In the current market you probably have a number of clients who are looking to reduce their portfolio’s risk and volatility. A strategy that is easy to explain is the purchase of protective puts: buy puts against a long stock position – the client maintains his stock position and its upside potential and the put offers downside protection against any further decline in the overall market or of a particular stock. Clients recognize this as a form of insurance, a financial product they already purchase for their house, their car, their life.
The drawback to protective puts in the current market is the high level of volatility which has substantially increased the cost of insurance. When faced with the premiums of puts clients are quite likely to suffer from sticker shock. But investors can still reduce portfolio risk and volatility if they are willing to consider different hedging strategies. Two examples of these are: writing covered calls and collars.