Using Currency Options To Increase Your Odds
The Dynamic Wealth Report
October 26, 2011
by Karl Stevenson, Editor
Last week I told you I’d cover additional strategies for hedging your
portfolio. While there’s a lot of ways we can protect your investments,
this week I want to take you on a slightly different route... and focus
on options.
There’s no question, options allow you to trade with the odds in your
favor. And while options are the number one hedging strategy pros use,
today I’ll stick to showing you how options can increase your odds when
trading.
If you’ve been watching the trading action this year, you know how crazy
this market is. And it’s the kind of market you need to keep a close eye
on. Otherwise, it can get ugly fast!
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To help you stay nimble, you should consider options for trading. To show you how it works, I’m going to give you a sample options trade
straight from my portfolio.
Let’s get started…
When you trade with options, you are putting much less capital at risk
to own a particular investment… a stock, an index, an ETF, or even
currencies. It may sound complicated, but it’s a lot easier to do than
most people think.
We’re going to focus on buying investments we want to see rise in value. And to do that, we’ll need to buy call options.
Buying a call option on a stock, ETF, or other index gives you the right
to buy 100 shares of the stock from the seller of the option at a
certain time (the expiration date) for a certain price (the strike
price).
Buying call options is a very simple option trade. It’s a lot like
buying the investment itself. When you buy a call option, you want the
stock to go up in price. The big difference is call options allow you to
control more shares of a stock with less money than buying the shares
outright.
Here’s one of my latest trades…
Last month I rolled out a trade in my Currency Options Insider service. I recommended buying call options on the Australian Dollar (XDA). XDA is
the spot price of the Aussie Dollar.
More specifically, I recommended an XDA December 2011 $99.50 call
option.
A single call option gives us the right to buy 100 shares of XDA at
$99.50 anytime before the option expires on December 17th. As the buyer,
we paid a fee (called a premium) of $230 per contract.
Here’s why the odds are in our favor with options…
Basically, if the currency doesn’t go up, the most you can lose is the
initial $230 investment. So your risk is strictly limited to the
premium. But if XDA goes up in value, so do your call options.
Now the odds come in with the potential percentage gains… they simply
dwarf potential losses. This is due to the leverage you get with an
option. Remember, each of our call options controls 100 shares of the
Aussie Dollar spot index, XDA.
Since I recommended buying call options on XDA, the option is up a
whopping 121%. That’s a huge return. Remember, we bought the XDA
December $99.50 Calls for $2.30 each… and just yesterday they traded as
high as $5.08 each!
What’s more amazing, in some of our trades, the call options have shot
up an unbelievable 600%…
Option trading increases your odds because you are risking a limited
amount of capital. You have a known amount of risk, which is a fraction
of what the underlying investment would cost you if you bought it
outright.
Your profit potential, however… can be 2 to 1, or even 10 to 1!
Options are a staple of my speculative portfolio and also a tool I use
to hedge positions in my long term portfolio. And while I’d love to
explain how to use options to hedge your portfolio, it could take pages
upon pages to cover all the important details…
If you’re curious to learn more and want in on the action… I’ll be
rolling out another option trade in the Currency Options Insider later
this week, click here for more details.
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