Options Trading: How To Generate Gains Of 550% Trading Options

| December 21, 2010 | 0 Comments

Christmas is here.  It’s the most wonderful time of the year.  (Channeling my inner Andy Williams…)

According to the National Retail Federation, one of their “Top Ten Holiday Trends for 2010” is giving gifts to… yourself?!?

That’s right, self-gifting is projected to increase 8% this year.  More than 57% of gift buyers will splurge on a little something for themselves this year.  So much for this being the season of giving…

Now if you’re anything like me, your Christmas wish list is pretty short.  I know I’m not dying to get my hands on any of the new gadgets or gizmos this year.

Instead, I’m going to treat myself to a few speculative options plays.  I know I’ll get more enjoyment watching an option double, triple, or more than I will from anything I can buy at the mall.

Simply stated, I love to see huge winners in my options account.

With the stock market running wild on a Fed induced liquidity binge, tis the season for call buying.  I mean the market’s jumping like a 5 year old kid on a sugar high!

Now, if you’ve never traded options, I’m sure you’re wondering what I’m talking about.

In short, buying a call option on a stock gives you the right to buy 100 shares of the stock from the seller of the option at a certain time (the expiration date) for a certain price (the strike price).

Buying call options is a very simple option trade.  It’s a lot like buying a stock.  When you buy a call option, you want the stock to go up in price.  The main difference is call options allow you to control more shares of stock with less money than buying the stock.

Let’s take a look at an example…

A few months ago in my Elite Option Trader service, I recommended buying call options on Pegasystems (PEGA).  More specifically, I recommended the March 2011 $25 calls.

The call option gave us the right to buy 100 shares of Pegasystems stock at $25 anytime before the option expired on March 18th.  As the buyer, we paid a fee (called a premium) of $185 per contract.

Here’s why I love options…

In the simplest of terms, if the stock doesn’t go up, the most you can lose is the initial $185 investment.  So your risk is strictly limited.  But if PEGA’s stock goes up in value, so do your call options.

The best part is the percentage gains on the option blow away the gains on stock.  This is due to the leverage you get with an option. Remember, each call option controls 100 shares of the underlying stock.

Since I recommended buying call options on PEGA, the stock is up an impressive 76%.  Not too shabby.  But our call options have rocketed to an eye-popping 550% gain…

Now that’s the kind of self-gift I have on my wish list!

To be perfectly honest, buying calls and puts isn’t something I reserve for holidays.  In fact, options are a staple of my speculative portfolio.  But in keeping with the self-gifting theme sweeping the nation this year, I’ll treat myself to a few more this holiday season.

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Category: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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