Tradeoffs

When making use of any option strategy, the investor understands that he has something to gain. The strategy can be very conservative, emphasizing loss prevention. It can also be aggressive, emphasizing either enhanced profitability (limited gains) or the low probability chance to earn out-sized gains.

When using options as a risk reducing tool, there is often something that must be sacrificed. It could be cash (in the form of insurance premium). It could be accepting limited profit potential for the investment being protected. One additional point: “Limited profits” does not mean that the gains must be small. That term refers to the fact that the chance for unlimited profits is sacrificed. Those limited profits can be far beyond the expectations for the average investor.