Is there a good options strategy that has a fairly low risk?
Check out this site: http://www.m-x.ca/produits_options_actions_en.php  (Under the Trading Strategies). If you have a background in math or eco or are comfortable with graphs, I suggest you graph the payoffs of each of these strategies.  It will really help you understand it.  If you need help with this, let me know and I can draw a couple out for you. Your question is rather vague but also complicated however I will try to answer it.  First off, many investors buy options to hedge against a current position in a stock (already own the stock).  But you can also try to make money off of options rather than protecting yourself. Let's suppose you anticipate that a stock will increase in value so you want to capitalize on this.  Suppose further that you have a small amount of money to invest, say $100.  Suppose the stock is currently at $100 so that you can only afford 1 share.  Suppose there is a call option out there with strike $105 that costs you only $1. Let's compare two scenarios: The stock increases to $120 at the maturity date of the option. So, you made a lot more money with the same initial investment.  The amount of money you put in is small (i.e. can be perceived as low risk).  However, if the stock price ended up being $104.90 then your options are worthless (i.e. can be perceived as high risk). HTH. "You may look into covered calls.  In short, selling the option instead of buying it ... playing the house.   One can do this on the ""buying side"" too, e.g. let's say you like company XYZ.  If you sell the put, and it goes up, you make money.  If XYZ goes down by expiration, you still made the money on the put, and now own the stock - the one you like, at a lower price.  Now, you can immediately sell calls on XYZ.  If it doesn't go up, you make money.  If it does goes up, you get called out, and you make even more money (probably selling the call a little above current price, or where it was ""put"" to you at). The greatest risk is very large declines, and so one needs to do some research on the company to see if they are decent -- e.g. have good earnings, not over-valued P/E, etc.  For larger declines, one has to sell the call further out.  Note there are now stocks that have weekly options as well as monthly options.  You just have to calculate the rate of return you will get, realizing that underneath the first put, you need enough money available should the stock be ""put"" to you.   An additional, associated strategy, is starting by selling the put at a higher than current market limit price.  Then, over a couple days, generally lowering the limit, if it isn't reached in the stock's fluctuation.  I.e. if the stock drops in the next few days, you might sell the put on a dip.   Same deal if the stock finally is ""put"" to you.  Then you can start by selling the call at a higher limit price, gradually bringing it down if you aren't successful -- i.e. the stock doesn't reach it on an upswing. My friend is highly successful with this strategy. Good luck" "There isn't really a generic options strategy that gives you higher returns with lower risk than an equivalent non-options strategy. There are lots of options strategies that give you about the same returns with the same risk, but most of the time they are a lot more work and less tax-efficient than the non-options strategy. When I say ""generic"" I mean there may be strategies that rely on special situations (analysis of market inefficiencies or fundamentals on particular securities) that you could take advantage of, but you'd have to be extremely expert and spend a lot of time. A ""generic"" strategy would be a thing like ""write such-and-such sort of spreads"" without reference to the particular security or situation. As far as strategies that give you about the same risk/return, for example you can use options collars to create about the same effect as a balanced fund (Gateway Fund does this, Bridgeway Balanced does stuff like it I think); but you could also just use a balanced fund. You can use covered calls to make income on your stocks, but you of course lose some of the stock upside. You can use protective puts to protect downside, but they cost so much money that on average you lose money or make very little. You can invest cash plus a call option, which is equivalent to stock plus a protective put, i.e on average again you don't make much money. Options don't offer any free lunches not found elsewhere. Occasionally they are useful for tax reasons (for example to avoid selling something but avoid risk) or for technical reasons (for example a stock isn't available to short, but you can do something with options)." "No.  The more legs you add onto your trade, the more commissions you will pay entering and exiting the trade and the more opportunity for slippage.  So lets head the other direction.   Can we make a simple, risk-free option trade, with as few legs as possible? The (not really) surprising answer is ""yes"", but there is no free lunch, as you will see.  According to financial theory any riskless position will earn the risk free rate, which right now is almost nothing, nada, 0%.   Let's test this out with a little example. In theory, a riskless position can be constructed from buying a stock, selling a call option, and buying a put option.  This combination should earn the risk free rate. Selling the call option means you get money now but agree to let someone else have the stock at an agreed contract price if the price goes up.  Buying the put option means you pay money now but can sell the stock to someone at a pre-agreed contract price if you want to do so, which would only be when the price declines below the contract price.  To start our risk free trade, buy Google stock, GOOG, at the Oct 3 Close:   495.52 x 100sh = $49,552 The example has 100 shares for compatibility with the options contracts which require 100 share blocks. we will sell a call and buy a put @ contract price of $500 for Jan 19,2013.   