How Options Can Help Your Portfolio

For some people, options trading conjures either fantasies of instant riches or nightmares of losing everything. But those are the visions of market-timing speculators, not long-term investors. For most investors with a long-term view, trading options is a way to protect individual stocks or an entire portfolio from a downturn. Moreover, used conservatively, options can generate cash in amounts that far exceed the average dividend. This guide is meant to walk you through some of the basics.

First, the nuts and bolts: An option is a contract that gives its holder the right either to buy shares at a fixed price (a call option) or to sell shares at a fixed price (a put option). The price at which you can either buy or sell the underlying shares is the strike price, and the price of the contract itself is the premium. You'll pay the premium if you purchase an option, or you'll pocket the premium if you sell a contract to someone else. An option contract represents 100 shares of the underlying stock, and the contract expires on a fixed date; the holder may exercise an option on or before that date. Listed premiums are multiplied by 100. For example, if the premium is listed at 50