This article originally appeared on RealMoney.com on Sept. 2, 2014 at 9:00 a.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.
As option traders, we all search for that Holy Grail that will explain the right edge of the chart. Naturally, we cannot see the future, but at times we can set ourselves up for a big payday. Yet we all strive to hit that one golden goose of a trade -- the one that puts us on another level financially, mentally and emotionally. There is no better feeling than nailing a big winner, and we all would like to be prepared and believe we can control it. Of course, that is really impossible to accomplish -- but we can prepare ourselves for the opportunity, and maybe we'll get lucky.
I'm often told General Electric (GE) is one of the most boring names out there. GE is a stodgy old industrial stock that does not have much beta beyond the market. In other words, it'll move slower than the market up or down. The stock currently trades in the mid-$20s and it has gone virtually nowhere over the last year or so. While stocks like Netflix (NFLX) , Apple (AAPL) and Boeing (BA) have soared since 2012, GE is barely up 25%. But, if your timing is right, GE could provide you with some great short-term returns.
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The chart and technicals are powerful tools when it comes to option trading. Wouldn't it be great to nail an option trade for a 10x return in a short period of time?
A couple of years ago I had one of my biggest gains in a GE option trade. It was just prior to an expiration week; the stock chart was looking fine, with indicators just starting to turn bullish. There were about seven days prior to expiration and the out of the money strike was selling at $0.13. There was small risk in taking this trade and just waiting it out. Well, some news hit the following day and the stock ran through the strike, going up $0.55. End of day, the option was at $0.50 -- a robust gain but there was more time left to wait. As the next week moved along, GE went up about $0.85 in price, a strong move for the stock in a week. The option ended that expiration Friday at $1.35, or up more than 1,000% from the previous Thursday. The stock rose about 9% that week. Boring? Indeed!
This is just one story of a successful trade when we got a bit lucky. But isn't luck when preparation meets opportunity? It would take 10 lifetimes to achieve a 1,000% return in GE stock, yet the options trade yielded that much in about seven days. Again, at the right place and at the right time. These trades are not high probability, of course; in fact, you would probably lose 99% of the time trying to reach for a 10x trade.
Option trading gives you tremendous leverage if you find yourself suddenly on the right side of the trade. But to just guess and throw out random trades is NOT a good strategy. Further, risk management is paramount in all situations, because the expectation of outsized returns is very low.
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