Stock options are often said to be too risky or complicated for individual investors like us.
But I’m here to tell you that, in my view, that’s simply not the case.
In fact, in a market like this, stock options have a lot of advantages over regular stock trading.
Now, we’ll get into some more detail in a moment. But options can actually allow an investor to take on less risk while amplifying their potential reward.
For example, when you buy a stock option contract, which controls 100 shares of stock, your risk is limited to what you paid for the option.
That’s often just a few hundred dollars, whereas if you bought 100 shares of stock outright, the potential downside in dollar terms is much greater.
And on the reward side of the equation, options provide a leveraged way to turn relatively small stock movements into much bigger gains.
I’ll explain all of this and more in today’s update, so please continue reading below.
Call & Put Options
There are tons of different options strategies out there, but today I want to go over the two most basic option types… Call and put options.
A call option is a contract that gives the buyer the right, but not the obligation, to buy a security at a specificized price within a specified time period.
A put option is a contract that gives the buyer the right, but not the obligation, to sell a security at a specificized price within a specified time period.
Investors typically buy call options when they expect the price of a security to rise, and they typically buy put options when they expect the price of a security to fall.
Now, what’s that about a specified price and a specified time period? Well, every option contract has what’s called a strike price and an expiration date.
Strike Price & Expiration Date
The strike price is the price where the underlying security can be bought (for a call) or sold (for a put).
This is also called the “exercise” price, as investors can exercise their right to buy or sell the underlying security.
However, options only give investors a certain amount of time to exercise those rights, which is determined by the expiration date.
While some expiration dates may fall on Mondays and Wednesdays for certain index options, like the SPDR S&P 500 ETF Trust (SPY), most expiration dates fall on Fridays.
Some big stocks, like Apple (AAPL) for example, will have options available that expire every single Friday, but most small to medium-sized stocks will only offer regular monthly options that expire on the third Friday of the expiration month.
Now, just like every stock has a ticker symbol, the same is true for options.
An option ticker will seem complicated at first, but it’s actually really useful information to understand.
Let’s use the SPY August 19, 2022, expiration $365 strike price call option (SPY220819C00365000) as an example and break its symbol down.
The first section of the symbol contains the underlying stock’s ticker symbol: “SPY”
The next six digits tell you the year (22), month (08) and day (19) of the expiration date: “220819” or August 19, 2022
The following letter will either be a “C” for call option or a “P” for put option.
The last section of the ticker represents the strike price: “00365000” or $365.
The first five digits are for the strike dollar amount, while the last three digits are for the decimal places. You can think of it written out with a decimal point as “00365.000” if that helps.
Okay, that was a lot of background information, but what are options actually good for anyway?
Well, options allow investors to risk much less money for the same amount of stock exposure.
Using the SPY example above, if you wanted to buy 100 shares of SPY today, it would cost you roughly $365 per share, or $36,500.
Even if you only risk 20%, that comes out to $7,300 ($73/share times 100 shares).
But with options the dollar amount of risk is much less. For example, the SPY August 19 $365 calls are currently trading for approximately $18.00 per share.
Because an option contract controls 100 shares, the total cost to buy one contract is about $1,800.
So, you can see that even risking 100% on the option still gives you less potential downside than risking 20% on the same amount of the underlying stock shares.
When used correctly, options are a great way to leverage your dollars to produce a higher percentage return.
For example, let’s say that SPY recovers and trades back to $400 per share by expiration on August 19, 2022.
The gain from buying 100 shares at $365 and selling them at $400 comes to $3,500 for a return of 9.6%.
But let’s say we buy one SPY August 19 $365 call contract for $1,800 and SPY trades back to $400 per share by expiration on August 19, 2022.
Well, if the price of SPY is $400 at expiration, then the $365 strike call will have intrinsic value of $35 per share, or $3,500 per contract.
After all, because this option gives the buyer the right to buy SPY for $365, they could potentially exercise the option to buy 100 shares at $365 and then sell the stock on the open market for $400 ($35 profit per share).
But if we paid just $1,800 for the contract and it’s now worth $3,500, that’s a gain of $1,700 for every option contract.
And that equates to a much, much greater return of nearly 95%!
So, summing it up, you can see that the option alternative gives you much greater reward potential in percentage terms with a much lower cost to initiate the trade.
Now, the downside of course is that if SPY doesn’t move in the expected direction, or if it doesn’t move enough, or if it simply doesn’t make the move you’re expecting by expiration, the call option will expire worthless.
However, the most you can lose is the price you paid for the option, and that’s something you must realize before you enter an option trade.
Unveiling Project 6×6
Please get ready to join my colleague and expert trader Anthony Speciale this afternoon for a special session and the unveiling of his latest project!
You see, Anthony has been able to make over $100,000 in trading profits for six straight years in a row without using any indicators.
And options are a major part of Anthony’s strategy!
That’s why I highly recommend you click right here to register your email address for the groundbreaking reveal of Project 6×6…
Embrace the surge,
Editor, Stock Surge Daily