You know I love trading options. It's really the only thing I discuss in this blog.
I've been in the business for almost 30 years now and it's my goal to help and alert the public to the huge benefits of using options contracts as a part of an investing strategy.
With that, let me show you a recent trade I made using a unique option strategy on GameStop (GME) for zero cost.
I'm currently bullish on GME, and with it recently hitting all-time lows, I decided to step in and try a little bottom-fishing.
That may not always be the best course of action, as stocks can always move lower. But with GME recently tagging a low of $3.25 per share, there's really not much further it can fall.
I waited until it moved off that low and started to rise, before actually jumping in.
Here's a current chart of GME.
With GME trading at $4.15 per share at the time of my trade ( 9/17/19), I wanted a low-risk way of stepping into a bullish trade via the options market.
Sure, I could've just bought the stock at its very cheap price, but I knew of a way to use options to get a bullish stake for zero cost.
Here's what I did on September 17, 2019:
1. Bought the January 17, 2020 $6 call options for $.26 per contract.
2. Sold the January 17, 2020 $3 put options for $.27 per contract.
Between the sale of the put option at $.27 and the purchase of the call option at $.26, I actually came out ahead by $.01
One trade paid for the other - leaving me with zero cost.
Buying call options and selling put options are both bullish strategies, so I was able to use two methods to my advantage at the same time for no money out of pocket.
As you know from my numerous posts here about put-option selling, I sold the $3 put option in this case as a way to collect upfront income ($.27 per contract) and to set a buy-in price of $3 per share if GME falls to $3 by January 17, 2020.
Buying the $6 call option also gave me a cheap way to get a bullish stake that has unlimited upside - just like a stock purchase. As long as GME moves above $6 per share by January, my potential profit is unlimited.
As of 10/4/19, GME stock was at $5.52 per share and the call option was worth $.88 per contract and the put option was worth $.14 per contract.
So far I've made $.62 per contract on the call option, which gives me a 238% gain, and I've made $.13 per contract on the put option. Since selling put options entails a "margin requirement", my return on the put option so far is 21.7%.
If I closed the trade today, I would capture a total gain of $.75 per contract ($.62 + $.13). Using the 100-share multiplier, the actual dollar gain is $75 for the whole trade.
If I had bought 100 shares of the stock at $4.15 per share, it would've cost $415. With it now trading at $5.52 per share (as of 10/4/19), I would've had a profit of $137.
Yes, that's a tad more than my option trade profit, but the options cost me nothing, so it's a good trade-off.
Hop The Fence
The trade I engaged here is called a "fence", and it entails buying a call option whose strike price is set higher than the current stock price, and selling a put option whose strike price is set below the current stock price, both in the same expiration month. These are called "out-of-the-money" (OTM) options.
At the time of my trade on 9/17/19, GME stock was trading right near $4.15 per share, which put both the $6 call option and the $3 put option out-of-the-money and trading at $.26 and $.27 respectively.
By engaging the fence trade, I was able to enter a bullish trade on GME for a $.01 credit. Zero money out of pocket. Free!!!
This is a great way to scale into any bullish position for low or no cost.
If you are considering buying a stock, it might make sense to look at potential OTM fences to see if it's possible to get in for zero cost.
Note though, that if the stock moves lower, both the call option and the put option will move against you, and losses can result.
Well the call option purchase will decline in price, as that's what happens when stocks fall, and the put option will go up in value. Both of those positions will yield a losing hand.
But, the call option can never lose more than what was paid for it, and the put option can only move higher until the stock reaches zero.
In the case of GME, I couldn't lose more than $3 per share, and I knew that going in.
And just as I advise when selling put options, make sure you use the fence trade on a stock that you have a genuine interest in owning, because you may eventually end up buying it.
Let me know your thoughts. Send me questions. I'll always answer.