Trading options can be complicated but using a simple options strategy, I turned a $43 trade in to a $60 profit in just a few days and I’m going to show you how to do it.
Not all trades turn out this well. In fact, every trader has war stories resulting in both wins and losses. It’s part of the experience but hopefully by learning from your losses, you will end up having more winners later on. This trade came from simply listening and learning from options experts.
Here’s how it happened. Cisco (CSCO) is one of the technology bellwethers. I prefer to trade large cap, mostly blue chip companies because information is plentiful, I can be confident that should the stock drop in value, I own a strong company.
Cisco is this kind of company. I also knew from listening to financial news networks that the street (that’s what we call the full time investment professionals) is currently in love with Cisco. In fact, so much that they are expecting nothing less than brilliance from their quartly report on August 11th, 2010.
Last, fundamentally, Cisco is cheap. At only 13 times 2011 earnings, this stock is a bargain when compared to their 10% eps growth going forward.
All of this together made me think that going in to their earnings announcement, options traders as well as equity traders would load up on some Cisco. For that reason, I started a position with the Cisco August $24.00 Call. I purchased a certain amount of contracts at a cost of $43.00 per contract.
Any time you trade, you should always have an exit target. Mine was $100 or the end of the trading day on the day of their announcement which is August 11th. This may be too conservative but I don’t want to be greedy. I noticed that Cisco tends to have a big move after their earnings announcement and if I can double my money before the announcement, that’s fine with me. I don’t need to catch the very top of the move to feel successful.
As of the writing of this article, Cisco’s earnings announcement will take place tomorrow but I’ve already sold half of the position. As of yesterday, the August $24 call had reached a value of $103.00. I had reached my price target and locked in my more than 100% profit.
The reason I only sold a little more than half of the position is because trading is always about learning. I want to see what Cisco does after it’s earnings report tomorrow and the way it reacts to the news, good or bad, will be entered in to my memory banks. If the remaining contracts retreat in value, I’m still going to be up and the lesson will be to follow my exit strategy. If it rises in value, good for me and my dollar cost averaging strategy of selling a bit ore than half of the position will have paid off.
Take time to learn how particular stocks behave. I VERY rarely trade around quarterly earnings reports but I have confidence in Cisco. (I also have confidence in the options market’s confidence in Cisco)
Can you do this?
Buying a call option is about as simple as options trading comes. Find a stock that you believe will rise in value in a short amount of time and by the next strike price up. It’s risky but worth it. Leave a comment and I’ll be happy to answer your questions.