Most people who play the stock market are missing out. They’re not using the most powerful weapon in a trader’s arsenal – options.
Options are much faster-paced than stock trading, their potential gains are enormous and the buy-in is generally pretty cheap.
Although options are most popular with millennials, they’re not just a young person’s game. They can be used by anyone to supercharge their portfolio.
Still need convincing? In 2015, one trader turned $110,000 into $2.4 million in only 28 minutes. Those are the kinds of gains possible with options.
With stocks, a 5% or 10% gain in a day would be mind-blowing. With options, you can see 2,000% gains or more in a few hours. Of course, those are extreme examples. But in general, the potential gains of options trading are much larger than with stocks. So it’s no wonder options are becoming popular.
What are options anyway?
An option is a contract. Its holder has the right – but not the obligation – to buy (call option) or sell (put option) a certain amount of an underlying asset at a specified strike price before the expiration date.
Usually one option contract represents 100 shares of the underlying stock. For example, IBM’s January 15, 2021, $140 calls would give you the right to buy 100 shares of IBM stock for $140 per share by the expiration date.
Options effectively magnify movements in the market.
Let me break it down…
The trader I mentioned earlier who made millions with options bought them at just $0.35, or $35 for each contract covering 100 shares. The underlying stock was a company called Alteria, which at the time was in talks with Intel about a potential merger.
Alteria at the time traded for $34, while the options had a strike price of $36. They were effectively worthless. Exercising the right to buy at that moment would have lost you $2 on each share.
However, when news of the merger went through, Alteria’s share price shot up to $44.50, or $8.50 above the strike price. So each of those $0.35 options went up to $8.50 in value. That’s a 30% change in share price and a 2,329% change in the option’s value.
In other words, for every 1% the stock increased, the options went up 77%.
With options, you can achieve enormous gains while putting less money at risk. The only real downside is that you can lose your principal just as quickly as you can make money. So there is more risk involved (many options expire worthless), though on far less money.
I won’t lie, there’s a bit of a learning curve when it comes to options trading. But they aren’t as complicated as they seem. And you’re in luck…
Our friends at Trade of the Day want to help you become an options trading pro.
Options gurus Bryan Bottarelli and Karim Rahemtulla have teamed up to teach investors the art of smart speculation. Far from the reckless reputation options traders have picked up, smart speculation allows you to make consistent and profitable …read more
Source:: Investment You