As a trader, you are always seeking to maximize profits while minimizing losses, and Dan Passarelli of Market Taker Mentoring offers a more cost-effective strategy for accomplishing this goal, especially with high-priced tech stocks.
You have been watching Apple (AAPL) and you believe this downtrend for the stock is about to end. You believe that this stock, despite its high price, now has potential and could easily make it back to $500 soon. The problem is that you don’t want to shell out $450 for one share of the technology 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 $450, it is going to cost you (100 X $450) $45,000. 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, 450 with a May expiration, which carries a price tag of $22. Rather than dishing out $45,000 for 100 AAPL stock shares, you instead pay $2,200 for the options—a rather nice difference of $42,800 that you can use for something else or to purchase 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 $450 at the massive cost of $45,000, you have dished out a more reasonable $2,200 for the transaction. Of course, this is the scenario if you want to be simply 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 that to by 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 $2,200 is far better than paying $45,000 for the same product. What if you want to sell these options to someone who is willing to pay a higher ask price than you paid? That is another subject for another time. Remember, there is no fool-proof way to make money in the market—there is risk involved in any trading strategy. One way to make sure you maximize your cash is to make sure you study your subject, remember that knowledge is power.
By Dan Passarelli, Founder, Market Taker Mentoring
