Ken Trester

Little Risk, A Lot of Happy Returns

by Ken Trester   08/15/08

Look at it this way, the option investor spent $1,000, preserved it and pocketed an extra $1,400 -- on top of their original investment dollars! Meanwhile, the stock investor risked nearly $18,000 and eked out a 20% gain for their trouble.

Like stock-buying, the risk that comes with option-buying is limited to what you pay for it. So, wouldn't you want to risk as little as possible if it meant you could still be positioned to take advantage of the same stock move?

Suppose the stock didn't go up in the time frame we expected it would. For the most part, good stocks go up and bad stocks go down. However, you never know when a CEO will be caught tapping his foot in an airport restroom or a bank announces that it's drowning in bad debt and may have to cut the dividend it once provided to loyal shareholders.

The best company/stock in the world can be susceptible to a damaging headline, and many drop on good news or even no news, too.

If that had been the case with Delta Petroleum, shareholders could have lost part or even all of their original $18,000 position. But even if the stock went kaput, those who bought the call options for $1,000 -- reflecting that same amount of shares as the bigger, riskier $18,000 position -- couldn't have lost a penny more than what they put into that trade.

As you can see, trading options can let you double your money in a matter of days. And we put a whole lot less money on the line than traditional stock investors do.

There's nothing wrong with owning a stock and enjoying steady returns over time. But when you want to make profits in a hurry without fronting the capital it takes to buy shares outright, be glad you have "options"!

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If you enjoyed this article, check out Ken Trester's "Use Trailing Stops to Protect Call and Put Option Profits" and Dawn Pennington's "Synthetic Call Options Similar to Real Deal."