The last advantage I am going to discuss is the one that I use to explain to die hard stock only traders why they should at least look into options. And that is this…..in a stock position you cannot lock in profits and maintain your position at the same time. But with options you can do both. Let me give you a real example of a situation that happened to a friend of mine. He bought 300 shares of GOOGLE for $200 per share. When the stock got to $270, he was faced with a dilemma. Should he sell and lock in a nice profit, or keep the position and the risk? Remember, a stock like this could gap down violently on the opening which would render useless a stop order as explained above. Knowing this, my friend chose to sell some….100 shares to be exact. This left him with 200 shares but he did lock in a nice profit. He continued to do this selling another 100 shares at $280 and the final 100 at $290. The problem was, the stock continued to run to around $470. Although making a nice trade, my friend left a lot of money on the table. By his own admission, he was not comfortable in any way, shape or form with the stock around $300. He did not necessarily want to sell but he did not want the profit to fall by the wayside either.
The solution to his situation was options (which he now knows all to well). If he had purchased three properly selected stock replacement calls, he would have had his cake and eaten it too! This is because options allow you to lock in profits while maintaining the same exposure to the stock if you want it. Let me show you how. Instead of buying the Google stock at $200, my friend becomes an option trader and buys the $170 strike calls. He will be purchasing time premium but we will work that out in a minute. When the stock trades up to $240, he simply “rolls” up to the $210 strike. He does this by selling out his three $170 strike calls and buying three $210 strike calls in one trade. The trade itself is called a vertical spread but that is not important in this scenario. What is important is that by doing this trade, the option trader takes in a credit because the option he is selling ($170 strike call) is trading higher than the option he is buying ($210 call). The option trader is bringing in more than he is putting out. This positive cash income (credit received by doing the trade) is part of the profit made in the original purchase of the $170 strike calls. This can be done repeatedly as the stock continues to trade up. Each time, the option trader will bring in a credit representing a portion of the profit made from the last trade. From the $210 strike calls to the $240 strike calls, then to the $270, $300, $340…….and on and on as long as the trader wishes to continue. The option trader is locking in profits while maintaining the same three contracts, deep-in-the-money call positions that the option trader originally started with. This unique strategy is only possible because of options!
Options have many advantages over simply trading a stock. Profit protection, risk management and flexibility are compelling reasons for investors to investigate them and the many advantages they can offer. If you are looking for a financial opportunity that can impact your future, then you should learn about options!