You may have heard that Options are scary, dangerous, or even too risky.
Trust me. I’ve heard so many excuses my head spins from it.
But they’re not difficult at all. In fact, they offer you greater flexibility and leverage than your average stock. In addition, you’re using an option just as you would with a stock to speculate, for aggressive growth, and income.
For example, let’s say we believe that Micron Technology (MU) now trading at $45 could move to $60 a share. Let’s say we wanted to buy 100 shares, costing us $4,500. If that stock now moves to $60, we just made $1,500 – which isn’t bad at all.
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What many don’t realize is that you could have made much more, and paid far less.
For example, we could have used a Call Option.
For those of you new to the term, a call option gives you the right – but never the obligation to buy actual stock – by a set price by a set date. Also, each contract carries 100 shares of stock with it. So, of we wanted to play around with 100 shares of a stock, which we never have to take ownership of, we’d buy one contract (1 contracts x 100 shares in each contract).
It’s also important to know that an option will expire at some point.
For example, if my set date is October 2019, I need to know that by the third Friday of that month, my option will cease to exist. Of course, our goal is to exit a trade long before that happens with a profit in hand. Should we hold too long, our option can expire worthless.
And that’s not our goal here.
Let’s revisit the Micron Technology example.
Let’s say that we believe Micron could run from $45 a share to $60 a share by October 2019. First, we need to know that by the third Friday of that month, our option would be set to expire. So, to give ourselves some wiggle room, we could pick an option that wouldn’t expire until let’s say November 2019.
We could buy a Micron Technology (MU) November 15, 2019 45 call option, which expires on the third Friday of November 2019. Let’s say it currently trades at $4. We’d take that $4 and multiply it by 100 because there are 100 shares in a single contract.
That would give us an entry price – without trading fees – of $400. That’s a fraction of the $4,500 we’d have to pay for 100 shares of the stock alone.
That allowed us to save $4,100 ($4,500 – $400) by buying the call option.
Here’s the best part — if we bought the stock at $45 and it ran to $60, we could have made a profit of $1,500 after buying 100 shares of just the stock.
However, if we bought the MU November 15, 2019 45 call option at $400, and the stock ran from $45 to $60 a share, the call option could be worth up to $9.60 based on current options trading metrics. That means you could have made a profit of $5.60 ($9.60 – $4), or $5,600 ($5.60 profit multiplied by 100 shares in a contract).
In short, not only can an option cost far less, but it can offer you the leverage you want.
We’re very sure more of you would prefer a $5,600 profit than a $1,500 profit, right?
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