In a previous article, I explained the reasons why I prefer to trade in options and I think now you will agree with me.
But probably you asked how does it work? How is it possible? Because actually options behave in a non-intuitive way. At least it seems like that until you understand the exact mechanism.
Abstract: to better understand this article, you must have read the free ebook on options that I wrote. If you have not already read it, you can download it from here.
This is what I will explain in this article, starting from a CALL.
A CALL is like a deposit
It is an example that I often use and who has been to the trading with options seminar will recognize it.
Imagine that a CALL option is like the compromise of a house. Put a deposit, which is a small part of the price of the house and you have control of the house: it is like it were yours and you have the right to buy it by the date of the deed at a defined price.
If, as I teach in my seminar Investing in Real Estate you put at the buy-compromise a very low payment as deposit (a few thousand Euro) you immediately can see the advantage of an CALL option: with a few thousand euros you control hundreds of thousands of Euros ( value of the home).
What if at the time of the deed the market price grows? You get a very high gain with respect to the money that you have put on. Let us say you have paid 3000 Euros for a house of 300,000 Euros. At the time of the deed the house increased its value to 310,000 Euros: you have earned 300% on your investment (10,000 / 3,000)!
Now replace the house with a package of titles and you will have exactly the operation of a CALL option!
Put a small amount (the premium) to control a package of shares that you undertake to buy at a certain price at a certain date. If the value of the shares will grow, the value of your option will grow (because the market would be able to buy your shares at the price that you reserved).
At this point, you can wait for the option to expire, buy the titles at the lower price, sell them on the market, and earn the difference. In fact, no investor in options does so, rather they sell it directly before maturity.
Coming back to the house example, those who have attended my seminar Investing in Real Estate know that you can make a compromise sales or sell the house at the market price having only paid the deposit.
Similarly, you make a “compromise sales” with options: in this case, the compromise is the option itself. You understand well the huge profit that you can achieve with this operation: instead of buying and selling expensive stocks, you buy and sell the economic rights of those shares. So, for the same money invested gains 10, 100 times more!
(Again, if for you it is easier, use the example of a compromise: if a house is 100,000 euro and a compromise is 3000 euro you can buy and sell 33 compromises with the money you spend for buying the house: get the idea?)
During the seminar “Trading with Options”, of course, you will not only learn these things, but you will also learn practical operational strategies for trading in options: it was the first course in Italy to teach these things and there are now thousands of students who have attended it.
Now, after having read this article, you know more than 99% of those who invest in the stock market in shares and consider options a mysterious and dangerous way to trade.
A CALL (and PUT of which I will speak in a future article) can really change your life, as they have already changed the lives of so many others who have learned about trading with options.
To your financial freedom