WHY WE USE OPTIONS FOR
RISK MANAGEMENT
Offense is what tends to get all the attention.
Defense is what protects everything you've built.
Most conversations about investing focus on growth — finding the right stocks, the right funds, the right allocation to maximize returns. That's offense, and it matters. But for investors who have spent decades building significant assets, defense matters just as much. Maybe more. Because a well-executed defensive strategy isn't just about avoiding losses. It's about staying in the game long enough for your offense to work.
There are really only three ways to protect a portfolio when markets turn against you. Two of them have significant limitations that most investors don't discover until it's too late. The third is what we use, and it's worth understanding why.
THE WAY ALMOST EVERYONE DOES IT: DIVERSIFICATION
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You've heard this your whole life. Don't put all your eggs in one basket. Spread your money across stocks, bonds, real estate, international funds. It's called Modern Portfolio Theory, and it has been the industry standard since the 1950s. Your financial advisor almost certainly uses it. So does your 401(k). So does virtually every major investment firm in the country.
The idea is intuitive: when one asset class falls, another rises, and the ride smooths out. In calm markets, it works reasonably well.
But here is where it falls apart. Think back to 2008. Or March 2020, when COVID rattled global markets. When investors become genuinely fearful, correlations between asset classes converge — stocks, bonds, international funds, all of it moves down together. The diversification that was supposed to protect you stops working precisely when you need it most. It's like an umbrella that handles a light drizzle but inverts in a real storm.
Even in normal conditions, diversification doesn't eliminate risk. It only distributes it. You still absorb the losses, just spread across more positions. And because your capital is spread thin, you don't fully capture the upside either. The result is a strategy that keeps you safe enough but keeps you average.
There is also a structural reason this approach dominates the industry that has nothing to do with what's best for you. Diversification is simple to explain, easy to implement at scale, and easy to defend when markets disappoint. It works well enough for firms managing thousands of clients with a single standardized model. It was never designed to be customized for your specific situation.
A CLARIFICATION ON HOW WE USE DIVERSIFICATION
We do diversify our clients' portfolios, but we use diversification as an offensive tool, not a defensive one. A portfolio built for growth will naturally hold a variety of positions across sectors, because we want clients participating in growth wherever it is happening. We are not against diversification. We simply believe it is widely misused as a substitute for genuine risk management, and we offer our clients something more effective on defense.
THE WAY MANY INVESTORS TRY:
TIMING THE MARKET
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This approach feels logical. If you believe a downturn is coming, sell your positions, hold cash, and buy back in when conditions improve. Simple in theory. Consistently unsuccessful in practice.
Even professional money managers with dedicated research teams and sophisticated analytical tools cannot time the market reliably. The data is unambiguous on this point. Research shows that missing just the ten best trading days over a multi-decade period cuts overall returns nearly in half. Ten days out of thousands. And those best days overwhelmingly occur during the most frightening moments in the market — exactly when investors sitting in cash are least likely to act.
There is also a compounding psychological trap. Timing the market requires being right twice — once on the exit and once on the re-entry. Most investors manage one and miss the other. They sell during a decline, feel relieved watching from the sidelines, and then watch the recovery happen without them. They wait for a more comfortable entry point that never quite feels right. Eventually they re-enter near a peak out of fear of missing further gains. Then the cycle repeats.
Market timing isn't a strategy. It's a reaction. And reactions driven by fear and uncertainty produce predictable, costly results.
THE WAY THAT ACTUALLY WORKS:
OPTIONS AS A RISK MANAGEMENT TOOL
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As portfolios grow beyond a certain size, investors gain access to additional tools for managing risk that simply aren’t practical for smaller accounts. Options are one of those tools.
The word "options" carries baggage for many investors — and for understandable reasons. Used carelessly or speculatively, options can amplify risk rather than reduce it. Some advisors have caused real harm to clients by using them irresponsibly. That history is worth acknowledging directly.
But used correctly, within a disciplined and transparent framework, options are among the most effective risk management instruments available. They are how institutional investors like pension funds, endowments, and large family offices have managed portfolio risk for decades. The difference is access and expertise, not the tool itself.
As portfolios grow, the range of risk-management tools available to investors expands as well. Options strategies tend to become practical only once portfolios reach a certain scale — generally around $250,000 or more — where positions are large enough to structure protection efficiently. At that point, investors gain access to a level of portfolio risk management that is simply not practical for smaller accounts.
Consider your homeowner's insurance. You don't purchase it because you expect your house to burn down. You purchase it because if something catastrophic happens, you want defined, reliable protection. You know exactly what the coverage costs. You know exactly what it provides. There are no surprises.
A put option works the same way for your investment portfolio. If you hold a portfolio of stocks and want protection against a significant market decline, a put option allows you to lock in a defined floor today. If markets fall sharply, the put option gains value and offsets the losses in your portfolio. The worse the decline, the more valuable the protection becomes. And like an insurance premium, the cost was known before anything happened.