Therefore we will receive $50,000 for certain on Jan 19,2013, unless the options clearing system fails, because of say, global financial collapse, or war with Aztec spacecraft. According to google finance, if we had sold a call today at the close we would receive the bid, which is 89.00/share, or $8,900 total.  And if we had bought a put today at the close we would pay the ask, which is 91.90/share, or $9190 total. So, to receive $50,000 for certain on Jan 19,2013 we could pay $49,552 for the GOOG stock, minus $8,900 for the money we received selling the call option, plus a payment of $9190 for the put option we need to protect the value.  The total is $49,842.   If we pay $49,842 today, plus execute the option strategy shown, we would have $50,000 on Jan 19,2013.  This is a profit of $158, the options commissions are going to be around $20-$30, so in total the profit is around $120 after commissions.   On the other hand, ~$50,000 in a bank CD for 12 months at 1.1% will yield $550 in similarly risk-free interest.   Given that it is difficult to actually make these trades simultaneously, in practice, with the prices jumping all around, I would say if you really want a low risk option trade then a bank CD looks like the safer bet.  This isn't to say you can't find another combination of stock and contract price that does better than a bank CD -- but I doubt it will ever be better by very much and still difficult to monitor and align the trades in practice." By coincidence, I entered this position today. Ignore the stock itself, I am not recommending a particular stock, just looking at a strategy. The covered call.  For this stock trading at $7.47, I am able, by selling an in-the-money call to be out of pocket $5.87/sh, and am obliged to let it go for $7.00 a year from now. A 19% return as long as the stock doesn't drop more than 6% over that time. The chart below shows maximum profit, and my loss starts if the stock trades 21% below current price.  The risk is shifted a bit, but in return, I give up potential higher gains. The guy that paid $1.60 could triple his money if the stocks goes to $12, for example. In a flat market, this strategy can provide relatively high returns compared to holding only stocks.
"Don't compare investing with a roll of the dice, compare it with blackjack and the decision to stand or hit, or put more money on the table (double down or increase bet size) , based on an assessment of the state of the table and history.  A naive strategy of say ""always hitting to 16"" isn't as awful as randomly hitting and standing (which, from time to to time will draw to 21 fair and square) , but there's a basic strategy that gets close to 50% and by increasing or decreasing bet based on counting face cards can get into positive expectations. Randomly buying and selling stock is randomly hitting.  Buying a market index fund is like always hitting to 16.  Determining an asset allocation strategy and periodically rebalancing is basic strategy.  Adjusting allocations based on business cycle and economic indicators is turning skill into advantage." What is a good resource to learn about options trading strategies? Options are a quite advanced investment form, and you'd do well to learn a lot about them before attempting to dive into this fairly illiquid market. Yale's online course in financial markets covers the Options Market and is a good starting point to make sure you've got all the basics. You may be familiar with most of it, but it's a decent refresher on lingo and Black-Scholes. How can I use options to establish some cash flow from long standing investments while minimizing capital gains expenses? This question seems designed to get people to talk about covered calls. Essentially, you sell call contracts: you let people buy things you already have at a price in the future, at their whim. They pay you for this option, though usually not much if the options aren't in the money. You can think of this as trading any return above the call option for a bit of extra cash.  I don't invest with taxable accounts, but there are significant tax consequences for options. Because they expire, there will be turnover in your portfolio, and up front income when you take the sell side. So if you trade in options with close expiration dates, you'll probably end up with a lot of short-term capital gains, which are treated as normal income. One strategy is to trade in broad-based stock index options, which have favorable tax treatments. Some people have abused this though to disguise normal income as capital gains, so it could go away. Obviously the easy approach is to just use a tax advantaged account for options trading. An ETF might also be able to handle the turnover on your behalf, for example VIX is a series of options on S&P500 options. A second strategy I've heard of is buying calls and puts at a given strike price. For example, if you bought Dec '13 calls and puts on SPX @ 115 today, it would cost you about $35 dollars. If the price moves more than 35 dollars away from 115 by DEC '13 (in either direction), you've made a profit. If you reflect on that for a bit, you'll see why VIX is considered a volatility index. I guess I should mention that shorting a stock and buying a put option at the market price are very similar, with the exception that your loss is limited to the price of the option.  