Smart Investor: exploring options: a strategic tool for investors Smart Investor: exploring options: a strategic tool for investors Smart Investor: exploring options: a strategic tool for investors

Smart Investor: exploring options: a strategic tool for investors

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.   
  

Exploring options: a strategic tool for investors

Over the years, I’ve written extensively about options and how they can be a powerful addition to any investor’s toolkit. Traditionally, options are often associated with short-term trading and speculation, but my focus has always been on how they can serve long-term investors as well. Options aren’t just for traders looking for quick wins—they can provide risk management, leverage, and flexibility for those with a longer investment horizon.

This article brings together a selection of my most insightful pieces from the past, showcasing where and how options can play a pivotal role in your investment strategy. As these articles were written over the course of time, it’s important to check the publication dates—some references to specific stocks or market conditions may no longer reflect current prices or trends. Whether you're interested in hedging against downturns, leveraging tech stocks, or simply diversifying your portfolio, options can offer solutions that go beyond traditional investments. Here’s a journey through key articles that highlight where options can truly make a difference for investors.


Why options should be part of every investor's strategy

In the fast-paced world of financial markets, diversification is often touted as the key to managing risk and boosting returns. But did you know there’s more to diversification than just spreading your investments across different asset classes? Options—often called the "Swiss army knife of finance"—offer a flexible, powerful way to enhance your portfolio's performance. By exploring this foundational article, you'll discover how options can be used alongside stocks and bonds to provide both risk management and the opportunity for additional gains.

For those just beginning their journey into options, it's essential to understand the fundamental mechanics. One of the most important concepts in options trading is delta. Delta helps predict how an option’s price will change in response to movements in the underlying stock. Whether you're new to options or a seasoned investor, this guide offers a clear introduction to how delta works. Once you’ve got the basics down, you can dive deeper into advanced delta strategies, exploring real-world examples that demonstrate its applications in more complex scenarios.

Protecting your portfolio with hedging strategies

Investors who want to safeguard their portfolios against market downturns should look to hedging strategies. In volatile markets, protecting your gains can be just as important as seeking new opportunities. By incorporating options into your strategy, you can build a hedge that protects your investments while still leaving room for potential upside. This article explains how you can use put options and volatility-based tools like VIX calls to shield your portfolio from downside risks.

A practical application of hedging can be seen through an investment in Microsoft. Suppose you’re considering a $15,000 investment—should you buy the stock outright or explore options strategies? This investment simulation compares purchasing stock with two options-based strategies: long calls and the long call zebra strategy. This hands-on example helps illustrate the unique advantages options can offer, especially in terms of maximizing returns with controlled risk.

When it comes to tech stocks, which have shown remarkable gains, using options as a hedge becomes even more crucial. Stocks like Microsoft, Apple, and Tesla can experience significant price swings, and locking in those gains is a challenge for any investor. In this series on tech stock hedging, you'll find simple yet effective hedging strategies that allow you to protect your profits without sacrificing growth potential. Part two delves into stock-specific approaches, giving you the tools to apply these strategies to individual holdings like AAPL and TSLA.

Leveraging long-term options for strategic growth

For investors who prefer a longer time horizon, options can be an incredible tool for portfolio management. Rather than focusing on short-term gains, long-term options provide the opportunity to maintain exposure to the market while minimizing downside risk. This comprehensive guide explores how long-term options, or LEAPS, can be used to strategically diversify and secure steady growth in a way that aligns with your long-term goals.

Given the complexity of options, it helps to have a toolkit to guide your decision-making. This investor’s toolkit is designed for those looking to optimize their use of options alongside traditional stock investments. It covers a wide range of strategies and includes case studies to help you unlock the full potential of options as part of a balanced investment plan.

Understanding volatility and diversification through sector ETFs

No conversation about options is complete without discussing volatility. Volatility not only affects the price of options but also influences your overall risk exposure. In this essential article, you’ll learn how volatility is measured, why it matters in options pricing, and how it can be used to your advantage when assessing market opportunities.

Another important aspect of managing risk is diversification. Sector ETFs offer an efficient way to spread your investments across different industries, and using long-term options on these ETFs can further enhance your portfolio. This article breaks down how to leverage sector ETF options to achieve exposure to broad market trends without taking on excessive risk. It’s a smart approach for investors looking to diversify and control their capital more effectively.

Finally, for investors who are heavily focused on tech stocks, balancing your portfolio with defensive ETFs is key to managing risk. This case study explores how long-term options on defensive ETFs such as XLU and XLRE can add stability to your portfolio without giving up growth potential. By incorporating these options, you can safeguard your portfolio during periods of market volatility while still benefiting from the growth of tech stocks.

Check out these guides and case studies:
In-depth guide to using long-term options for strategic portfolio management  Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure.
Case study: using covered calls to enhance portfolio performance  This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains.
Case study: using protective puts to manage risk  This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. 
Case study: using cash-secured puts to acquire stocks at a discount and generate income  This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors.
Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. 
Previous "Investing with options" articles
"Saxo Options Talk" podcast
Other related articles
Why options strategies belong in every trader's toolbox
Understanding and calculating the expected move of a stock ETF index 
Understanding Delta - a key guide for Investors and Traders
 

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.