How to DOUBLE & TRIPLE Your Potential Profits (with Options)

Summary

In this video, Seth Freudberg, from a top proprietary trading firm, explains how options trading can vastly increase profit potential while reducing risk. He discusses a recent tech stock sell-off and introduces the concept of using deep in the money call options to replicate owning 300 shares of stock at a fraction of the cost. Through a practical example with Amazon stock, he demonstrates how options can provide significant returns with much less capital than buying shares directly. The video offers insights into how options leverage can amplify profits when done strategically and efficiently.

Takeaways

• 😀 Options trading can greatly amplify profit potential with less risk compared to buying stocks directly.
• 😀 The video discusses a trading strategy to express a bullish sentiment on tech stocks using options, particularly the Q's ETF.
• 😀 A major sell-off in tech stocks, particularly the Q's, created an opportunity for traders to consider buying in at lower prices.
• 😀 Instead of buying 100 shares of Amazon stock, using deep in-the-money call options can offer similar exposure at a fraction of the cost.
• 😀 The example shows how using three call options at a much lower price than 100 shares can lead to higher returns, despite using less capital.
• 😀 The concept of a 'synthetic stock position' is introduced, where the performance of deep in-the-money call options mimics owning 300 shares of stock.
• 😀 Delta, which predicts how much an option's price will change with a $1 change in the stock price, is crucial for understanding option price movements.
• 😀 In the example, the call options performed similarly to stock, yielding a 29% return with significantly less capital risk than owning the shares.
• 😀 Options traders can potentially leverage deep in-the-money calls for higher profits with much lower upfront capital than buying the stock itself.
• 😀 It's important to understand the potential downside of deep in-the-money calls, as losses can be greater in the case of a price drop, though the loss will be more gradual than owning the stock.

Q & A

What is the main advantage of using options instead of directly buying stocks?

The main advantage of using options, particularly deep in-the-money call options, is that they allow traders to control more shares for a lower initial investment, thus offering the potential for higher returns with less capital outlay than buying the stock directly.

How do deep in-the-money call options mimic owning stock?

Deep in-the-money call options mimic owning stock because they move similarly to the stock price, particularly when the option's Delta is high. For instance, a high Delta of 0.91 means that for every $1 the stock price increases, the option price increases by about $0.91, closely tracking the stock’s movement.

What is Delta in options trading, and why is it important?

Delta is a measurement of how much an option's price will change in relation to a $1 change in the stock's price. A higher Delta indicates that the option's price will change more closely with the stock's price. This is important because it helps traders predict how the option will perform as the stock moves.

What does the term 'synthetic stock position' refer to in options trading?

A synthetic stock position refers to a strategy where a trader buys options that behave similarly to owning the stock itself, but at a much lower cost. In this case, using deep in-the-money call options can create a position that behaves similarly to owning 300 shares of a stock, but for a fraction of the price.

How does the risk in deep in-the-money call options compare to owning the stock directly?

While deep in-the-money call options mimic owning the stock, they do come with higher risk. If the stock price falls, the value of the options decreases faster than the value of the stock itself due to the option's price being more sensitive to changes in the stock's price.

What happens to the profit potential when using deep in-the-money calls instead of buying stock?

The profit potential is significantly higher when using deep in-the-money calls compared to buying stock because options are cheaper to acquire, allowing traders to control more shares for a smaller initial investment. This leverage can lead to greater returns if the stock moves in the desired direction.

Why did the video use Amazon stock as an example?

Amazon stock was used as an example to demonstrate how a similar market scenario unfolded in both Amazon and the broader tech market. The example illustrates a sell-off followed by a bounce, showing how deep in-the-money call options could be utilized to profit from a potential recovery.

What was the difference in cost between buying Amazon shares and using deep in-the-money calls?

Buying 100 shares of Amazon at $167.90 would cost $16,790, while using deep in-the-money calls (three 120 strike price options) would only cost $15,900. This difference shows how using options can allow traders to control more shares for less capital.

What would have happened if Amazon stock had dropped instead of bouncing?

If Amazon stock had dropped instead of bouncing, the value of the deep in-the-money call options would have decreased faster than the stock itself, although the rate of decline would slow as the stock continued to fall due to the option's Delta decreasing.

What is the significance of the options strategy in terms of leverage?

The options strategy using deep in-the-money calls provides significant leverage, allowing traders to control a larger number of shares with less capital. This leverage magnifies both the potential profits and risks, making it an attractive tool for traders looking for greater returns with a smaller investment.