12/4/2019
If options are traded in the right way, they can be a powerful value boost to your personal investment portfolio, no matter its size. With a few minutes a day and some market knowledge, the only thing standing between you and additional salary is picking up your phone, which I'm sure you're doing during your free time anyways. All it takes to be profitable is to be right more than 55-60% of the time (of course we want to be right more of the time, with the best traders striving for 70%). Trading is funny that way, and that's why it can be so appealing. Once you hit these numbers, bumping profits from $10 to $100 is no extra work, it simply lies in leverage and doing more of the same.
What are options?
With purchasing options, you are essentially agreeing to buy a certain stock, at some future date, at some specific price. Immediately, you can see that it can seem more intimidating than simply purchasing a stock. It doesn't have to be that way. The way I trade options, they just serve me as a more leveraged version of that stock. Let's consider an example. Today, I bought an option contract on a gold ETF for $49. That means that I own a contract to purchase 100 shares in 2 weeks. If the price of gold rises, the price of my contract will increase at a disproportionate rate. Today, the price of my contract can go up 20 cents per share. Seems like nothing, but that's 20 dollars profit considering the 100 share contract. This is the important part in understanding leverage: To get that same profit without options, I would have had to buy maybe $1,000 worth of gold (an estimate), but I only spent $49. And with call options, you know your downside risk upfront. I can't lose more than $49 dollars even if they find an underwater city made of gold tomorrow.
There are countless options strategies out there. The simplest is buying a call option, which is as easy as I described it above. There are others that may fit your risk tolerance, though. A covered call, for example is a strategy where you limit your upside potential but increase your odds of making money on the trade. A butterfly bets on the stock to remain unchanged in price, and a put bets on the stock losing share value. You can learn more about these and others, if you're interested, on the all-knowing Google machine.
There are a lot of opinions out there on how to successfully trade options, but my strategy revolves around a few key points. At the end I''l explain how my gold option fits into these right now. Firstly, I add on the way down, where appropriate. Buying more when the underlying asset is losing money seems counter intuitive, but if I hold my same confidence that it will go up, doing so would increase my gains. It's impossible to time the market. I mean impossible. You never know when an asset has reached its crest or valley,
but if I think something's going up and it goes down, it might just be closer to its valley.
This is the power of volatility (a factor built into the pricing of options). Volatile options are a good thing, because they provide more opportunity for you to sell higher or buy lower.
Secondly, I look for general market context. If the market is doing well, it's more likely that any given stock will also do well. Thirdly, catalysts are important. Look for one in the future that you think isn't being anticipated well. This could be a release of clinical trial results for a biotech company, or earnings reports. Finally, take advantage of volatility and most importantly, you should know a lot about the asset that you're putting money into. I feel like I know a decent amount more than the average person in biotechnology, so that's one of my favorites.
Back to my purchase of a NUGT (gold ETF) call option. The fed is done lowering interest rates, so stock performance should settle, and with fears of a looming recession, gold is a safe place for people to put there money. The Fed meets in over a week and will announce that there will be no change in rates. I don't think this is reflected well in gold's current price. We will see how it goes.
Options are one of my favorite vehicles to invest in. With a little knowledge, it's one that can be turned profitable with little time and capital. It's true that you need money to invest money, but leveraged options (pun intended) like options are a good way to increase risk, possible return, and excitement. I suggest giving it a try if you feel like you're ready for it!
Disclosure: This post is meant for educational purposes. You should do your research before trading in the stock market. I was not paid by anyone to make this post.
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