Remember, since an option is a derivative contract, it can be sold without owning it first. This extremely powerful tool is known as spreading. It is a secret that option professionals have been using for decades but which has only recently entered the mainstream. This provides the trader with the ability to benefit from a stock’s price movement but at a much lower cost than buying stock.īut there is yet another step you can take with options to reduce your risk even further. Options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want…and for only the period of time you think necessary. Stock is a very blunt, and expensive, investment instrument that’s sort of like being forced to buy a 300-channel cable TV package when all you want to do is watch Nickelodeon and the Food Network.
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In chemistry terms, call and put options are the “atoms” that make up a stock “molecule.” When you buy a stock, you are buying exposure to the full range of a stock’s price movement, up and down, for an unlimited period of time.
There is a way to generate 100% and 200% returns much more quickly…in days rather than years…and that involves the use of options as a substitute for stock. Stocks can double or triple over time, but it usually takes years. Velocity refers to the speed of generating profits. Jim, I’ve often heard you advise investors: Don’t trade stocks, trade velocity.
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