Buying straight calls or puts on stocks is not an impossible task to profit from, but there is definitely a specific approach you must use to avoid the inherent problems of Premium and Time Decay.
A: You need to buy In the Money options, "but," only on stocks with Low to Very Modest Implied Volatility on the options.
This of course limits your stock trading universe, because many popular stocks have high implied volatility on their options.
B: You also want to limit the bid to ask spread to .10.
C: You want to look for really good Intrinsic Value.
Example of Intrinsic Value:
Stock Price....Strike Price...Bid Price...Ask Price
......22.83..........20.00.........2.90..........3.00
The above option is $2.83 In the Money, therefore the intrinsic
Value of the above option is 2.83.
You would have pay the 3.00 ask price to buy the above option.
That means you are really only paying .17 for the privilege of
trading the above stock for about a month.
The Delta on the option is .99
That means if the stock moves 1.00, the option moves 99 cents.
So for $300 you get to trade a $2,283 worth of stock for about a month and participant in 99% of the price movement.
If the stock hasn't moved by expiration day, you cash in the option for roughly a bid price of 2.70 to 2.75 ($270-275).
Note: The above example was Dell Computer.
The April 20 call strike was used in the example above.
Other stocks with similar parameters are CSCO and ORCL,
and there are many others like that.
If you did your homework and found good charting low to medium volatility stocks, with a low bid to ask spread, and buy
In the Money options like the example above, you can trade with a very small account and yet fully participate in at least 90% of the stock price movement of many popular stocks.
"But first and foremost learn to properly chart stock movement,
otherwise its just a lesson in watching your account slowly shrink."
Jeff
