Puts
Investors have long used put-buying to enter into or hedge certain positions during market volatility. Today, put-writing strategies are commonly used to protect portfolios against losses, said Cott.
One such strategy involves writing index puts at the money in regular intervals to collect the premium. The strategy generally captures much of the market upside while avoiding some of the downside, leading to a less volatile portfolio.
Collars
Advisors of clients who have long-held legacy stock positions with low cost basis may be interested in using calls and puts in a collaring strategy, said Cott. Collaring involves writing an out-of-the-money call option while purchasing an out-of-the-money put option.
“The discussion comes in to see if there’s a way to carve out some of the position to participate in the upside and sell a call to protect on the downside,” says Cott. “Collaring provides the best of both worlds.”