You've likely seen some of the incredible money traders are making in these markets by using options, but you may not know exactly how to go about doing it.
Maybe you've even tried your hand at it now that Robinhood has made options trading so easy for everyday investors and traders. But maybe you're not capturing these 1,000% gains that go viral every few days.
You've possibly even forecast the correct move on a stock but still lost money on your options trade.
You're not alone. Every options trader has gone through that, especially when you're just getting started.
But you've come to the right place.
We're the home of some of the world's premiere options trading experts, and our goal is to help our readers make money trading options.
So let's get started.
Today, we'll show you what you need to know to make the best options trades. Plus, we'll show you exactly how to set up one on Robinhood today...
The Options Trading Basics You Need to Know
Options trading can be one of the most lucrative ways to play the market, but there's a bit of a learning curve. Many traders dive in head first once they learn the basics of calls and puts.
The problem is you're missing a few other pieces of the puzzle. Aside from the price of the stock and the strike price of the option, you need to know a few more things, like options liquidity and implied volatility (IV) to turn a correct forecast into a winning trade.
The Complete Guide: The coronavirus has erased trillions of dollars from global markets, yet this can be one of the most important wealth-building moments in your life - if handled correctly. Here's what to do...
We don't mean you need to become an options master, dissecting the "Greeks" like delta and theta. But you should at least understand how they work in their simplest form.
For example, right now, thanks to extreme volatility in the stock market, options are quite expensive. That means you have a smaller margin for error in picking and timing your trades.
And if you think you can just buy lower-priced options, you might be so far from the action that liquidity becomes a problem. The spread between the bid and ask price could be so wide that it eats away any profit you might have.
Here is a short list of concepts you should know at least a little:
Strike: This is the price at which the option buyer and seller agree to trade the underlying stock if the option is exercised.
Premium: This is the price of an option. It depends on how volatile the market is, the difference between the strike price and the stock price, and how much time is left until the options expire.
Time Value: Most of the time, an option price is higher than the difference between the strike price and the stock price. The difference is time value. For any option that is out of the money, which means a call strike above the stock price or for a put strike below the stock price, the only value it has is time value. And time value decays every day until expiration, at which it is zero.
Perhaps at this point, you realized why some of your past trades didn't work. That's a good thing. But you still may think, "How do I find option trades that give me a better chance for success?"
As we said, we are here to help, and for that we look to Money Morning's options trading specialist, Tom Gentile. Tom's systems can help you navigate the current market conditions, and in fact, his readers have already achieved gains of over 1,000% during this bout of volatility.
We want you to benefit too, and we've got a trade already lined up for you.
It's not as simple as just buying a put, but it's one that locks in upside while minimizing the downside.
And you can do it right on Robinhood...
Get Started Trading Options with This Play
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Considering how strong the U.S. economy was before the pandemic hit, it's a good bet the economy - and the stock market - will get back to its winning ways once things get under control. Jobs will come back, and people will get back out there to spend.
The problem is we don't know exactly when that will happen. Sure, you can go out and buy a stock and wait. You may have to suffer with another big drop before the bull returns, too.
That's why Tom is looking at LEAPS options. LEAPS stands for long-term equity anticipation security. Basically, it is an option that expires more than a year from its creation. And you can get them now with expirations in January 2021 and January 2022. That gives you plenty of time for the market to recover.
But even LEAPS are expensive in this market. That's why we want to use a spread trade to cut down on risk
A spread is the simultaneous purchase and sale of an option, or LEAPS, with different strike prices but with the same expiration date. For a call spread, we buy the lower strike and sell the higher strike price. In this way, the higher-strike option partially offsets the price of the lower-strike option. In other words, the trade costs less to start, and we've already built in lower risk.
Here's how to do it.
First, we have to select the underlying stock. Tom likes Kellogg Co. (NYSE: K), a multinational food manufacturing company that makes childhood favorites like Corn Flakes, Pop-Tarts, and Cheez-Its. These are all popular products with long shelf lives - meaning demand right now is high as people stock up.
As the market headed into its recent low, shares of K were only down about 26%, while the broader S&P 500 fell about 34%. That's a good sign K will bounce back first when the recovery begins and will push call options prices higher.
Next, you want to look at the next expiration for LEAPS in January 2021.
With the stock currently trading near $61 per share, you can buy the $65 LEAPS call for $6 and sell the $70 LEAPS call for $2.95 with zero commissions on Robinhood. That is a net cost of $3.05, or $305 per contract.
If Kellogg trades to $70 or higher by next January, which would be near its pre-bear market price, the spread will be worth at least $500 (the difference between the strike prices), and your net profit will be $195 per contract.
If you buy the stock at $61 now and sell at $70 in January, that would only be a profit of 14.8%. And you would have to put up $6,100 to start.
The best part is that if the bear market growls on for many more months, your downside risk is limited to the $305 you paid for the spread.
It's the benefits of options leverage with the lower time pressure of stocks rolled into one.
That's a great trade to get you started on making money with options.
But you can make even more money by trading short-term options.
Tom gives his paid-up subscribers trades in real time.
And thanks to him, some of his readers were able to grab lightning-quick payouts of $9,000... $18,000... even $44,000. Learn more...