They’re too hard to understand.
You need far too much money to trade them. They’re too risky. Far too many of them expire worthless. Only the pros make money from them.
For over 20 years, those are just a few of the laughable excuses I’ve heard from traders that refuse to use an options strategy.
But what many of them fail to understand is this:
- They’re very easy to understand. You’re simply using a call option if you believe a stock will move higher; and a put option if you think a stock will move lower. There, you just learned the basics.
- Two, trading options is less expensive than trading a stock, which I’ll prove.
- Three, options are as risky as stocks, while giving you extra leverage
- Four, only 30% expire worthless. And usually we’re out prior to expiration.
- Five, tens of thousands of retail traders just like you, use them to profit
It actually takes more time to come up with an excuse than it is to trade an option.
Here’s a great example.
On January 23, 2018, e-commerce company ETSY was down on its luck, technically oversold. It was being ignored, even though fundamentals were improving, too. Not only did the company have a new CEO at the helm, activist investors were buying in.
TPG Capital and Black and White Capital for example took a stake in the company. Even better, in November 2017, the company posted revenue of $106.4 million, higher than the $105 million expected. Earnings were 21 cents per share on a GAAP basis, up from a loss of 2 cents per share a year ago.
The company was turning things around.
Finding this opportunity a trader had two options. One, a trader could have bought shares of ETSY at $20 a share. Or, two a trader could have bought the ETSY March 16, 2018 20 calls for just $158 a contract ($1.58 x 100 shares in a contract). Remember, a contract gives you the right, but never the obligation to own any shares of stock.
If that trader wanted to buy 100 shares of ETSY, it would cost $2,000.
However, that same trader could pick up those same 100 shares for just $158. That’s a savings of $1,842. So I really fail to grasp the idea that options are costly.
Fast forward to February 29, 2018.
The company posted blowout earnings. The stock raced to $25.25.
At that price, the trader is looking at a win of 26.25%. The call option raced to $5.35, which gave that same trader a return of 238.6%.
Or, to look at it another way that trader could have made a whopping return of $262 using just the stock on $1,000 risked. Using that same $1,000 with the call options produced a return of nearly $3,400.
Not only did that trader spend less on an option, he made much, much more.
The choice is yours – make excuses for not trading options. Or trade options and give yourself the leverage you truly deserve to do well.