Options Trading! :)

nickh725 (50)in #options • 8 years ago

I recently had the pleasure of talking to a friend about options trading. For those of you that are unfamiliar with options trading, it is a more leveraged version of stock trading. Buyers of calls are purchasing the right to buy a security at a certain price in the future. For example, if someone thought that Bank of America (BAC) was going to go up soon, they could buy a call option to purchase 100 shares of BAC at $32.5 on February 2nd. As of right now, it would cost $.18 a share to purchase the option. If BAC went above $32.68 by 2/2, then the buyer would stand to make $1 for every cent BAC went above $32.68. It would cost just $18 to make this trade, even though it is trading $3,220 worth of stock! The appeal to options is that traders make significantly more money on a correct trade. These leverage advantages come with downfalls however, because if Bac traded below $32.5 on 2/2 then the option would expire worthless. Options trading is a high risk/ high reward environment much like cryptocurrency trading.

During our conversation we discussed the insanity in the stock market right now, and some possible ways of playing it! As I said in previous article "the state of the stock market" https://steemit.com/stocks/@nickh725/the-state-of-the-stock-market, the stock market is extremely overbought right now. It has actually never been this overbought on the weekly RSI before!

Since the S&P 500 is overbought, an easy and cheap way to play a pullback would be to buy a put in SPY. SPY is an ETF that tracks the movement of the S&P 500. You can purchase a March 2nd $287 put for just $3.34 per share. On a 100 share contract the risk for the purchase would be $334. This is an extremely cheap way to play the market because, because the SPY would just have to fall $2.88 below its current price of $286.54 to become profitable. This is a move of just 1% lower in 1 month. For every dollar below $283.66, the position would make $100. If the market were to make a healthy pullback of 5%, this option would stand to make 400% return on investment! That is the power of options trading!