3 Options Trades for the Little Guy

by Tyler Craig | August 28, 2012 12:25 pm

3 Options Trades for the Little Guy

The options market boasts a motley crew of participants. Everyone from the adrenaline junkie to the oh-so-cautious risk analyzer roams the grounds with hopes of using the versatile option contract to more deftly score big profits.

Of particular appeal to the little guy, though, is the option contract’s ability to drastically reduce the price tag of otherwise untouchable stocks.

With our current bull market now more than three-and-a-half years old, numerous stocks have vaulted over the century mark, with some climbing into the $200s, $300s and higher[1]. Many who arrive on Wall Street with small trading accounts in tow are quickly beset by discouragement when they realize the Apples (NASDAQ:AAPL[2]) and Googles (NASDAQ:GOOG[3]) of the world have share prices north of $600.

While this epic rise has been viewed as a godsend for those who entered early and had the patience to sit tight, it deters smaller traders looking to enter the fray nowadays.

Fortunately for those with a smaller bankroll, option contracts for these high-fliers can be bought for a pittance compared to what one would have to pay for 100 shares. For example, buying 100 shares of AAPL currently requires more than $67,500! In contrast, an option trader could snatch up two at-the-money October 675 call options — and control a comparable amount of shares — for just under $6,000.

To structure a long option position designed to behave similar to long stock, traders should purchase in-the-money options with a higher delta[4]. These options have a higher probability of maintaining their value over time, as well as moving more dollar-for-dollar with the stock price.

Here’s three such possible options trades for the little guy:

Apple

AAPLchart 300x179 3 Options Trades for the Little Guy
Click to Enlarge
The most recent catalyst to Apple’s ongoing rise was the news of its successful patent infringement lawsuit against Samsung[5], one of its top competitors. While I do think the event might serve as a short-term sell-the-news phenomenon, the trend in AAPL remains higher and dips should continue to be bought.

Traders looking for bullish exposure to AAPL through year-end might consider buying the Dec 650 calls following the next pullback in the stock.

MasterCard

MAchart 300x179 3 Options Trades for the Little Guy
Click to Enlarge
Another high-priced stock in the midst of a multi-year uptrend is MasterCard (NYSE:MA[6]). If it can break out of its recent trading range, higher prices are likely in the offing.

Traders looking for a renewed advance in MA might consider buying the Jan 2013 410 call option on a breakout over the $430 resistance level.

Amazon

AMZNchart 300x179 3 Options Trades for the Little Guy
Click to Enlarge
To round out our high-flying trio, let’s take a look at the king of the online retail space — Amazon.com (NASDAQ:AMZN[7]). With the stock sitting in a strong uptrend and a stone’s throw from all-time highs, a long call purchase for those looking for continued upside through year-end makes sense.

Traders could buy the Jan 2013 230 call.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Endnotes:
  1. some climbing into the $200s, $300s and higher: http://investorplace.com/2012/08/split-a-palooza-ko-dltr-aapl-amzn-pcln-ebm-cvx/
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  4. delta: http://investorplace.com/2009/07/understanding-delta/
  5. successful patent infringement lawsuit against Samsung: http://investorplace.com/2012/08/apple-win-great-today-but-tomorrow-samsung-aapl-patent/
  6. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  7. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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