Options trading offers two things that everyone wants - lower risk and higher profit potential.
It's simply a matter of finding the right play and building the right strategy. Today, we'll show you an options strategy that can control your risk and maximize your upside.
While it may seem too good to be true, options really can deliver. The low prices of options compared to stocks means you start your trade with less skin in the game. Each options contract controls 100 shares of a stock for a fraction of the price of buying all 100 shares. If the stock moves in the direction you predict, then your gains are multiplied thanks to that leverage.
Let's say you buy a stock for $40 per share and it goes up $1. That's a 2.5% gain. Not bad if you can do that over and over again.
But what if you bought the right option for $1.50? It might go up by $0.75 when the stock goes up $1. That's a 50% gain in the same amount of time.
Even if you're wrong, your risk is limited to the small amount you paid to begin. Compared to the much higher prices for stocks, and you can see how your risk is lower.
There's more to the story though.
You can reduce your risk even more by using the right options strategies.
Today, we'll show you how to avoid one of the biggest mistakes options traders are making right now. It's a simple fix that can save you some cash while giving you even higher profit potential.
Then we'll show you how to use this strategy in our best options trade today...
How to Lower Costs When Trading Options
While options let you profit off of a specific stock, it's easy to forget that they both behave differently and have different markets. A liquid stock, one that trades hands tens of thousands of times a day, may not have many liquid options. The option may only trade a few hundred contracts. That's quite a difference in liquidity.
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That's important for you because it affects not just the price you pay for the option but your ability to cash out with a profit.
The more liquid the stock or option, the more volume changes hands each day. And the more people are trading it. That means there is a robust market for the most liquid stocks or options, which, in turn, means you get good executions and tight bid/ask spreads.
The closer the bid and ask price are, the less you will likely have to pay. For a stock trading at $40 per share, the individual investor might not mind buying at $40.10, instead of $40.
But with options, that $0.10 difference could mean the difference between a good trade and a great one. If you tried to buy that option at $1.50 and your trade is executed at $1.60, you've already lost 13.3% of your potential profit. Remember, we are talking about a stock going up $1 from $41 and an option going up $0.75 from $1.50. That potential 50% gain suddenly turns into less than a 40% gain.
That's still good, but over time, you are just giving away your profits unless you have a strategy to overcome that.
And we do.
Here's how you can reduce your chances of overpaying, which will maximize your upside.
We're showing you exactly how to do it in a specific options trade right now...
The Best Options Trade to Make Today
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Too many options traders are willing to overpay for a contract when they like the underlying stock, but that comes right out of your profits. One way to protect against that is to use a limit order. Simply stated, a limit order is just the maximum you are willing to pay to buy that option.
Unlike a market order, where you tell your broker you will by at whatever the next price is, you define it, not the broker. There is no more hoping your trade is executed at the same price you want.
The best part is that all you have to do is change one parameter on your order screen - from "market order" to "limit order" and then specify what that price should be.
Money Morning Quantitative Specialist Chris Johnson has a great example of an option trade using a limit order.
First, he starts with a great underlying stock. He has his sights set on homebuilding industry, but not on a simple homebuilding company. Rather, this company combines technology with alternative energy as they relate to homebuilding. Why not get a triple bang for the buck?
The company is SunPower Corp. (NASDAQ: SPWR), and it is a large manufacturer of solar panels, including the ones that go on the roofs of houses and all sorts of other structures. The stock has been on a tear, rallying from its March low near $4.50 all the way up to its recent price of $13.82. Along the way, it announced better-than-expected earnings and moved up sharply.
Weeks later, the earnings froth has worn off, and the stock settled back a bit, getting ready to continue in its bullish trend. Chris thinks there is a 30% upside potential over the next four to six months. But he does not want to pay too much for it and recommended using a limit order.
For the specific options trade, he likes the SPWR Jan. 15, 2021 $12 calls (SPWR210115C00012000) using a limit order of $2. This is a bit below the current price of the option of $3.60, so for this trade, a little patience is required.
If the stock pops 30% higher from when Chris spotted the trade, shares would reach $16. If that happens in four months, the trade will make you 119% profit. That's a solid gain.
So why not jump in a $3.60, as Chris sees so much upside?
Because at that price, you are starting out paying 80% more for the options. You can see how that will cut into your profits. You're looking at just a 22% profit and the risk that the trade could go against you.
If you never get your limit price, that's OK; you'll live to fight another day. But jumping into a trade by overpaying means you're taking a bigger risk for a smaller gain.
But there are more opportunities than just this trade. Our experts are uncovering them all the time.
Check out how you can find their latest ideas...
He Made Millions Trading for an Hour Before Breakfast
Andrew Keene was living with his parents. Two years later, he had $5 million to play with - all because of this one strategy.
The crazy thing is you can do it in less than 90 minutes a week.
To see how easy your life could be, click here.