We have all seen stocks that cost far more than we'd like to spend. There's an options trade for that. And it's simple enough to do on Robinhood.
This options trade allows you to control shares of high-priced stocks like Amazon.com Inc. (NASDAQ: AMZN) without even buying a single share. We're going to show you how to execute the trade in just a moment.
A Robinhood account makes options trading simple for even beginner options traders. But there's an even bigger profit opportunity when they realize options trading is more than just buying puts or calls.
There are deeper options trading strategies available to Robinhood investors. Money Morning's options trading specialist, Tom Gentile, recently showed us this play…
You know that you can buy a call option or a put option and hope your stock goes the right way. But you can, in fact, control your risk even more on high-priced stocks.
You probably know that the bigger the stock price, the bigger the options price. And with Amazon trading at over $2,680 per share, it is hard to find a bigger price anywhere.
Options 101: It's never been easier to learn how to trade options, especially with our free guide from top trading expert Tom Gentile. Click here to get it.
Tom Gentile makes it a rule never to spend too much on a trade, and that's especially true if you're new to options trading. For most investors, that means trading one of the best stocks on the market – Amazon – isn't realistic.
But that's not quite true…
Tom's options strategy actually gets the market to help pay for your trade. And the best part is that it is simple enough for anyone to use, even on a platform like Robinhood.
This could be a matter of simply pressing a few buttons and doubling your money. And we want to walk you through it, step by step. Let's show you just how simple it is to take your options trading to the next level with this trade…
The Best Options Trade on Robinhood Right Now
If you think a stock is going up, you buy a call. But if you want to protect yourself from being wrong, you can buy a call and sell one at the same time. Here's how it works.
The two call options are on the same stock and have the same expiration date. The only difference is that you buy the call with a lower strike price and sell the call with a higher strike price.
In this way, the money you receive for the sale of the higher strike will partially offset the money you have to pay to buy the lower strike price. Your net cost can go down, sometimes dramatically.
Don't forget, in most cases, the lower your initial cost is, the lower your risk. Wouldn't that be nice to have in your pocket in the current volatile market?
Last week, Tom suggested a trade like this:
- Buy AMZN Aug. 21, 2020 $2,780 call for $104.62 (June 29 closing price).
- Sell AMZN Aug. 21, 2020 $2,800 call for $98.38 (June 29 closing price).
The net cost, or debit, for this trade is $104.62 – $98.38 = $6.24, or $624 per contract that controls 100 shares of Amazon stock.
If Amazon closes above his $2,800 target by the Aug. 21 expiration, the spread would be worth the difference between the two strikes, minus the cost of the option. That would be $2,800 – $2780 – $6.24 = $13.76, or $1,376 per contract.
Since Tom recommended this trade, Amazon has rocketed 359 points higher to trade at $3,030, comfortably above the strike price needed to make this spread profitable.
Readers could have been cruising to a 120% profit.
Of course, nothing is free. For the reduced risk, you also have to give up some of your profit potential. Since Amazon stock rose above $2,800, the profit did not continue higher. But isn't that worth it to be able to trade Amazon without having to take out a second mortgage on your house? Buying just the call option would cost $10,462, far out of the reach of most of us.
But even if you missed out on this recommendation, we can do it again. After all, Amazon is one of the best stocks to own right now because it continues to churn out new record highs. By using this options spread strategy, you can keep turning its positive momentum into money-doubling gains.
Here's a similar play on Amazon you can do this week:
- Buy AMZN Aug. 21, 2020 $3,180 call for $109.38.
- Sell AMZN Aug. 21, 2020 $3,200 call for $103.
This trade will cost you just $638 to get into, but will pay out $1,362 if Amazon shares finish above $3,200 on Aug. 21.
It really is that easy. Remember, this trade isn't without risk. You can lose your initial investment if Amazon doesn't hit that target, but that's all you'll have at stake.
And if you're looking for more actionable options trades, make sure you check out our experts…
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