Is there a good options strategy that has a fairly low risk?
Check out this site: http://www.m-x.ca/produits_options_actions_en.php  (Under the Trading Strategies). If you have a background in math or eco or are comfortable with graphs, I suggest you graph the payoffs of each of these strategies.  It will really help you understand it.  If you need help with this, let me know and I can draw a couple out for you. Your question is rather vague but also complicated however I will try to answer it.  First off, many investors buy options to hedge against a current position in a stock (already own the stock).  But you can also try to make money off of options rather than protecting yourself. Let's suppose you anticipate that a stock will increase in value so you want to capitalize on this.  Suppose further that you have a small amount of money to invest, say $100.  Suppose the stock is currently at $100 so that you can only afford 1 share.  Suppose there is a call option out there with strike $105 that costs you only $1. Let's compare two scenarios: The stock increases to $120 at the maturity date of the option. So, you made a lot more money with the same initial investment.  The amount of money you put in is small (i.e. can be perceived as low risk).  However, if the stock price ended up being $104.90 then your options are worthless (i.e. can be perceived as high risk). HTH. "You may look into covered calls.  In short, selling the option instead of buying it ... playing the house.   One can do this on the ""buying side"" too, e.g. let's say you like company XYZ.  If you sell the put, and it goes up, you make money.  If XYZ goes down by expiration, you still made the money on the put, and now own the stock - the one you like, at a lower price.  Now, you can immediately sell calls on XYZ.  If it doesn't go up, you make money.  If it does goes up, you get called out, and you make even more money (probably selling the call a little above current price, or where it was ""put"" to you at). The greatest risk is very large declines, and so one needs to do some research on the company to see if they are decent -- e.g. have good earnings, not over-valued P/E, etc.  For larger declines, one has to sell the call further out.  Note there are now stocks that have weekly options as well as monthly options.  You just have to calculate the rate of return you will get, realizing that underneath the first put, you need enough money available should the stock be ""put"" to you.   An additional, associated strategy, is starting by selling the put at a higher than current market limit price.  Then, over a couple days, generally lowering the limit, if it isn't reached in the stock's fluctuation.  I.e. if the stock drops in the next few days, you might sell the put on a dip.   Same deal if the stock finally is ""put"" to you.  Then you can start by selling the call at a higher limit price, gradually bringing it down if you aren't successful -- i.e. the stock doesn't reach it on an upswing. My friend is highly successful with this strategy. Good luck" "There isn't really a generic options strategy that gives you higher returns with lower risk than an equivalent non-options strategy. There are lots of options strategies that give you about the same returns with the same risk, but most of the time they are a lot more work and less tax-efficient than the non-options strategy. When I say ""generic"" I mean there may be strategies that rely on special situations (analysis of market inefficiencies or fundamentals on particular securities) that you could take advantage of, but you'd have to be extremely expert and spend a lot of time. A ""generic"" strategy would be a thing like ""write such-and-such sort of spreads"" without reference to the particular security or situation. As far as strategies that give you about the same risk/return, for example you can use options collars to create about the same effect as a balanced fund (Gateway Fund does this, Bridgeway Balanced does stuff like it I think); but you could also just use a balanced fund. You can use covered calls to make income on your stocks, but you of course lose some of the stock upside. You can use protective puts to protect downside, but they cost so much money that on average you lose money or make very little. You can invest cash plus a call option, which is equivalent to stock plus a protective put, i.e on average again you don't make much money. Options don't offer any free lunches not found elsewhere. Occasionally they are useful for tax reasons (for example to avoid selling something but avoid risk) or for technical reasons (for example a stock isn't available to short, but you can do something with options)." "No.  The more legs you add onto your trade, the more commissions you will pay entering and exiting the trade and the more opportunity for slippage.  So lets head the other direction.   Can we make a simple, risk-free option trade, with as few legs as possible? The (not really) surprising answer is ""yes"", but there is no free lunch, as you will see.  According to financial theory any riskless position will earn the risk free rate, which right now is almost nothing, nada, 0%.   Let's test this out with a little example. In theory, a riskless position can be constructed from buying a stock, selling a call option, and buying a put option.  