For Quick Profits, Trade Options

While chatting with a hedge fund manager friend online last week, as we marveled at the continuous new highs in the market, he typed, “Literally no risk owning stocks right now.”

Of course, he knows there is risk owning stocks – but his statement emphasizes how it seems like the market goes up every day and everyone has a “risk-on” mentality.

And over the past year, I’ve noticed that my readers have become willing to take on more risk. Options have become a popular trading tool, as they offer the ability to put just a little money at risk yet achieve huge gains.

For example, someone who wanted to make a short-term bet on Apple (Nasdaq: AAPL) increasing in price could have bought the January $270 calls on December 12 for $6.05 (or $605, as option contracts trade in 100-share blocks).

They could have sold them five days later at $14.50, for a gain of $845 – which would be 140%.

On December 11, a trader could have bought the SPDR S&P 500 ETF Trust (NYSE: SPY) December 20 $315 calls for $2 and sold them for $5 on December 17.

Someone who bought 10 contracts would have turned $2,000 into $5,000 in less than a week.

Buying calls and puts is a great way of taking shots at profits from short-term market moves.

Now, it is important to understand that options can lose value quickly too, particularly if there is not much time left until expiration. So it’s a higher-risk, higher-reward strategy.

For those who want to trade for quick profits, there are several ways to get in on the action.

Buy puts or calls on a stock. If you follow a stock and believe you have a strong indication of its direction, you can buy options on the individual stock.

Buy puts or calls on an index or exchange-traded fund (ETF). If you want to bet on or against the market or a sector rather than an individual stock, you can buy options on the S&P 500, the Nasdaq, the Russell 2000, biotech indexes, semiconductor indexes, etc.

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Seth Golden 1 month ago Contributor's comment

These are not sound practices by my assessment regarding VIX.

Beating Buffett 1 month ago Member's comment

So what would you recommend?

Seth Golden 1 month ago Contributor's comment

The VIX complex doesn't lend itself well for hedging instruments as premiums are often high and due to the rapid moves and general upward trend in markets, requires timing/pricing efficiency on the entry and exit. Terrible discipline, especially when one can utilize index ETFs that offer reasonable premium and trend more closely with market outcomes. Lastly, using VIX options or VIX-ETP options render themselves useless in after/premarket hours, severely limiting potential to mitigate where the bulk of the daily market moves occur.