How to Triple Your Stock Market Returns Using Options

Stock option trading enables investors to increase their leverage and thus their rate of return over simple stock trading. If an investor has a solid approach to picking stocks that go up in the short term, the returns can be increased by 3 to 15 times using stock options. The trade off for this increased return is that the investor has to also judge the time period over which the increase will occur.An option gives the owner the right but not the obligation to purchase something. More specifically, stock options are financial instruments that come in four varieties: Long or Short positions on a Put or Call.Long means a person purchases a Put or a Call. Short means a person sells or “writes” a Put or Call. Option writing is a more advanced topic so this course will focus on the more common long or option buying and the following descriptions assume all positions are long.A Put is the instrument that profits when the underlying stock declines in price. When the stock goes down, the value of a Put goes up. A Call is the reverse of a Put. The value of a Call goes up when the stock increases in price.As you can see, if you expect the stock price to go up, you buy a call. If you expect the price to go down, you buy a put. There are two more parts to an option that need to be covered. First is the expiration date. All options have a date in which they expire or become worthless. Remember that an option gives the owner the right to purchase something. This right is for a limited amount of time. Depending on the stock, different options might be available for several consecutive months into the future, or there may be a couple of months skipped. The specific day of the month that an option expires is always the third Friday of the month, unless it is a holiday, in which case the expiration is on Thursday.The second element is the strike price. This is the price that the option will be exercised at. Again an option is the right to buy something, and the price at which something is bought is the strike or exercised price. Depending upon the option, these prices may be incremented by $2.50 up to $10.This all adds up to a lot of choices when it comes to buying an option. Calls or puts plus different expiration months, and multiple strike prices within each month is a lot of different decisions. Investors are advised to look carefully at the open interest and volume when considering which option contract to buy. A low volume/open interest will generally result in large spreads between the bid/ask prices and thus reduce profits, plus it may make it difficult to sell the option contract.Being able to pick the stock, direction, and time period are all critical for successful stock option trading. A recent statistical analysis of over 30 years of stock data has revealed certain reoccurring patterns that can yield high returns in stock option trading. The analysis was done with custom developed software and then the strategy was applied to all stocks for the last five years. Investors have already begun to exploit the patterns found in this research and are reporting highly profitable trades. Whenever investors find inefficiencies in the market, there is a rush to take advantage of those inefficiencies.

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