(wr note: the next two posts discuss but do not recommend investment tools that can be used successfully in falling markets. The discussion presents the difficulty of using these tools—they are even hard to write about!--but if studied and explored, they can add flexibility to your portfolio—and make money in down markets. These two posts offers no strategies or techniques, but cite actual tables and a mock example of these tools, and introduce the investment terms that describe the tools. As always the purpose of Perlo is to invite you in, remembering that thinking is important to self-care, and to offer information as hospitality along life's journey.)

If you are worried about your savings or retirement income, “put” your fears to rest. A common trading technique will earn money for your portfolio even when the market prices for shares are falling through the roof.

The technique involves trading options instead of trading stock shares. An option simply gives the purchaser the right to buy or sell a share of stock at a pre-set price. An option to buy might have a price at $5 or $10 or $20 a share to buy the stock. An option to sell might have the same prices.

An option is a contract to buy or sell at the agreed price, called the strike price.

Why not just buy or sale the stock? An option reduces risk by fixing the price of the sale (again, called the strike price). An option also reduces risk by requiring less money for your investment, usually only 5 and 1 percent of the stock price. Since you are buying the right to buy or sell but not the stock itself, an option has less money at risk and controls risk by fixing the price.

Remember, the price of the option is the price paid for the right to buy or sell stocks at a strike price—buying options does not purchase or sell the stock itself.

Why not just buy or sale the stock? Because options reduce risks and increase the opportunity to build revenue by investing—<u>even in down or declining markets</u>—even as severe as the one the markets are currently experiencing!

One more point about options. Options not only contract the right to buy or sell at a strike price, options also must be used within a fixed time period, a specific date. If not used (or “exercised”), the right “expires” or ends on that date. After that date, the right to sell or purchase stock no longer exists for the option holder. And the investor loses the price paid for the option. (To reduce this likelihood, experienced traders often combine option buying and selling with positions in the stock.)

Here's a quick summary. An investor can buy an option, which gives the investor the right to buy or sell stock before a given date. After that date, the option expires. Options reduce risks. Options increase profits.

There are two kinds of options, calls and puts. Call option involve the rights to sell shares at a fixed price. Put options involve the right to purchase shares at a fixed price. Both options can be bought or sold.

New York Stock , 1955 (fair use)

If they are so good at lowering risks and making money in every kind of market, how come there are no ads or talk shows about these magical rights? How come CNBC, the Wall Street Journal, CNN Money, or even Oprah rarely or never discuss stock market options as an investment tool?

That is hard to answer except options use the principles of Algebra to calculate their risks and profits. Options base their investment leverage on a little bit of advanced math. The delta function of Algebra, the rate of change in the slope of a line—or the stock price of an investment--is the key to knowing the technical data that drives options pricing and makes for successful options trading. Secondly, options can be priced at as many as ten or more different strike prices!

Put options are used to make profits in a falling market. The lower the market goes, the more money a put option will make!

That's completely counter-intuitive. How does a put option make money when markets are falling? Shouldn't the put options be losing money, like all the rest of the investments? This doesn't sound right! It defies common sense!

That's one reason why options don't make the talk shows. They are not easy to discuss in sound bites. South Carolina once had the leading video instruction programs for secondary schools, and I remember the lady who taught Algebra by video lesson. Options have about the same viewer interest! (The best thing was the signing on and off music.)

To see how complex options can be, let's use General Motors as an example, once the world's largest industrial corporation. It's Tuesday (03/09) share price close (the close is the last trade) was $1.89. Options always expire on the third (3rd) Friday of the month.

And a put option is an option to purchase a 100 shares at the strike price.

The price of the March put options (which expire on the 3rd Friday) were:

Strike price, $2.50, option price, $0.84.

Strike price, $5.0, option price, $3.30.

(The strike price doubled, but the option price quadrupled!)

Strike price, $7.50, option price, $5.76.

Strike price, $10.00, option price, $8.23.

(The option price increase virtually matches the strike price increase!)

Here's an example of selling a put option, rather than buying a put, and it is even more complicated.

Sell a March 45 put option, (strike price $45). Its price is $8.50. This means that at anytime between now and the third Friday in March, you may have to purchase 100 shares of stock at $45 a share. For be willing to buy these shares at $45, you are received $850 upfront when you sold the put. (a contract is in lots of 100 shares. The premium or price of each share's put was $8.50. 100 shares = $850.).

Later in March, you are facing two situations. If the option expires, you have made a profit of $850. If the option is exercised, you purchase 100 shares at the strike price, $45.

Your total is $4,500 to own a 100 shares of stock. But you already received $850 when you sold the put. So your actual cost is $3,650--or $36.50 a share.

Because you sold the put, you purchased the shares at a 30% discount!

Doesn't it seem too good to be true? You end up with either free money or buying the stock at a discount.

New York Stock Exchange, 2007 (fair educational use)

Options are not easy to understand. But like riding a bike or learning to skate, once you get it, after a little practice, option trading makes sense!

Options have their own market in Chicago. It's called the Chicago Board of Options Exchange (CBOE).

And in a collapsing market, they are useful tools to protect and re-build your portfolio, and no more difficult to master than learning to skate backwards!

(Walter Rhett's note: “I once trading options extensively in a private account, so my post is based on actual individual investor experience. Brokers and agents will often steer clients always from options, citing “high risk,” “loss potential,” and other “bos.” Traders in options do have to have a special SEC license, and many brokers who are expert salespersons do not have the time or skills to master the very different paradigm of option investing—which doesn't hinge on P/E ratios, company calls, or quarterly earnings. Options actually track the actions of market prices in a pure form. The CBOE has excellent training and education materials and videos, some free! (www.<u>cboe</u>.com/LearnCenter/ or www.<u>cboeoptions</u>institute.com/LearnCenter/Online/ or google CBOE options education) But as in all investments, intermediate goals for safety must be set. Study carefully, act wisely, master the strategies, and restore your portfolio.”)

Thanks for reading! Southern Perlo is posted from Kudu Coffee (African coffees and good conversation!), in Charleston, SC. In a Southern voice, it gathers stories and views for local communities, and was recently featured on the Lou Dobbs radio show. (A Perlo is rice enriched by local bounty; carefully crafted to enhance its pleasure and value; enjoyed by all.)

Coming Soon: “Is Obama Bi-Polar?”