Protect a Lifetime of Wealth with Puts
Insure your stocks from loss (with very little effort or cost) by buying put options on the stocks that you already own or on stocks from the same sector and of similar fundamentals to those in your portfolio.
Make your put portfolio a separate profit center, even though it’s designed as an insurance policy. Buying cheap, out-of-the-money puts can provide this net. For a nominal price, you can get a lot of reassurance.
Exercise Your Right to Profit
Buy calls to initiate a long stock position.
If you buy a call at the $30 strike, then no matter how high that stock trades during the life of your options contract, you can buy shares at $30 right up until expiration. Plus, you’re not obligated to buy the stock, and you can close the trade at any time without touching a single share.
Even better: If the stock drops, the most you can lose is what you spent to buy the calls.
Buy Options the Right Way
Select options that are undervalued and underpriced and are trading close-to-the-money (i.e., the stock price is trading near the strike price).
Also, look for as much time as possible before expiration. This goes for buying both calls and puts. Another way to get a good price is to find a stock that is moving within a 2- or 3-point trading range.
Try to buy cheap call options when the stock is trading at the lower end of its range and cheap put options when it is at the upper end.
Test the Market-Makers’ Limits
A limit order requires that you get the price you want to pay or else your trade won’t be made.
As a result, when buying options with limit orders, it may take a few tries before getting an order executed at a price you want to pay.
To streamline the process, try to get a price that falls between the bid and ask prices.
Stop, Do Not Pass Go
Sometimes it’s best to exit a trade that’s no longer going your way.
Setting sell stops is a personal decision: 10%-50% down is standard. Once an option has lost half its value, it’s rare to see it make a full recovery, let alone become profitable.
Options are a cash business, and you have a very limited time in which they will either boom or go bust. The more a trade turns against you, the less you have in your account that’s earning interest and available for the next trading opportunity.
Look for Surprise Volatility
You have to know where to find stock option candidates. The nature of the market today creates opportunities for surprise volatility. It’s dominated by institutional money managers, and as these managers move huge amounts of cash both in and out of stocks, a lot of surprise volatility develops.
One place to look for stocks with surprise volatility potential is in momentum industries such as tech, biotech and telecom that are traded on the over-the-counter market. The smaller capitalizations of these types of stocks make them more volatile.
LEAPs Tilt the Odds in Your Favor
The best stocks to buy are those that are undervalued. And when you combine an undervalued stock with an undervalued LEAP, your chances of profit are much greater.
You can use a stock’s earnings estimates to help you determine the value of the shares its options. Multiply the consensus earnings estimate for the stock by its current price-to-earnings ratio to arrive at a projected stock price when your LEAP expires. If this price projection is above the breakeven stock price, you have found an undervalued LEAP, so you profit from the price difference and if the stock rises!
Trade Options to Generate Regular Income
Anyone who owns at least 100 shares of a stock—or owns call options—can sell (write) covered calls.
If you write a $20 Call priced at $2 per share, you would receive $200 in your account. ($2 x 100). This is, in effect, an insurance policy with $200 worth of downside protection. If shares drop 2 points (or $2), your option income covers your stock loss. So as long as the stock trades fairly flat, covered calls can put the stock to work harder for you and enable it to generate income for you even though shares are stagnant!
Get In-The-Money & Stay There
When an in-the-money option enters its last week before expiration, close the entire position and take profits.
If you own an in-the-money call and the stock is trading above the strike price at expiration, your right to buy the stock at the strike price will be executed UNLESS you indicate that you don’t want the stock.
Don’t wait for it to expire. Close the trade before it’s closed on your behalf.