Editor’s Note: This is Part I in my series on ODTE Option contracts. Stay tuned for the next installment tomorrow!
Wall Street is famous for inventing new ways to lose money. The most recent invention is “zero days to expiration” — or ODTE — option contracts.
The contracts have become popular with individual investors. That’s because many of these ODTE contracts are inexpensive and have potential for large gains.
But much like a lottery ticket, ODTE options carry exceptionally high risk.
Traders in ODTE options have to get the market direction right. And timing has to be almost perfect.
And while the media debates how much systemic risk these ODTE contracts are putting on the overall financial system, I just want to make sure that YOU keep your hard-earned savings safe.
Believe me, there are better ways to make aggressive trades that skew the odds more towards your favor.
Today, let’s look at a different way to use aggressive options to grow your wealth.
Avoid ODTE and Buy These Options Instead…
There’s nothing wrong with using a small portion of your investment money for aggressive or speculative trades.
When used properly, this approach can help you grow wealth quickly — without putting your entire net worth at risk. I use a “barbell approach” with my own money, keeping the majority of my investments safe while trading aggressively with a small portion of my capital.
But instead of using ODTE options for my aggressive trades, I prefer a different type of contract.
I’ve found the most success with in-the-money option contracts with plenty of time until expiration.
If you’re not an option trader, this may sound a bit complicated.
But it’s actually fairly simple once you understand the basic option concepts. I’ll cover them quickly here, and there are plenty of great online resources if you want to learn more about these trading tools.
Call Contracts and Put Contracts
Option contracts are divided into two categories — call contracts and put contracts.
A call contract gives you the right to buy shares of stock at a certain price (within a certain time frame). Think of it like having the ability to “call” shares of stock into your account.
A put contract gives you the right to sell shares of stock at a certain price (within a certain time frame). You can think of this as the ability to “put” the shares into someone else’s account (by selling them).
These contracts trade on an open exchange much like stocks. So the value for call and put contracts rise and fall as the value of underlying stocks rise and fall.
Strike Prices (or “Agreement” Prices)
Each option contract has an “agreement” price known as a “strike price.”
If you own an option contract, you have the right to buy or sell shares of stock at this specific price.
Recently, I recommended Disney (DIS) call option contracts in my Speculative Trading Program. We bought the DIS April 21st $90 Calls.
These call contracts give us the right to buy shares of DIS at $90.
As I write this alert, shares of DIS are trading closer to $100.
If you own these call contracts, you have the right to buy shares at $90 (thanks to your contract). And you can then sell the shares at $100 in the open market. That makes our call contracts worth at least $10 per share because we can recognize an instant profit of $10 by using this contract.
If shares of DIS trade higher, the value of our contract will increase even more!
Similarly, I recently recommended buying Snowflake Inc. (SNOW) put option contracts. We bought the SNOW April 21st $165 puts.
These call contracts give us the right to sell shares of SNOW at $165.
Today, SNOW is trading near $141.
If you own these SNOW put contracts, you could buy shares in the market at $141. And then using the terms of your put contract you could sell those shares at $165.
That would net you a profit of $24.
So these put contracts should be worth at least $24 per share.
Please note that each option contract represents 100 shares. So if a contract is priced at $10 per share, it will cost you $1,000 to buy one contract.
Tomorrow, I’ll post Part II of this series and explain why it’s so important to have more time until expiration.
In the meantime, here’s to growing and protecting your wealth!