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If you are bullish on Stocks, Indexes or ETFs, you can control 100 Shares of each for a fraction of the cost of buying them. In addition, the small amount of the cost is also the Maximum Loss you are exposed to. And since you invest such a small amount, the Rate of Return will be substantial if the Stock, Index or ETF moves up in price.
Example - If you are bullish on XYZ Stock and the current price of XYZ is $250, you would have to invest $25,000 for 100 shares. Or, you could Purchase an "Option Spread" An "Option Spread" uses one Option with a Strike Price where you can Buy 100 Shares of XYZ at a certain price...and one Option with a Strike Price ABOVE the first Option's Strike Price...where you would SELL the 100 Shares of XYZ.
Example - If you are bullish on XYZ Stock and the current price of XYZ is $250, you would have to invest $25,000 for 100 shares. Or, you could Purchase an "Option Spread" An "Option Spread" uses one Option with a Strike Price where you can Buy 100 Shares of XYZ at a certain price...and one Option with a Strike Price ABOVE the first Option's Strike Price...where you would SELL the 100 Shares of XYZ.
| Stock, ETF or Index: | Symbol: | BUY, SELL or HOLD: | Cost to Control 100 Shares: | Max Loss: | Max Profit: | Rate of Return: | Stock Chart: | Option Details: |
| Apple | AAPL | BUY | $140 | $140 | $360 | 257% | Chart | Option |
| S&P Index | SPY | BUY | $33 | $33 | $67 | 203% | Chart | Option |
| Gold ETF | GLD | BUY | $35 | $35 | $65 | 186% | Chart | Option |
| Silver | SLV | BUY | $30 | $30 | $70 | 233% | Chart | Option |
| GOOG | BUY | $170 | $170 | $330 | 194% | Chart | Option | |
| NASDAQ | QQQ | BUY | $34 | $34 | $66 | 194% | Chart | Option |
| Netflix | NFLX | BUY | $195 | $195 | $305 | 156% | Chart | Option |
| DIA Index | DIA | BUY | $34 | $34 | $66 | 194% | Chart | Option |
In this example...we will Purchase an Option with a Strike Price of $270 and we will Sell an Option with a Strike Price of $280. Each Option trades daily at a price called the Option "Premium". In this example...we will say the Option with the $270 Strike Price is selling for $4. That means it will cost us $400 ( $4 times 100 shares ) to Purchase the 1st Option. And the Option with the $280 Strike Price is selling for $3. Since we are SELLING the 2nd Option, we will collect $300 ( $3 times 100 shares ). This means the "Option Spread" cost us a net of $100 ( $400 cost minus $300 collected ).
Since Options give us the Right but not the Obligation to Purchase Stocks at the Strike Price, our only responsibility is to take a Profit if the underlying Stock moves up in price or lose the net cost of the "Option Spread"...which in this case is only $100. As you can see, "Option Spreads" are a very unique way to be bullish on Stocks at a very inexpensive cost....a cost that is also the Max Loss we can be exposed to...no matter how low the underlying Stock may fall.
Now lets follow what happens after we enter into the "Option Spread". All Options have an "Expiration Date" at which time the Option is no long in effect. We would recommend to only enter into "Option Spreads" that have at least 60 to 90 days to expiration. In our example....we will say the 2 Options in our Spread both expire 60 days from the date we entered into the "Option Spread". Since the Strike Price of the 1st Option is $270, we need the underlying XYZ stock to move up in price ABOVE $270 PRIOR to the 60 day expiration date of our "Option Spread".
If XYZ moves up in price to $271, we will be even since our cost of the "Option Spread" is $1 and the Strike Price is $270..our "Breakeven" is actually $271. If the price of XYZ goes up to $280, then we will realize our Max Profit of $10 less the $1 paid for the Spread...for a net Profit of $9 or $900 ( 9 time 100 shares ). The $900 Profit on our original $100 cost is a 900% Return. Since we can sell our "Option Spread" at anytime prior to expiration...we would just sell it instead of waiting for expiration for a profit.
