Why Options Now?  

The past year or so has been very instructive even for veteran investors.

Sharp, sudden rallies are followed by equally sharp, sudden collapses. I will not lie to you – this is a tough market.

But the lesson is clear -- it pays to have exposure to the market at all times. How else can you make money?

Trading stocks right now is not easy and the risk of losing and losing big time has put a lot of traders on the side line.

But as a Complete Options subscriber (http://www.completeoptions.com/COR-II-WEB-02-20-08.htm ) you could be in exactly the right place.

Options are excellent speculative vehicles which require relatively little financial exposure and still offer big time profit potential. Cheap options can give you outstanding bang for your buck or good downside insurance when you buy puts.

The Best News

Right now is the best time to use options as a replacement for purchasing stocks and you’ll get far more leverage and far less risk as you participate in the stock market.

This strategy protects you from the risk of a crash in the market, as long as you don't go overboard.

To use options as surrogates for stocks you must usually purchase in-the-money calls (the stock price is above the strike price) that have minimal time value. But this is a mistake since in-the-money options are expensive. 

When trading with more expensive stocks you will have to pay from 5 to 10 points ($500 to $1,000) for in-the-money options. The drawback to this is that if the stock has a sharp correction much of your premium will collapse. You’ll lose big time.

To protect yourself somewhat from this you can buy an out-of-the-money LEAP, which is a long-term option that can last for up to two and a half years. This large amount of time helps the option premium hold up better during a stock decline.

But a LEAP is more expensive than a shorter-term option. So when you buy a LEAP it is very important to set a mental stop loss on the underlying stock.

Build Your Own Portfolio

If your stock buying program has been on the sidelines you might consider using LEAPs as a substitute.

For example as I am writing GE is trading at $27.48; 500 shares would cost you $13,740.00 a lot of money to risk in this market.

Take a look at what a GE LEAP option can do. You can control 500 shares of a January 2010 30 GE call for just over $1,300. The most you can lose is $1,300 and you have control of GE for another 17 months.

I ask you what is the safer and more prudent trade in this market -- $13,000 of stock or a $1,300 LEAP option?

I could list trade after trade like GE and in virtually every case you’d be better off trading LEAPs if you want market participation right now.

How to Protect Your LEAP Profits

As I said above you need to use a stop loss as we do here at Complete Options. You need to set a mental stop loss and if the stock closes below this stop loss, sell the LEAP.

This will usually protect you from losing much or your entire option premium if the stock declines. Letting time and money slip away is a major sin of option buyers.

This stop loss should be a "trailing stop." As the option increases in price due to a rise in the stock you keep moving the stop loss up so that it is never more than 5 or 10 percent below the stock price.

But if the stock price declines, you do not adjust the trailing stop. This way, if the stock declines from its high you will be able to sell the LEAP in plenty of time to preserve most of your profit.

Also, LEAPs tend to lose their value quickly in the last six months before expiration. So if you own a LEAP that is out of the money when it moves into its final six months of life, you should strongly consider closing your position.

Another key to buying LEAPs and in-the-money options is to make sure that you are paying a fair price. These options cost more than short-term options, so your risk in the event of a price collapse is greater. The less money you have on the table, the less your risk will be.

To sum up, options can be excellent surrogates for stocks. But be sure to pay a fair price for these more expensive options and use a stop loss to protect your premium in case the stock declines.

Need options trading help; need options profits? Go to: http://www.completeoptions.com/COR-II-WEB-02-20-08.htm