Stock market strategies

Swordfish: Are Stupid Options Actually Genius?

There are many ways to trade. Most traders gravitate towards options. They can be used to build a position at a lower cost than buying shares of a stock. Or they can offer better returns when there’s a massive move.

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  • Plus, options include both call and put options. So traders can inexpensively bet on a stock declining at a fraction of the cost of shorting a stock. The options market also offers a window into interesting and unusual trades.

    For instance, the options market will let investors make trades with expiration dates years into the future.

    For investors who predict a multi-year bull or bear market, buying long-dated options can offer massive prospective returns. Even if those trades look impractical or downright stupid now.

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    Currently, traders can bet five years out that the market will rally as much as another 67%. Over a five-year period, that’s certainly possible.

    However, the average five-year rolling period is a bit under 70%. If the bet is correct and stocks return over 67%, the buyer of the options could make 10-60X returns, or up to 6,000%.

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  • If the bet is wrong, it could mean a total loss. That’s the case if stocks trade lower, flat, or up less than 67% by 2029.

    While buying long-dated market calls may sound like a potential big winner, the risk of loss remains high. Traders are usually better off making shorter-term trades. But sometimes, even a silly-sounding trade idea could be a big winner.

     

    To watch the full options trade breakdown, click here.

     

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