A Seat At The Big Boy Table

 

Date: 7/1/2021
Author: Chris Hood

 


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.


When trading options, I prefer to play the large-cap stocks.

Powerhouses like GOOGL, AMZN, and MSFT have methodical movements and little chance of really bottoming out.

Tickers like this are also very liquid, with high open interest in the options market.

I can quickly jump into and out of trades.

However, the stock prices are so high that they seem out of reach for many traders with small to medium accounts.

For example, AMZN (at the time of writing) is trading at $3440.16 per share.

This means directional trades like long calls can be exceptionally pricey and either completely unaffordable or create positions far above your allocation rules.

I’m bullish on AMZN in the long term.

A trade that would likely pay handsomely over time is just buying the 0.77 delta long call for sometime next year.

Suppose that was your strategy.

You decide to buy the AMZN 17th Jun 2022 2890 call with 350 days until expiration. A simple idea with lots of upside.

The problem is that it’s going to cost you over nearly 72.5K for a single contract.

It’s simply outside the budget of the average retail trader.

Even if you could afford this, you’d need almost 2.5 million dollars of trading capital to keep the position at a 3% allocation.

Does that mean you should just ignore AMZN?

Definitely not.

One of the advantages of options is the flexibility of trade types. If I want to participate in a big move on this ticker, I can still play.

So how’s this possible?

You’re paying quite a bit for all that time value, so use closer expiration dates at the same delta, especially if you’re very bullish short to medium term.

A long call on AMZN at the same delta but with only 105 days until expiration (Oct 15th, 2021) drops the price to $42,1700.00 per contract.

Bring it into the 50-day window (Aug 20th, 2021), and your cost will be just under 30K.

Much more affordable.

But still, if you’re operating with a 50 thousand dollar account, either trade would be too risky.

Buying OTM options at about the 0.30 delta is also a possibility.

If AMZN is trading in the 3440.00 range today, an Aug 6th, 2021 call at the 3610 strike would only be $5,785.00.

We’re starting to get into the affordability zone for many more traders.

However, there are even cheaper ways to capitalize on AMZN if it moves up.

Reducing your cost even further by buying a bull call debit spread. In other words, buy a long call, then sell a call further OTM to reduce the price.

Naturally, this caps your upside, but it’s a reasonable trade-off to play a powerful trend.

Your price and your profit potential depend on how far apart you set your strikes.

For Oct 15th, 2021, you could:

       Buy the 3440 and sell the 3500 strike

       This 3440/3500 bull call spread will cost you $2870.00 and for a potential gain of $3130.00.

 

       Or…

 

       Buy the 3440 and sell the 3450 strike

       A 3440/3450 bull call spread will cost $503.00 for a potential return of $497.00.

 

Starting to get the picture?

You might also decide to sell a bull put spread and gain on the AMZN upswing.

Were you to sell the Jul 16th, 2021 3440/3430 spread, it would cost $530 for a potential $497 profit. An excellent 1:1 risk-reward situation.

Finally is the cheapest play of all, the call butterfly.

Though they don’t have a high success rate, butterflies more than makeup for it with their potential payoff. One decent winner can easily make up for a dozen losers.

Your middle strike based on the predicted move, you buy a 3520/3530/3540 AMZN call butterfly for Jul 9th, 2021.

The cost of the trade?

Eight dollars… and the potential profit is nearly 1K.

Just because you have a smaller account doesn’t mean you have to ignore these large-cap stocks.

Do your analysis, then pick an affordable strategy.

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