The biggest myth about options expiring worthless.
Since we launched The Trend Rider last week, I've been getting tons of email. A lot of it centers around the fact that I haven't had a losing trade in a year. Some people straight up don't believe it, others say they're in awe.
In any case, there's a lot of buzz on the topic of a 12-month winning streak. Let me clear the air. First, it's 100% accurate that I haven't had a loser in a year. Second, I'm the last person who expects that to continue forever. I've been a trader too long to have an ego. Eventually I will make a trade that will be a loser. There, I said it.
We're off to a good start with a 48% winner on the first official Trend Rider trade (big sigh of relief that my streak didn't end with the first trade ... the irony wouldn't even be funny).
I know this won't end the buzz about my winning streak ... in fact, maybe you'll be able to have some fun with it. Create an office pool for when the streak will end, if you want. Just wanted to bring this up before I got into this week's article.
Two things to say before moving forward:
1) I do not manage money for anyone currently. If I did so while I was sending trading alerts to members of my new subscription-based, membership-only trading service, The Trend Rider, it would be a major conflict of interest.
So if you are interested in what I am doing, becoming a member is the only way to find out, and besides, it's much less expensive than the fees that I would be charging you if I did manage the money.
2) I can still make general recommendations to you like what I'm about to say next, but I cannot offer you specific trading advice on these weeklies (and no, not by e-mail either.)
We have obviously been warning about a choppy or negative market in the near term for months. I won't repeat today the 10-plus reasons why you should be cautious today.
I won't even ramble on like a broken record (like I have been doing for the last three months) about why you need to sell covered calls on market rallies.
Today I will dispel a myth ...
There is a way to profit from a down market using options, without getting into any complicated strategies. Simply buying the puts -- or if you have a diamond in the rough, buying call options -- can reduce your risk.
I know what most of you are probably thinking:
'I've been told that 90% of options expire worthless.' Believe me, this is totally untrue.
According to the Chicago Board Options Exchange (CBOE), only about 30% of options expire worthless in each monthly cycle.
Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration. In fact, over 60% of all options are traded out in the marketplace. This means that buyers sell their options in the market, and writers buy their positions back to close.
I think that people say that 90% expire worthless because they are referring to the series (example: 'May 50 call').
The option series itself may expire worthless if the stock is under 50 on expiration. But a number of people may have exercised the option when the stock WAS up at 55, before trading under 50.
In any case, if you have a stock that is at $70.00 and you think that it will trade lower, you can probably buy an 'in the money' put option. Usually options that are in the money have little time value. The benefit of having very little time value is that if the stock trades flat, your put option will not trade much lower the way that an option would if it had a great deal of time value built into the price that you paid for it.
It would probably be best to buy a put option that expires in six months with a strike price of $75.00 which would be $5.00 'in the money' with a $70.00 stock.
If the stock traded to $85.00, the folks who shorted the stock from $70.00 will lose $15.00 per share. But the folks who own the put option with a strike price of $75.00 will only lose what they invested in the put, which will likely be around $6.00.
However, if the stock traded $10.00 lower, the folks who shorted stock make $10.00 p/share while the in-the-money put buyers make about $9.00. It's worth giving up that point.
Just be sure that you play options that represent the share amount that you would have played if you played the stock.
I will continue with these short 'lessons,' if you want to call them that, on these free weeklies. But again, if you want the actual trading ideas, check out my new service. We're going to have a lot of fun this year.
I have gotten several e-mails with questions and comments that have helped me to understand what the members of The Trend Rider need.
I am hoping to maintain my current track record for a while since the new subscribers have been so interested in it.
So far, so good.
The first position that I recommended was a sell of the January 2006 Nike 85 calls at $3.90 which traded down to $2.00 for a 48% return in 2 days. I got lucky on how fast that one was closed out.
I mentioned to all of you readers of this free bi-weekly that you should look for a pullback on Nike, but didn't give a specific trade. From now on I can't even do that. It's just not fair to my paying subscribers.
Here's a peek from yesterday's Trend Rider subscriber email. You might find it interesting, and it'll give you a glimpse at what it's been like for me as a professional money manager to make the switch to a subscription-based advisor.
Here is part of the e-mail that I sent to The Trend Rider members yesterday morning:
I feel like a kid on his first day of school.
This is the second week of The Trend Rider, and while I'm far from a rookie at stock and options trading, I am completely new to this newsletter style, membership only trading system thing.
My past relationships with the people that I have advised have been mainly face to face and if not, it was over the phone. When I managed people's money, I was able to get a good idea of their different specific needs.
But using a website and e-mails to invite you in on the trades that I recommend is obviously a little different. Well, here's how I have done so well so for people so far and what I have to offer you:
When I find what's closest to a sure thing, I'm going to send you the trading alert immediately. But this is a game of waiting for pitches. The guys with the highest on-base percentage are guys who know when to swing. My point is that there will be times when I don't have anything for you to trade. There will be other times when I have three ideas in a week.
I'm going to wait for the market to open, because there are a few trades on my radar screen but I must see how they trade this morning before making a decision on............
After that, I went on to tell the subscribers what I am looking at. One of the positions I mentioned I went ahead and initiated later in the day and it's up slightly already. It's an option that I think will trade about 30% - 40% higher.
Today I initiated a second position that is also up slightly. It's a stock that trades in the twelves that I think my subscribers will see at least 20% profit on short term. Insiders have been accumulating a large amount of stock, and they're in a strong financial position.
The 50% discount runs out in 2 days. If you go to the site, you can read my story on the page that pops up when you click on the 'Become A Member' tab.
I hope to see you there!