I have found that my particular use of options mixed with my charting abilities (which I can teach you) provide more profit than any other of the 50 systems and advisory services that I have tried.
We want to leverage our money in the markets. We want is to use a little bit of money to make lots of money in the markets, rather than using a large amount of money to make a little bit of money in the markets. How do we do this? To leverage your money in the markets, the most common way is to use options on stocks.
When you buy a call option, just like when you buy a stock, you are betting that the stock will rise in price. When you short a stock or buy a put option, you are betting that the stock will go down in price. The difference between buying stocks and buying options is the amount of money that is exposed to the whims of the market.
If you anticipate a certain directional move in the price of a stock, the right to buy or sell the stock at a predetermined price for a specific duration of time can offer a very attractive investment opportunity. The decision as to what type of option to buy is dependent on whether your outlook for the particular stock is bullish or bearish. If you’re bullish on a stock, buying a call option allows the opportunity to profit from the potential upside movement of a stock without having to risk more than a fraction of the stock price. On the same note, if you are bearish on a stock, buying a put option allows you the opportunity to profit from the downward movement of the stock without having to risk but a fraction of the stock price.
If You Are Bullish On A Stock
When you are bullish on a stock, you as the investor have two main choices regarding the type of investment you can use to capitalize on the stock movement. You can go long on the stock. That is, you can buy X amount of shares of the stock and then sell those shares when the price of the stock moves up. Or, you can buy a call option at a fraction of the cost of the stock, and then sell the option when the price of the stock goes up. When the stock price goes up (in the case of a call option), the price goes up as well.
Now, let’s examine our two choices in-depth:
Choice #1: Buying the Stock – let’s assume that it’s January and the current price of XYZ stock it $45. Since you are bullish on the stock, you believe that XYZ’s stock price will move upward from here. As a stock buyer, you would at this point buy the stock at $45 and wait until the stock moves up. Your cost to buy the stock would be $45 multiplied by the number of shares you want to buy. Let’s assume that you are buying 100 shares for this example. That would be $45 x 100 = $4,500 per 100 shares.
Assume now that the price of XYZ’s stock climbs to $55 in two days, and you want to sell your shares and take your profits. Your profit would be $55 x 100 = $5,500 (per 100 shares) minus the $4,500 (that was used to buy the stock) equals $1,000 profit. That equals out to be a 22% gain on the money invested.
Choice #2: Buying the Option – let’s say that it’s January 6th, and the price of XYZ stock is going to move up in price in the next day or week. Since you are bullish on the stock, you would then buy a call option on XYZ with the strike price of $45. Let’s also assume that the premium (price) of the option is $3. With these assumptions you would first look up the option symbol for a call on XYZ stock with an expiration date of January and a $45 strike price. When you have this information, you can enter an order with your broker (or online broker) to buy the number of contracts that you wish to control, within the allowed position limits of XYZ January $45 calls.
This is what happens when you have completed your order with your broker. Your broker will purchase the number of contracts of XYZ January 45 calls that you have specified, then deduct from your account $300 for every contract purchased. Remember that a contract is 100 options, and the minimum option order is one contract. So, that is 100 options per contract multiplied by the premium (price) of $3 per option.
Now you will own X number of XYZ January 45 call options contracts which will be placed in your account and which you will control. Assume now that the price of XYZ stock climbs to $55 on or before your XYZ call options expiration date. Let’s also assume that the premium (price) of your XYZ options climbs from $3 (your purchase price) to $11 based on the stock’s upside movement. Now your options are worth $800 per contract more than what you invested.
At this point you have two choices of how to take your profits:
A.) You can exercise your right to buy XYZ stock for $45 a share, which would be 100 shares per contract, then sell the stock shares on the open market at $55. The cost/profit involved in this choice is as follows - $4,500 to purchase the stock at $45 plus the $300 that you paid for every option contract equals $4,800 for every contract you exercise. Your profit would then come when you sold the stock shares in the markets - $5,500 for every 100 shares sold at $55, minus the $4,800 that you paid to exercise your option contract would equal $700 profit per 100 shares of stock sold or per options contract exercised. That is a 15% gain on the money you invested.
B.) You can sell your options contracts for $1,100 per contract. In this instance, you are simply collecting the difference between the current price and the price you paid for the options. Your profits here would be $800 per contract. That’s $1100 (current option price) minus $300 (your invested money) per contract. That’s 266% profit on the money you invested.
Choice #2 (options investment choice) and Choice B (playing the options without owning the stock) in the case of a bullish sentiment, is how I trade call options. As you can see, Choice #2 used with Choice B is much simpler and more profitable that Choice #1 or Choice A.
This strategy allows you to benefit from upwards price movement while limiting losses to the premium paid if the stock price decreases.
Note: For owners of the stock, in order to exercise the option and sell the underlying stocks at the exercise price, the buyer must file a proper exercise notice with the OCC (Option Clearing Corporation) through a broker before the date or expiration. All calls covering the specified stock are referred to an “option class.” Each individual option with a distinctive trading month and strike price is an “option series.” The XYZ January 45 calls would be an individual series.
