Certainty in an Uncertain World

11/28/2011 12:01 am EST

Focus: OPTIONS

The global market turmoil has created a wave of unprecedented volatility and uncertainty that has left many investors scratching their heads and often not knowing what to do next. While the volatility in the markets can be extremely challenging, the opportunities are equally incredible. So how can an investor embrace the volatility and at the same time limit the risk and ultimately increase the wealth of their portfolio? It may seem like an impossible task, but it's not.

One trading tool that many investors are unaware of or intimidated by is the options market. The minute many investors hear the word options they conjure up ideas of complicated and highly risky vehicles that are meant only for the most sophisticated trader. All of those notions are more or less false.

Options are one of the best vehicles for traders to use in extremely volatile times, options can limit risk and also provide unlimited profit opportunities, the best of both worlds. Buying options allows the buyer the "right but not the obligation" to have ownership of the underlying equity, ETF, or commodity futures contract, while avoiding some of the expense and risk associated with those other instruments.

When an investor purchases a CALL option they are betting the particular commodity, equity, or ETF is going higher, if they purchase a PUT option, the view is that a particular market is going lower. By purchasing the option all of the risk is known up front by the purchaser, so in other words if the option costs $1,200, that is your total risk, plus any brokerage fees and costs. That's it. No risk of margin calls, or huge swings in equity, it offers a predetermined up-front risk monitor for each trader.

Option trading can offer some of the best risk management for a trader in volatile times like these, offering a way to take advantage of all the opportunities with limited risk.

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