Is there ever an instance where options investing is not speculative? The term 'speculative' is not well defined. For many people, the answer is no. It's very easy to just buy put options and wait for prices to fall, or call options and wait for prices to rise. Moreover, the second strategy above essentially gives you similar performance to a stock without paying full price. These all fall under the headline of increasing a risk portfolio rather than decreasing it, which I figure is a decent definition of speculation. On the other hand, there are ways to use options minimize risk rather than increase it. You can buy underwater options as portfolio insurance, if your portfolio drops below a certain amount, you still have the right to sell it at a higher one. And the Case-Schiller index is run in part, on the hopes that one day there might be a thriving market for real estate options (or futures). When you buy a home or lend money to someone to buy one, you could buy regional Case-Schiller options to protect you if the regional market tanks. But in all of these cases, it's required for someone else to take the opposite trade. Risk isn't reduced, it's traded around. So technically, there is a speculative element to these as well. I think the proper question here is whether speculation is present, but whether speculation can be put to good ends. Without speculators, the already very thin market for options would shrivel faster. Yes, that's the risk. If the stock is bouncing around a lot your options could get assigned.  If it heads south you now are the proud owner of more of a falling stock.  It's good that you're looking to understand the risks of an investment method.  That's important no matter what the method is. The other example I'd offer is the case for diversification. If one buys 10 well chosen stocks, i.e. stocks spread across different industries so their correlation to one another is low, they will have lower risk than each of the 10 folk who own one of those stocks per person. Same stocks, but lower risk when combined. It definitely depends on your risk appetite as Joe Taxpayer pointed out in his answer. Covered calls are a good choice for someone who already own's the stock, because the premium collected reduces the cost basis for the position. The downside is that if the calls are exercised, there is a good chance that you are missing out on additional upside in the stock price (because the strike is obviously below the market value for the stocks).  Another good option trade is the spread option. This would allow you to capture the difference between the two strikes of the options in the spread. This is also one of the less risky choices because your initial cost an potential profit/loss are known in advance of entering the position. "Yes, of course there have been studies on this.  This is no more than a question about whether the options are properly priced. (If properly priced, then your strategy will not make money on average before transaction costs and will lose once transaction costs are included.  If you could make money using your strategy, on average, then the market should - and generally will - make an adjustment in the option price to compensate.) The most famous studies on this were conducted by Black and Scholes and then by Merton. This work won the Nobel Prize in 1995. Although the Black-Scholes (or Black-Scholes-Merton) equation is so well known now that people may forget it, they didn't just sit down one day and write and equation that they thought was cool. They actually derived the equation based on market factors. Beyond this ""pioneering"" work, you've got at least two branches of study.  Academics have continued to study option pricing, including but not limited to revisions to the original Black-Scholes model, and hedge funds / large trading house have ""quants"" looking at this stuff all of the time.  The former, you could look up if you want. The latter will never see the light of day because it's proprietary. If you want specific references, I think that any textbook for a quantitative finance class would be a fine place to start.  I wouldn't be surprised if you actually find your strategy as part of a homework problem. This is not to say, by the way, that I don't think you can make money with this type of trade, but your strategy will need to include more information than you've outlined here.  Choosing which information and getting your hands on it in a timely manner will be the key." I'd say that because you are young, even the 'riskier' asset classes are not as risky as you think, for example, assuming conservatively that you only have 30 years to retirement, investing in stocks index might be a good option. In short term share prices are volatile and prone to bull and bear cycles but given enough time they have pretty much always outperformed any other asset classes. The key is not to be desperate to withdraw when an index is at the bottom. Some cycles can be 20 years, so when you need get nearer retirement you will need to diversify so that you can survive without selling low. Just make sure to pick an index tracker with low fees and you should be good to go. A word of warning is of course past performance is no indication of a future one, but if a diversified index tracker goes belly up for 20+ years, we are talking global calamity, in which case buy a shotgun and some canned food ;) "I'd suggest you start by looking at the mutual fund and/or ETF options available via your bank, and see if they have any low-cost funds that invest in high-risk sectors.  You can increase your risk (and potential returns) by allocating your assets to riskier sectors rather than by picking individual stocks, and you'll be less likely to make an avoidable mistake. It is possible to do as you suggest and pick individual stocks, but by doing so you may be taking on more risk than you suspect, even unnecessary risk.  For instance, if you decide to buy stock in Company A, you know you're taking a risk by investing in just one company.  However, without a lot of work and financial expertise, you may not be able to assess how much risk you're taking by investing in Company A specifically, as opposed to Company B.  