Options provide a great deal of leverage versus stocks, the one difference being time decay with options, although that can be overcome in the right situation. If you're looking at charts and technicals and buy into the theory that momentum continues to move stocks, you'll find a world of opportunity.
Have you seen stocks soar or fall hard on news-related events? Some options will move 10 to 12 times more than the stock. Options are defined-risk trading vehicles; you can only lose what you put in (there is no margin provided, cash only). We have seen some amazing returns in options over a short period of time.
But some traders out there look for the home run trade, the one that will make up for the previous 50 losers. We've seen 200%, 300%, 500% winners in few short days. Those can really have an impact, even if you keep the trades small. You know, the one trade that when it comes in will put our accounts in another stratosphere. The lottery winner! Imagine randomly picking a few of these each month; that would do wonders for your portfolio, right?
Frankly, these plays are not to be relied upon, and should be more strategic than random. The probability of the lotto play is very low, and considering 80% or more options expire worthless, the odds become even tougher. But if you manage your risk carefully, understand the outcome and are fine with it, then if the setup is there; why not take it? If you're only risking a small amount, even if the play dissolves to zero we can recover the loss on a different (less risky) trade.
Last week we had an earnings release from Alphabet Inc. (GOOGL) after the close on July 25. The market was expecting a pretty good move, but smaller than normal. LeeAnn, one of our best traders from the chat room, decided to try a lotto play on this name. Knowing Alphabet did not report well in April but that the chart and technicals were coming around, she chose to go with a 1200 strike expiring on Aug. 2. This call cost quite a bit, about $7.50. She knew the odds were long of this move paying off, but with about six days to go and the earnings catalyst it was worth a small play.
Turns out, the call rose up toward the $60 level after Google soared on Friday. That lotto play paid off for LeeAnn to the tune of 700%, and that was for one day. Of course, LeeAnn understood the risk and was OK with losing the entire premium if Alphabet didn't rise or turned downward.
What is a good size for a lotto? Just use a fraction of your normal size. If you trade about 3,000 normally, then a lotto play should be 1,000 or less.
In the end, lottos are a nice way to enhance performance; in isolation they can be good, but the results cut both ways. If there is something to learn here, please know your risk tolerance, check yourself once and maybe twice before you hit the buy button, and then accept the outcome. If poor, it should not devastate you. If good, it may give you a shot in the arm.