 | Marc Lichtenfeld
Chief Income Strategist
The Oxford Club |
I stared at my computer screen in disbelief. My hands were shaking as I moved the mouse. I clicked "sell" and was suddenly $5,000 richer. Less than a day had passed since I'd entered my position. This was back in 1999, and that $5,000 was big money. I was making about $40,000 a year at my job, so a windfall of five grand moved the needle on my finances. I bought calls on Sun Microsystems right before earnings were to be released. The company easily beat analysts' expectations, sending the stock sharply higher. My calls became an overnight 10-bagger. The $500 I invested turned into $5,500. At that point, I had made hundreds of stock trades and done pretty well. But my position sizes were small, so I had never made thousands of dollars so quickly. Certainly not in one week, forget about one day... [Yours Free! Top FIVE Dividend Stocks Right Now. Click here.] I had recently started trading options, and I loved the potential for making big profits while reducing risk. Many people think options are speculative - and they can be. Because they expire, you can lose money if the underlying stock sits in place or trades lower. But when you speculate with options, you can actually reduce your risk. Let me explain... Many people trade options incorrectly. An options contract allows you to control 100 shares of stock. If you were going to buy 100 shares of stock at $40 per share, you would have to invest $4,000. Options can let you control the same number of shares for far less. Traders who don't quite understand the power of options think that instead of buying 100 shares of stock for $4,000, they should buy $4,000 worth of calls (a call is a bet on the stock price going higher). If the stock declines by 25%, or 10 points, the stock investor will lose $1,000 - but the options trader will likely lose most or all of their $4,000. I approach an options trade by focusing not on the value of the underlying stock or on how many shares the contracts will control, but on how much risk I'm willing to take. Back to our $40 stock example. If, on a stock trade, I place a stop at 25%, that means I'm willing to risk 10 points, or $1,000 on 100 shares. Rather than buying $4,000 worth of calls, which could lead to me losing my entire investment, I would choose to buy $1,000 worth of calls. If the trade didn't work out, the most I could lose would be $1,000. I couldn't lose more than my initial investment. If the stock went up 10 points, I would make $1,000 on a stock trade, but I could make more than that on calls. The downside to trading options instead of stock is that there's a greater chance of loss. But trading options, when done correctly, can also limit the size of your loss. To sum up, when you buy calls instead of stock, you are risking less money and have the opportunity to make more profits. For investors who have a little play money or who like to make calculated speculations in the markets, options are a great way to bet on or against a stock. Good investing, Marc P.S. On Thursday, July 14, at 2 p.m. ET, I will reveal my new strategy that focuses solely on a unique kind of investment I call "penny options." They give you the chance to see big, satisfying returns in short periods of time, like... 907% on AbbVie in 10 months... 636% on Skechers in four months... and 442% on Toyota in just 10 days. Sign up for my FREE Penny Options Summit right here. Want more content like this? | | | |
Marc Lichtenfeld | Chief Income StrategistMarc Lichtenfeld is the Chief Income Strategist of The Oxford Club. After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc's commentary has appeared in The Wall Street Journal, Barron's, and U.S. News & World Report, among others. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer's TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich with Dividends: A Proven System for Double-Digit Returns achieved bestseller status shortly after its release in 2012. Marc is the Senior Editor of The Oxford Income Letter, which is based on his proprietary 10-11-12 System. He is also the Editor of Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits. | | |
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