5 Stock Bets to Turbo-Charge Your Returns

We've been in a sideways market for some time now, with the major market indexes trading in a relatively tight range. Nevertheless, there is one way to boost your portfolio's returns during this period: options. Before you roll your eyes and click to the next article, give me a chance to walk you through one straightforward strategy and present you with five trade ideas. It could change the way you think about investing in the current environment.

Bullish on a stock? That's what calls are for
First, we need to get some basics down. A call option gives you the right to purchase a stock at a set price (the "strike" price) within a certain time frame. Buying a call with a strike price above the current stock price typically means you are bullish on the stock; indeed, it only makes sense to be willing to pay a premium to the current price for a stock in the future if you expect the price to rise beyond the strike price.

For example, if you think that IBM (NYSE: IBM) shares are headed higher over the next six months, you can buy the July 2011 $150 call on IBM for $5.75 (IBM shares recently traded around $144). If IBM stock is trading at $175 when the call option expires, the call will be worth $175 - $150 = $25 (remember, it gives you the right to buy a share of IBM, which is trading at $175, for $150). Your net gain is $25 – $5.75 = $19.25, for a 235% return on your initial investment, smashing the stock's 22% return over the same period.

Reducing your downside
However, if the shares are below $150 at expiration, the calls expire worthless, whereas the shares have held their value. One way to reduce your potential loss on this option trade is to offset the call purchase with the sale of a call with a higher strike price. The combination of the purchase and sale is known as a call spread. Your initial outlay -- which is your maximum possible loss -- is lower, but your upside is now capped, with the most you can earn equal to the difference between the two strike prices minus the net cost of the call spread.

For example, resident Fool options expert Jeff Fischer recommended a $40/$45 call spread on Best Buy (NYSE: BBY) at the beginning of April with the stock trading just above $42. Eight months on, the stock has gone nowhere; meanwhile, the call spread has chalked up a satisfactory gain. In fact, with Best Buy's shares at roughly the same level, investors could consider putting on the similar January 2012 $40/ $45 call spread today -- a trade with the possibility of a 117% gain if the shares close at or above $45 at expiration.

5 undervalued stocks, 5 trade ideas
The following table contains five ideas of bull call spreads on stocks that look undervalued. On what basis am I suggesting these stocks are undervalued? They are the product of a screen I created using Capital IQ. All have a forward price-to-earnings multiple in the bottom quintile of stocks in their primary industry and a trailing price-to-earnings multiple that is in the bottom quintile of its historical range (going back to January 1995).

Source: Yahoo! Finance.

Let me be very clear: These are ideas, not recommendations. Although I suspect these stocks are undervalued, I have not done the sort of due diligence that would enable me to determine it conclusively. Furthermore, these trades have a relatively short time horizon -- that's right, even a full year is the short term when it comes to stocks -- so identifying a catalyst for a revaluation in the share price would be extremely useful here. That would certainly require detailed bottom-up research.

Take the next step to earning these gains
If you have the time and ability to do that type of research, you can earn the sort of option returns I described above. If not, you can still put options to work for you by following the recommendations of options expert Jeff Fischer. Since the inception of the Motley Fool Options service, Jeff's 44% total return has smashed the S&P 500. If you'd like to begin turbo-charging your portfolio's return by investing a small portion of your assets, simply enter your email address in the box below and Jeff will send you a free report in which he breaks down several of his favorite strategies.