subject: The 100 Return Options Trading Strategy - Buying Calls to Increase Your Returns [print this page] The 100 Return Options Trading Strategy You pick up the phone and call your stockbroker to see how your portfolio is doing. He quickly tells you about a great stock that is showing some significant improvement in the market and he suggests you buy some of this amazing company that is trading around its 52 week low. He continues by stating how spectacular the profile of the company is. "Oh, you are not going to believe how strong the balance sheet is of this company" and "This Company is sitting on a huge amount of capital that will allow them to expand by acquiring other companies in their sector." Well, if this stock is ripe for the taking, why risk a large amount of money purchasing the stock. You see, there are many strategies you could be using as opposed to buying stock and letting it sit in your portfolio until you make a 10% or 15% return. Why not use option trading strategies to increase your cash on cash return? One fundamental option trading strategy that can be used based on your stockbroker's analysis of a great stock is purchasing calls. Purchasing calls is a way to really increase your cash on cash return. For example, you can buy ABC stock at a price of $30.00 in anticipation of making a 15% return over the next couple of quarters. Sure, it is possible for ABC stock, which is near its 52 week low, has a strong balance sheet and is sitting on a large amount of capital to increase from $30.00 to $34.50 ( $30 x 1.15 = $34.50), but why risk $30,000.00 on purchasing 1000 shares at $30.00 for a return of $4500, when you can buy 10 call option (for every 1 option contract, you will control 100 shares of stock) and control 1000 shares of ABC for a buy-in of between $1000.00 to $5000.00. Now consider this, for every point ABC stock moves up, your call options will increase dollar for dollar. So if you purchased 10 calls options at $5.00 each and ABC stock moves from $30 to $31, your option will move from $5 to $6. So let's compare the return on a one point upward move in ABC stock: The 100 Return Options Trading Strategy * Purchase 1000 shares of ABC stock at $30: Your risk is $30,000.00 * Purchase 10 ABC call options at $5: Your risk is $5000.00 * ABC stock moves from $30 to $31: Your increase in cash for the stock purchase is $1000 and your % return on your stock purchase is 3%. * Now compare the purchase of 10 ABC call options: * ABC stock moves from $30 to $31: Your increase in cash for the 10 call option purchase is $1000 and your % return on your 10 call option purchase is 20% As you can see, your cash on cash return is extremely higher by purchasing an option over purchasing the stock. Before I end this article on the value of option trading strategies and the value of purchasing call option versus purchasing stock, let me be very clear... anytime you buy options, there is a time value or an expiration date on the call option contract or any option for that matter, whether you are buying or selling options. So understand, an option will expire worthless, so always give your self ample time to earn a return on the purchase of your call option. Further, in regards to the information scenario above, we only discussed the upside and the return when the stock increases in value. You should also be aware that for every point movement downward, your call option contract will lose point for point with the stock, so make sure your decision to purchase call options is prudent with the understanding that the most you can lose in your trade is the price you pay for the call options. Lastly, this strategy is best used for a volatile stock that has an obvious trading range. Our example above was based on a hypothetical company that was trading near its 52 week low. The 100 Return Options Trading Strategy
The 100 Return Options Trading Strategy - Buying Calls to Increase Your Returns
By: Trading Expert
welcome to Insurances.net (https://www.insurances.net)
