America’s pastime began again in earnest last week, with Major League Baseball’s opening day taking place in stadiums across the country. As they do every year, the league’s marquee power hitters will try to light up the scoreboard by swatting the ball out of the park. To do so, however, these big boys of summer will have to swing for the fences. Of course, the downside of big home-run swings is that very often, even the best sluggers will strike out.
When it comes to investing, some option trades are similar to trying to hit home runs. Buying out-of-the-money puts and calls is the equivalent of swinging for the fences, because when you’re right you can earn a profit that lights up your portfolio’s scoreboard.
But just as it is in baseball, trying to hit a home run with out-of-the-money options can also leave you walking back to the proverbial dugout after an embarrassing strikeout.
If you’re an intrepid investor willing to take a shot at a home run trade — and if you’re willing to accept the risk of striking out — then out-of-the-money options might be just the thing for you. Here are three such options for traders willing to swing for the fences.
Trade #1: AAPL May 2012 590 Put
Everyone seemingly loves tech superhero Apple (NASDAQ:AAPL), and investors have rewarded the stock by bidding it up to new all-time highs throughout the bull market of 2012. Yet over the past several trading days, the broad market has suffered a selloff, and on Tuesday that selloff even caught up with Apple.
For those who suspect the recent selling could morph into a deeper correction in stocks, even the best of the best stocks will be susceptible to the downturn. For those who want to swing for the fences on the possibility that Apple shares will tumble, buying the out-of-the-money AAPL May 2012 590-strike put is the equivalent to taking a serious home-run cut.
Trade #2: GLD May 2012 170 Call
If the bears hang around for a while, we could see the resumption of the flight-to-safety trade in gold. If this scenario plays out, intrepid options players can swing for the fences with an out-of-the-money call on the SPDR Gold Trust (NYSE:GLD), the ETF pegged to the spot price of gold bullion. Here, the GLD May 2012 170 call could empower your portfolio to “touch ’em all.”
Trade #3: UNG May 2012 18 Call
The spot price of natural gas has been falling for some time, and over the past six months the value of the United States Natural Gas (NYSE:UNG) ETF is down some 54%. A combination of increased supply and a slowdown in demand due to warm winter weather teamed up to push the value of UNG to record lows.
But natural gas may not be dead just yet. If oil prices were to spike to new record highs, there will likely be more attention paid to alternatives such as natural gas. If this happens, it could cause the out-of-the-money UNG May 2012 18 call to really heat up.
If you aren’t afraid of striking out, then step up to the plate and take a big home-run swing at these out-of-the-money options.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.