A Faster Way to Bigger Gains
There’s a saying that it takes money to make money. In the world of investing, it’s especially true.
If you started 2020 with $1 million and simply invested in a S&P 500 ETF for the full year, you would have made more than $180,000 (including dividends received). On the other hand, if you only had a $10,000 portfolio and did the same thing, your return would have been about $1,800.
That’s a source of frustration for regular folks who want to get started in the market. If you aren’t starting with a lot of money, how do you make enough money in the market to make a difference? After all, if you don’t have a lot of money, you won’t have much free money to invest in the market.
One way to add extra oomph to your money is to open a margin and use leverage to accelerate your gains. But this is very risky. If things go against you, you could end up losing much more than your original investment.
Leverage Without Margin
An alternative is to trade options. Because options are priced lower than the underlying stocks, you can buy more shares of the option than you can the underlying stock. And a 1% move in the stock price will result in a higher-percentage move in the option price. (Note: You can still use margin, i.e. borrow money from the broker, to trade options if you want to increase your leverage even more, but you don’t have to.)
Let’s illustrate this with an example, using real prices. Assume that you have $5,000 to invest on the final day of 2020, and you want to invest it in either General Electric (NYSE: GE) stock or an at-the-money June GE call. At their respective closing price on 12/31/20, you could have bought 462 shares of GE or 39 contracts of the GE June 2021 $11 call. Let’s see how each scenario would work out.
The table shows the closing price of GE stock and the June 11 call option on each trading day so far this year (as of this writing). It also shows what the gain or loss would be if you bought either the stock or the option. As you can see, as of Friday, 1/15/21, if you had invested the $5,000 in the stock, you would be up $244, or almost 5%. Not bad, for two weeks. But if you had bought the option instead, you would be up more than $1,000. That’s more than four times higher!
Know Your Risks
That is the beauty of options. If you are right about the stock, you can multiply your gains via an option. But you should also notice on the table that on the down days for GE stock, the option position went down more.
Indeed, if you trade options, you have to be prepared to take the good with the bad. On the good days, your option position will gain more, but on the down days, your option position will also fall more.
If you held the option to expiration and it’s out of the money, then it will expire worthless and you will lose 100% of what you invested. Sometimes the stock can move so quickly against you that an option’s value could fall to essentially zero before you act. By comparison, if you buy a stock, it’s highly unlikely that you will lose everything you invested. However, if you are paying close attention, you can usually sell an option and salvage some value before it fell to zero.
Unless you bought your options on margin, you will never lose more than what you paid for the option. On the other hand, if you write (or short sell) an option, then you theoretically could lose more than 100%. That’s the risk you take when you short sell. But if you are paying close attention, you can manage your risk.
The bottom line is that whether you buy or write options, they can be very profitable contributors to your portfolio.
High-velocity options trading…
If you’re looking to turbocharge your profits from options trading, turn to my colleague Jim Fink.
As chief investment strategist of Velocity Trader, Jim has created an options trading system that he calls the Velocity Profit Multiplier (VPM). The VPM has consistently outperformed, in markets that are going up, down or sideways.
Jim has used this proprietary investment system to personally amass a $5 million fortune. The VPM is proven and time-tested. It can juice even the smallest stock gains into massive triple-digit windfalls…in as little as three days.
Jim’s VPM allows you to quickly make life-changing amounts of money, regardless of your investing experience or the current size of your portfolio.
In a new presentation, Jim explains how you can leverage the VPM to turn $5,000 into $255,000 in the next 12 months. Click here for details.