Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 14

Various Uses of Options and Why I Love to Trade Them

■ Leverage

Options give you leverage and the ability to control larger amounts of stock with less capital. If AAPL is trading at $600 and I buy 100 shares of stock, it costs me $60,000 — that is a lot of money. However, I could buy the October 500 calls for $100. This would get me long AAPL stock at $600 between now and expiration for only $10,000. Therefore, leverage gives me the ability to control more stock for a lower initial margin. With that $60,000, I could buy six of the October 500 calls, which would allow me to control 600 shares of stock, not just 100. (Remember that every call option gives the buyer the right, but not the obligation, to purchase 100 shares.)

More Uses of Leverage

I've spent my entire trading career learning to read the market and trade the options contracts that are tied to equities. Trading equity options allows the individual trader to use small account balances and have large position sizes. Some options accounts can be set up with as little as $5,000 or even $2,500. Suppose I was trading in a regular brokerage account with a balance of $5,000; I could buy about eight shares of AAPL at $600 each. On the other hand, if I had an options account and I wanted to buy AAPL contracts with one month to expiration, I could control approximately 200 shares of AAPL through the AAPL equity options contracts.

The reason this works is because equity options allow the buyer of the contract to control ...