4 Proven Options Strategies to Profit in 2009 and Beyond

The Motley Fool has published a short and useful report about how self-directed investors can use options, ETFs and other hedge strategies to actively manage a portfolio in volatile markets.

Download the PDF report below, an introductory message from coauthor Jeff Fischer follows:

Why Options, Why Now?

Many investors approach options with skepticism and caution — some simply refuse to consider them. That’s not entirely unreasonable. You don’t need to use options in order to be a successful investor. Even I believed for a long time that options were not a Foolish way to invest.

But as I began to learn more about options, and as I grew more experienced using them, I discovered that they are excellent tools for generating income, protecting profits, hedging overall portfolio risk, and ultimately earning outsized gains.

Over the years, I’ve found that options can generate returns in flat markets, cushion the blow of down markets like the one we’re experiencing, and juice my portfolio returns in up markets.

That’s why, along with short positions and exchange-traded funds (ETFs), Motley Fool co-founder David Gardner and I made options a staple of our Motley Fool PRO real-money portfolio and investment service.

What Are Options?

Options give the option holder the right, but not the obligation, to buy or sell an underlying stock at a set price (the strike price) by a set date (the expiration date). The option contract allows you to profit if a stock moves in your favor before the contract expires. Options are not available on all stocks — only those with enough interest and volume.

There are only two basic types of options: calls and puts. A call appreciates when the price of the underlying stock rises. So you buy a call if you are bullish on that company. A put option appreciates when a stock declines. You buy a put if you believe a stock will fall or to hedge a stock that you already own. One way to remember this is: “call up; put down” (as in, call something up, or put something down).

Next, let’s walk through the most common options trades we make in Motley Fool PRO: buying calls, buying puts, selling (also know as writing) covered calls, and selling puts.