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Buy Calls to Lock in Opportunity
A beginning investor and trader may have great ideas but not much money. How can someone who understands the fundamentals and technical aspects of the market profit without a lot of cash. One way to profit from stocks when you do not have a lot of cash is to buy calls to lock in opportunity in the stock market. A common bit of wisdom for beginning investors and traders is to invest in and trade that which you know. For example, folks working in medicine, pharmacy, and nursing will have more insight into new pharmaceuticals than the average investor. Mechanics and auto dealers will have better insight into the auto industry. Oil drillers, refinery operator, and folks working offshore for big oil will have better insight into the energy market than the rest of us. But, what do you do with lots of good ideas and very little cash? Buy calls to lock in opportunity as you see it.
How do stock options work? How do calls work? Calls are options contracts in which the buyer pays for the right to purchase a stock, commodity future, or currency at a set price, no matter how high that price might rise. He pays his money and is under no obligation to purchase the stock in question and will only do so if the stock price goes up sufficiently the make the transaction profitable. But, remember, our new trader in this instance is not wealthy. Here is where he buys calls to lock in opportunity instead of buying the stock. First of all the trader will look for inexpensive calls, calls that are barely “in the money.” These are call contracts which the market in general believes will not be profitable. The market prices these accordingly so they are cheap. Also remember that our hypothetical investor and trader has a great deal of insight into the stock in question. He sees something that the market in general has overlooked. If his appraisal is correct the market will see the same thing in the near future. When that happens, the stock price will rise significantly and the value of the options contract will go up with the stock price. The options buyer will have purchased a contract for pennies and find that it is worth dollars. This also works for a stock that is likely to go down in price. When to buy puts on a stock is when your expertise tells you that apparently stable stock is about to go into a tailspin.
Profit as You Buy Calls to Lock in Opportunity
Remember that our hypothetical investor, trader, and expert in the stock in question is not rich. So, how does he come up with the money to buy the stock in question? He does not have to. All he needs to do is sell his call contract. The call contract will typically go up in price as much as the stock rises. In an ideal situation a stock rises by twenty or thirty dollars and so does the value of a call contract.