That is fundamentally different from diversification, which relies on the hope that asset classes won't move together. And it is categorically different from market timing, which relies on prediction. With a properly structured options position, the protection is contractual. It is defined, transparent, and priced in advance.
OPTIONS FOR UPSIDE PARTICIPATION, NOT JUST PROTECTION
Options are not only a defensive tool. Certain strategies allow a portfolio to participate meaningfully in market gains while managing the capital at risk required to do so. Rather than committing full exposure to capture upside, options can create structures where you participate in growth with a defined, understood risk profile. You stay invested and engaged without placing all of your capital at full market risk.
WHY MOST ADVISORS DON'T OFFER THIS
If options are this effective, why aren't they standard practice? There are several honest answers to that question.
Options are more complex than index funds. They require specialized knowledge, ongoing management, and individualized implementation. Advisors must obtain specific client authorization to use different levels of options strategies, and they require a level of customization that simply does not scale to thousands of clients. The dominant business model in the financial advisory industry is built around simplicity and scale — standardized portfolios applied broadly, not strategies tailored to individual circumstances.
For advisors like us who are willing to invest the time and expertise to manage portfolios this way, options provide something that diversification and market timing cannot: a defined, honest picture of risk before anything happens. You know what protection you have. You know what it costs. You know what your exposure is. There is no guessing, no hoping, and no discovering in a down market that your protection wasn't what you thought it was.
That is what genuine intelligent risk management looks like.
HOW WE USE OPTIONS AT CONVERGENT
We use options selectively and only within a disciplined, long-term framework. Specifically, we use them for three purposes: to provide a defined layer of downside protection, to enhance the efficiency of existing portfolio positions, or to pursue a specific investment objective aligned with a client's goals and risk tolerance.
We do not use options for short-term trading. We do not use them speculatively. Every options position is explained to our clients in plain language before implementation: what it is, why we are using it, what it costs, and what it provides.
Transparency is not optional in a fiduciary relationship. It is the foundation of one.
If you have had concerns about options in the past, or have encountered advisors who used them in ways that felt opaque or aggressive, we welcome that conversation. Understanding exactly how and why we use them is part of how trust is built — and it is a conversation we are always willing to have.
FREQUENTLY ASKED QUESTIONS
Aren't options risky? I've heard they can cause big losses.
They can be, but only when in the wrong hands and used for the wrong purposes. Options used speculatively, or without full client understanding, have caused real damage to investors. That history is legitimate and worth taking seriously. The distinction is in how they are used. We use options as risk management tools: to define and limit downside exposure, not to amplify it. Every position is transparent, explained in advance, and consistent with the client's overall strategy and risk tolerance. Used this way, options reduce risk rather than increase it.
How is this different from what my current or most other advisors do?
Most advisors rely primarily on diversification as their risk management approach. That is not wrong, but as we've described here, diversification has meaningful limitations, particularly during periods of genuine market stress when correlations converge. If your current strategy doesn't include a defined mechanism for limiting downside exposure — something with a contractual floor rather than a statistical hope — then it is likely relying on diversification alone. Our approach adds a layer of structured protection that functions regardless of how asset classes correlate in a given environment.
Does using options cost more?
Options strategies do carry a cost, typically in the form of premiums paid for protective positions, or in the structure of how upside participation is captured. Options strategies also tend to become practical only once portfolios reach a certain size. Because options contracts are structured around fixed share quantities, portfolios generally need to exceed about $250,000 for protective strategies to be implemented efficiently. We are transparent about the costs and factor them into our overall strategy assessment.
The relevant question is not whether the strategy has a cost, but whether that cost is justified by the protection and efficiency it provides relative to an unprotected alternative. In most cases for clients at a certain stage of wealth, the answer is yes. The cost of not having defined protection is far higher than the cost of having it.
Do I need to understand options to work with you?
You need to understand what your portfolio is designed to do, what protection you have, what it costs, and what your risk exposure is. We translate every strategy into plain language so that you are always clear on those four things. The technical mechanics of options are our responsibility to manage. The outcome, a portfolio with defined risk and meaningful growth potential, is what you need to understand and feel confident about.
IS YOUR CURRENT STRATEGY GIVING YOU BOTH THE GROWTH AND PROTECTION YOU DESERVE?
Many of the investors who reach out to us are simply looking for perspective on whether an options strategy could fit into their broader investment plan.
If you are not completely confident you are getting ideal growth and protection for your portfolio, and our approach resonates with you, we invite you into a conversation.
There is no obligation and no sales pitch. It begins as a straightforward exchange: we learn about your situation, you learn about our approach, and together we determine honestly whether we are the right fit for each other. It really is that simple.