If the stock continues to move even higher in price beyond $280, we cannot participate in that increase since we sold a $280 Call Option. Therefore, our Max Loss is $100 and our Max Profit is $900 regardless of where the XYZ stock goes in price prior to expiration.
Here are some examples of how to use "Option Spreads" on Stocks, Indexes and ETFs. In each case, the "Cost to Control 100 Shares" is the Net Cost we would have to pay for the Spread. ( The cost of the 1st Option less the proceeds from the 2nd Option ). The Max Loss is the Net Cost of the Spread and the Max Profit is the most we can make on the Spread regardless of how high the price of the underlying Stock, Index or ETF moves in price. Click on the "Option Details" to see how each Spread works.
Since Options give us the Right but not the Obligation to Purchase Stocks at the Strike Price, our only responsibility is to take a Profit if the underlying Stock moves up in price or lose the net cost of the "Option Spread"...which in this case is only $100. As you can see, "Option Spreads" are a very unique way to be bullish on Stocks at a very inexpensive cost....a cost that is also the Max Loss we can be exposed to...no matter how low the underlying Stock may fall.
Now lets follow what happens after we enter into the "Option Spread". All Options have an "Expiration Date" at which time the Option is no long in effect. We would recommend to only enter into "Option Spreads" that have at least 60 to 90 days to expiration. In our example....we will say the 2 Options in our Spread both expire 60 days from the date we entered into the "Option Spread". Since the Strike Price of the 1st Option is $270, we need the underlying XYZ stock to move up in price ABOVE $270 PRIOR to the 60 day expiration date of our "Option Spread".
If XYZ moves up in price to $271, we will be even since our cost of the "Option Spread" is $1 and the Strike Price is $270..our "Breakeven" is actually $271. If the price of XYZ goes up to $280, then we will realize our Max Profit of $10 less the $1 paid for the Spread...for a net Profit of $9 or $900 ( 9 time 100 shares ). The $900 Profit on our original $100 cost is a 900% Return. Since we can sell our "Option Spread" at anytime prior to expiration...we would just sell it instead of waiting for expiration for a profit.
If the stock continues to move even higher in price beyond $280, we cannot participate in that increase since we sold a $280 Call Option. Therefore, our Max Loss is $100 and our Max Profit is $900 regardless of where the XYZ stock goes in price prior to expiration.
Here are some examples of how to use "Option Spreads" on Stocks, Indexes and ETFs. In each case, the "Cost to Control 100 Shares" is the Net Cost we would have to pay for the Spread. ( The cost of the 1st Option less the proceeds from the 2nd Option ). The Max Loss is the Net Cost of the Spread and the Max Profit is the most we can make on the Spread regardless of how high the price of the underlying Stock, Index or ETF moves in price. Click on the "Option Details" to see how each Spread works.
Click on the Option Details to see how each Option Spread works. Don't forget to review any of these Option Spreads with your Investment Professional and never invest without consulting on Options Expert. You must also have an Option Agreement with your Broker.
February 2012
| Stock, ETF or Index: | Symbol: | BUY, SELL or HOLD: | Cost to Control 100 Shares: | Max Loss: | Max Profit: | Rate of Return: | Stock Chart: | Option Details: |
| S&P Index | SPY | BUY | $24 | $24 | $76 | 317% | Chart | Option |
| NASDAQ | QQQ | BUY | $15 | $15 | $85 | 567% | Chart | Option |
| DIA Index | DIA | BUY | $20 | $20 | $80 | 400% | Chart | Option |
| Gold ETF | GLD | BUY | $37 | $37 | $63 | 170% | Chart | Option |
| Silver ETF | SLV | BUY | $15 | $15 | $85 | 567% | Chart | Option |
| Apple | AAPL | BUY | $85 | $85 | $415 | 488% | Chart | Option |