Yes my friend you too can make good money buying call options, but you have to be smart about it. With every option strategy there comes with it advantages and disadvantages. For the sake of brevity I will use various terms without defining each one. If you see anything that seems unfamiliar to you then refer the article titled: Words That EVERY Option Trader Should Know. Now where was I? Oh yes, making money buying call options.
For those who don't know, a call option is a financial instrument of sorts that can play beautiful music. My favorite song being Ca-ching! An option contract comes in a bundle of one hundred shares each. The beauty with options is that you don't need to fulfill the cash obligations of buying the shares out right. In fact you don't need to own any shares at all to make money with options! With options you gain control over a large amount of shares for a mere fraction of the price. For example: say EFG company is trading at $50 a share and I expect the stock to jump up within the next month or two. I could
A.) Buy 100 shares, which will cost me $5000 plus commission fees, or
B.) I could buy 1 call option at $1 per share which would cost you only $100 plus commissions
About 6 weeks later you check your position only to see that EFG jumped up to $60 a share. Pretty sweet, right? If you bought the shares outright you made $1000, congratulations. On the other hand, if you bought the call option you made $900 ($1000-$100 cost for the option). Those who aren't paying attention will only see that $100 more were made buying the stock outright, but it took $5000 to make that $1000 or a 20% gain. That is great, but If you bought the call option then it cost you $100 to make $900, or a 900% gain. This, my friend, is the power of options. I know you're thinking, "Well, gee, that sounds awesome, but how can I make money buying call options."
Great question and now comes the answer. You want to purchase In the Money (ITM) call options for securities that you believe the underlying stock, index or ETF is trending up. Most new option traders are too enticed by the allure of buying Out of the Money (OTM) options hoping for unheard of gains. This is how most people lose money in options and end up quitting. Don't fall into this trap. ITM call options have intrinsic value and that is what you want. (If any of these terms seem strange to you then refer to the article: Words That EVERY Option Trader Should Know) You also want options that display low volatility. Don't worry if you aren't experienced with volatility. It doesn't have to be a difficult topic to understand. Most online brokers have volatility charts that are very simple to read, but just know that you ONLY want to buy options with lower than average volatility. For example let's say that a chart for EFG Company's volatility has ranged from 90% to 30% in the last year. Simply take those two numbers, add them together and divide them by two. You will get a figure of 60%. In this case you wouldn't want to buy any options that display a volatility of 60% or higher.
There are more efficient methods for this, but with no other options this is a generally good practice determining an acceptable volatility. Those who sign up for my newsletter receive free and easy to use tips and tricks like this (much more in depth than this, though). Before I go I want you to get two points embedded in your head:
A.) Focus on buying options that are already ITM
B.) Only buy options with below than average volatility
Thank you for reading and yes you REALLY CAN do this! Till next time...