Bull Slingshot

So a couple of years ago I spent 3 days with a trading mentor and learned a handful of really cool strategies for trading/investing.  Side note, if you are thinking about getting into trading do NOT cheap out on truly educating yourself with the market and how to trade.  But I will save that for another post.

Tuesday I decided to dust off the notes from that session and tried out one of the strategies I had learned called a Bull Slingshot.  The premise of this trade is to find a stock you are extremely bullish on and using a combination of stocks and options slingshot your profits sky high.  The key is for the underlying stock to rise high enough so that the profit of the stock covers the cost of buying the options.  Lets look at an example.

Stock ABC is currently selling at $15/share and the Jan12 20 call option is selling for $1.  We buy 100 shares of stock for a cost of $1,500 and 2 options for a cost of $200 ($1*100 shares in an option *2) for a total outlay of $1,700.  If the price of ABC stock goes up to $17, we sell our 100 shares for and receive $1,700, or our initial cash outlay.  This is when this trade really gets fun.  You are now left with 2 call options that are essentially risk free.  Since your profit in the stocks covered the cost of the options, you can let the options ride.  And if we think about this, if the stock price has risen $2, then your call options have increased in value as well so you also have the option of closing the entire position out.

The key to this trade is finding a stock that is an an uptrend.  In order for this strategy to work the stock must be going up.  You can also do the opposite in a Bear slingshot (short the stock and buy puts), but shorting stock is always a risky proposition.