Stock talk for the main street investor.

Using Options To Reduce Risk

I’ve recently started selling covered call options to reduce risk and increase cash in my portfolio. A call option is the option to buy a stock at a pre-defined price. For example I recently sold 4 call contracts on SPWRA at $14 expiring in July for $0.72/share. This means that if the stock is over $14 on July 16 when the options expire I will be exercised and I will have to sell my shares for $14. On the other hand if the stock is below $14, I get to keep $0.72/share. Since I own the stock the worst thing that can happen is getting called and having to sell my shares at $14.

What this does is reduce downside risk in a stock. Since I sold the options when SPWRA was about $12.50 if the stock is not below $11.78 I haven’t lost money. Best case scenario is the stock is somewhere close to $14 but not above.

To trade options you have to have special approval in your brokerage account. Personally I have approval to sell covered calls, but not uncovered calls (where I don’t own the stock). This keeps me from taking too much risk.

If you’re looking to take some risk out of your portfolio in turbulent times covered calls might be a good way to go.

Disclosure: Author is long SPWRA and short SPWRA calls.

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