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Hedging Your Bets with Options


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

"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.