Buy Stocks for Minimal Cost Using Options

01/17/2012 7:00 am EST

Focus: OPTIONS

Dan Passarelli

Founder, Market Taker Mentoring, LLC

High-priced stocks like Apple (AAPL) are great candidates for a call option strategy, which allows buyers to capitalize on the stock’s upside potential without committing thousands of dollars to buy physical shares.

You have your eye on a stock, a very high-valued stock like Apple, Inc. (AAPL). You believe that this stock, despite its high price, continues to have tremendous upside potential. The problem is that you don’t want to shell out $420 for one share of the tech giant.

What can you do to maximize your money and cash in on the perceived upside? Easy: buy a call option rather than the stock.

Quick Definition

For the uninitiated, a call option is a bullish strategy wherein a trader purchases the right (but not the obligation) to purchase a stock at a specified price within a specific time period. One advantage to buying a call option rather than purchasing a stock is that you can gain a much larger percentage return on your investment.

The Example

If you want to purchase 100 shares of AAPL stock at $420, it is going to cost you $42,000 (100 x $420). However, let’s say that you decide to purchase one call option on AAPL (each option represents 100 shares) with a strike price of, say, 420, with a February expiration, which carries a price tag of $16.40.

Rather than dishing out $42,000 for 100 AAPL shares, you instead pay $1,640 for the options, a rather nice difference of $40,360 that you can use for something else or can put to use purchasing other options.

The Money

The cost efficiency of purchasing call options can be far greater than simply purchasing shares of a stock, especially when you are dealing with high-priced stocks like AAPL. Remember that one option contract is the right to purchase 100 shares of a stock at that price. So, rather than purchasing 100 AAPL shares at $420 at the massive cost of $42,000, you have dished out a more reasonable $1,640 for the transaction. Of course, this is the scenario if you want to simply be bullish on AAPL stock.

Conclusion

As you can see, it is possible to lay out far less money to purchase call options on a stock than to buy the call itself. In fact, the earlier the expiration you choose, the lower the price you could pay. No matter what math you use, paying $1,640 is far better than paying $42,000 for the underlying product.

See related: Buy Stocks at No Cost Using Options

You do need to understand the basics of time decay and option Greeks, but become familiar with those and you will be on your way to using option strategies with confidence.

Remember, there is no foolproof way to make money in the market. There is risk involved in any trading strategy, but one way to make sure you maximize your cash is to make sure you study your subject. Knowledge is power.

By Dan Passarelli of MarketTaker.com

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