Stock Options: The Profit Strategy Behind an Oft-Overlooked Investment Tool
November 23, 2010 at 05:00 AM EST
Stock options are a valuable tool for any investor who wants to increase income, maximize returns and better control risks in his or her stock portfolio. They can be used alone, in combination with other options, or paired with their underlying securities. Yet few investors make an effort to use - or even understand - options strategies, despite their benefits. If you're among this group of reluctant option traders, it's probably because you're a victim of what I call "The Options Myth," which goes something like this: "Options aren't for you. Only really sophisticated and experienced investors should consider options. With options, it's all or nothing; you can lose your entire investment. At least with a good stock you know it's not going to zero. If you're wrong, you've always got a chance for a comeback because you still own something!" This mantra is chanted to clients by literally thousands of financial professionals around the world - "advisors" who either don't understand options themselves or view them exclusively as ultra-high-risk. Some mainstream brokerage firms - Edward Jones , for example - even refuse to let their account holders trade them. But the truth is that options really can be for you - and they should be, whether you're a go-for-the-gold speculator, an average investor looking to hedge your portfolio against market pullbacks, or a retiree seeking to get a little extra cash flow from your dividend-paying shares.