So how exactly do you chalk up a $4,600 profit on one of the market’s biggest oil stocks… without even buying the shares, or a risky option?

This little-known strategy combines the best of all worlds:

• A low purchase price.
• Unlimited return potential.
• A downside that was identical to owning the shares.

In fact, the move in the investment was almost dollar-for-dollar on the upside and dollar-for-dollar on the downside, compared to owning the actual shares.

Here’s how the trade worked – and how you can do it yourself…

Do You Want to Pay $36,000 for 1,000 Shares… Or Just $12,000?

We executed the trade on Brazilian oil giant, Petrobras (NYSE: PBR).

At the time of entry, the stock was trading for around $36, so a 1,000-share purchase would have cost $36,000.

However, the Petrobras $25 January 2013 deep-in-the-money call option was trading for $12. So in buying 10 contracts, which equates to controlling 1,000 shares, the dollars at risk were 66% less than if we bought the shares ($12 multiplied by 1,000 = $12,000).

Now, let’s look at the downside…

If you’d bought the shares and assigned a 20% stop loss, the stock would have to fall by $7,200 before you’d be stopped out. That loss would be almost identical to a corresponding loss for the option, which is typical of deep-in-the-money options.

The terminology for this is a high delta trade. Delta simply refers to the change in price. A delta of 100% would indicate an identical change in the price of the underlying stock and option.

Here’s how the trade played out…

Investment Utopia: Bigger Gains With Lower Risk

When Petrobras shares traded up to $40, I recommended selling the options after just a couple of months.

Result? About $16.60 for the sale – a gain of around 38% on the original investment, or $4,600 in net profit ($16.60 minus $12 multiplied by 1,000 shares = $4,600).

Compare that to a regular shareholder, who’d have seen a gain of $5,000 – only $400 more than the return on the option trade, or about 14%. And that was having put 66% more capital at risk, too.

So the next time you want to invest in a blue-chip stock, consider using the high-delta, deep-in-the-money strategy to:

• Reduce the dollars you have at risk.
• Own more companies with your capital (diversification).
• Increase the return on your investment by a factor of three to four times.
• Maintain the same downside dollar risk.

Good investing,

Karim Rahemtulla

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.