Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star

Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
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Second Chance Options by Barbara Star

Optionable stocks allow traders to use short-term strategies that combine technical analysis with the right option strike price and realistic targets to provide an edge.

What could be better than picking up a quality stock for pennies on the dollar? And not only during times of economic distress, but also during times of economic growth. Optionable stocks make it possible to pick up a quality stock for pennies on the dollar by allowing traders to “lease” good companies as a substitute for actually owning the stock outright and for far less money than it would cost to purchase the underlying stock. Buying puts and calls on stocks offers greater leverage with limited risk than buying the stock outright. Of course, like any lease agreement, it is time limited. And if the price of the stock you leased doesn’t move quickly enough in the desired direction during the specified time limit, you can lose your initial investment.

However, just as problematic as selecting the right stock is knowing when to purchase an option on that stock. The usual mantra for option traders begins with: If you think price is going up, buy a call; if you think price is going down, buy a put. There is no better illustration of the difficulty in predicting price turns than the 2008 crude oil market. Analysts began calling for a top when a barrel of crude neared $100 and continued calling for a top as it soared beyond $120, $130, and $140. Then they claimed crude oil would climb to $200 a barrel. Wrong again! Crude oil peaked in July at $147, which led to a steep decline in oil-related stocks as crude oil prices subsequently plummeted below the $70 a barrel mark.

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