If You Are Bearish On A Stock
Put options may provide a more attractive methods of investing (for investors that do not own stock) than shorting stock for profiting on stock price declines, in that with purchased puts you have a known a predetermined risk. The most you can lose is the cost of the option. If you short a stock in the event of a price upturn, the potential loss is unlimited, or rather limited when you sell.
Put options also provide investors who are long on a stock (they own the stock) protection from price declines. If the stock declines unexpectedly, due to market conditions, the investor can still sell shares of the stock at the strike price of the option. Therefore, if the current price of the stock is $50, and the investor had bought a $55 put option, the investor will be able to sell the stock at $55 on or before the option expiration date – no matter how far the stock may decline.
Now, if you are bearish on a stock you do not own, you as the investor have two main choices regarding the type of investment you will use to capitalize on a stock movement. You can go short on the stock. That is, you can sell X amount of shares and the buy those shares back when prices move down. This type of investment requires a margin account.
You can buy a put option at a fraction of the cost of the stock and then sell the option when the price goes down. How you profit from the option is similar to call options with one exception. When the stock prices go up (in the case of a call option), the price of the option goes up as well. When the stock price goes down (in the case of a put option) the price of the option goes up!
Let’s examine how these two types of investments would work out:
Choice #1: Shorting the Stock – Let’s assume that it is January and the current price of XYZ stock is $45. Since you are bearish on the stock you believe that XYZ’s price will move downward from here. As a bearish investor, at this point you would short the stock at $45 and wait until the price moves down. Your cost to short the stock would be half the price of the stock ($22.50) multiplied by the number of shares you want to short. For this example, you will be shorting 100 shares. That would be $22.50 x 100 = $2,250 per 100 shares. Since shorting stock requires a margin account, you only need half the price of the stock up front. This money will be frozen in your account! You will receive the other half of the stock price in your account.
Assume now that the price of XYZ’s stock declines to $35 in two days and you want to take your profits. You would have to buy back the amount of stock that you shorted at the decline price of $35. Your profit would be $45 x 100 = $4,500 (per 100 shares), which is the amount received in your account minus the $3,500 (that you paid to buy back the stock), equals $1,000 profit. That turns out to be a 22% gain on the money that you invested.
Choice #2: Buying the Option – Let’s say that it is January 6th, and the price of XYZ stock is $45. Now let’s say that you believe that XYZ stock is going to decline in price over the next day or week. Since you are bearish on the stock, you would then buy a put on XYZ with a strike price of $45. Now let‘s assume that the premium (price) of the option is $3. With these assumptions you would first look up the option symbol for a put in XYZ with an expiration date of January and a $45 strike price. When you have this information, you can enter an order with your broker (or online broker) to buy the number of contracts which you wish to control, within the allowed position limits of XYZ January $45 puts.
This is what happens when you complete your order with your broker. Your broker will purchase the number of contracts of XYZ January 45 puts that you specified, then deduct from your account $300 for every contract purchased. Remember that a contract is 100 options and the minimum option order is one contract. So, that is 100 options per contract multiplied by premium (price) of $3 per option.
Now you will own X number of XYZ January 45 put options contracts which will be placed in your account and which you control.
Assume that now the price of XYZ stock declines to $35 on or before your XYZ put option expiration date. Let’s also assume that the premium (price) of the XYZ put options climbs from $3 (your purchase price) to $11 based on the stock’s downside movement. Now your options are worth $800 per contract more that you invested.
At this point, you have two choices of how to take your profits:
A.) You can exercise your put and your right to sell XYZ stock for $45 a share, which would be 100 shares per contract. But first, you must buy the stock at $35 and then sell the stock shares on the open market at $45 utilizing you put options. The cost/profit involved in this choice is as follows: $3,500 to purchase the stock at $35 plus $300 that you paid for the option equals $3,800 for every contract that you exercise. Your profit would then come when you sold the stock shares in the open markets - $4,500 for every 100 shares sold at $45, minus the $3,800 that you paid to exercise your option would equal $700 profit per 100 shares of stock sold or per options contract exercised. That is a 15% gain on the money you invested.
B.) You can sell your options contracts for $1,100 per contract. In this instance, you are simply collecting the difference between the current price of the option and the price you paid to buy the options. Your profit would be $800 per contract. That is $1,100 (current option price) minus $300 (your invested money) equals $800. That is a 266% profit on the money you invested.
Choice #2 (options investment choice) and Choice B (playing the option without owning the stock), in case of a bearish sentiment, is how I trade a put option. As you can see, Choice #2 used with Choice B is much simpler and more profitable that Choice #1 or Choice A.
This strategy allows you to benefit from downward price movements while limiting losses to the premium paid if the stock price increases.
Note: For owners/shorters of stock, in order to exercise the option and sell the underlying stocks at the exercise price, the buyer must file the proper exercise notice with the OCC through a broker before the date of expiration. All puts covering the specified stock are referred to as an “option class.” Each individual option with a distinctive trading month and strike price is an “option series.” The XYZ January 45 puts would be an individual series.
Now, what if XYZ prices had climbed to $55 (referring to a put option) or fell to $35 (referring to a call option) prior to expiration and the option price fell to 1 1/2, your option would then be “out of the money.” But, you could still sell your option for $150 per contract, thereby recovering half of the original $300 per contract that you invested!
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