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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Today we’re going to finish our two-part series on a recent winner in my trading service, The Opportunistic Trader. Specifically, how we almost quadrupled our money in just one week. (You can read yesterday’s part one here.)
In this trade, we collected 260% in the space of just five days on the homestay and vacation rental company, Airbnb Inc. (ABNB).
Yesterday, we focused our attention on the technical side of the ABNB chart. Today, I want to focus on the strategy and why I use options.
First, let’s briefly go back to our chart we looked at yesterday. But this time, let’s just stick with our entry and exit points and compare buying options on ABNB vs. the stock itself…
Airbnb Inc. (ABNB)
Source: eSignal
If we had bought the stock (instead of options), we would’ve generated around a 15.5% return. That’s factoring in ABNB’s closing price from Monday ($174.60) and Friday ($201.62).
Now, don’t get me wrong…
That’s far from the 260% return we achieved with our option trade, but it’s still a handy return in the space of just five days.
However, let’s look at why we placed a trade on ABNB in the first place…
Remember, we were aiming to capture a potential upswing in ABNB shares if their Q3 earnings beat market estimates – which they did.
By buying a call option, that gave us the right to buy shares in ABNB at any point prior to the option expiring.
As the call option buyer, the choice is always ours. We don’t have to buy those shares, we simply have the right to. Instead, we chose to sell our call options for a very tidy profit.
To better understand our strategy, let’s consider how things would have played out if that earnings report had gone the other way and shares in ABNB tanked…
By buying the call option, the most we would’ve lost is the option premium we paid, which is just a fraction of the cost of buying shares outright.
Had we bought the shares, not only would we have needed more capital, but we would likely have been looking at a much bigger loss.
By this comparison, it might seem like options have a huge advantage over buying shares…
However, remember with options that the clock is always ticking. If the move you’d hoped for doesn’t pan out (and you don’t close out your position prior to expiration), then those options will expire worthless.
That’s why when I place an options trade, I always have a timeframe in mind for when I expect the move to happen. I then manage my risk accordingly.
Put simply, the reason you buy options – and why I use them in my trading service – is to capture an unfolding move.
What you shouldn’t do is buy options on a stock in the hopes that something might happen at some point in the future. Doing that is a sure way to tear up your money.
And because buying an option premium will cost you less than buying the shares outright, you can allocate your capital to a larger number of trades.
Getting those trades right – and trading more often – is what can really build your account as a trader.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. For more chances to make quick profits like ABNB, click here to learn more about The Opportunistic Trader. It’s my elite options trading newsletter specifically engineered to take advantage of quick market moves.
It’s the perfect way to see how I trade in action… And, I look forward to helping you build your account as a trader. To find out if it’s right for you, click here now.