Better know your option options

— -- Q: Could you please explain the risks and rewards of buying and selling calls and puts?

A: With stocks gyrating wildly from day to day, more investors are looking to stock options to smooth out the ups and downs of their portfolios. Options are financial instruments that can help investors manage portfolio risk.

Calls and puts are the two main types of options investors have at their disposal. Calls allow their owners buy a certain stock at a preset price by a preset time in the future. Puts let their owners sell a certain stock at a preset price by a set time in the future.

So, options let you lock in certain prices for stock to protect yourself from huge downside. That's a big plus when the stock market gets rocky, as it is now.

But it's really impossible to answer your question the way it's stated. Buying or selling calls and puts can be either extremely risky or extremely conservative, based on how it's done.

For instance, buying a put can be conservative if you own the underlying stock. This strategy is called a protective put because it can limit your downside to the price you paid for the put. It is, in effect, like buying an insurance policy to protect your portfolio.

Before playing with options, you should take the time to learn and know exactly what you're doing. The Chicago Board Options Exchange's Options Institute is a great place to start. You can learn about options here.

Another great resource is a book called The Options Playbook offered by online broker TradeKing. It's an easy-to-follow guide on options that's worth checking out if you want to be 100% clear you know what you're risking and stand to gain by playing options.

Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.