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Hedging Your Bets with Options

CNBC.com
Tuesday, 20 Feb 2007 | 2:21 PM ET

It may be time to hedge your bets.

The bull market has been running for at least four years, and volatility has remained at historic lows for some time now. That indicates that investors may be getting complacent, says Randy Frederick, director of derivatives at Charles Schwab, which means it's time for investors to protect their investment gains.

Options Trading
A warning that positive comments from Fed Chairman Bernanke and a strong market may have made investors complacent, with Randy Frederick, Charles Schwab Director of Derivatives and CNBC's Sue Herera

"I’m not saying that the market is ready to make a big downturn," Frederick told CNBC. But, "we do know if it's going up, at some point it will stop...It’s a good time for people to take a step back and hedge their positions."

That's where options come in. While investors have used them to place market bets for some time, they've increasingly been using options to hedge, or protect, their positions. Options can used in several strategies, Frederick says, whether it's to write "covered calls" to generate extra income, or to create a "collar" that will limit losses.

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  • Sue Herera is a founding member of CNBC, helping to launch the network in 1989. She is co-anchor of "Power Lunch."

  • Tyler Mathisen co-anchors CNBC's "Power Lunch." Mathisen also co-anchors "Nightly Business Report produced by CNBC."

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