The cryptocurrency craze has swept the market over the last year, bringing to light the theme of speculative investing.
As the price of bitcoin has risen more than 1,550 percent in the last 12 months, investors have been flocking to it and other various digital currencies in a chase for similar profits.
But if you’re looking to make bitcoin-like returns for a lower risk, there is a simple way to do it using options.
“A lot of people like to buy options for two reasons: They like to do it to define their risk, and they like to do it for leverage,” Dan Nathan, co-founder and editor of RiskReversal.com, said Tuesday on the “Options Action” segment of CNBC’s “Fast Money.”
Nathan outlined one of the most basic options strategies: buying a call. Here’s how it works:
— You are bullish the underlying asset.
— Gives you the right, but not the obligation, to buy a stock at a set price for a given period of time.
— Defines one’s risk against potential volatility.
“There aren’t too many risk assets where you could [see the asset double], and that’s what we’ve been talking about with [cryptocurrencies],” he said. “But when you’re buying calls, short-dated calls, for instance, into events, you have the potential to do that.”
As an example of a speculative event where a stock could see wild swings, Nathan brings up Bank of America earnings. The big bank is set to report next Wednesday before the bell, and he used the stock to show how buying a call can help investors hedge their bets heading into a volatile event like earnings.
Nathan suggested buying the January 30.5-strike calls for 50 cents. This trade makes money if Bank of America rises above $31 by next Friday’s expiration.
But the trader also has the potential to make much more than that.
“To get a double you need [Bank of America to close at $31.50], that’s up about 3.5 percent,” he said. “For me, that’s taking a speculative view on a short-term event, being long premium and defining your risk.”
On Wednesday, Bank of America rallied more than 1 percent and was trading around $30.70, just 30 cents below the break-even point for Nathan’s trade.
