By Brad Sherwood
What if you were a real
estate investor, and you believed that you could find a buyer within a short period of time who will pay $120,000 for a property
that you can buy for only $100,000? You could buy the property outright, using your own financing, and then sell when
you found the buyer. But then you'd have to make payments, pay the bills, manage the property and take money out
of your pocket.
But did you know that you can
own the exclusive right to pay no more than $100,000 - or any price YOU agree on - for a set period of time? Then if
you can find the buyer in the meantime who will pay you $120,000, you would simply exercise your right to pay only $100,000
for it, turn around and collect $120,000 from the buyer, and pocket the difference less related fees and expenses. These
are called Real Estate Options and those in the know are using this very technique to amass fortunes. But did you also
know that this technique can be done with almost anything you can buy and sell?
How much would you have to pay for an option like the one above? If it gave you the exclusive right
to buy at $100,000 for three months for example, it could cost you around $1,000. Now if you did this and found a buyer
willing to pay you $120,000, and then paid all the related expenses, you could walk away with $10,000 or half the $20,000
difference. To you that's a return of $10,000 on only a $1,000 investment in only 3 months or 1,000%. Annualized
that's 4,000%.
That's exactly how it works with options
on futures contracts. You spot a "sleeper" market, pay a premium to lock the price at anything you agree on
beforehand, and then wait for the underlying futures price to move, hopefully in your favour. It's even better using
options contracts with futures because there is almost never a problem finding a buyer: Options on futures are amazingly
liquid! Like options in real estate, if the price turns out not to move in your favor, you are not obligated to purchase
the property or commodity. And even though that carries the risk of losing what you paid for the option, you are guaranteed
never to lose more than that amount - or $1,000 in our example above.
Because options on futures are so liquid, most are bought and sold as an investment in their own right and not exercised.
This is why an entire parallel market in options trading has grown up. Here is where you'll find potentially one
of the most powerful investment vehicles known to man.
