| Since options started being trading in exchanges, | | | | leverage effect in call options, it still gives you the |
| few people actually use options in their trading or | | | | unlimited upside profit if the stock price rise. |
| investment. However, recently the market has | | | | Alternatively, you can buy more calls options for |
| changed. In 2005, 1.5 billion contracts are being | | | | this stock or other stocks because your risk is |
| traded in the USA. In CBOE alone, more than | | | | limited. |
| $200 billion worth of option contracts are being | | | | Another strategy you can do is bull call spread. In |
| traded. | | | | the above example, 20 bull call spread might cost |
| More and more individual traders and institutional | | | | you $4,000 (assuming $200 per contract). Bull call |
| money managers are interested in options mainly | | | | spreads give you a lower breakeven point |
| because of their leveraged profit opportunities, | | | | compared to call options, so you will profit faster |
| ability to limit risk, ability to profit in any market | | | | when the stock price moves up. The only |
| environment, and the flexibility to create various | | | | setback is that the upside profit potential is limited. |
| strategies. What this means is that now traders | | | | You can also do a call ratio back backspread in |
| and investors are able to combine different option | | | | which you sell a lower strike call option and buy a |
| contracts with different strike prices and different | | | | higher number of higher strike options. You would |
| expiration dates to create profitable and suitable | | | | want your choice of option to give you a credit |
| strategies for the market environment. | | | | to open this position. This strategy gives you |
| Now the question is how do we use options to | | | | unlimited upside profit potential, and some profit |
| replace our current trading or investment | | | | even if the market falls. You make losses if the |
| strategies? A better question is not only to | | | | market moves up slightly and slowly. |
| replace, but to replace in a way that boosts profit | | | | To replace selling stocks or futures, you can do |
| potentials and reduces risks. | | | | the reverse. You can buy put options, bear put |
| In stocks there are only two things you can do. | | | | spread or put ratio backspread (sell a higher strike |
| You can buy the stock and profit when the price | | | | put and buy a higher number of lower strike put). |
| goes up or you can sell short the stock and profit | | | | For these options strategies, you can limit your |
| when the price goes down. In futures, you can do | | | | risk. If you were to buy the stocks or futures, |
| the same, that is to buy or to sell short futures | | | | you risk the total of $100,000, and by selling |
| contracts. Another thing you can do in futures is | | | | short, you risk more than that. |
| to do a time spread. In this article, we will be | | | | With options, you need to take into consideration |
| covering how to use options to replace buying | | | | the time element. You have to anticipate the |
| and selling the underlying instruments. | | | | speed of the market movement, and buy the |
| To replace buying stocks or futures with options, | | | | appropriate expiration time. Do you expect the |
| there are several things you can do to benefit | | | | market to move in a few days, weeks, months |
| from price rise. You can buy call options, bull call | | | | or years? This influences your decision on options |
| spread or call ratio backspread. If you have | | | | expiration and options' strike price. If your duration |
| $100,000 and you plan to buy 2000 XYZ shares | | | | is longer, you can buy more contracts of cheaper |
| at $50 and hold it for 12 months, you would have | | | | out-of-the money options. |
| to spend the whole $100,000. By buying the stock | | | | So, to choose the best strategy to adapt your |
| you risk all $100,000 if the stock's price plummets. | | | | current trading or investment style, calculate your |
| The alternative is to buy 20 call options for | | | | total risk and plot a risk profile for each strategy. |
| $7,000 (assuming $350 per contract), and keep | | | | Evaluate the risk versus reward, and pick one |
| the remaining $93,000 in AAA bonds that gives a | | | | that suits your current system the best. |
| good yield. Your risk is limited to the $7,000 you | | | | is committed in providing valuable education, |
| paid for the call option, but you probably get it | | | | resources and tools to help traders to improve |
| back from yield from the bond. Because of the | | | | their trades. |