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Make Five Times as Much Money as Buffett – With Less RiskBy Jeff ClarkThursday, April 19, 2007 Warren Buffett is buying railroad stocks.
When that news hit the wires last week, railroads turned into rocket ships and the stocks exploded higher. Investors jumped all over themselves trying to piggyback on Mr. Buffett's brilliance.
And why not? You can do worse than copy the world's greatest investor.
But you can do better, too.
A smart options strategy can increase the return of any stock idea. And it can reduce the risk at the same time.
Unfortunately, most investors look at options as just a speculative tool. They'll buy a call option or a put option as a gamble on the direction of a stock. And, most of the time, they'll lose money doing it.
But the really smart option traders – the folks who consistently rack up win after win after win – use option combination strategies to increase the odds of success on any trade.
For example, when you buy options, you're spending money... and you need the stock to move a few percentage points in your direction just to recoup the premium you paid. This puts you in a hole at the beginning of a trade and is the reason most people lose money in the options market.
However, if you can combine the purchase of an option with the sale of another option – or even two other options – then you can actually pocket money at the start of the trade and create a situation that allows you to profit whether the stock goes up, down, or just stays the same.
By using option combinations, you actually reduce the risk of a stock trade and you increase the probability for profit. But what's even better is option combinations often require less than 20% of the capital needed to buy the stock outright. So the returns are five times as large.
Show me any stock idea, and I'll show you an option combination strategy that reduces the risk, increases the potential return, and produces a profit no matter if the stock goes up, down, or stays the same.
You can do this on any of the railroad stocks Warren Buffett bought. In fact, you can do it on all of the stocks in the Berkshire Hathaway portfolio. Do it enough times and who knows? Maybe Mr. Buffett will start following your trades for a change.
Best regards and good trading,
Jeff Clark
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