How to Supercharge Your Stock Profits
Options. The mere mention of the word is enough to send a shiver down many investors’ spines.
But, the fact is, you don’t have to understand any complex options strategies to make money using them.
Today, I’ll show you how you can use options to supercharge your gains.
But first, let’s take a look at how options work — and how they’re able to boost your trading profits…
An option is a tool that gives you the right (but not the obligation) to buy or sell a stock at a predetermined price on a predetermined date.
A “call option” gives you the right to buy a stock, and a “put option” gives you the right to sell it.
An option is composed of a few different pieces:
- The “underlying” is the stock that the option gives you right to buy or sell
- The “strike price” is the price that the option lets you buy or sell at
- The “expiration date” is the date when the option’s “life” ends.
How Options Could 10X Your Gains
As a basic example, let’s look at Microsoft (NASDAQ: MSFT), which was trading for $30.77 in April 2013 — even though that was a little while ago, it shows you how options work, which is the important thing. Let’s say you thought Microsoft was a good buy at that time that’s set to move higher. More specifically, you think it will climb in price several dollars by the middle of the summer.
So you buy the Microsoft July 2013 $31 call, which was trading for $1. Since one options contract controls 100 shares of a stock, you’re out $100 for your trade ($1 option cost times 100 shares).
First, let’s break down what that specific call means: It gives you the right to buy shares of Microsoft at $31 per share anytime between now and the end of July (stock options always expire on the third Saturday of the month, unless it’s a holiday).
But why would you want to buy options in the first place?
Well, take a look at what happens if you’re right… If Microsoft climbs to $34 by the middle of the summer, its stock went up just over 10% (remember, it started at $30.77).
Not too shabby.
But since you bought the option, you would have seen your investment climb by 200% in those same three months.
The option gave you the right to buy Microsoft at $31 when it was already trading at $34 — that’s a gain of $3 for each of the 100 shares your option controls. In total, your proceeds are $300.
When you take out your initial $100 cost, you’re left with $200 — or $2 in profit for every dollar you invested!
That’s what makes options so powerful. And that’s why for 10x the profits (or even more), you should consider giving options a try.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch