My dentist's assistant is a very happy young lady. She owns two shares of Google, and Google has been on a tear lately. It's gone from $403 per share to $485 over the last month for a nifty gain of $82 per share or 20.3%. A certain patient of the same dentist is also very happy. He owns 10 Google Dec 400 Call option contracts. The price of each contract, which controls 100 shares of Google, went from $3,781 to $8,920 over the same period for a gain of $5,139 per contract or 135.9%. But wait. There's more to it than that.

Being a cheapskate, this old guy doesn't like to pay the full amount for option premiums. So he sold enough out-of-the money Google Put options to halve the cost of his Calls. Normally, he would have sold 10 Google Dec at-the-money Put options to off-set most of the cost of the Call options, but he didn't want to take the risk. Of course there are ways of off-setting some or all of the cost of Call options without increasing risk, but they all result in a reduction in the potential reward. The thing this old guy loves about trading options is the ability to balance risk and reward. Actually, he also loves the idea of spending as little money as he can to make as much as he can. So he likes to fashion Combo trades that give him a better-than-even chance of winning at a reduced cost.

Long-term subscribers to VectorVest know that I have written about options trading on many occasions. The last time I cited the use of options was in my essay of 09/01/06 called "Risk, Reward and Patience." Prior to that, I wrote about buying nine-month, at-the-money Call Options in implementing the Summer Hiatus strategy. As noted in that essay, buying Call Options instead of the actual stock whenever possible greatly reduces the money one has at risk. This subject was discussed at some length in a very important essay I wrote on 02/17/06 called "Albert's Gift to VectorVest." It's well worth reading.

There's another relatively sophisticated option trade that's worth considering for long-term Bullish positions. This trade offers an investor unlimited upside potential with a relatively moderate maximum loss. If done properly, it even offers the opportunity to make money if the stock price crashes to the downside. In many ways, it's a better trade than a Long Call, a Bull Call Debit Spread or a Synthetic Long Stock. It's called a Call Ratio Back Spread.

For example, the old man could have simultaneously sold 20 GOOG Dec 400 Calls @ $37.80, have $75,600 credited to his account (not counting commissions), purchased 30 GOOG Dec 430 Calls @ $20.90, and paid $62,700 from his account for a net credit of $12,920. According to the VectorVest Options Analyzer, his maximum loss of $6,750 would occur at expiration at a stock price of $410 per share. His upside breakeven stock price would be $417 and his downside breakeven stock price would be $406 per share. At yesterday's closing price of $485.10, his profit would have been $65,790. Not a bad deal if you're interested in Low-Risk, Leveraged Investing.

WARNING:
DO NOT TRADE OPTIONS UNLESS YOU HAVE BEEN TRAINED TO DO SO, FULLY UNDERSTAND THE RISKS WHICH MAY BE INVOLVED AND KNOW WHAT YOU ARE DOING. YOU MAY RECEIVE A FREE INTRODUCTION TO OPTIONS TRADING AT THE VECTORVEST UNIVERSITY, PURCHASE THE VECTORVEST OPTIONS COURSE ON CDs OR ATTEND ONE OF OUR LIVE OPTIONS COURSES.