How to Be a Smart Speculator in a Tough Market
I have two sides of me that are almost polar opposites, and they often surprise people, depending on how well they know me.
In my everyday life, I’m laid back. Most things roll off my shoulders. And I’m never the guy who talks just to hear himself speak.
On the other hand, I’m the lead singer in a rock ‘n’ roll band and am one of the top boxing ring announcers in the sport, where my job is to whip the crowd into a frenzy.
My investing strategies mirror my dual personality.
Most people know me as the dividend guy. After all, I wrote the international bestselling book on the subject – Get Rich with Dividends. I strongly recommend investing in dividend growth stocks. I pound the table on it whenever I can. It’s a steady and reliable way of generating income and growing wealth.
But once I know the long term is taken care of, my rock ‘n’ roll side comes out…
And I speculate using options.
Some investors have heard that options are too risky. And options can be risky if they’re used incorrectly. They can be volatile, and their prices can move sharply in a short period of time.
That’s why I prefer to trade small amounts of options that are each priced for less than $5 – options that I call “penny options.”
These are not options on penny stocks. Penny options are inexpensive options on quality companies.
The benefit to trading penny options is that an investor can speculate while lowering the amount of capital they have at risk.
If an investor bought 100 shares of a $50 stock, the purchase would cost $5,000. But if the same investor bought one call option (call options control 100 shares), it may cost $5 per share, or $500 for the total investment.
If the stock goes up, the call will make money – usually giving an investor a higher percentage gain than they’d get with the stock.
For example, if an investor owns 100 shares of stock at $50 and the stock goes to $55, they’d make $500, or 10% on their money. If the same investor owns one call contract instead, the call could be worth $10, meaning the investor would make the same $500 profit but 100% on their money. The investor had the same size gain as they would with stock, but with 90% less money at risk.
With penny options, you get all of the upside of stocks with significantly fewer dollars at risk than if you buy stocks outright.
And with inflation surging and the market giving investors a hard time, we’re all looking for ways to put some extra dollars in our account without taking on much risk.
You should continue to be a thoughtful, deliberate long-term investor. But if you have that rock ‘n’ roll side (and most of us do, no matter our age), then trading cheap options is a smart way to speculate. You can make just as much (or more) as you would with stocks, but with far less capital at risk.
That’s a smart way to speculate.
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