Cheap Option Contracts That Will Double - NOT!

Topic: Find Me a Cheap Option That Will Double!

Dear Options Trading FAQ:

This Friday 10/20/95 I will purchase my first set of option contracts. For the past 2 months I have been buying and selling options on "paper" and have done fairly well. I have decided to take the plunge! I am not a large investor and my plan is never to invest more than I can afford to lose. I am looking to double my investment and then sell the option. I do not intend to get "greedy". I have researched and researched options trading and strategies but I am still very nervous about laying it on the line.

I have some stock options in mind but I am wondering what some of your picks might be? Something selling between 1/8 and 1/4 per contract but no higher. ANY suggestions would be appreciated and I understand about no guarantee. Thank you for your time.

Hopeful Option Trader

Dear Abandon All Hope Ye Who Enter Here:

My hope is to dissuade you from your intended course of option trading. Or to deflect it slightly anyhow. What you are proposing to do is quite difficult, to say the least. Finding options at an eighth to make money on is discouragingly difficult. Doing it with limited capital reserves your first time out makes it near impossible.

Further, the date that you propose is an options expiration day. Do you intend to buy an expiring option? That would make it a pure crapshoot. It is rare that an option gets rescued on the last trading day.

One can make significant profits from very little money in the option market but not from buying worthless options. They are priced at 1/8 because they will likely go to zero.

Here’s how I did it once. After a hiatus from personal trading, I set out to prove that a significant amount can be made from buying a one-lot. I picked an OEX call option trading for 3 1/2 anticipating a significant upside breakout. The trend turned out to be real. Ordinarily, I would have taken a quick profit, but because I only had one contract instead of the usual 10 or more, I held on. I sold this contract on a pullback for 7 1/2 and rolled the proceeds into 5 less expensive contracts on the next push. This turned out to be one of the first bull legs in the push to Dow highs and I wound up turning the $350 into $4700 or so after a nice series of trades. A rather nice return from a one-lot!

These opportunities are rare but a strong trend makes it possible. This current tech rally saw plenty of $2 and $3 options go up plenty in just a few days.
I would take the same amount of money that you intend for the cheap options and carefully wait for that next runaway market. The 1/8, 1/4 options do sometimes explode but like at the track, you must be willing to face the more common occurance: A worthless bet.

Bottom Line: Buy less option contracts that are worth more.

PS. In your paper option trading, keep track of what the bid/asks of the options are. You cannot go by what the paper lists as the last sale of the option contract. That does not reflect reality and often misleads paper option traders!

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Strategy, Options Pricing

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