Three Ways To Make Buying Options More Affordable
There’s absolutely no denying how powerful options can be. Options have nearly unlimited uses. And, savvy traders can learn to reap huge rewards from trading options on a regular basis.
Of course, like anything else in the world of investments, options aren’t perfect.
One of the few negatives to trading options is some calls and puts can be expensive. Now, expensive options are still typically far cheaper than buying stock. But, certain options can still be a bit pricey for the average investor.
Fortunately, there are several ways to make buying options more affordable. Let’s take a closer look at three of these methods.
First off, the easiest way to make options cheaper is to simply buy out of the money calls or puts. The farther out of the money, the cheaper the option. But keep in mind, going out of the money lowers your probability of success. As such, you’ll need to balance how much you want to pay with what probability of success you’re comfortable with.
A better, slightly more complicated way of lowering the price of buying an option is by using a vertical spread.
A vertical spread involves buying a call and simultaneously selling a higher call in the same month, or buying a put and selling a lower put. The purpose of the trade is to lower the cost of your long call or put.
The drawback is your gains are capped at the short strike. Still, this is an extremely popular trade and is especially useful when you have a set belief of where a stock is headed. (Tip: Use the stock’s price target as your short strike.)
Finally, a somewhat more advanced strategy is to sell put options to finance a call purchase or sell call options to finance a put purchase. The premium collected from the short option goes towards lowering (or entirely covering) the cost of the long position.
Remember, this is a more advanced strategy because it ramps up the risk level of the trade quite a bit. If the underlying moves against you, you could lose on both the long and the short parts of the trade. However, if you feel there’s a floor or ceiling on the price of a stock, this could be a very lucrative strategy to utilize.
There you have it. Three ways to make buying options more affordable, ranging from super easy to moderately advanced. Try using one of these methods the next time you come across a call or put you really want to buy but just seems too expensive.
Yours in Profit,
Gordon Lewis
Category: Options Trading
