The ProShares UltraShort 20+ Year Treasury ETF was added to SwingTrader on Friday after bouncing back above the 50-day moving average.
TBT stock rises when interest rates rise, leading to a swing trading opportunity.
Investors who think the TBT ETF will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright. This can be a good way to protect precious capital in these volatile markets.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of TBT stock, he or she would have to invest around $2,646 at Friday's closing price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If investors were to buy one TBT 25 call option expiring on Oct. 21, they would only need to invest around $240 rather than $2,646.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 27.40.
The most the trade can lose is the premium paid of $240, which would occur if TBT finished below 25 on Oct. 21.
Unlimited Upside Potential With Call Option
However, if TBT stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Oct. 21, 30 call would reduce the trade cost by around $60 but would also limit the upside above 30.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