This combination should earn the risk free rate. Selling the call option means you get money now but agree to let someone else have the stock at an agreed contract price if the price goes up.  Buying the put option means you pay money now but can sell the stock to someone at a pre-agreed contract price if you want to do so, which would only be when the price declines below the contract price.  To start our risk free trade, buy Google stock, GOOG, at the Oct 3 Close:   495.52 x 100sh = $49,552 The example has 100 shares for compatibility with the options contracts which require 100 share blocks. we will sell a call and buy a put @ contract price of $500 for Jan 19,2013.   Therefore we will receive $50,000 for certain on Jan 19,2013, unless the options clearing system fails, because of say, global financial collapse, or war with Aztec spacecraft. According to google finance, if we had sold a call today at the close we would receive the bid, which is 89.00/share, or $8,900 total.  And if we had bought a put today at the close we would pay the ask, which is 91.90/share, or $9190 total. So, to receive $50,000 for certain on Jan 19,2013 we could pay $49,552 for the GOOG stock, minus $8,900 for the money we received selling the call option, plus a payment of $9190 for the put option we need to protect the value.  The total is $49,842.   If we pay $49,842 today, plus execute the option strategy shown, we would have $50,000 on Jan 19,2013.  This is a profit of $158, the options commissions are going to be around $20-$30, so in total the profit is around $120 after commissions.   On the other hand, ~$50,000 in a bank CD for 12 months at 1.1% will yield $550 in similarly risk-free interest.   Given that it is difficult to actually make these trades simultaneously, in practice, with the prices jumping all around, I would say if you really want a low risk option trade then a bank CD looks like the safer bet.  This isn't to say you can't find another combination of stock and contract price that does better than a bank CD -- but I doubt it will ever be better by very much and still difficult to monitor and align the trades in practice." By coincidence, I entered this position today. Ignore the stock itself, I am not recommending a particular stock, just looking at a strategy. The covered call.  For this stock trading at $7.47, I am able, by selling an in-the-money call to be out of pocket $5.87/sh, and am obliged to let it go for $7.00 a year from now. A 19% return as long as the stock doesn't drop more than 6% over that time. The chart below shows maximum profit, and my loss starts if the stock trades 21% below current price.  The risk is shifted a bit, but in return, I give up potential higher gains. The guy that paid $1.60 could triple his money if the stocks goes to $12, for example. In a flat market, this strategy can provide relatively high returns compared to holding only stocks.
The simplest way is to invest in a few ETFs, depending on your tolerance for risk; assuming you're very short-term risk tolerant you can invest almost all in a stock ETF like VOO or VTI.  Stock market ETFs return close to 10% (unadjusted) over long periods of time, which will out-earn almost any other option and are very easy for a non-finance person to invest in (You don't trade actively - you leave the money there for years).  If you want to hedge some of your risk, you can also invest in Bond funds, which tend to move up in stock market downturns - but if you're looking for the long term, you don't need to put much there. Otherwise, try to make sure you take advantage of tax breaks when you can - IRAs, 401Ks, etc.; most of those will have ETFs (whether Vanguard or similar) available to invest in.  Look for funds that have low expense ratios and are fairly diversified (ie, don't just invest in one small sector of the economy); as long as the economy continues to grow, the ETFs will grow. If you're willing to shell out some cash, vendors will be quite happy to sell you everything you need. Picking one out of thin air, and no idea if this is a good price or not, the CBOE will sell you EOD data for every option for $40 for one day, and at a discount for multiple days.  Beyond the high/low/close for each contract, you get the volume. Or a month of TAQ data will run your $1550, for what that's worth, which probably isn't a lot for a retail strategy. "The standard low-risk/gain very-short-term parking spot these days tends to be a money market account.  However, you have only mentioned stock. For good balance, your portfolio should consider the bond market too. Consider adding a bond index fund to diversify the basic mix, taking up much of that 40%. This will also help stabilize your risk since bonds tend to move opposite stocks (prperhaps just because everyone else is also using them as the main alternative, though there are theoretical arguments why this should be so.) Eventually you may want to add a small amount of REIT fund to be mix, but that's back on the higher risk side. (By the way: Trying to guess when the next correction will occur is usually not a winning strategy; guesses tend to go wrong as often as they go right, even for pros. Rather than attempting to ""time the market"", pick a strategic mix of investments and rebalance periodically to maintain those ratios. There has been debate here about ""dollar-cost averaging"" -- see other answers -- but that idea may argue for investing and rebalancing in more small chunks rather than a few large ones. I generally actively rebalance once a year or so, and between those times let maintainng the balance suggest which fund(s) new money should go into -- minimal effort and it has worked quite well enough.,)" "You've described the process fairly well.  