Using Currency Options To Increase Your Odds

| October 26, 2011

Last week I told you I’d cover additional strategies for hedging your portfolio.  While there’s a lot of ways we can protect your investments, this week I want to take you on a slightly different route… and focus on options.

There’s no question, options allow you to trade with the odds in your favor.  And while options are the number one hedging strategy pros use, today I’ll stick to showing you how options can increase your odds when trading.

If you’ve been watching the trading action this year, you know how crazy this market is.  And it’s the kind of market you need to keep a close eye on.  Otherwise, it can get ugly fast!

To help you stay nimble, you should consider options for trading.  To show you how it works, I’m going to give you a sample options trade straight from my portfolio.

Let’s get started…

When you trade with options, you are putting much less capital at risk to own a particular investment… a stock, an index, an ETF, or even currencies.  It may sound complicated, but it’s a lot easier to do than most people think.

We’re going to focus on buying investments we want to see rise in value.  And to do that, we’ll need to buy call options.

Buying a call option on a stock, ETF, or other index 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 the investment itself.  When you buy a call option, you want the stock to go up in price.  The big difference is call options allow you to control more shares of a stock with less money than buying the shares outright.

Here’s one of my latest trades…

Last month I rolled out a trade in my Currency Options Insider service.  I recommended buying call options on the Australian Dollar (XDA).  XDA is the spot price of the Aussie Dollar.

More specifically, I recommended an XDA December 2011 $99.50 call option.

A single call option gives us the right to buy 100 shares of XDA at $99.50 anytime before the option expires on December 17th.  As the buyer, we paid a fee (called a premium) of $230 per contract.

Here’s why the odds are in our favor with options…

Basically, if the currency doesn’t go up, the most you can lose is the initial $230 investment.  So your risk is strictly limited to the premium. But if XDA goes up in value, so do your call options.

Now the odds come in with the potential percentage gains… they simply dwarf potential losses.  This is due to the leverage you get with an option.  Remember, each of our call options controls 100 shares of the Aussie Dollar spot index, XDA.

Since I recommended buying call options on XDA, the option is up a whopping 121%.  That’s a huge return.  Remember, we bought the XDA December $99.50 Calls for $2.30 each… and just yesterday they traded as high as $5.08 each!

What’s more amazing, in some of our trades, the call options have shot up an unbelievable 600%…

Option trading increases your odds because you are risking a limited amount of capital.  You have a known amount of risk, which is a fraction of what the underlying investment would cost you if you bought it outright.

Your profit potential, however… can be 2 to 1, or even 10 to 1!

Options are a staple of my speculative portfolio and also a tool I use to hedge positions in my long term portfolio.  And while I’d love to explain how to use options to hedge your portfolio, it could take pages upon pages to cover all the important details…

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Category: Options Trading

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