Using options as investment tools

Putting options to work in an investment portfolio

Using options as investment tools
Many investors know that a put option gives them the right to sell a stock at a specified price within a set period, while a call option provides the right to purchase shares at a specified price, also within a set period.

Some investors, however, may not realize that these financial instruments have a variety of applications. They can use options to potentially optimize returns on capital, for example, and to help protect their assets from volatility that has become commonplace in the global economy.

Individual and institutional investors can protect their investments and enhance opportunities for growth with a wide range of risk-management products available through Montréal Exchange (MX), Canada’s only financial derivatives exchange. MX offers options on 281 equities listed on TSX as well as currency options and options on TSX-listed exchange-traded funds (ETFs).

Investors who don’t want to trade directly in options can buy shares in several ETFs whose managers sell calls against a portfolio of securities. Investors share in the proceeds, although they also share in any losses incurred by the funds.

In today’s investment climate of low interest rates, global volatility and shifting economic conditions, investors may consider including options and other derivative products in their investment portfolio. As with any financial instrument, though, they should understand the mechanics and the possible risks before they start buying and selling options. Options provide another tool that investors can use to protect their assets and add a degree of certainty to their portfolio’s performance.