Now, After digesting all the info in Part 1, you may be asking yourself, wow, a 3000% gain on on a relatively small price movement while only risking $15!! Why is the risk so cheap?? (shouldn't you be paying more than $15 for a chance at that type of return??)
Well... There is a reason that its only $15... actually at least 3 big reasons.
Look at it this way: how can you make a profit if you buy a stock? The stock simply has to go up and you are instantly in profits. That's it.
Now options are a different animal. Take a look at any options chain (if you dont have software, look it up on finance.google.com type in AAPL, and click on "option chain" on the left hand side under the red "Company" header. The options are priced in $5 increments when you are close to the actual AAPL stock price.
Reason #1: The stock has to move in your direction. This is the same as buying a regular stock. Nothing new here.
Reason #2: Lets go back to the twinkies example again. If you took a survey of every single person who was interested in buying or selling a box of twinkies, and you asked what price they had in their head to sell or buy, Think about what the odds are that any random person is thinking about $28.96 vs a nice whole number like $30. A vast majority of people would be thinking of a nice whole number in their head, and this is the basis of "resistance" and "support"
Since sooo many people will be thinking of selling their box at $30 (especially compared to any random, non neat, easy, whole number like 28.49), a move from 28.50 -> 28.70 will be MUCH MUCH easier than a move from $29.90 -> $30.10. In this case $30 acts as significant resistance. Obviously the more "whole" the number is, the more resistance it will bring. $35 should be less resistance, $100 should be more (if it was close to $100) In other terms, if you were a billionaire and you wanted to screw around with the price, think about how many more boxes you would have to buy to move the price from $29.90 -> 30.10 compared to 28.50 -> 28.70.
Now, in order for your contract to move "in the money" (aka above the strike price of $30, where your profits are leveraged) The stock will have to move through that huge $30 resistance. That significantly lowers the odds of your contract getting into the money.
Reason #3: the stock has to both: move in your direction, cross over a resistance point ALL before a cut off date. You could be dead right that a box of twinkies will be worth well more than $30 but if that doesnt happen before the end of next week, you're dead in the water. Twinkies could be going for $5,000 per box in 1 month, but if it doesn't do that before your time is up, it doesn't mean anything! Imagine that... a million or so % gain was on the table, but you didnt buy enough time and your contract expired worthless giving you a 100% loss...
Now... What if I told you that there is a way to have all three of these factors ON YOUR SIDE??
