Using options for a defensive purpose can be beneficial. Here is one of the ways we would look at doing this. If you own a stock and are concerned that the stock may move down you can create a collar. A collar is where you would SELL a CALL and BUY a PUT. For example you can SELL a CALL slightly above the current price thus receiving funds, then use those funds to purchase the PUT to protect your downside. The amount of premium you receive for the CALL will give you an indication of the census on that stock. If you are getting much more premium for the CALL then you are being asked for the PUT, the options market believes the stock is more likely to go up.
The heads up here is to check the downside of your position. You want to look at the annual lows and see where it is in comparison to that price. For example if the stock is at $100 and the high is $110 and the low is 70, you have a lot more to lose if the market corrects. If you see that the stock has moved to $85 several times and continues to rally after that price you have support at $85. You may want to buy your PUT at a lower price to save some premiums.
If you use a taxable account be aware of this trade. Options can cause some taxable income and this strategy is used well with retirement accounts. Our Sensei suggests that you always have a coach when developing a strategy.
options are NOT suitable for all investors and people can and do lose money!