This options trade is the perfect way to play today's market environment.
Best Options to Buy This Week
More people than ever are learning how to trade options. But knowing the basics of options trading is only half the battle: You need to know how to find the best options trades to make money.
That's exactly what you'll find here.
We'll show you the simple steps you can take to find profitable options trades.
Plus, we'll also show you the best options trades you can make right now, courtesy of the options experts here at Money Morning.
Speaking of experts, here's Money Morning's options trading specialist, Tom Gentile, with a brief overview on what makes options trading so phenomenal, plus why this is one of the best places to learn the ropes:
Why Options Trading?
Options are exploding in popularity because retail traders have seen their profit potential.
Stock options give you the right to buy or sell shares of a stock by a certain date. Since you don't actually own the stock, just the right to buy or sell it, you can control many more shares of the stock for a fraction of the price of owning them outright. That's called leverage. And it lets you amplify the profit potential of stock trades far beyond what you would see from simply buying and selling shares.
For even more detail on how this works, make sure you check out our guide on how to trade options.
What many new traders have found out the hard way is that there's more to making money with options than buying a call on a stock you like and waiting.
You need to find the right combination of a stock, the strike price of the option, the expiration date, and the cost of the contract to consistently find profitable options trades.
Here's how you can do it.
Finding the Best Options Trades
While there are a nearly limitless combination of options traders can use to create a strategy for any situation, we want to focus on finding trades using simple calls and puts.
There are three elements to key in on to take your trading to the next level.
Find the Right Strikes and Expirations
There are many variations of strike prices and expiration dates for every stock with options. A one-sized rule is nearly impossible.
But a few guidelines can help you find the best options.
First, look for strike prices just out of the money.
Options already in the money will be very expensive and that will cut into your potential gain.
Options far out of the money will be much cheaper, but the stock will have to move dramatically in order for you to make any money.
The best idea is to look for options one or two strikes out from the stock's trading price. This will give you the best combination of affordability and potential to hit.
Second, look for expiration dates three to six months out.
This is a broad rule since six months can be a lot of time, but you likely don't want to tie up your money any longer than that. And plenty of traders make good money with weekly options, but you'll want expert help before you dive in.
Similar to finding the right strike price, expiration dates nearer the current date will be cheaper if the options are out of the money. But you have little time for the stock to move, raising your chances of losing money. And if the option is in the money, close expiration dates will be very expensive.
Options with expiration dates far away will be more expensive since the stock has more time to get in the money too.
But an expiration date three to six months out is the sweet spot between giving the trade time to work – the stock moving into the money – and affordability, lowering your risk and maximizing your upside.
Trade Liquid Options
One of the most important factors new options traders overlook is liquidity in the options market. Liquidity simply means there are many buyers and sellers for a particular options contract. That means prices are accurate, and most importantly, you'll be able to sell your options contract when the time comes.
When the market for the specific options you're looking at isn't liquid enough, it means the price you see on you trading screen might not be the price you end up paying. It may even mean there are no sellers at all for the contract, meaning you can't enter the trade.
It also means that when you buy the contract, you may not be able to sell it. Imagine buying a call option on a stock that soars higher, seeing a profit on your trading screen, and not being able to sell the option for a profit.
The way to find options with liquidity is to look at the bid-ask spread. Options with close spreads are typically liquid enough to trade. If you see a wide range, or a range that includes $0, then the option is unlikely to be liquid.
That may eliminate little-known stocks from your plans, but that's all for the better. As Money Morning's options trading specialist, Tom Gentile, says, "98% of stocks and ETFs out there simply aren't worth a single penny."
But "the big banks and brokerage firms want you to gamble your money on all of them," says Tom.
That's why looking for liquid trades can go a long way toward making your moves more profitable.
Manage Your Risk
Options are great at helping you trade while lowering your risk, but that can go out the window if you aren't careful.
First, make sure you use limit orders when buying and selling options.
The options market can be fast-moving, and using a market order could mean you end up paying more for a trade than you initially expected. It may also mean you sell your contracts for less than you hoped. But using a limit order can make sure you get into and out of trades at the price you want.
Second, don't chase trades.
You may be dying to open a position on a particular option and see that your limit order isn't filling. Stay disciplined, and don't change your entry point just because the market isn't cooperating.
"If you do, you could end up buying at the high or near the high of the day only to see the markets calm down and the option prices start coming down," Tom tells us.
Third, stick with your plan.
Set aside a percentage of your portfolio you'd like to use for options trading and stick to it. It's tempting for traders, especially new traders, to make a ton of trades and chase bad money with good. That's only increasing your risk.
