Unlike straight-up, buy-and-hold stock investing where you buy the stock and wait for it to go up, options allow you to take the “hoping” out of that process. You don’t have to care whether a stock is going up or down, just as long as it moves in the direction you think it will — and quickly, at that!
No doubt you can find yourself being bombarded with financial news headlines and wondering how to make sense of it all. But while the broader markets are popping or plummeting, individual stocks and sectors are oftentimes operating in their own universe — it’s not unusual to see technology names running up while the financials are going down, and vice versa.
And while stock investors are seeing turmoil and running for the sidelines, as options traders, we’re able to buy calls in the winning names and buy puts in the losing names. Not only are we able to trade while everyone else is heading for the hills, but we’re also able to profit handsomely not only in spite of the current market conditions, but even because of them!
When it comes to the ingredients of an ideal trading opportunity, the most important one in my book is getting a good price. And that means finding undervalued options, or options that haven’t yet reached their potential worth.
Not only am I seeking options are worth far more than their asking price, but I also don’t want to pay more than $2 ($200 per contract) for them. Why? Because they have the best risk-versus-reward potential.
I’d rather pay $1 for an option that can realistically double in value in the next few weeks than pay $20 for one that might only go up a few cents. That’s a lot of capital to tie up for a small payoff — and it’s a whole lot to lose if the stock doesn’t trade in the direction we think it will.
There are many traders who don’t blink at paying $50 or $100 per share ($500 or $1,000 per contract), but it’s difficult to near-impossible to double your money when it costs so much to enter a trade!
When your brother-in-law or colleague tells you that he “lost his shirt” by trading options, he probably put all his money into one trade like this.
Don’t let someone else’s bad experience — based on inexperience — deter you from getting into the game. There are plenty of amazing opportunities for incredible returns … if only you know where to look for them!
A great reason to trade options is because you can get the leverage of buying 100 shares of that $50 stock without spending $5,000. You can use that same $5,000 to initiate several options positions instead of betting the farm on one single stock.
If you’re investing to make money — and who isn’t? — then making some smart choices at the outset with the money you do have can help you to grow your trading account substantially. And by taking advantage of options to simulate stock positions, but on incredible discounts, you have the ability to reach your financial goals more quickly.