Even if you know that investing in individual stocks is risky, it can be very hard to know how risky those particular individual stocks are, compared to other alternatives. This is doubly true if the investment involves actions more exotic than simply buying and holding an asset like a stock.  For instance, you could definitely get plenty of risk by investing in commercial real estate development or complicated options contracts; but a certain amount of work and expertise is required to even understand how to do that, and there is a greater likelihood that you will slip up and make a costly mistake that negates any extra gain, even if the investment itself might have been sound for someone with experience in that area.  In other words, you want your risk to really be the risk of the investment, not the ""personal"" risk that you'll make a mistake in a complicated scheme and lose money because you didn't know what you were doing.  (If you do have some expertise in more exotic investments, then maybe you could go this route, but I think most people -- including me -- don't.) On the other hand, you can find mutual funds or ETFs that invest in large economic sectors that are high-risk, but because the investment is diversified within that sector, you need only compare the risk of the sectors.  For instance, emerging markets are usually considered one of the highest-risk sectors.  But if you restrict your choice to low-cost emerging-market index funds, they are unlikely to differ drastically in risk (at any rate, far less than individual companies).  This eliminates the problem mentioned above: when you choose to invest in Emerging Markets Index Fund A, you don't need to worry as much about whether Emerging Markets Index Fund B might have been less risky; most of the risk is in the choice to invest in the emerging markets sector in the first place, and differences between comparable funds in that sector are small by comparison.  You could do the same with other targeted sectors that can produce high returns; for instance, there are mutual funds and ETFs that invest specifically in technology stocks. So you could begin by exploring the mutual funds and ETFs available via your existing investment bank, or poke around on Morningstar.  Fees will still matter no matter what sector you're in, so pay attention to those.  But you can probably find a way to take an aggressive risk position without getting bogged down in the details of individual companies.  Also, this will be less work than trying something more exotic, so you're less likely to make a costly mistake due to not understanding the complexities of what you're investing in." "What you are proposing is called a ""covered call"" strategy.  It is a perfectly reasonable speculative play on how far the stock will move within a certain amount of time.  If your belief that the stock's volatility is such that it is unlikely to reach the strike price before the maturity is greater than the markets (which it seems it is), then go ahead and sell the call." Congratulations on being in such good financial state.  You have a few investment choices. If you want very low risk, you are talking bonds or CDs. With the prime rate so low, nobody is paying anything useful for very low risk investments.  However, my opinion is that given your finances, you should consider taking on a little more risk. A good step is a index fund, which is designed to mirror the performance of a stock index such as the S&P 500. That may be volatile in the short-term, but is likely to be a good investment in the longer term. I am not a fan of non-index mutual funds; in general the management charge makes them a less attractive investment.  The next step up is investing in individual stocks, which can provide very big gains or very big losses.  The Motley fool site (www.fool.com) has a lot of information about investing overall. I am going to. Like I said I have not traded options much in general, but I can see a lot of potential in derivatives in general, and it makes me kind of grin. In the case of commodities, the advantages are really apparent. The only problem I see with stock options is that they expire, and thus if you are more long term bull on a stock, it would be harder. But for things like commodities, that are shorter term any ways and require margin, it makes a lot of sense IMO. I could see how you could gain a larger diversification through options (being able to bet on Russell 2000, S&amp;P, etc. ) or esoteric markets (electricity).   I will look up that book that you mentioned. Thanks man. An alternative options strategy to minimize loss of investment capital is to buy a put, near the money around your original buy price, with a premium less than the total dividend. The value of the put will increase if the stock price falls quickly. Likely, a large portion of your dividend will go towards paying the option premium, this will however ensure that your capital doesn't drop much lower than your buy price. Continued dividend distributions will continue to pay to buy future put options. Risks here are if the stock does not have a very large up or down movement from your original buy price causing most of the dividend to be spent on insuring your position. It may take a few cycles, but once the stock has appreciated in value say 10% above buying price, you can consider either skipping the put insurance so you can pocket the dividend, or you can bu ythe put with a higher strike price for additional insurance against a loss of gains. Again, this sacrifices much of the dividend in favor of price loss, and still is open to a risk of neutral price movement over time. A lot of people here talk about shorting stocks, buying options, and messing around with leveraged ETFs. While these are excellent tools, that offer novel opportunities for the sophisticated investor, Don't mess around with these until you have been in the game for a few years. Even if you can make money consistently right out of the gate, don't do it. Why? Making money isn't your challenge, NOT LOSING money is your challenge. It's hard to measure the scope of the risk you are assuming with these strategies, much less manage it when things head south. So even if you've gotten lucky enough to have figured  out how to make money, you surely haven't learned out how to hold on to it. I am certain that every beginner still hasn't figured out how to comprehend risk and manage losing positions. It's one of those things you only figure out after dealing with it. Stocks (with little to no margin) are a great place to learn how to lose because your risk of losing everything is drastically lower than with the aforementioned tools of the sophisticated investor. Despite what others may say you can make out really well just trading stocks.  