Tom tells us a simple strategy to managing your risk is to keep your risk the same on each trade. Even if you feel like the trade is going to be a home run, don't be tempted to increase the money you're putting in. Stick to your plan.
And never trade with money you can't afford to lose.
Best Options to Buy Right Now
Options trading is fast-paced, so you'll need to act quickly when you find the right trade. Not only do options change price as the expiration date nears, but changes in the underlying stock price can cause options prices to shoot higher or lower.
That means if you're looking for options trading recommendations, you can't rely on an idea that's out of date, even if it's just a few weeks.
Here at Money Morning, we publish options trade ideas multiple times a week.
You can find our latest trades right here…
- The Best Options Trading "Crystal Ball" in the Markets
- Boost Your Options Trades in 2016 with This Momentum Indicator
- These 6 Signals Tell You When to Enter or Exit Your Options Trades
- This Options Trading Indicator Is the Key to Timing
- How to Make Even More Money from the "Presidential Pattern"
- Time Your Options Trades Perfectly with This Chart
- How to Use Breakouts to Plan Successful Options Trades
- This Skill Is Essential for Pinpointing Your Options Trades
- Use This Technique to "Channel" Your Options Trading Profits
- How to Survive the Markets Without Stop-Loss Orders
- The One Options Trading Lesson They Don't Want You to Learn
- How to Measure Price Movement When Trading Options
- Target Big Price Moves Easily with This Options Trading Strategy
- Don't Fear Options - Start Trading with These Four Steps
- The "Greeks" Can Tell You When Trades Will Hit Pay Dirt
- Three Rules for Options Trading Success
According to the Options Clearing Corp. (OCC), the average daily options volume was 6,470 in 1973, the year in which listed, exchange-traded options first launched.
Since then, the average daily options volume has soared to 16,443,005 - 2,500 times more than it was over 40 years ago.
And since weekly options trading started, it's become the most widely traded of any options class - averaging 25% of any option on the S&P 500.
This impressive growth is no coincidence. People are making a beeline to options trading because, the truth is, there's simply no better, easier way to risk so little and still make piles of money in days or weeks.
You just can't top options for big returns, and now the "secret" is out, and regular investors know it.
Timing is absolutely crucial when it comes to options trading - it can mean the difference between a modest gain and a triple-digit winner.
Stocks only move in three directions: up, down, or sideways. But with this options trading strategy, it doesn't matter which way they move.
You don't have to buy stock to snag triple-digit gains. With this trading strategy, you can double your money in under 10 days without buying a single share.
Optimists say the Apple car could revolutionize the auto industry. Skeptics argue there's no room for Apple to rival the likes of Tesla.
Due to their short-term nature, options can be tricky. Their prices are often subject to quick and drastic changes, which can put off long-term investors.
But this unique buy-and-hold strategy offers the luxury of time and leverages the power of options to lock in triple-digit returns.
Some experts call earnings season overrated, but each new season brings big opportunities for options traders.
And with firms preparing to report their latest financials, traders need to act fast in order to seize big profits - and avoid even bigger losses.
Last week the U.S. Federal Reserve decided against raising interest rates four times this year, opting for just two hikes instead.
Some analysts point to this recent change of mind as proof of an impending recession. Others state there's no strong possibility of one.
But I'm not going to wait to find before I make my trading decisions. And you shouldn't either.
Today I want to talk about another major mistake traders are making. Now to be fair... they're making it because they're simply misinformed.
But what they're misinformed about provides an opportunity to double your money - at half the price.
Investors' growing concerns are driving the markets right now. And this uncertainty can turn that winning option trade of yours into a huge disappointment - in a matter of seconds.
Of all the indicators that are out there, only volume reigns supreme. Many traders and investors misuse or flat-out ignore volume because they don't understand it or simply undervalue it.
It's easy to worry about when to exercise your trades. Especially when you're new to options trading.
The key is knowing when to make your move. And while normally I'm happy to take a double on my trades right away, there are times when it pays to wait all the way until expiration.
You can probably imagine why the NYSE's decision to eliminate stop orders next week is causing traders to worry...
But we're going to talk about the one reason they shouldn't worry at all - and it's called options.
The beauty of trading options is that it offers a way to profit off of stock moves without having to shell out lofty amounts of cash to buy the stock itself.
The beauty of options is that they're so versatile. You can use them to make money when stocks are going up or down. They can make you steady income or huge windfall gains.
For instance, you can use the bull put spread I showed you to dominate minor upward market moves.
And when the market is edging down, remember the bear call spread we talked about.
Both of these strategies are great to use when wanting to further leverage your cost of an option trade beyond buying calls or puts.
But there's one thing we haven't talked about yet: how to play a flat market.
You can use this strategy to make money when no one else is.