Cheap Option Stocks: How to Make Huge Gains with Minimal Investment

It’s a phrase all too familiar to investors who’ve watched stocks skyrocket while their own gains were, well, less impressive. But here’s the thing: you don’t need massive amounts of capital to make a killing in the stock market. In fact, with just a few well-placed option trades, you could potentially turn a modest investment into life-changing gains. This isn't theory — it's reality for those who know how to play the options game smartly. But how do you find those opportunities?

You’re probably thinking: “Options? Isn’t that risky?” And yes, it can be — if you don’t know what you’re doing. But in this guide, I’m going to show you how cheap options, in particular, can be one of the best ways to take advantage of the market with minimal risk and maximum upside. And trust me, the story I’m about to share proves it.

But before we get into that, let’s talk about why cheap options are a game-changer, especially for everyday investors like you and me.

The Power of Leverage in Cheap Options

You’ve probably heard the term "leverage" thrown around a lot in investment circles. In simple terms, leverage allows you to control a larger amount of stock than you would if you bought shares outright. Options are the quintessential tool for this because they give you the right (but not the obligation) to buy or sell a stock at a specific price, by a certain date.

But here’s the kicker: because you’re not buying the actual stock, your upfront investment is significantly lower.

Let’s break this down with a hypothetical:

Imagine stock XYZ is trading at $100 per share. To buy 100 shares, you’d need $10,000. Now, instead of purchasing the shares outright, you buy a call option for $2 per contract, which gives you the right to buy the stock at $105 (called the strike price). One option contract controls 100 shares, so your total cost for one contract is just $200 ($2 x 100).

Now, let’s say XYZ surges to $120. Your option’s value skyrockets because the stock price is well above the strike price, and you have the potential to buy those shares at a massive discount. Instead of investing $10,000, you’ve leveraged your position for just $200, and your returns are magnified exponentially.

Why Cheap Options?

Not all options are created equal. Some contracts are incredibly expensive, especially on high-volatility stocks. But cheap options — usually defined as contracts costing less than $5 — can offer some of the best risk-reward opportunities in the market.

Why? Because they provide leverage at a fraction of the cost of owning the stock, while also limiting your downside risk to the price you paid for the contract. If the trade doesn’t work out, the most you stand to lose is the premium you paid (in our example, $200). Compare that to the potential loss if you bought the stock outright and it tanked.

Cheap options also allow investors to diversify their portfolios. Instead of putting all your money into one or two expensive trades, you can spread it across multiple cheap options, increasing your chances of hitting a big winner.

The "Home Run" Potential

The real allure of cheap options is the home run potential. These aren’t everyday occurrences, but when they happen, the gains can be astronomical. Let’s look at a real-world example that left one investor grinning ear-to-ear.

Enter Netflix (NFLX).

In 2011, Netflix was a household name, but its stock was trading at a modest $50 per share. Some investors believed in the future of streaming, but others were skeptical. Enter one savvy options trader, who saw the opportunity to buy cheap call options on Netflix. He purchased options with a strike price of $70, expiring in six months, for just $0.50 per contract.

At the time, that seemed like a wild bet — Netflix needed to gain 40% just for the option to be profitable. But within months, the stock surged, riding the wave of streaming's growing popularity. The options exploded in value, with the trader eventually selling them for over $20 per contract.

Let’s do the math: an initial investment of just $500 (for 10 contracts) turned into $20,000. That’s a 3,900% return. All from a cheap option.

How to Find Cheap Option Opportunities

You might be wondering how to find these opportunities. After all, not every stock is Netflix, and not every cheap option trade is going to deliver such spectacular returns. But there are a few key strategies you can use to increase your odds of success.

1. Look for Stocks with Upcoming Catalysts

Some of the best options trades come when stocks are on the cusp of a big move. This could be due to an earnings report, a product launch, or a significant piece of news that could dramatically shift market sentiment. The key is to buy options before the catalyst occurs, so you’re positioned to profit from the stock’s movement.

For example, if a company is about to report earnings and you believe the market is underestimating their potential, buying cheap call options ahead of the earnings report could lead to significant gains if the stock spikes.

2. Focus on High Volatility Stocks

Volatility is a double-edged sword in the options world. While it can make options more expensive, it also increases the potential for big price swings — and big profits. Look for stocks that have a history of volatility or are in industries where rapid changes are common, such as tech or biotech.

3. Use Technical Analysis

Technical analysis can help you identify entry points for options trades. By analyzing stock charts and looking for patterns like breakouts or reversals, you can increase your chances of timing your options purchase correctly. Tools like moving averages, support and resistance levels, and relative strength index (RSI) are useful for identifying when a stock is about to make a significant move.

The Downside of Cheap Options

Of course, it’s not all sunshine and rainbows. Cheap options come with their own set of risks. For one, because they’re often out of the money, they require the stock to make a significant move for the option to be profitable. If the stock doesn’t move enough, the option could expire worthless, and you lose your entire investment.

Another risk is time decay. Options have an expiration date, and the closer you get to that date, the more the option’s value declines if the stock hasn’t moved in your favor. This is why it’s crucial to time your trades carefully and avoid holding options too close to expiration unless you’re confident in a big move.

Managing Risk

The key to success with cheap options is managing your risk. Never invest more than you’re willing to lose, and always have a clear exit strategy. Many professional traders will set a profit target — say, 100% or 200% gains — and sell part of their position when that target is reached. This allows them to lock in profits while still maintaining some exposure to further gains.

Conclusion: A High-Risk, High-Reward Game

Cheap options can be a powerful tool for investors looking to maximize their returns with minimal upfront investment. They offer significant leverage, the potential for astronomical gains, and a limited downside. But they’re not without risk, and it’s essential to approach them with caution, a solid strategy, and a clear understanding of the risks involved.

So, the next time you hear about a stock making a big move, remember this: you don’t need to invest thousands of dollars to get in on the action. Sometimes, all it takes is a well-placed cheap option trade to turn a small investment into a life-changing windfall.