Options for Protecting Your ETF Positions

“In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” – Warren Buffett Most long-term investors consider options to be risky and complicated, as Warren Buffett seems to imply in the quote above. But some options strategies provide an effective way to minimize risk: covered calls provide an immediate premium and no downside risk – just opportunity cost – while protected puts let investors limit their losses by establishing a price floor for their long stock position or hedge an entire portfolio with index puts. For ETF investors, options provide a great way to realize the same benefits on entire indexes rather than individual stocks, which could result in a higher long-term, risk-adjusted returns.