570


Source: CBOE. Closing prices as of Feb. 23 2009

While buying 100 shares of these stocks would cost you thousands or even tens of thousands of dollars, you can buy a call option for 100 shares for less than $100 in many instances.

Low risk, big reward
Now granted, a lot of the time, you're going to lose your entire investment with an out-of-the-money call option because it will expire without your exercising it. Not only does the stock have to rise significantly from its current levels, but it has to do so within the time frame you select. The longer the time period you choose, the more you'll have to pay for the option -- which increases the amount you could lose.

In addition, the way many of these options are priced, you could see the stock rise substantially without seeing much if any profit on your option position. In contrast, if you simply buy the stock, you start making money the moment the share prices move up.

The trade-off, though, is that options limit your risk. If stocks continue to fall, you can't lose any more than the small amount that you paid for the option. Limiting your losses to a single point or even less could be worth giving up some of the potential upside -- and you still have the chance to make money if things go extremely well.

You have the option
You can invest quite well without ever using options. But in circumstances like a volatile market, options could be just what you're looking for.