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If I want to make a $1000 bet that, say, a share of AAPL will be $1000 in a year's time, what's the best way to do that?

AAPL is over $600 today, so with my $1000 I can only afford to buy one share. Even if anyone would sell it to me, if I was right I'd only make $400 (66%).

I could buy $1000 worth of Jan 13 AAPL call options at a strike of $750 (currently $35 each), which means if I were right I'd make $7142.

Is there a better option (no pun intended)? I don't care about losing my principal but I do not want to risk any more than that.

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Bear in mind that, generally, an options contract is for 100 shares and so the price of one contract is 100 times the quoted premium per share. –  Chris W. Rea Apr 11 '12 at 11:12
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If you can't afford to buy more than 1 share of Apple, you really don't have any business using leverage or options to speculate on it. –  duffbeer703 Apr 11 '12 at 14:18
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Would also be worth pointing out 2 things, if the price of apple would increase to $1000 it would increase the market cap by $340 Billion to almost $1 Trillion. The second being 66% a year is an incredible return that almost everyone would happy to obtain. –  psatek Apr 11 '12 at 15:19
    
duffbeer, psatek, please look over /there/ for my point. You missed it. –  Robert Atkins Apr 12 '12 at 2:20
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@duffbeer703 - I +1 your comment. The flip side to this is that we don't know the background of the OP. I answered from a general strategy view. Basically, one can bet (and I say bet, I don't call it investing) under $1000 and create his own odds by selecting the spread strikes that he wants. When gold was just over $1000, I wrote joetaxpayer.com/will-gold-break-1250-by-2011 which set up a 4 to 1 bet whether gold would break $1250 about 15 months later. Those who bought one ounce made $250, the option spread, $3000 (on the $1000 bet). –  JoeTaxpayer Apr 12 '12 at 13:50
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3 Answers

apple options

Specific stock advice isn't permitted on these boards. I'm discussing the process of a call spread with the Apple Jan 13 calls as an example.

In effect, you have $10 to 'bet.' Each bet you'd construct offers a different return (odds). For example, If you bought the $750 call at $37.25, you'd need to look to find what strike has a bid of $27 or higher. The $790 is bid $27.75. So this particular spread is a 4 to 1 bet the stock will close in January over $790, with a $760 break even.

You can pull the number from Yahoo to a spreadsheet to make your own chart of spread costs, but I'll give one more example.

You think it will go over $850, and that strike is now ask $18.85. The highest strike currently listed is $930, and it's bid $10.35. So this spread cost is $850, and a close over $930 returns $8000 or over 9 to 1.

Again, this is not advice, just an analysis of how spreads work. Note, any anomalies in the pricing above is the effect of a particular strike having no trades today, not every strike is active so 'last trade' can be days old.

Note: My answer adds to AlexR's response in that once you used the word bet and showed a desire to make a risky move, options are the answer. You acknowledged you understand the basic concept, but given the contract size of 100 shares, these suggestions are ways to bet under your $1000 limit and profit from the gain in the underlying stock you hope to see.

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I'm not sure I'm following your point here. Your examples are related to the strategy idea proposed by AlexR? –  Robert Atkins Apr 12 '12 at 3:50
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Robert - I edited in more details to answer your question here. I am happy to clarify, but need more than "not understand" to respond to you. Is there a certain part of option spreads you don't understand? Keep in mind, sometimes when one is too familiar with a concept, we skip over some detail that might be key. Your questions in response will help me be a better teacher. –  JoeTaxpayer Apr 12 '12 at 13:41
    
Why would I buy "point spreads" over simply buying the option? Just to limit my downside risk? If I do this, do I necessarily have to limit my upside? –  Robert Atkins Apr 16 '12 at 15:10
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Because at the time I answered, there was no call priced at $10 or lower. Because if there were, you might have had to choose between a much higher strike, vs lower pair but higher chance of success, and last, because your request didn't state it the price was going to infinity, only $1000, and I offered the best return given your scenario. –  JoeTaxpayer Apr 16 '12 at 20:09
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You could try to refine your options strategy:

For instance you could buy the USD 750 call option(s) you mentioned and at the same time sell (short) call options with a higher strike price, which is above the share price level you expect that Apple will trade at in one year (for instance USD 1,100).

By doing this, you would receive the premium of the call option(s) with the higher option, which in turn would help you finance buying your USD 750 call(s).

The net effect of this trading strategy would be that you would give up the extra profit you would earn if Apple would rose above USD 1,100 (the strike price of the call option sold short). Your total risk would be even less than with your actual strategy (in my view).

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I think that those options might well be your best bet, given the potential 700% return in one year if you're right.

You could look and see if any Synthetic Zeros (a Synthetic Zero is a derivative that will pay out a set amount if the underlying security is over a certain price point) exist for the share but chances are if they do they wouldn't offer the 700% return.

Also might be worth asking the question at the quant stack exchange to see if they have any other ideas.

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