That being said, one of my favorite beginner strategies is buying stocks that dip for reasons that don't fundamentally affect the company's ability to make money in the mid term (2 quarters).  Wallstreet loves these plays because it shakes out amateur investors (release bad news, push the stock down shorting it or selling your position, amateurs sell, which you buy at a discount to the 'fair price'.) A good example is Netflix back in 2007. There was a lawsuit because netflix was throttling movie deliveries to high traffic consumers. The stock dropped a good chunk overnight.  A more recent example is petrobras after their huge bond sale and subsequent corruption scandal. A lot of people questioned Petrobras' long-term ability to maintain sufficient liquidity to pay back the loans, but the cashflow and long term projections are more than solid. A year later the stock was pushed further down because a lot of amateur Brazilians invest in Petrobras and they sold while the stock was artificially depressed due to a string of corruption scandals and poor, though temporary, economic conditions. One of my favorite plays back in 2008-2011 was First Solar on the run-up to earnings calls. Analysts would always come out of these meetings downgrading the stock and the forums were full of pikers and pumpers claiming heavy put positions. The stock would go down considerably, but would always pop around earnings. I've made huge returns on this move. Those were the good ole days. Start off just googling financial news and blogs and look for lawsuits and/or scandals. Manufacturing defects or recalls. Starting looking for companies that react predictably to certain events. Plot those events on your chart. If you don't know how to back-test events, learn it.  Google Finance had a tool for that back in the day that was rudimentary but helpful for those starting out. Eventually though, moreso than learning any particular strategy, you should learn these three skills: 1) Tooling: to gather, manipulate, and visualize data on your own.  These days automated trading also seems to be ever more important, even for the small fish. 2) Analytical Thinking learn to spot patterns of the three types:  event based (lawsuits, arbitrage, earnings etc), technical (emas, price action, sup/res), or business-oriented (accounting, strategy, marketing). Don't just listen to what someone else says you should do at any particular moment, critical thinking is essential. 3) Emotions and Attitude: learn how to comprehend risk and manage your trigger finger. Your emotions are like a blade that you must sharpen every day if you want to stay in the game. Disclaimer: I stopped using this strategy in 2011, and moved to a pure technical trading regime. I've been out totally out of the game since 2015. If you are looking for a simple formula or buying order / strategy to guarantee a lower buying price, unfortunately this does not exist.  Otherwise, all investors would employ this strategy and the financial markets would no longer have an validity (aka arbitrage).  Buying any investment contains a certain level of risk (other than US treasuries of course). Having said that, there are many option buying strategies that can employed to help increase your ROR or hedge an existing position.  Most of these strategies are based a predicted future direction of a stock on the investor's part.  For example, you hold the Ford stock and feel they are releasing their earnings report next week.  You feel that they will not meet investors' expectations.  You don't want to sell your shares but what you can do is buy put options.  If the stock does indeed go down then you make money on your put options. Here is a document on options.  It is moderately technical but very good if you want a good introduction on the subject.  The strategy that I described above is on pg 33. http://www.m-x.ca/f_publications_en/en.guide.options.pdf I would recommend reading Intelligent Investor first. It was written slightly more recently (1949) than Security Analysis (1934). More important is that a recently revised edition* of Intelligent Investor was published. The preface and appendix were written by Warren Buffett. Intelligent Investor is more practical as an introduction for a novice. You may decide not to read Security Analysis at all, as it seems more like an academic text or professional's guide i.e. for accounting. Benjamin Graham's Intelligent Investor remains relevant. It is used, successfully, as a guide for value investing, despite the hysteria of market sentiment and day-to-day variations, even extreme volatility. For example, I just read a nice article about applying the value investing principles extolled in Intelligent Investor a few weeks ago. It was written in the context of current markets, which is amazing, to be so applicable, despite the passage of decades. For reference, you might want to glance at this book review (published in March 2010!) of the original 1934 edition of Security Analysis.     * The URL links to a one-paragraph summary by U.S. News & World Report. It does not link to a book sales website!