Yes, you really can buy Apple shares for $4 for a limited period of time. This is not a joke and thousands of traders do it every day.
They do this with stock options. If you think Apple (AAPL) shares, currently $118 are going to rally significantly before the middle of January, you can buy a $4 call option to profit from that move. An option contract is for 100 shares of stock. If the price is $4, the cost to you is $400. That is your total risk. If Apple shares fell to $50, you would only lose your $400. If Apple shares rallied, your option will go up relative to the stock gain.
Equity options are a wonderful trading vehicle. Your risk is always limited to the price you pay but your potential gain is unlimited.
In the Apple chart below the price of the stock is $118.78. As of today's close, the cost of the January $120 call option is $4. Apple shares are rebounding after several analyst upgrades. This is the company's biggest quarter for iPhone sales with an estimated 78 million to be sold in Q4. This normally provides a huge boost to earnings and the stock rises into the January 27th earnings report. It is entirely possible Apple shares could rally back to the highs at $133 before January earnings because we are in the best two-months of the year for the market. Tech stocks tend to do really well over the next six weeks.
If Apple did rally to $133 your option would be worth about $13 or $1,300 per contract or more than a +200% gain in six weeks. Obviously, this is just speculation but this is how investing with stocks and options works.
If Apple only rallied to $125 over the next two weeks, your option would double in price and there is no requirement to hold it until expiration. You can sell for a profit at any time even if it is just a couple days from now.
The January $120 call option is $4. That option gives you the right to any appreciation in Apple stock until it expires in January. That expiration date is January 15th. That gives you the rights to any gain in the stock for the next eight weeks.
The $120 call is not the only option available for January. You could buy the $125 call for $2.04 or $204. While that call is cheaper, the stock has to move an extra $5 just to reach your call strike. Obviously if the stock does really well and rebounds to $130 or higher, your percentage of gain would be higher but your total gain in dollars would be lower. A 200% gain on a $2 option is $6 compared to the 200% gain on a $4 option at $12. Which would you rather have, $600 or $1200?
Each investing method has its advantages. The higher cost option closer to the "money" or the strike price, which is $120, will accelerate faster on a stock gain and the premium will decay slower if there is no movement.
However, the $2 option at $125 costs less so you have less money at risk. Unfortunately, your odds of a big gain are less the farther the strike price is from the stock price. This is like betting on the underdog in a horse race. The odds are good you will lose money but should the horse actually win your payoff is much higher.
I prefer the common sense approach to option investing. Buy options relatively close to the stock price and pay a little more as "insurance" against a slow rally or none at all.
Remember, you can sell options at any time. You can sell the day after you buy them, or next week or next month. There are no restrictions other than you must sell them before the expiration date, which in this example is January 15th.
If you do not have a lot of money to invest, it makes sense to use options. Buying the $4 call costs $400 to control 100 shares of stock. Buying 100 shares of Apple costs $11,878. Obviously, your percentage of return is much better with options.
If you like the options education you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.