Options Minimize Risk in Stock Investing

Physician's Money Digest, September 2007, Volume 14, Issue 9

Stocks are tricky. There's always the possibility that an event in the market can cause prices to fall. Risk is managed typically by investing according to your risk tolerance and by diversifying investments. Along this vein, investors can hedge their risk exposure by purchasing options.

An option is the right to buy or sell a stock for a fee from an option writer at an agreed on sum within a period of time. Option traders evaluate risk by using charting tools and by measuring the delta (ie, the degree to which an option's price is affected by changes in the underlying asset's price) and by the theta (ie, the level of certainty of the timing of an option's expiration value). If you do not buy or sell the stock within the time period, you only lose the writer's fee.