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Chapter 7. Option Strategies in Down Markets > Options and Downside Risk

Options and Downside Risk

An essential element of using calls in down markets is the reduction of losses caused by further downside movement. Premium earned for writing short calls reduces net basis in stock, which also helps close the gap between basis and current market value. Long puts or long calls provide profitable outcomes as long as stock prices move enough in the desired direction; the problem with long-option positions is twofold. First, time works against you when you buy options. Second, time value declines as expiration approaches, requiring far more price movement in the stock to justify the decision to go long in the option.

The Down-Market Benefits of Options

Consider the four primary down-market benefits of options in determining when to use them to manage your portfolio:


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