Who doesn’t love explosive returns?
I mean that’s part of the reason I started to trade out my career trading penny stocks. These stocks would move fast and can sometimes generate monster returns.
I stuck to that for a while, until I realized I could trade large-cap stocks as I would trade small-cap momentum stocks…
And I can do all that without breaking the bank and using a lot of capital to buy shares.
Remember in the last lesson, when I mentioned how options provide leverage?
Well, the same patterns I utilize to uncover small-cap momentum stocks actually pop up frequently, in my opinion, in large-caps.
With options, I can trade them also as I would with stock. In other words, I can gain exposure to the upside and potentially rake in large gains, with defined risk.
Let me show you how it works, and how to take your trading to the next level.
A Better Way To Gain Exposure To Large Caps?
Let’s face it, if you’re able to trade large-cap stocks, it opens a world of opportunities. Of course, it can get expensive, and that’s where options come into play.
When it comes to options, I try to keep things simple. I’m more or less using them for directional bets, and I’m not throwing on a lot of crazy options trades.
If I’m bullish on a stock, the easiest way to express that opinion is to purchase call options.
On the flip side, if I have a bearish outlook, I can purchase puts.
Of course, there are other factors that play a role, but I just want to keep it simple for now.
So when I notice a bullish pattern on a large-cap stock or a stock with a high dollar value, I automatically look to the puts.
Take a look at Etsy Inc. (ETSY) for example.
The stock formed a continuation pattern, and that signaled it was time for me to make a move.
When you look at the price tag on ETSY, you can’t really get a large enough share size. I mean if I wanted to buy 1,000 shares, it would’ve cost me more than $100K. That’s not very efficient.
So what’s the alternative?
Call options.
There’s something known as delta, and it’s an options Greek. All that really means is it lets me know how much an option will move given a $1 move in the underlying stock.
With calls, the delta value ranges from 0 to 1. On the other hand, the delta for puts range from -1 to 0. Remember, options have a multiplier of 100. So if a call options has a delta of say 0.50, for every $1 move in the underlying stock, the options should move $0.50 ($50 per contract).
With ETSY, I wanted to trade it a little more like stock, so I looked for 60 – 70 delta calls (I just multiplied the delta by 100 because that puts it into dollar-terms).
So I typically look a few weeks out with these options plays. With ETSY, I purchased Oct. 30 $110 calls for $9.30. There were about 6 weeks left until the expiration date (I placed the trade on Sept. 17).
Just a few days later, I sold those options for a nice 24.73% return (or about $12K).
The same can be done if there’s a bearish pattern, except I would just purchase puts with a -70 to -60 delta (remember, the delta for puts is a negative value). So for every $1 drop in the underlying stock, the puts would gain $60 to $70 per contract.
Keep in mind, the delta is always changing.
The key is to understand calls are bullish, puts are bearish. Over time, you’ll learn how to select strike prices and expiration dates that fit your trading style.
Now, calls and puts are a bit more aggressive. So in my next lesson, I want to show you an alternative strategy that can put traders in a position to win in three different scenarios.