Using Leverage to Reduce Risk

For a stock that has gained more than 160% from $50 to $131 over the past 52 weeks, this seems a reasonable price to protect this investment. Let's face it, like that house sitting on a peninsula in the middle of hurricane alley, it takes only one small squall -- such as a problem with the iPhone batteries or a backlash against the contracts that offer a limited choice of carriers yet long-term commitment -- to knock down what underpins the high growth projections.

On the flip side, if it all lives up to its promises and the iPhone and other Apple products have blowout holiday sales, the stock could easily rise above $200 by next April, a 53% gain.

Now no one wants to give away nearly 25% of that profit -- remember that the purchase of these puts moves your effective cost basis or purchase price up to $146 a share -- but it's a lot easier to be magnanimous knowing you stand to gain 25% or more while your losses are limited to just 15% of your original investment. The lesson: While leverage has its downside, by applying it in a pre-emptive fashion, you will be well-positioned to reap the advantages of its upside.

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