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Why Archimedes Would Have Loved Options Trading
Archimedes was a physicist, a mathematician, and an engineer – not an investor. But there are certain aspects of his scientific studies that you can apply to your trading. For instance, Archimedes once said, “Give me a lever long enough and a prop strong enough. I can single handedly move the world.” He could have been talking about the leverage you get from trading options.
As you may know, I am a short-term speculator. I look for short-term moves where probability is stacked in my favor. Once I have found the right stock to trade, I look for the right option to play on that stock. Investing in the option allows me to get the greatest amount of leverage for the move I anticipate the stock to make, without taking on too much risk.
I was looking back at my options trades for the month of May, and out of nine trades, I had five winners and four losses. That may not sound very good, but I had a great month. Let me explain…
Even though the average move on the stocks behind my five winning options trades was only 6.1 percent (up or down, depending upon the stock), I averaged a 75 percent win on the options trades… because of leverage.
Also because of leverage, I only had to put about 10 percent of my available cash into each of those options trades – and, by the end of the month, my options account was up more than 30 percent.
If you have never traded options, you really should consider them as a low-cost way to add some spark to your portfolio. My options account represents 20 percent of my total portfolio, but it accounted for all of the gains in my overall portfolio for the month of May. The other 80 percent of my portfolio is tied up in long-term investments, and they were flat in May – but thanks to that nice gain in my options portfolio, overall I was up 10 percent that month.
[Note: Rick Pendergraft is a market expert and two-time winner of the "Top Trader" award at Schaeffer's Investment Research. Frequently quoted in Reuters, Business Week, Forbes, USA Today, and The New York Times, Rick recently made his debut on Bloomberg television.]
