There are two types of options, calls and puts. This fact allows you to sell an option without owning it first. As such, options are not physical things like a barrel of oil or 20 tons of pork bellies, but rather are contracts between two parties that confer rights and obligations. Options are derivatives - they derive their value from an underlying stock and represent the right (but not the obligation) to buy or sell 100 shares of the underlying stock by a predetermined date (expiration, which is the Saturday after the third Friday of the month).

Options are an incredibly flexible tool that investors can use to reduce risk and generate extra income all at the same time. Today, IвЂ™ll introduce an option strategy that can lower your portfolioвЂ™s risk. The key to generating income with options is to sell them, which lets you reap the rewards from the speculative frenzy of option buyers. You may be thinking, вЂњOptions? I thought options were risky!вЂќ In fact, options are risk-transfer tools, some of which increase risk (in exchange for greater profit potential) and some of which generate income and reduce risk (in exchange for lower profit potential).ДЄlthough most people think of them as a way to speculate on big price moves, they can be used conservatively - to profit from a lackВ of price movement. It involves the use of stock options, which can be used to generate additional income and reduce the risk of your stock portfolio by creating cash dividends out of thin air. Yes, there is a way, but it requires a bit of imagination. So, is there any way to enjoy the wealth-compounding benefits of extra dividends with your current blue-chip stock (but dividend-deprived) portfolio? Stock Options Generate Income Furthermore, you bought your current portfolio of high-quality stocks for a reason and you may not want to sell any of them before their investment thesis plays out.

If you donвЂ™t have any in your portfolio, I strongly recommend that you get some.В They provide investors with regular income and cushion you against inevitable вЂ“ but always scary - market declines.Д«ut what if you already have a stock portfolio composed of stocks that donвЂ™t pay dividends or, if they do, donвЂ™t yield as much as you wished they did? Selling everything and starting over with high-yielders is one possibility, but super-high dividends are usually the sign of super-high risky stocks and the last thing anyone needs is to wake up to news down the road that one or more of your stocks has cut its dividend. Dividend-paying stocks are wonderful investments.

Put options jim fink