Trading Individual Puts And Calls
There are times when buying puts and calls is the right thing to do.
Case in point…
GOOG. Let’s look at the real life example I gave you earlier. It’s a classic case of why… sometimes… there’s a good reason to buy calls…
Google (stock ticker symbol GOOG ) was great to trade because the stock was in a powerful trend.
In my example, if you bought 1000 shares of the stock, it would cost you $434,000. If you bought it on margin it would cost you half that.
Now let’s say that right after you buy GOOG it jumps up in price by thirteen dollars ($13.00 ) per share.
When the price of the stock went up thirteen dollars per share, you made $13.00 on each of your 1000 shares… for… a gain of…
$13,000 !
That’s a nice profit on one trade.
But let’s start over and say you want to use CALL options on GOOG instead. An “option” gives you the right… but not the obligation… to buy shares of the stock.
Let’s say you can buy an option to buy shares of GOOG for $3 each. Each option contract equals 100 shares of stock so 10 contracts controls 1000 shares. And this would cost you $3,000.
Staying with the real example, when the stock price of Google jumped up by thirteen dollars in one day…. the price of the options to buy Google went from $3.00 to $12.00.
Your profit in this example is $9.00, not as much as on the stock, but since you controlled 1000 shares of stock… you end up with a profit of…
$9,000 !
And since you only put $3,000 into the trade, you made…
300% Return
On 1 Trade
In 24 Hours !
This is what I’m talking about when I say “explosive” options profits. But let’s stay real. Remember, 77% of all options expire worthless. The majority of put and call buyers lose all their money. So this is pure speculation.
Sometimes you can even day trade options. But most of the time, when you buy a put or call, plan on being in 3 – 5 days. The reason is because stocks tend to move in the same direction for three to five days at a time. These are short term trades.
When would you buy puts and calls?
- Stocks In Trends
- Events
- Broad Market Trades
One way would be when you see a nice stock in a great trend going higher and you can’t really afford the stock, like in the google example.
Any stock that you believe is going higher in the next 3 to 5 days that has weekly options is a good candidate. Gold, ticker symbol GLD is a good example.
Buying weekly PUTS is good at earnings season when you think a stock will tank.
Or Calls if you think it will rise.
One of the best times to buy calls or puts is a day before a company releases it’s earnings report because this can really propel a stock up or down.