When the index goes down, the option to sell at the preset price increases in value, offsetting the loss in your portfolio. If the market goes up, the option expires worthless. You also pay less for options that last a shorter time. Or you could just hedge part of your portfolio. Options can also be used to hedge a particular stock, or a sector.
Many investors have inquired about how to protect Internet holdings, strategists say.
But Schwartz thinks that this is generally too expensive. For most investors, that price is too high, Schwartz says. One strategy, too complicated to describe in detail, involves purchasing half the shares desired at the market price, then selling both calls and puts against the shares. Clearly, options are a tricky area, and investors should study up if they want to play. Fullman credits the exchanges' educational programs with fueling interest in options trading.