If you’re trading a small dollar account, less than $5k, you may be finding it hard to buy expensive stocks like Tesla, Amazon, Apple, or Netflix. If this sounds like you, you may want to consider using Call Options. They will give you the exposure you’re looking for and are cheaper than buying the stock outright.
Let’s take a closer look.
What are Call Options?
A Call Option gives the buyer the right to purchase a stock at an agreed price or strike, on or before the contract expires. In return, you will pay a premium to the seller. It is important to remember that you are never obligated to purchase the stock.
Speculating with Call Options
When you buy Call options, you will make money when the stock price goes up before the option expires. Call Options are used each and every day by market professionals to speculate on stock price increases. Although speculators have the right to, they rarely choose to own the stock. Their goal is to sell the Call option for a profit BEFORE the option expires.
Advantages of Buying Call Options
Leverage- buying call options will be substantially cheaper than buying stocks outright. By owning the Call option, you will still participate in any price movement in the stock up until the contract expiration date. Let me explain with an example;
You are considering buying Microsoft stock, which is currently trading at $105 per share. Buying 100 shares of Microsoft stock will cost you $10,500. Alternatively, you could purchase one MSFT Mar 15, 2019, $105 Call contract for $4.75 or $475 per contract. A standard options contract represents 100 shares of stock so you have to multiply the quoted price by 100.
Reduce Risk- many investors are afraid to trade options because they perceive them to be risky. Well, they can be if used incorrectly. Many new traders do so by risking more than 1% of their account balance on a single trade. Trading with a gambling mentality is a recipe for disaster.
When risk-managed correctly using the 1% Rule, buying Call options can involve less risk than buying the stock.
"Buying Call Options can be less risky than buying stock"
Some of you might be wondering, how is that possible?
When buying Call options your risk will always be capped at the cost of the option. In the Microsoft example above, $475.
The other great thing is that you know your risk in advance of placing the trade.
Compare this to owning Microsoft stock.
The stock price could easily move by 5% - 10%, due to negative news or earnings announcements. A disappointing earnings release after the market close could easily see the price fall to $95 per share when the market re-opens for trading the next day. The $10,500 you paid for your Microsoft shares would now be worth only $9,500. So you are now sitting on a $1000 potential loss.
How would you feel?
The likelihood of this scenario happening is often underestimated by many stock investors.
So there you have it.
Learning how to trade call options can be a useful way to boost your investment returns. For anyone trading a small dollar account, they will often be a better alternative than buying the stock outright, due to their lower cost and reduced risk.
If you're interested in learning more about how to trade Call Options...
Here's What to Do Next
I’ve created some free stockmarket training for you and I’d like you to have it.
This will allow you to learn more about investing in the Stockmarket and our online Learn to Trade Programme. This is designed for people who want to take charge of their finances, invest for the long-term, earn more, and become financially secure.
Here’s what you will learn in this training:
How to reduce risk and invest in Stocks in a safe and steady way
How using options will allow you to create an additional monthly income and boost your returns in only a few hours per month
How you can protect yourself from the Next Stock Market Crash, so you can worry less and focus on the things you enjoy