It's tough to answer a question that ultimately is 'how is this fair?' It's fair in that it's part of the known risk. And for the fact that it applies to all, pretty equally. In general, this is not very common. (No, I don't have percents handy, I'm just suggesting from decades of trading it's probably occurring less than 10% of the time). Why? Because there's usually more value to the buyer in simply selling the option and using the proceeds to buy the stock. The option will have 2 components,  its intrinsic value (""in the money"") and the time premium. It takes the odd combination of low-to-no time premium, but desire of the buyer to own the stock that makes the exercise desirable." You are probably right that using a traditional buy and hold strategy on common equities or funds is very unlikely to generate the types of returns that would make you a millionaire in short order. However, that doesn't mean it isn't possible. You just have to accept a more risk to become eligible for such incredible returns that you'd need to do that. And by more risk I mean a LOT more risk, which is more likely to put you in the poorhouse than a mansion. Mostly we are talking about highly speculative investments like commodities and real estate. However, if you are looking for potential to make (or more likely lose) huge amounts of money in the stock market without a very large cache of cash. Options give you much more leverage than just buying a stock outright. That is, by buying option contracts you can get a much larger return on a small movement in the stock price compared to what you would get for the same investment if you bought the stock directly.  Of course, you take on additional risk. A normal long position on a stock is very unlikely to cause you to lose your entire investment, whereas if the stock doesn't move far enough and in the right direction, you will lose your entire investment in option contracts. Any portfolio, even one composed of risk-free assets is subject to risk. That said, to short an equity without margin risk, puts can provide.  To replicate a short without excess margin, an at the money put should be used.  To take on less leverage, a deep in the money put can be used.  Puts are not available on equities deemed illiquid by regulation. A long/short portfolio can help mitigate variance risk, but then the problem becomes the risk of a lack of volatility since options decline in value over time and without a beneficial change in the underlying. I am a bit at a loss as to how you can read the same book, that inspired Warren Buffet, and take away that trading 600 contracts per month is a way to prosperity.  As a fellow engineer I can say with assurance this speculation scheme is doomed to failure.  Crossing out the word gamble was a mistake.   Instead you should focus on two things.  The first is your core business, which is signal processing.  Work and strive to be the best you can.  Seek out opportunities to increase your income while keeping your costs low.  As an engineer you have an opportunity to earn an above average salary with very low costs. Second would be to warehouse some of those earning and let others who are good at other things work for you.  You may want to read the Jack Bogle books and seek an asset allocation model.  I tend to be more aggressive then he would suggest, but that is a matter of preference.    You don't really have the time, when you focus on your core business, to manage 6 trades a month let alone 600.  Put your contributions on auto pilot and a surprisingly short time you will have a pile of cash. Short time horizon, small pot of money, and low appetite for risk?  That smells like low return situation to me. I guess it depends on how low your appetite for risk is, though.  You could open a brokerage account (free) and purchase $10K worth of a fully diversified ETF like VTI, optionally putting maybe 20% of it in a diversified bond ETF.  I consider that a reasonably conservative investment, but if you are of the mindset that you cannot tolerate a drop in your wealth, it's not going to work.  Plus if you don't have any other investments, this will be the thing that requires you to report capital gains to the IRS, and that paperwork is never fun. As an alternative, you have CD's, which will make you very little.  Or a high-ish interest rate electronic savings account like Capital one 360 or Emigrant Direct (there are probably newer ones now that outcompete even these).  Still, with anything in this paragraph you will be lucky to beat inflation.  The real interest rate was negative last time I checked, so every risk-free investment will lose money in purchasing power terms.  To beat inflation you will need to take on nonnegligible risk.