Why Options are Necessary in Investing
An Alibaba Bull Put Spread
A Great Alternative to Traditional Investing
Two years ago, at the annual Cabot Investor Conference, a man stood up in front of a room full of Cabot subscribers and told us, “I promised my wife that if I ever traded options, she could divorce me on the spot!” And why was this? “If I wanted to gamble, I could go to Vegas.”
Clearly, I couldn’t disagree with him more.
As the chief analyst of Cabot Options Trader and Cabot Options Trader Pro, I work every day to show the beginner, intermediate and advanced options traders that options are an absolute necessity in investing today. I clearly define the risks and rewards when I send out a trade alert, and I update my thoughts on the position until it is closed.
For example, here’s a recent Trade Alert that I sent out for Alibaba (BABA). In the Alert, I detailed the trade, and then broke down the various risks and rewards. Here is the Alert that subscribers to Cabot Options Trader Pro received on November 19, 2014:
Bull Put Spread: Sell Alibaba (BABA) January 97.5 Puts (exp. 1/17/2015) and Buy January 92.5 Puts (exp. 1/17) for $0.75 or more.
Today, I want to add another high-beta long to the portfolio, which will profit as long as the stock moves higher, remains range-bound or doesn’t fall too far.
BABA, which had a large run to as high as 119 recently, has pulled back in recent days and is currently trading at 111.50. I want to take advantage of this weakness to sell a bull put spread.
To execute this trade, you need to:
Sell January 97.5 Puts,
Buy January 92.5 Puts.
We will make our full profit of $0.75 if BABA closes above 97.5 on January expiration, for a profit of 17.64%.
Our breakeven is 96.75.
The most we can lose is $4.25 if BABA were to close at 92.5 or below on January expiration.
As usual, I’m not calling the low on the stock; I’m setting my potential breakeven level more than 10% off the current stock price.
As you can see, there isn’t a scenario or risk that I didn’t fully explain in the Alert. And since the initial Alert, I’ve updated the position every Monday, and sent out position updates if any situation popped up that could impact the position.
So how did this trade work out?
Since that trade was made, BABA has fallen to 101.62 per share. Had a trader just gone long on 100 shares of BABA at 111.50, he would be out $988.00 (9%).
On the other hand, Cabot Options Trader Pro traders locked in a profit of 11.11% on half of the trade last week and 17.22% today-for an overall gain of 14.17% in just two months’ time.
As you can see, options are just another great alternative to traditional investing.
Alternatively, if you’re brand new to options investing, my Cabot Options Trader advisory will help you to get started.
Your guide to successful options trading,
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro