Why Trading Stock Options Is Better In A Recession.

The 2008 recession and market crash is the worst financial and economic crisis since the great depression. By February 2009, the DJX dropped almost fifty percent, erasing all its gains since 1998. Re complete points, the DJX dropped over 7000 points, which is more than the complete DJX index before 1998. Without doubt, this market crash has rendered many traders and stockholders powerless in search to earn profits. Though profiting during such market condition is a particularly hard thing to do, traders and backers still bought stocks in hope of a recovery only to be disappointed again leaving a few stocks in deep losses in their account.

When cash is used this way, what it basically does is to rob stockholders and traders of money for investing when the real recovery starts. So, is there a strategy to put those bets with little money and prohibit your losses to beside the point amounts if your bet is wrong as it had been so regularly in this stock exchange crash so far? Yes, the answer can be discovered in stock options trading. Everybody knows that stock options trading is deadly and you might most likely lose all of your cash.

What everyone didn’t recognize is the confirmed fact that stock options trading is also a risk limited way of trading for massive profits while controlling possible losses to insignificant amounts! Stock options are contracts that allow you buy a stock at a selected price regardless of how high the price of that stock is in the future ( Call Options ) or sell the stock at a specific price in any case of how low the price of the stock is in the future ( Put Options ). By replacing the purchasing of the stock with purchasing its call options, you can be in a position to control the profits on a stock using a little of money. If the stock goes up, you simply sell the call options for a corresponding profit as you would as if you bought the stocks. If the stock goes down, you lose nothing but the tiny quantity of money you paid for the call option contract. See where I am going with this? If you had bought only the call options of those stocks that you have acquired all of last year, you would have lost only a miniscule fragment of the losses that you would already have sustained through purchasing the stocks.

We’ll take a glance at an example. John and Peter have $15000 to invest with each and both came to a decision to buy shares of Apple Inc, AAPL, after it collapsed to $141 in October 2008, expecting a bounce. Peter made a choice to buy one hundred shares with $14,100 and John came to a decision to play it conservative and bought one contract of AAPL’s call options with strike value of $140 which was asking at $10.20 for a total cost of $1020. One contract of call options lets you control the profit of 100 shares of the fundamental stock.

In this example, John fully replaced the buying of 100 shares of AAPL with buying one contract of its call options. 2 weeks later, AAPL dropped all the way to $85 as the recession deepened. Peter lost over $5600 while John lost only the $1020 that he spent buying the call options.

Supposing both Peter and John were right about AAPL and the stock rallies to $200. Peter would have made $5900 in profit while John would have made the same $5900 less the amount of $1020 that he paid for the call options. See how buying stock options rather than the stock itself in this changeable condition allow you to make some bets for a bounce without chancing all of your money? In the example, Peter would only be in a position to make one bet once on AAPL with $15,000 while John would’ve been prepared to make those self same bets more than 10 times at strategic support levels.

Who would have a better possibility of winning? By replacing the purchase of stocks with controlling the same number of shares of that stock through its call options, you will surely have a better likelihood of survival in this recessionary market condition. Be warned that you entirely expect to lose the entire amount paid on the call options if the stock continue to go down, and is why you NEVER use all of your cash in a single trade.

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