Ken Trester

Little Risk, A Lot of Happy Returns

by Ken Trester   08/15/08

No doubt you've got some stocks in your retirement fund, and maybe you've branched out and gotten into some of the hot "story" stocks that seem to always be making headlines. Perhaps you've even gotten into some good dividend-paying plays so that you benefit not only when a stock goes up, but also when it makes those extra payments that you can use as an additional source of income.

You can use options in your portfolio as a supplement, similar to a dividend, to make your stocks work harder for you. But what really gets me jazzed are the option plays that you initiate with your "fun" money -- the ones where you don't have to touch a single share of stock in order to turn a profit.

Unlike stock investing, where you buy shares and wait for the value to go up, you can use options independent of your long portfolio to profit no matter which way the market is trending. Even better, compared to buying stock positions that could cost you thousands -- if not tens or hundreds of thousands -- of dollars, options allow you to control the same number of shares for just pennies on the dollar.

As an option buyer, you get to participate in the underlying stock's movement without a huge capital outlay. For example, we recently recommended a Delta Petroleum call option. In the week and a half it took for the shares to go from $17.80 to $21.50 (a 20% increase), our options went from $1 apiece to $2.40 -- a 140% jump in the same time frame!

The reason we can make these types of triple-digit profits is because we're buying inexpensive options. We more than doubled our money with those Delta Petroleum calls, but the real magic is in how we made a similar profit to the stock buyer without the same high-dollar investment.

The investor who bought 1,000 shares at $17.80 spent $17,800 to initiate his position. The 20% pop in the shares translated into $3.70 per share, or a $3,700 gain. Not bad for a stock to achieve in a little more than a week.

My subscribers got into the December 20 Calls when I recommended them in October at $1 per share ($100 per contract, as a contract represents 100 shares of the underlying stock), or $1,000 for the same thousand-share position as the long-side investor.