Here's a Balanced Fund That Explores the Options

Editor's note: This column first appeared in The Save Safe Plan on Friday, April 11. For more information on The Save Safe Plan, click here.

The options market is a dangerous place to play if you don't know what you're doing. In options, you're betting against another person. One of you will make money. And the other will lose. It's a zero-sum game.

But that doesn't mean these financial instruments are purely speculative. An option can act as insurance policy in case the price of the underlying stock falls. You can use options to increase your risk or lower it.

Dick Cancelmo, manager of the (BRBPX Quote)Bridgeway Balanced fund, is not one of the speculators. Cancelmo sells options in this stock and bond fund to build a portfolio that has some of the upside of an up market and less of the downside in a down market.

In general, an option gives an investor the right to buy (a call option) or sell (a put) a specific amount of a particular stock at a specified price during a specified time period. If you buy a call, you have the option to buy a stock at a set price at a later date. You're betting the stock will go up. If you buy a put option, you can sell the stock at a set price in the future, and you're wagering that the stock will fall.

But again, there's always another person on the other side of that transaction. Bridgeway's Cancelmo sells puts and calls in this fund to generate an income stream that's lower risk than actually buying stocks.

Broadly speaking, Cancelmo is placing bets with investors who think stocks will go up and those who think stocks will go down. By selling -- or writing -- these options the fund collects income. The buyer of an option has to pay something for each contract -- called a premium -- and the Bridgeway fund gets to keep that money.