Insurance You Can Trade

An option is a contract that gives you the right — but not the obligation — to buy or sell an asset at a specific price before a specific date. Think of a put option like homeowner's insurance: you pay a small premium now so that if disaster strikes, you're covered.

There are two flavors. A call option gives you the right to buy. A put option gives you the right to sell. Portfolio protection mostly uses puts — they increase in value when stock prices fall, offsetting your losses.