The key to understanding stock options and how they can play a huge role in you making money is to realize that you don't need thousands of dollars to get started.
Yes, having thousands of dollars will help you reach your goals faster, but stock option investing allows you to invest small sums of money and quickly build up your account.
Stock option investing allows you to take a small sum of money and have the chance to earn a high return on that money. This will allow you to build up your investment account quicker.
Not many people have $30,000 laying around that they can invest in stocks, but most can find $90.
Let's pretend the stock price for Apple Inc. just closed at $99.72.
So if you wanted to buy one share of Apple computer it would cost you $99.72, plus commissions.
Let's say that one year later the stock has gone up in value by 10%. You would have made roughly $10 on your $99 investment.
Now earning 10% return on your money is great, but I wouldn't advise anyone to wait a whole year just to earn $10!
Everyone knows the more money you invest in stocks the more money you can make. Now let's see how the same $90 can be used with stock option investing...
I'll show you a $90 option trade that I made. Looking at each of the blue arrows lets go over this trade. The symbol is "HUM" which is the stock symbol for Humana Inc.
Using my trading tools I saw that a potential trade was on the horizon.
The stock looked like it was about to take off in price. I bought "2" contracts of a Feb 2009 45 Call option for $.45. You will learn more about call options in a later lesson, but essentially you buy call options when you think the stock is going to rise.
Now that you know the definition of a stock option, what "rights" did I purchase with this "Call option"?
Yes, it means I bought the "right", but not the "obligation", to "buy" (Call option) 200 shares (2 contracts) of Humana Inc. on or before February of 2009.
**If you are confused and are still having a hard time understanding stock options then go back to the what are stock options lesson and review it again.
I paid $90 for these contracts. If you recall 1 option contract = 100 shares of stock. So you always multiply the options quoted price by 100 ($.45*100 shares=$45).
I bought 2 contracts ($45 * 2= $90). If this confuses you don't worry, we will get into how options are priced in another lesson. Just know I paid $90 for these 2 contracts.
Let's see how this trade turned out:
I closed the trade roughly 15 days after I entered it. The options went up in value to $1.65, or $165. I bought two contracts so that means $330 ($165 *2) was put back into my account.
Remember though I only invested $90 on this trade so let's see how much money I made.
$330 - $90 = $240 profit or 267% return on my money. Not bad for 15 days and only spending $90.
So this goes to show that you don't need a great deal of money to make a decent return on your money. Now I can't retire on $240 but 267% return on your investment is still 267%.
I hope this goes to show why stock option investing is so appealing. Stock options are one of the best investment vehicles I have ever learned about!
**Disclaimer: this is a very high risk trade; hence the reason I only invested $90. These returns don't happen often, but they do happen nonetheless. The purpose of the example was to show you that you don't really need a large sum of money to make decent investment returns.
I hope by now you are more interested in learning all you can about stock option investing. It's not for everyone, but I do feel that everyone should at least learn about them.
Understanding stock options takes time, but you can speed up the process by having someone show you how to trade instead of reading how to trade stock options from a book or online.
Obtaining an options trading mentor was one the best decisions of my life.
I tried the whole self education route, but I stayed broke and frustrated and couldn't quite piece together all the material I was learning for free.
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You can also read one of our options mentoring success stories to see how understanding stock options can really pay off for you.