How to use Call Options
Call Options can be used to significantly increase your returns. It is a strategy for up-trending stocks. A Call Option is the right to buy stock at a set price for a set period of time. In the example below, this stock is breaking through resistance. This stock is at $98, what if we buy the stock and sell it at $106. In this situation we made $106-$98=$8 or 8%. What if we bought a Call? Buying a call is the right to buy a stock at a certain price. In our example, we buy the $100 strike price for $2.
We can buy a $100 call for $2 and the current price for the stock is $98. In this example the stock rises to $106, what can we do? We can sell the $100 Call Option for around $7.5. In this trade we made $7.5-$2=$5.5 or 275%. If you had a choice to take an 8% gain or a 275% gain, what would you do? For added protection we can put a stop on your Call at 50% (that way you can only lose half of the Calls value). Let's do some calculations, if your average returns when right is 150% and average loss is 50%. What if your right only 40% of the time? Your percentage of return is: (1)*(.4)-(.5)*(.6)=$.3 WOW! On the average we get $.30 every time we do this trade. When should you exit this trade? On the first sign of weakness, or declining MACD and Stochastics. Take an exit on down day with heavy volume. Please remember to paper trade until you become familiar and successful on your trading system.
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