option strategies

Options are powerful financial instruments that can be effectively utilised to protect equity portfolios from market volatility and downside risk.

One key strategy is using protective put options. This involves purchasing put options on stocks held in the portfolio or on the ASX200 index. These options provide the right, but not obligation, to sell the underlying stock or index at a predetermined strike price within a specified time frame. By including protective puts a floor is established on potential losses in the portfolio. If the market has a downturn and the stock price declines the put option gains value which also helps offset losses. This strategy is particularly useful in uncertain market conditions or before significant economic events. 

Another approach we use is employing covered call options. With this strategy call options are sold against stocks already owned. This generates additional income from the premiums received from selling the calls. It also caps the potential upside from rising stock prices in exchange for mitigating downside risk. Typically, the premium gained from the selling of the options is used to purchase the protective put options and manage the downside risk.

Options can be tailored to fit specific risk tolerance and investment objectives. Implementing these strategies requires a comprehensive understanding of options, market dynamics and risk management. Utilising options wisely helps manage the portfolio in turbulent market conditions and protect the value of the portfolio.