If you would like to participate in some of the growth of the market without risking your principal, there is a relatively simple strategy you can use to do so. It requires a basic knowledge of options and bonds. For simplicity’s sake, we’ll use a hypothetical portfolio of $100,000 to show how this works

First you must establish a time horizon, such as seven years. Then you will go out and find a bond that pays a rate of interest that will grow back to your original principal amount over the next seven years. It may be wise in this case to choose a stable corporate bond with a high rating that pays a higher rate than a CD or government security. For example, if you could find a new corporate issue that pays 7%, then you would need to invest approximately $70,000 in them in order to receive back $100,000 in seven years.

The level of safety that you require from the bonds will depend upon your risk tolerance; those who cannot afford to lose their money should probably stick to government bonds or CDs, while more adventurous investors could benefit from higher corporate rates. Even preferred stock could be used for this part of the strategy if the higher risk and volatility is acceptable.

The second part of the equation involves buying call options on the market index of your choice. Most banks and insurance companies that use this strategy to produce indexed annuities and CDs buy calls on the S&P 500 Index, but any index can be used. But the remaining $30,000 of your portfolio will go toward buying as many calls on the index of your choice as possible. For the uninitiated, call options are derivatives that can be purchased by bullish investors on a stock or index.

If the price of the stock or index rises, then the value of the call option will increase substantially, and vice-versa if the price of the underlying investment falls. Therefore, if the index drops in value, then the calls will expire worthless, and you will be left with your initial principal at the end of seven years.

For this type of strategy, you would buy a kind of call option known as a LEAP (Long-Term Equity Anticipation security). Traditional options expire within one year, but LEAPs can last for up to three years. Ultimately, the idea here is to reap the profit from the rise in the derivatives’ value during the seven years that it will take to recoup your principal. If the index posts a solid gain during that time, then you will see a dramatic rise in the price of your LEAPs.

Depending on how much the index rises, you could conceivably double your money from the LEAPs and still get your principal back as well. This would leave you with perhaps $160,000 at the end of the seven-year period-and your initial investment was never at risk!