Exploit This Correction… and Double Your Money

Editor’s Note: Only four days left…

On November 13 at 1 p.m., Options Strategist Karim Rahemtulla is going live with his Undefeated Options Summit.

During it, Karim will share the strategy that has helped him accomplish a perfect track record since launching his options trading service, Automatic Trading Millionaire. He’ll show you how to implement it in your own portfolio.

The Club is bustling with excitement.

You see, for years, we’ve tried to make options accessible to Members. Karim’s options trading event will do just that.

The Summit is entirely free to attend. To claim your spot and learn more, click here now.

– Rachel Gearhart, Associate Franchise Publisher

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From the Baltimore Clubhouse – One advantage of trading during a market correction is making cheaper trades that help maximize your upside.

But it’s not just stocks that get cheap.

Options also become a more attractive way to make strategic bets on the market and take advantage of near-term volatility.

For example, consider a recent trade I made on Cronos Group Inc. (Nasdaq: CRON).

Last week, I purchased the December 2018 $9 calls at $0.75. This week, I sold at $1.55 for a quick 107% gain after just six days.

Capitalizing on the rebound in stock prices following last month’s carnage translated into a fast payday thanks to intelligent options trading.

That’s why investors should supplement their stock investing with options trading. It’s an excellent way to juice one’s portfolio and make above-average returns in the market.

Now, my trade was very short term. But not all options trades are short term. In fact, you can use options to make long-term bets on the market too.

Take the SPDR S&P 500 ETF Trust (NYSE: SPY) as an example.

As of this writing, the S&P 500 ETF trades for about $275 per share.

An option contract covers 100 shares of the underlying stock (or, in this case, ETF). So for an apples-to-apples comparison, we’ll consider the cost basis for 100 shares of the S&P 500 ETF.

At $275 per share, that’s $27,500 for 100 shares.

Let’s say you are bullish that the market will rebound at least 10% from today’s prices by December of next year. That would hand you a $2,750 profit on a $27,500 trade in the S&P 500 ETF.

So your cost basis is high… and your potential reward is relatively low.

Now, let’s imagine instead that you decide to trade the S&P 500 ETF options.

Since we’re thinking far into the future – more than a year in this case – we’ll have to use special options called LEAPS. They trade just like ordinary options on the market. But they expire at least one year in the future. They’re perfect for longer-term trading.

Right now, the December 2019 $280 calls trade for about $18. But remember, an option contract represents 100 shares of the underlying.

So our cost basis for one contract is $1,800. That is much less capital than the $27,500 needed to buy 100 shares of the S&P 500 ETF outright.

You can already start to see a savings advantage with options trading.

Let’s say the S&P 500 ETF jumps 10% before the option expires next December. That puts its price at around $302.50.

With a strike price of $280, that sets the intrinsic value of the calls at about $22.50.

But your profit with the options is $450 – a 25% gain. You could potentially earn more than double the market’s rate of return.

But what if the market drops 10% instead?

If you purchase shares of the S&P 500 ETF, you’ll lose about $2,750. And if you purchase $280 calls, you’ll lose your entire $1,800 principal. However, your total loss will still be less.

Here’s another example… this time a stock…

Facebook‘s (Nasdaq: FB) shares have been dragged through the mud since the company became plagued with concerns about user privacy and fake news.

Currently, Facebook trades for nearly $150 per share. But it’s been excessively beaten down in this correction.

I would not be surprised to see shares of Facebook rebound 30% between now and December of next year (barring a full-on bear market). That’s because, in spite of Facebook’s controversies, I believe investors have largely overreacted.

So let’s consider the math for both a stock and an options trade.

In the stock trade, a 30% price jump would generate a $4,500 profit on 100 shares of the stock. But that would require a cost basis of $15,000.

Or you could look at the December 2019 $155 calls trading for around $20.

Your cost basis would be close to $2,000 – much cheaper than it would be to buy 100 shares of the stock. And your potential profit would also be about $2,000 – a 100% gain.

Your return would be more than three times greater… but you’d risk less capital to achieve it.

It just goes to show that options trading can be used to intelligently reduce risk while also maximizing reward.

Good investing,

Anthony