By: Costas Bocelli — June 28, 2018
Here's The Smart Way to Build (And Keep!) A Fortune
Most people believe options investing is risky, reckless even.
But let me be the first to tell you that's a huge misconception.
In fact, if you use options the right way... the way they are intended... you can actually reduce risk, not increase it.
I'm not saying that options investing carries no risks. That would be a reckless thing to say. Anytime you put capital on the line, there's a chance you could lose some of it.
That aside, it remains true that options are the perfect vehicle for handling any of the four possible goals you can have with your money...
- Grow wealth over longer periods of time...
- Generate steady, reliable income...
- Protect wealth (that's a key one, especially for retirees)...
- And generate cash quickly -- that is, to speculate if that's your cup of tea.
Whichever bucket that you may fall into (maybe all four), options can help you get there and with less risk!
Over the past several weeks in True Market Insiders, we touched on all four of these investment goals.
On May 17th, we shared with you a longer-term oriented growth strategy that substitutes a deep in-the-money Call option for a direct position in an underlying stock.
At the time, Visa (V) was trading $130 per share, which meant a 100 share position would have cost $13,000.
The Call option, on the other hand, only cost $1,300. You got to control the same 100 shares while spending just 10% of the cost of the stock.
Recently, the shares of Visa (V) have traded higher, to around $133.50 per share.
(Click any image to enlarge)
If you purchased the stock, you would have gained 2.7% on your investment.
But if you purchased the Call option instead, it would have increased in value to $1,550 which means you gained 19.2% on your investment! This is a perfect example of how options can make your money work harder and smarter for you.
And just two weeks ago, we showed you how how to turn your stocks into a cash generating machine using a covered Call strategy.
In this example, we used Visa (V) once again to illustrate that investors that prefer to own the underlying stock can also use options to their benefit. In this case, we were able to sell a near-dated out of the money Call option and collect an instant income payment of $115 for every 100 shares of Visa that is owned.
The contract was struck in July at $140 per share.
With three weeks remaining to expiration, the stock remains below the strike price, so there is a good chance the Calls will expire worthless which, because we get to keep the money we collected, would result in an +8.4% annualized return.
The best thing about this income-generating strategy is that come July expiration, you can repeat the process and collect another instant income payment.
And in this past week's article, we discussed how you can use options to protect wealth by purchasing Put options or Put Spreads against a long stock position.
We cited the threat of increasing trade tensions as a potential catalyst that could send stocks plunging.
And my oh my, did we get a big dose of that on Monday. The Dow Jones Industrial Average plunged nearly 500 points as escalating trade tensions between the U.S. and China roiled markets.
The Trump Administration was forced to walk back some of the harsh rhetoric which eased some of the selling pressure by the end of day.
Nevertheless, the price of Apple (AAPL), the stock in our example, dropped from just above $185 to a low of $180 during the day.
If you recall, the option hedges we discussed on AAPL were to purchase the September 185 strike Put option, or to create a Put spread by selling the 165 strike Put option against it to lower the cost of the hedge.
In both cases, the hedges immediately kicked-in and your stock position was protected.
And it's only been just one week!
Now think about the peace of mind you get by having that down side protection in place while still enjoying the benefit of unlimited upside potential which lasts until the middle of September.
Are you starting to see how options deserve a place in every investors tool box?
And let us not forget how you can try to rack up a huge score using options.
Speculation is the sexiest part of investing. There's no better feeling than connecting on a 90mph fast ball and hitting it out of the park.
But speculating means taking on relatively more risk.
The good news is that options can be the perfect investment vehicle when you want to speculate, because they allow you to swing for the fences without serious repercussions if you happen to strike out.
The key is to make sure you are targeting the right option and using leverage responsibly.
If you can follow those couple rules, then it's okay to swing away when you see an opportunity at hand.
Three weeks ago, we showed you how you can speculate with options by purchasing a relatively cheap out-of-the-money Call option in Diamondback Energy (FANG).
At the time, on June 7th, FANG was trading $111.00 per share.
As a speculative trade, we looked to purchase the August 120 strike Call option that cost $400 per contract.
The idea was to play for a rebound and look for the stock to trade back towards the previous highs.
The great news is that the trade idea resulted in a massive home run. FANG has indeed rebounded and is recently trading around $131 per share which means the Call is worth $1,450 per contract -- a return of +263% in just under three-weeks.
Over the past several weeks, we covered the entire gambit of all the things that you can do with your money. And you can see from these real world, timely examples how options can benefit all types of investors.
See you soon!