Using Options to Invest in Energy

Written By Nick Hodge

Posted June 14, 2011

Ever wonder how to take your investment game to the next level?

You know what I’m talking about…

If you’re like I was when I began investing, you’re splitting the few investment dollars you have into the handful of stocks you think will go higher.

That’s what I used to do before I found a better way. And that’s what millions of Americans still do.

Today, I’d like to show you what that better way is and how you can use it — just like the wealthy — to make better gains off the same stocks you usually trade.

Take Any Energy Stock

It doesn’t matter which sector of the energy market you favor. This technique works as well for solar as it does for coal.

Let’s just jump right in…

Arch Coal (NYSE: ACI) is up about 4% as I write this. It’s tacked on $1.10 to its share price and is trading at $26.25.

Arch Coal

That’s not too bad for the first 45 minutes of trading.

But smart energy investors made over 200% in the same time on the same stock. They just did it with the option. Take a look:

Arch Coal Option

And like I said, it works for any energy stock.

JA Solar (NASDAQ: JASO) tacked on 4% this morning as well, adding $0.20 to trade around $5.29…

JA Solar

Surely better than any money market or CD you could be in. But again, there were investors who made 75% on that same 4% stock move.

They did it by buying the option.

JA Solar Option

Myths and Misconceptions

Before you run for the hills because I’ve mentioned options, let me say they aren’t nearly as scary as you’ve heard.

When you buy an option, you’re buying just that: an option to buy a stock.

Arch Coal is trading $0.26 above $26.00, so traders want the option to buy it cheaper, at $26.00. And they’ll pay a premium for it.

As you can see in the image above, the “option” to buy Arch Coal at $26.00 is worth 205% more today than it was yesterday — all because the stock went up a few cents.

When you’re dealing with billions of dollars and millions of trades like banks are, options make for a nice hedge.

Hypothetically, let’s say Citi has a monstrous short position in Arch Coal. They thought the stock was going lower for sure. When they turn out to be wrong and the stock heads higher, they can buy options to hedge against their loss.

It may seem complex (do you really think the banks want everyone to be able to trade like this?), but it’s far from it.

If you have an online trading account, you can trade options. You buy and sell them just like a stock. All you need is the option code.


Best of Both Worlds

You can do the same thing if you think a stock is headed lower.

Take a well-known utility like Pacific Gas & Electric (NYSE: PCG). It was only down a penny this morning, trading at $41.70.


But that must’ve been enough for some traders to think the stock was going to fall even farther.

In this case, you’d buy an option to sell shares of PG&E — as opposed to an option to buy shares in the Arch Coal example. Because if the stock falls to $35.00, you’d come out well ahead if you had the option to sell at $40.00.

That’s why even though shares only fell a penny, the option to sell the stock at $40.00 was up 300% this morning.

PG&E Option

Now, I’m not going to drone on about options other than to say they always trade at a higher percentage than the underlying stock — no matter which way it’s moving.

And you can do it with energy stocks, tech stocks, ETFs, commodities — you name it.

Since it’s not my area of expertise, I’d like to point you in the right direction to learn more…

We here at Angel Publishing, particularly Ian Cooper, thought it was high time we took the mystery out of options.

What I’ve shared here can’t even be counted as an introduction. This free tutorial is a much better place to start.

It’s an options “How-To” e-book that includes multiple lessons and, providing you like making more money, will set you down the path to easy options profits you’ve probably been avoiding for years.

Call it like you see it,

Nick Hodge

Nick Hodge
Editor, Energy and Capital

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