I've been an investor in stocks for the past 14 years and have the confidence that I know what I'm doing. (Not that I can beat the market, but that I know what I'm doing. :-) I'm a long-term investor, who sometimes but rarely sells after less than a year of ownership.
I would like to understand some practical issues in dealing with options as a strategy to reduce risk.
For a stock, I can read the S+P report and look at fundamentals like price/earnings ratio, earnings history, long-term debt, etc. and make my own estimate as to the likelihood of whether the market value of a stock will go up in the next few months/years (therefore decide to buy or hold), or down (therefore decide to sell or not buy). I can make my own estimate of value (with lots of uncertainty, but it's an estimate) and compare with the market value, and decide if I think the market is undervaluing or overvaluing.
I am considering buying put options, to protect my downside risk if the stock I own goes down, or buying call options, to protect my risk if I decide to sell or not buy a stock. (I do not want to get into short positions on options -- too much risk.) But I have no idea how to do the kind of finance analysis for options that I do for a stock.
How would I decide what strike price and duration of option to buy? (e.g. if I own stock XYZ presently at $50/share, how would I decide whether to buy put options at $45 or $40, and 3 months vs 6 months?)
How would I decide whether I think the market is overvaluing or undervaluing options?
How would I decide how many options contracts to buy? (relative to the # of shares of the stock I would feel comfortable buying/selling)