Options plays

Using puts and calls can help you ride out volatile markets

options on nearly 70 baskets of stocks, including the Dow Jones industrials and the Nasdaq 100.

If you buy a put or a call, you can’t lose more than the amount you pay while you stand to gain handsomely if the stock or index moves in the right direction. On the other hand, selling an option when you don’t own the underlying stock exposes you to potentially steep losses. The stock could rise and you’ll have to buy back the option at a loss, or else lose your shares to the option holder.

All of these strategies have yet one more factor to consider: trading costs. Using the J.P. Morgan May 140 call example, you might have a sizable $60 (20%) trading profit on the option but have most of the gain wiped out-if your broker charges a $25 minimum commission-on the buy and the sell side. The Options Institute’s Kearney recommends trading several options at a time to prevent a broker’s commissions from completely eating up your profits.

For more information, contact the Chicago Board of Options Exchange (800-OPTIONS, www.cboe.com) or Nasdaq-Amex (800-THE-AMEX, www.amex .com).

Pages: 1 2