Explore Your Options by Tom Gentile
I have a longer-term portfolio of stocks that Iíd like to protect against any repeat performances of 2008 into March 2009. How can this be done with options?
Thatís a good question, but the answer doesnít lend itself to one size fits all. Depending on how many stocks are in your portfolio, call and put liquidity within those individual issues, your risk and reward preferences, and how much time youíre willing to allocate to managing positions will lead to very different courses of action in the option market.
An investor with long-term holdings in a handful of stocks with liquidly traded options might consider actively managing each situation separately from his or her other holdings. The time required to maintain a portfolio hedged with options shouldnít be prohibitive, even if that person works full time and canít commit to monitoring the market throughout the day.
In this situation, many investors look at establishing either buy-writes or collars on their stocks. The former, the most popular strategy with investors, takes in premium by selling a call one-to-one against the amount of shares held in the underlying and has the effect of reducing the cost basis of the position.