AppLovin joined SwingTrader last week after passing a 91.91 buy point in a cup base. Investors who think APP stock will continue to rally and don't want to risk significant capital can use long call options rather than buying the stock outright. This can be a good way to protect precious capital in these volatile markets.
How The Long Call Option Works
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of APP stock, they would have to put around $9,000 into the trade.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares.
Setting Up The APP Stock Trade
Say an investor buys one APP stock call option contract with an 82.5-strike call option expiring on January 17. Since that's trading around 15 today, the option only costs around $1,500 rather than $9,000.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 97.5.
The most the trade can lose is the premium paid of $1,500, which would occur if APP finished below 82.5 on January 17.
However, if APP stock shoots higher, the upside is unlimited.
Other Ways To Play The Trade
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Jan. 17, 110-strike call would reduce the trade cost by around $450 but would also limit the upside above 110.
A stop loss could be set if APP drops 8% from the entry point.
According to the IBD Stock Checkup, APP stock is ranked No. 1 in its industry group. It has a Composite Rating of 98, an EPS Rating of 82 and a Relative Strength Rating of 97.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
