Reap the Gains Without the Big Risk

By George Leong for Daily Gains Letter | Dec 31, 2012

The fiscal cliff has dominated the news, but we also have the eurozone risk, national debt, job creation, weak revenue and earnings growth, and China.

Given all of the uncertainties, there is ample risk in stocks, and you need a good investment strategy.

Now, you can buy into new positions and assume the risk, but a much safer investment strategy alternative is to play either upside via call options. In this way, you can take advantage of any upward move in the equities market but, at the same time, manage the maximum risk you have via this option investment strategy.

Let’s say you feel the economic renewal will continue to drive auto sales, but you also are a bit worried about a possible economic downfall if Europe and China tank.

You are looking at Ford Motor Company (NYSE/F), and you feel the stock may be heading higher. The risk is that the stock could move downward. A viable investment strategy is to play Ford via call options, instead of buying the stock outright. This will not only add leverage to your trade, but it will also limit the loss to the premium paid, which is a good investment strategy.

Chart courtesy of www.StockCharts.com

Let’s take a look at Ford, and assume you want an option investment strategy that equates to 1,000 shares of Ford. You feel Ford could rally to $15.00 by September 2013.

Assuming this, you buy 10 call contracts of Ford, equal to 1,000 shares of the underlying stock. For every board lot of Ford, for example, one call option may be written.

Here’s the mechanics: Looking at … Read More