It doesn't take a genius to work out that you can make money on the stock market by buying shares and selling them at a profit once they have gone up in value.
In fact there are thousands of people who do this daily for a living. It's called Stock trading, and without a doubt, can be an effective strategy to earn an income.
In order to trade stocks however, you need to be able to buy them in the first place, and not everyone has large amounts of money at hand to do so.
That's without considering the hefty fees that are commonly associated with larger trading transactions.
Contents at a Glance
- But there is a trading vehicle that will allow you to make money on the Stock Market at a fraction of the cost of buying shares
- Using Call Options
- As the share price rises, so too does the value of the Call Option.
But there is a trading vehicle that will allow you to make money on the Stock Market at a fraction of the cost of buying shares
So this means you can trade with smaller amounts of money for an often higher rate of return.
Using Call Options
A Call Option is a contract that relates to a particular stock or security. When you buy a Call Option you have the right to buy the underlying shares at a fixed price, on or before a fixed date if you choose to do so.
You would buy Call Options if you had a Bullish view on the underlying stock. In other words you are expecting the price to go up.
Now this is where the Call Option gives you, the Options Trader, a major advantage over the Stock Trader.
You would buy Call Options if you had a Bullish view on the underlying stock. In other words you are expecting the price to go up.
Now this is where the Call Option gives you, the Options Trader, a major advantage over the Stock Trader.
As the share price rises, so too does the value of the Call Option.
Let me explain a little better how this works:
Imagine it's June and ABC shares trading at $50 each and we are expecting them to rise even more.We could buy a $52 August Call Option that would give us the right to purchase 100 ABC shares for $52 each. Our cost for the options contract would be say $500.
So this means we have two months in which the share price could rise above $52, but we could exercise our right to buy those 100 shares at any time before the option contract expires.
Once our option is 'In The Money'(once the share price is above our strike price of $52) we could exercise our option and buy the shares for $52 and then sell them at the higher market price.
Let's say by then ABC shares are trading at $60 then our profit would be...........
$ 6000 (our sell price to the market $ 60 x 100) -
$ 5200 (our purchase price using the option $ 52 x 100) -
$ 500 (initial cost of options)
= $ 300 profit
But I said our cost when Options Trading is a fraction of that when buying the actual stock right?
$ 5200 (our purchase price using the option $ 52 x 100) -
$ 500 (initial cost of options)
= $ 300 profit
But I said our cost when Options Trading is a fraction of that when buying the actual stock right?
Here is the power of Stock Options!
If the stock price had risen to $60 then the value of our Call Options could be as much as $1,000.Rather than exercising our option contract and using $5700 to realize a $300 profit, we could SELL OUR CALL OPTIONS to someone else and make a profit of $500 using just the $500 we need to buy the options in the first place!
This strategy is called Short Term Trading and can be a highly effective strategy to make money as income
You can even use Stock Options to make money in a falling market.
Your maximum potential losses when Options Trading this way is limited to the amount you initially pay for your option contract, and actually with the right strategies and money management rules in place, your potential losses can be much less than that.When I began Options Trading, I met with a lot of negativity from family and friends because they believed trading options was an easy way to lose money and far too risky.
But you know what? Buying a car is a much easier way to lose money because you are guaranteed to make a loss when it depreciates in value, but most people just don't look at it that way.
ANY purchase or investment will have an associated risk if you don't know what you are doing, so for this reason I would only recommend you consider stock options trading after completing the right educational avenues and using sound money management rules.
Options Trading Links
- Options Trading for Beginners
- Homestudy DVD's and Live Sessions available
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