Stock Investing Without the Risks of Owning Stock [Part 4]

There is nothing unusual about the example that follows - typical trades on a typical day in the market. Two points being made here are the significant differences in required investment and ultimate yield between trading stocks and trading stock options. Understand that my "homework" aka research is done before entering any trade.

The example involves Fifth Third Bancorp - stock symbol FITB - which traded thusly: open $6.50, high $6.70, low $5.08 and close $$5.35 today 5/7/09.

My trade involves 2,000 shares of stock when the stock price was $5.14 per share. The stock ownership scenario would have required an investment of $10,280 [2,000 x $5.14]. Selling the stock right at the $6.70 high would have yielded $13,400 [2,000 x $6.70]. The net would have been $3,120 [$13,400 - $10,280] and a very nice one day 30.35% yield in one day.YEEHAW!

Buying my 20 call options [10JUN5 @ $1.05 and 10JUN6 @ .65] cost $1,700; and selling my options [10JUN5 @ $1.70 and 10JUN6 @ $1.10] returned $2,800 for a net of $1,700 [$2,800 - $1,700] and a superbly nice one day 64.7% yield. WOWEE!

So there it is - buy 2,000 shares stock with $10,280 at risk or control 2,000 shares of the same stock via options with $1,700 at risk. And there are option techniques that work just as well when the stock is going down.

Those who would invest and place $10,280 at risk can step up to the options plate, donate half the 64.7% yield to their favorite charity and still do better than owning the stock.

My numbers, in the interest of simplicity, deliberately exclude trade commission costs. Please note that I am not by any means an investment professional and that I have no intention of giving investment advice. To the contrary, I am a nice old man with the sole purpose to share some of my simple, self taught investment concepts.