Safety First Investing: Options for Safety.

This is a book by an American stock investor named Wade Cooke. It was one of the first books I read about Options, and although he isn’t a certified stockbroker, he is self taught and explains the topic well. I always thought options were more risky then stocks, so the title caught my eye. In this book he explains the many ways he uses options for safety. One method he uses is buying call options instead of the stock when he anticipates a short term run up in the stock price around an announcement or stock split. In this example he buys 10-20 contracts of call options, which allows him to control 1000-2000 shares of a stock for a limited period of time. This strategy achieves two purposes, it reduces his capitol at risk and increases his return on investment. He refers to safety here as reduced capitol at risk being the main safety feature when buying calls.

Example;
He buys 1 contracts of Apple with strike price of 13$, when market price is 10$, for 1$ each share or 100$ per contract.
If he bought the stock his cost would be 100 time 10$ or 1000$.
Thus the capitol at risk here is 100$ instead of 1000$. Thats the safety aspect.
If the price climbs to 16$ he profits 3$ per share or 300$.
Because he only invested 100$ in the calls his return on his investment is 300$/100$ or 300%.
If he had purchased the stock his return would be 300$/1000$ or 30%. That’s the increased return on investment aspect.
So he likes options for safety and improved return on investment.

In this book he explains about 12 twelve different trading scenarios, where options allow you to invest less capitol, to control a large amount of stock to profit from price moves up or Dow. In each of these scenarios he explains a different way that options improve safety in several different ways, this example is only the first one. I thought it was a very interesting and easy to understand book. I recommend you read several sources for your options trading education and this should be one of them.

✍🏼 By Shortsegments.

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