Strategy for a Club, Buying Calls Part I
Jun 9, 2010Strategy for an Investment Club: Buying Calls Part I I've discussed what an option is and what you can do when you own an option. Today let's take a look at a simple strategy that is appropriate for most investment clubs. One of my core beliefs is that 'buying options' as a directional play is a loser's game. There are just too many things that can prevent the option buyer from earning a profit. However, there is one time that I believe buying options can be a good trade idea, and it's especially useful for investment clubs. But only if you understand the risk and reward. The main reason for introducing this idea now is to give readers one idea of how to use options. Recognizing that too much background information can be boring, I want to offer one idea that your club may want to adopt. It's not my favorite idea, but is is easy to understand. Note: This strategy offers less risk than buying stock, and that's a conservative way to use options. It also allows your club to use leverage, and that's an aggressive tactic when investing. The idea is for you to see one reasonable trade idea, but which combines safety from one point of view and more risk from another. Most clubs adopt a buy and hold approach to investing. Find quality growth stocks and hold until they no longer meet the requirements to remain in your portfolio. Most clubs must trade odd lots (<100 shares) due to not having enough cash. By buying a specific kind of call option your club will be able to buy the equivalent of 100 shares of stock every month or two. Warning: Do not buy hope. Do not buy options when the stock must make a big move for you to earn a profit. It does not matter how bullish you are or how good your information. Do not buy out of the money options (call options with a strike price higher than the stock price). Do not buy at the money options (options whose strike price is near that of the stock). The chances of losing 100% of your investment are too high, and for a club, that must be avoided. Only buy options that are in the money. This discussion is about bullish plays and the purchase of call options, but the same applies to bearish plays when buying put options. Example. A stock you would like to own (LIKE) is $57 per share. You have less than $1,000 to invest. One choice is to buy 15 shares. Another is to buy one call option that expires in two or three months. To follow this plan, you buy one LIKE Sep 50 call.This option gives you the right to buy 100 shares of LIKE stock. The price at which you can buy those shares is $50 per share. The option expires after the 3rd Friday of September (this year). Note that the stock price is already above $50, and the Sep 50 call is in the money to be continued.... Mark D Wolfinger Partner and Director of Public Relations Expiring Monthly: The Option Traders Journal http://www.expiringmonthly.com/ |