\tLet's say you want to buy stock in Company X. It trades for $10 a share. You could put up $1,000 to buy 100 shares… But you can control the same amount of stock with one option contract. You can buy a contract for, let's say, $50… and leave the other $950 in your account.<\/p>\n
\tIf Company X's stock goes up, you'll make money. If the stock goes down, the most you'll ever lose is that $50. That's a 100% loss… but it's a lot less than potentially losing 20% or more of the $1,000 you risked buying the stock.<\/p>\n
\tThis is a simple example. And it's the simplicity that proves my point. Options allow you to risk much less and profit just as much as buying stocks.<\/p>\n
\tBut that benefit disappears if you overleverage the trade and take on a larger position with options than you would otherwise take with the stock.<\/p>\n
\tThat's the biggest mistake most novice option traders make. Instead of replacing a 100-share purchase with one call option, they take the entire amount they would have allocated to the stock and buy a much larger position with the options.<\/p>\n
\tRather than buying one call option for $50 and leaving the remaining $950 in the bank, novice traders take the entire $1,000 and put it into buying more call options.<\/p>\n
\tThey end up buying 20 call options to try to get more bang for their buck. What would have been a 100-share purchase has turned into control of 2,000 shares. Instead of using options to reduce risk, they've increased their risk 20 times.<\/p>\n
\tLosing 100% on an overleveraged trade would be a disaster. And it's why most folks think option trading is dangerous. But it's not dangerous if you trade options the way they were originally intended… as a way to reduce risk<\/em>.<\/p>\n \tLimit your option exposure to control just the number of shares you would normally purchase. Leave the rest of the money in the bank. Then it won't be so bad to lose 100% on an option trade.<\/p>\n \tIt will almost always turn out better than what you could have lost on the stock.<\/p>\n \tBest regards and good trading,<\/p>\n \tJeff Clark<\/p>\n \tP.S.<\/strong> This past year, Delta Report<\/em> subscribers have been locking in over triple-digit gains, overnight, on trades spotted by my earnings algorithm.<\/p>\n \tIt's the product of years of work, wins, losses, and lessons learned. Last year, I traded using the system with my own money. And 90.2% of the trades were winners.<\/p>\n \tIf you'd like to know more about how my earnings algorithm works, click here<\/a>.<\/p>\n \tIf you have a question, suggestion, or would just like to share your thoughts on the market or your trading stories, send in an email right here<\/a>.<\/p>\n![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
<\/div>\n \tReader Mailbag<\/h2>\n