fter enjoying the year-long rally, investors are now once again dealing with the painful side of the risk-reward equation. The dire combination of European problems and the Gulf oil spill, added to the background noise of general economic concerns, pushed the stock market to its lowest closing level since last November. Even more worrisome is the fact that as the bearish move gains steam, short-term traders who use technical analysis and momentum-based indicators may well add fuel to the downturn by dumping remaining stocks and adding short positions.
Even if you're a long-term investor, it can still be hard to commit your hard-earned money to the stock market when things look dire. Instead of taking on the full risk of stocks, you might prefer some sort of compromise that would give you at least some profits from a market rebound while protecting you from the full brunt of a possible collapse. Fortunately, there's a way you can dial your risk to your exact comfort level.
Give yourself the option
To many, options are intimidating. While you may feel completely comfortable investing thousands of dollars in a stock, spending a smaller amount to implement an options strategy can still give some the heebie-jeebies.
The reason for this anxiety comes from the high-octane methods that some traders use with options to speculate on stocks and the overall market. Options can give you immense leverage over your portfolio, giving gamblers a prime way to shoot for the moon -- or go bust trying.
But just because some people use options as a way to maximize their leverage doesn't mean you have to. One simple strategy can provide a way for you to invest in stocks while taking on less risk than you would by simply buying the shares.
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