Utilizing Options

Options provide useful tools to supplement long-term stock market investments.  We primarily use options to generate additional income, buy stocks at a discount from current prices, participate in the appreciation of a stock with lower costs/risks, and hedge against declines in an individual stock or the overall market.  Following is a summary of our use of options for each of these purposes.  Please contact us to discuss options investing in more detail.

1)Options for generating income- We sell out of the money covered calls or puts to produce a income stream that supplements income from fixed income investments.

2)Options to buy stocks at a discount- When we sell out of the money puts, we select stocks that would be attractive to own if the options are exercised.  If the options happen to be exercised, we are able to buy the stock at a discount to the price when the options trade was initiated.

3)Options as an alternative to stock purchases-  At times, we may feel that a stock is temporarily undervalued, but we may not wish to invest in a full purchase of the stock.  As an alternative, we use option spreads to invest in the stock at a lower cost, with less risk.

4)Options as a hedge against market declines-  At times of market declines, we may buy put options on individual stocks or equity indexes to hedge our exposure to the stock market.