Dollabuzz Shows You How to Make Money Off a Stock Tip
Dollabuzz readers what it is what be!? Today we discuss how to make money off a stock tip. Dollabuzz has covered opening a traditional investment account such as a 401k or a Roth IRA. How about taking on a little more risk for the chance at a greater return? Suppose you discover a hot stock tip. How do you capitalize on this information and get paid?
You capitalize by purchasing call options. If you are new to investing through options a good place to start is with an in depth review of options.
There are numerous option strategies but we want to keep this post as simple and short as possible. Therefore, we will focus on one aspect of options (buying “calls”). In this post, Dollabuzz will provide an easy three step overview of how to make money off a stock tip by purchasing call options.
The first step is opening a brokerage account, step two is buying calls, and the final step is locking in your gains by “selling to close.” Let’s see how to make money off a stock tip by walking through an actual trade I made.
What Are Options: A Get Money Overview
Options: A Contact That Gives You Rights
When buying call options you are buying contracts and one contract is equal to 100 shares. This contract gives you a right to purchase shares of stock at a predetermined price (strike price). This right expires at a specific future date (expiration date). For this right, you pay a premium to the seller. As the stock price rises, so does the value of the premium. Money is made when you sell your right for a premium that is higher than what you paid for it. Sounds simple, right?
Two Advantages of Call Options
Two advantages to investing through options are less risk and the power of leverage. Call options are less risky because you can only lose as much as you paid for the premium. Leverage allows you to control a large number of shares on the low. For example, in this trade, I pay a premium of $219 to control 300 shares of stock. If I were to buy 300 shares of stock it would cost me about $2500.
Key Definitions That You Need To Know
If you think the share price of a stock will increase you buy call options.
The strike price is simply the price you have the right to purchase the stock. Strike prices higher than the current share price are “out of the money.”
The date that the contract expires or becomes worthless.
How to Make Money Off a Stock Tip Step #1: Open a Brokerage Account
There are numerous online options and you will need to complete paperwork acknowledging the risks associated with options trading. About $500-$1,000 investment is needed to start. But to get RICH off of one stock tip you’ll need a few thousand dollars. Remember: Never invest money you can’t afford to lose.
How to Make Money Off a Stock Tip Step 2: Your Call Strategy
Important Information for this Example
- Date: 9.1.17
- Stock: NEOS Therapeutics Inc (NEOS)
- Stock Price at Time of Trade: $8.32
- Options Purchased: $10 calls expiring on 10.20.17. Please note the $10 strike price is “out of the money.”
- Premium paid: $219 for 3 contracts (300 shares)
What the hell does all this mean? I just wanna make some money!
Great question! What this trade says is that I think by 10.20.17 the share price of NEOS will be $10 which is a 20% increase. I bought (paid a premium) for the right to control 3 contracts (300 shares) at $0.70 a share for $210 plus $9.00 commission. As the share price increases so does the premium associated with these contracts and this is where money is made.
Initiating the Trade: Learn With Virtual Money
Before investing with real money it would be a Dollabuzz move to practice buying calls online with virtual money. For those new to investing, buying calls can be confusing. Therefore, learning the rules and placing trades with virtual money is highly recommended. Once you get the hang of it, the next step is to execute the trade with real money. Here the steps needed to execute your trade.
- Enter ticker symbol
- Pull up “options” chain
- Look for strike price of out of the money
- Select desired strike price
- Select “buy to order”
- Enter number of contracts
- Set price to pay for each contract
- Review and hit enter
How to Make Money Off a Stock Tip STEP 3: LOCK IN GAINS
Now that you have a position you really need to monitor it closely. As the stock price increases so will the premium you paid. NEOS is expected to announce positive results around September 15th and closing my position on or around that time is my exit strategy. It is important to determine your exit strategy BEFORE investing. What gain or loss are you willing to accept? That is your strategy.
You Can’t Go Broke Taking Profits
A premium can decrease in value just as quickly as it increases. It is important to monitor your position closely and be ready to lock in your gain. If the trade is not working as planned, you can always “sell to close” and exit your position.
How To Find stock tips
How to find stock tips is a common question we come across. This stock tip came from Seeking Alpha (SA). SA is an investment blog whereby people post their thoughts and ideas on investing. One SA blogger I follow is Bret Jensen and his recent post inspired today’s trade.
How to Make Money Off a Stock Tip: Conclusion
Investing through options involves selecting the right stock and having belief in yourself. Ideally, you need a stock that will go up and go up fast by a specified date. The first step is opening a brokerage account. The second step is buying calls and the final step is locking in your gains by “selling to close”.
There numerous option strategies and the one presented here is a simple beginner strategy. If you are looking for an easy read on investing through options be sure to check out Understanding Options by Michael Sincere. It is a MUST read and a great resource. I used this book to learn how to invest in options and reference this book quite a bit.