Not Enough Capital to Buy Your Favorite Stock? Trade Options Instead.
According to a study conducted by CNet, there are over 94 million iPhones in use in the United States. This means that approximately 1 in 3 US residents have the popular device.
It is no secret that Apple has a large share of the smartphone market, and a lot of investors want to buy the stock for their portfolio. The problem is that as of Friday November 11th, the stock trades for $108.43, meaning it would cost you $10,843.00 to own just 100 shares.
There has to be a better way right? Well, fortunately there is. If you want exposure to a stock but cannot afford to pony up the capital – then you can simply trade options.
The Call Option – Not Enough Capital to Buy Your Favorite Stock? Trade Options Instead.
A call option is a contract that allows you to own the capital appreciation of a stock for a predetermined period of time – for just a fraction of the cost. In the event of a price decrease, your loss is limited to a very small amount. (more in this below).
The contract is based on a certain price level of the stock, called the strike price. Once this price has been struck, it will trigger unlimited upside gains for the life of your call option contract.
There is a common misconception that in order to trade options, you need to have a degree in finance or be a whiz kid in trading. Incorrect. If you are reading this so far and thinking, hey this makes sense, then you have what it takes.
How You Make Money – Not Enough Capital to Buy Your Favorite Stock? Trade Options Instead.
It’s time to get you excited about the explosive gains available using the call option. This is best illustrated through a practical example.
Let’s first assume that you think Apple will be trading at $115 in the next 60 days. That is $6.57 higher than Friday’s close, and a little over 6%.
Sounds exciting right? Wait until you find out how much more you can make if you buy the call option – and it will cost you a fraction of the price.
The right to purchase Apple shares for a strike price of $110 per share before January 20th of 2017 is currently trading at $330 for one contract. Each contract is for 100 shares.
Your target is $115, so instead of spending $10,843 to buy 100 shares and make $675 (6.22%) if you are right ( ($115 – $108.43)x 100 shares) you can buy the options for $330 and make $170 – which is a 51% return.
If you buy 10 contracts for $3,300 your return would be $1,700!
Here is how it works practically:
- You buy the $110 strike call option and $330 is taken out of your brokerage account
- The call option shows up as a separate position in your holdings, with it’s own value (fluctuates during US market open hours)
- Once Apple trades above $110 (the strike) you have unlimited gains to the upside before the expiry of your call option
- If the stock closes at $130 – your return is $130 – $110 (strike) x 100 = $2,000. Subtract the $330 you paid for the option, and your return is $1,670 on just $330 capital (500%).
- A few days before the option expires, you must sell it on the market to crystallize your gains and receive the cash
- If you hold the stock through the expiry date, you will have to purchase 100 shares for each contract (which is outside the scope of the article – but you should NEVER let this happen, always sell a day or two before expiry if there is a profit)
When Do you Lose? – Not Enough Capital to Buy Your Favorite Stock? Trade Options Instead.
You lose if you are wrong, and Apple stock actually ends up trading lower before the option expiry date. It doesn’t matter how much lower, for as long as it closes below your $110 strike price, you will lose the entire value of the option contract.
Your total loss is limited to what you paid for the option, or $330 – which is amazing! Even if Apple drops 50% on some crazy news, you cannot lose a penny more than $330.
This is the most misunderstood concept of options trading. The common thought out there among uninformed investors and traders is that options are “risky”.
In fact, they help you manage risk and limit losses. There is nothing risky about that. The ability to risk a little and make your capital back multiple times over is how you build long term wealth.
Where to Find Options Data for Free – Not Enough Capital to Buy Your Favorite Stock? Trade Options Instead.
You can find call option prices for different strikes using Yahoo Finance.
Here is a step by step on how to get there:
- Visit Yahoo Finance
- Type in your favorite stock symbol or company name
- Click on options as shown below (note, some companies do not have options listed, only the more expensive share prices tend to have them)
- Select the expiry date, and match this date with your expectation of where you think price will be by then
- Scroll through and find the call option you are interested in
Once you pull up the options “chain” of your choice, you will see all the strike prices and how much they cost. It will look similar to the image below.
Learn How to Make Explosive Profits: Trade Options
You do not have to have a lot of capital to trade options and earn explosive profits. Owning stock will tie up a lot of capital. The difference with options is that you only technically have invested capital and emotion in a stock for a fixed amount of time, because your call options will eventually expire.
While this sounds like a negative, it is a big benefit, because you can change your outlook and you don’t have to suffer the downside movements like the traditional investor. You can even make money when the stock drops using something called the put option. But that is for another article.
There are nuances to trading options, like what strike to buy, when to buy it, what expiry is optimal and much more.
We can teach you how to trade options like a pro:
Sign-up today experience our options education and you will learn many strategies to help you make a lot more money with a lot less capital – even if the stock goes down.
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.