Options Provide Extra Insurance

While most options traders take positions to generate income, options can also be used for insurance simply by purchasing put options that are tied to stocks you already own in your portfolio.

Imagine you are holding Apple (AAPL), which is trading for around $155, for long-term gains but it suddenly takes a turn for the worst and drops to $125 (as we saw recently when it announced spectacular earnings and conservative forward guidance).

If you had purchased the AAPL April 155 Put options, exercising those options would allow you to sell your AAPL shares valued only at $125 for $155. Thus you have saved yourself a $30-per-share loss.

Now, of course, you have to pay a premium for options, as well as commission fees, but most of the time, those minimal fees are overshadowed by the potential loss you saved.

There are a myriad of ways to invest with options to generate income, as well as protect your assets, but the one rule that I hold fast to is ensuring that I never pay more than $3 for an option.

Plus, I don't like to hold options trades for more than three weeks because, as we know all too well, this market moves quickly. Options let you move with lightning speed to catch the money or hold them for longer-term gains if the market is in a lull.

So while options mean choice, they don't necessarily mean chance. If anything, incorporating options into your investing strategies will increase the likelihood that your portfolio will profit--regardless of what the market throws at you.

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