Options Find a Place in Investor Toolbox

NEW YORK ( TheStreet) -- Although seen as speculative and dangerous in the past, options trading has increased as investors find simple and beneficial strategies to use for their portfolios.

Average daily trading volume for options has grown about 17% a year since 1992, according to data from the Options Clearing Corp. Options trading volume has only begun to sputter this year, with average daily volume currently down about 10% from 2011.

JJ Kinahan, chief derivatives strategist at TD Ameritrade, says options trading has grown tremendously due to "increased education and public awareness." In the past, people blamed derivatives for market downturns and were discouraged from using derivatives like options.

However, as investors gain experience in trading options and understand how options can be an important part of their portfolio, Kinahan expects that options trading will continue to grow.

Many people have stayed away from options because they lack understanding of different strategies and fear losing money through speculative strategies. However, Robert Luna, CEO and chief investment officer at Surevest Capital Management, says options can be used as a protective strategy and are "not purely a speculative vehicle."

Especially in the current market, it is "worthwhile for investors to look at some types of hedging strategies including options," says Mike Binger, senior portfolio manager at Gradient Investments. Even unsophisticated investors can use different option strategies to hedge against individual stock positions or an entire portfolio, he says.

Luna agrees that options can be a useful investment tool in the current market. "Simple asset allocation is no longer working, due to high correlation in the market, and investors need better ways to protect against downside risk," he says. Option strategies can provide some protection from downside risk, or at least alleviate some risk through premiums.

"Options allow for greater moves in stock prices than investors anticipated," Kinahan says, because options can give investors steady returns and more protection.

Kinahan says options also allow investors with small amounts of capital to participate in the market. "Most investors can't buy Apple ( AAPL) -- it's too expensive -- but options allow smaller investors to express their opinions about stocks like Apple."

However, trading options may not be an ideal strategy for everyone, depending on a person's investment goals. "Options are most useful for older clients, who have larger portfolios and can't really afford a downturn," says Luna. Especially in the current low interest rate environment, options could be ideal for investors seeking a consistency of returns and protection from a market downturn.

Two of the simplest and most basic strategies are a covered call or cash covered put. Both strategies give investors a way to earn higher returns with limited risk.

A covered call is beneficial for investors who want to exit a stock position at a specific price. This strategy involves selling a call option on stock the investor already owns. The investor earns a premium while waiting to possibly sell the stock at a higher price.

A covered call does not introduce any more risk to the investor compared to just holding the stock. However, one drawback is that a covered call limits the potential profit for the investor from an increase in the stock's price.

A cash-covered put involves selling a put option while holding enough cash to purchase the stock. This strategy is useful for investors who want to buy a stock at a lower price, while also earning a premium.

However this strategy does introduce some risk. If the stock price falls far below the strike price, then the seller could be stuck buying the stock at a price much higher than the market. If the stock price jumps much higher than the strike price, then the investor lost the opportunity to buy the stock at a lower price.

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