Option Trading Benefit #3 – Speculation

Benefit #3 – Speculation

All of us have received a “HOT” stock tip from our friends, relatives or siblings at some point and probably have acted upon it by buying shares of that particular stock.  Years ago (Jan 06), I came across a wireless device distributor called Brightpoint Inc. (CELL) that was suppose to “blow-up” in the next few weeks.  Either I could buy stock and HOPE that it goes up or I could buy options and limit my risk.

To minimize my risk on this highly speculative play, I decided to buy options instead of stock.  With CELL at $18, I bought both a call and a put option to take advantage of a stock move in either direction.  Over the next few weeks, CELL jumped to ~$26 and went onto make a high before reversing and dropping to $11.  I was able to profit from this speculative play with a very small investment.  However, if I would have bought stock at $18, I would seen a significant decline in my investment had I not sold it around its high of >$30 because the stock dropped drastically from that point within a few months.

Options allow you to speculate without heaving to take a major risk as the capital investment is low, but the upside benefits are the same as if you would have bought stock.  Options (long calls) limit your downside risk, but allow you to participate in the rally.

Review Options Trading Benefit #1 – Minimum Capital or Option Trading Benefit #2 – Protecting Your Investment.