Identifying great options trades is an exciting ride. But if you’re prone to motion sickness, you should get to know a few things about operating this powerful trading vehicle so that you’re prepared for takeoff.
If you’re a little queasy before the ride even begins, don’t worry — you’re not alone. Folks’ ears perk up when they hear about options. But not too many are prepared to jump right in and start trading them. They might have heard a story from a far-off relative or a "someone who knows someone who knows someone else" who might not have done so well in the options markets.
And they let that second- or third-hand information turn them against trying something that could be the difference between whether they remain in the workforce till they drop or whether they retire early to some remote island they’ve always dreamed about.
Yes, trading options can be THAT lucrative! And the beauty is, you’re only paying pennies on the dollar to enter a great deal of your options trades. As a traditional stock investor, I have no doubt that you’re looking at the charts of the companies you want to invest in (and those you already hold), and that’s what helps you to make your decision whether to buy or sell. (Here’s a smarter way to trade stocks using options. Watch this short video and find out how.)
So let’s get started.
Options can cost anywhere from a few cents to more than your average stock price, depending on how high the shares are trading. I like to place my bets on options that are trading at the $1.50 range, or, $150 per contract. (But I’ve never been known to pass up an options contract at 20 cents, 30 cents or 50 cents!) If a $1.50 contract trades up to $4.50, then I’ve just made a 300% return on my investment. (And that number can be tremendous with the less-expensive options!) But if the trade doesn’t go in my favor, the most I can lose on the trade is $1.50. However, depending on my strategy, the upside can be unlimited!
You don’t have to own the underlying stock to enter an options trade. You can buy calls or puts and secure the right, but not the obligation, to touch the stock. It’s possible to short (sell) options as well, but if you really want to be short but with less risk, you’re oftentimes better off buying a put option instead.
Options have a short shelf life—that is, they come with an expiration date. But that doesn’t mean you have to hold them until the end of that contract—you can take profits at any time or close the trade if it looks like it isn’t going to go in your favor. Trading options is all about having choices, and your investment strategy can be as unique as you are!
Options offer traders and investors a lot of flexibility. Did you know that you can trade options as a way of getting into a long stock position? Or that you can use options to protect a position you already own? Or even that you can use them as a way of protecting your entire portfolio? The possibilities are endless.
The relatively small investment that you make when you launch an options trade offers amazing leverage. It only takes a small move in the stock to yield a nice pop in its corresponding call options. (That is, if a stock spikes above $30 and you’re holding the nearby $25 or $30 calls, those are going to become even more valuable as that stock price rises.)
You can buy a call or a put option with your Vegas money, and in just days, you can see 100 percent, 200 percent, even 300 percent returns. Does that sound too good to be true? Not if you know which options to pick, and when and how to play them.
Jon Najarian is co-founder of OptionMONSTER.