Dawn Pennington

Put a 'Choke' Hold on Profits

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When the market turns south, a lot of long investors do one of two things: lament the losses their portfolio took during the latest financial fallout or rejoice because they pulled their money out just in time.

Either way, many probably still get stuck on the sidelines, waiting to build up enough capital and/or courage to jump in again after market events forced them out.

During market downturns, sidelined investors can be some of the most-vocal armchair quarterbacks. But if you're among them, you don't have to just speculate any more. If you're still holding long positions on stocks that have taken an unfair hit, there is a way to profit doubly on their move up.

To profit from market volatility, option spread strategies -- namely, vertical spreads (i.e., two options with the same underlying stock and same expiration date) -- are excellent ways to put less capital to work with more rewards for price fluctuation on positions that you already own.

In volatile markets, stock prices oftentimes bottom out and can only move sharply higher. Some, however, move into a freefall pattern and continue dropping faster than an anvil hurtling toward the "Road Runner."

If you are holding one or both kinds of stocks, using vertical spreads is a strategy to help you profit with options when you expect sharp price movement, but you're not sure of the direction.

There are a host of vertical spread strategies, but a "strangle" is one kind that can help get you get off the sidelines in a market environment that's going up, down and all around.

A strangle is an option spread where the investor holds a position in both a call and put in the same underlying asset with the same expiration date, but with different strike prices.

Executing a strangle is straightforward, and you can typically do so at a discount, as the aim is to buy a slightly out-of-the-money call and a slightly out-of-the-money put position.