I say: “Investing in options”
And I know what you’re thinking! Let me just wave my wand and close my eyes for a few seconds while I concentrate…
You think I’m crazy, no, no, you think the best way to make money in the stock market is to keep your money away from it.
You think, investing in options? He probably meant to say Trading, or more appropriately, Speculating because you don’t invest in options, that doesn’t make sense.
Ok, maybe you didn’t think all those thoughts exactly. It’s hard to use my psychic powers over the internet while you’re probably on a different continent and a different time zone.
But I really don’t want to get into a discussion on definitions of investing vs. trading vs. speculating.
My personal definition of investing if you choose to accept it, at least for this discussion is simply putting some money from your savings at risk on a financial instrument with the expectation of earning some more money. Time investment should be kept to a minimum, you’re busy as it is already. Preferably the investment should be low risk, so you don’t have restless nights worrying you might wake up and realize it’s all gone.
Since I want to reveal the simplest profitable options strategy, I will say outright, I won’t have space here to teach the whole intricate world of options and I will skim quickly over some parts so you don’t get glazed eyes and hit the back button.
So, first thing you have to know is that stocks are going to increase in value.
Well, since I just broke my crystal ball and the new one hasn’t arrived yet, all I can say is you should consult the greatest investors of all time. You know one of the names I’m going to drop, right?
Mr. Warren Buffett is a successful long term investor and he uses options too sometimes. I studied and I follow his methods and you should too.
Rule number one, by Phil Town is an easy to follow book with some short cuts on the subject of finding low cost investments in high quality companies.
High quality, not in the nice products or services, but in their profitability and growth and their track record of at least 5 years.
Low cost means they were neglected temporarily by the media or hysterically sold due to over reaction by the crowds in the stock market.
These are companies you should track. There aren’t many of those but when you find them, you’d better keep an eye on.
At chartly.com I write from time to time about special opportunities like these. And I’m not talking about opportunities that go away minutes after they occur. This anomaly in the stock market can last for days or weeks, sometimes months.
So, what to do once you spot these gems you wonder?
The simplest idea is to outright buy the stock with a portion of your investment money. But that’s too boring, everyone understands that already…
What I propose is to use a simple call option on the stock.
What’s so simple about this? You might ask. Well, many beginners make mistakes and buy cheap options with the hope of making an insane killing using options and some actually have beginner’s luck. Most don’t.
Instead of buying the cheapest call option available, which isn’t worth much, you should buy an option with a long time until expiration.
Yes these are more expensive, but there’s a reason for that extra cost. You might actually increase your chance of profiting with those.
Another variable to take into account is the strike price of the option. The lower it is, the more expensive the option will be.
Why am I going for the expensive options?
If the strike price of the option on expiration day, is below the stock price, you get the difference! If it’s above, you lose!
But that’s in the distant future. Right now, when you’re buying the call option and there is plenty of time to expiration, the deeper the option, the better for you. That’s because for every dollar the stock moves, the deep in the money option moves close to a dollar. Not so with out of the money options.
Yes, yes, I know, it’s more complicated than that. There is volatility and interest rates and many additional complex subjects to cover. But I’m running out of room here on my sheet of paper and we should leave some for another day.
You won’t be able to increase your leverage 100 fold, but 5 is plenty. Just remember to use this on investment ideas with a time horizon of about one year.
P.S. If you like this, you can read a more detailed explanation with real examples on my special report here.