Whether you believe the market will go up, down or sideways, there is an option strategy for you.
More and more investors are using options in their trading as a way to beat the market. In fact, the number of options contracts traded has quadrupled over the past 10 years. Whether that’s because of market volatility or in spite of it, options can provide staying power.
Plus, options are flexible. You don’t need a lot of money to get started. And it’s a lot easier than you might think.
One of the key advantages with options is that you can make money in any market direction. You can make money if a stock goes up, down or sideways. And with some strategies, you can even be wrong on a stock’s direction and still make money with an option.
Of course that doesn’t mean you can just close your eyes and pick anything. But it does mean that you can make money in virtually any market condition – even when you’re unsure what the market will do.
Another advantage with options is leverage. You can get started in options with only a fraction of the money you would normally need for the actual stock. And many option strategies come with a guaranteed limited risk.
It’s these advantages, and more, that can make options a perfect addition to someone’s portfolio.
What’s interesting, however, is that even though the popularity of options has soared, they are still not as well known or understood as stocks. But they should be.
If you’re bullish on a stock, you can buy a call option and make money as it goes up.
Momentum stocks and Aggressive Growth stocks are probably the best kinds of stocks to use for this. These are stocks that are on the move with some of the most explosive upside potential.
When buying call options, you need to be right on the direction of the trade as well as the time allotted for it to move. Add in a Zacks Rank #1 (Strong Buy), and these are some of the likeliest candidates to profit with this strategy.
If you’re bearish, you can buy a put option and make money as the price goes lower. Look for stocks trading at excessive valuations. Focus in on the ones with downward earnings estimate revisions. And if they are below their major moving averages like the 50-day and 200-day moving average, even better.
With put options, direction and time are important as well. Stocks with a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) will typically underperform the market over the short-term, which is perfect for this strategy.
Big Move in Either Direction
If you believe a big move could occur in either direction, but you’re not sure which way, you can make money with a straddle or a strangle. This entails buying both a call and a put at the same time.
One of the best times to use this strategy is before an earnings announcement or an important event. And some of the best stocks for this option strategy are high beta stocks. These are stocks that can move big, and that’s exactly what you want to see happen with this kind of strategy.
Once again, in order for a stock to make a big move, there usually needs to be a catalyst. One of the most reliable catalysts out there for big moves (up or down) is earnings reports. If you also take a look at the stock’s ‘earnings uncertainty’, you have the potential for the kind of volatility to make a strategy like this work.