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  • This is The Biggest Mistake New Option Traders Make

    [vc_row][vc_column][vc_column_text]Time and again, I have seen people talk about options as if options are from different planet and something average investor or trader can’t make money with? Are options really that bad? I mean, do people even understand what options are before they start trading options? A lot of money is being made in options. I mean, a lot. Even Warren Buffett trades options. Options can’t be as bad as people make out, can they?

    Fresh Series of Articles on Options

    As someone who has been writing about options for 90+ months, I thought to clear some of the biggest myths about options. With this new series of articles my intention is to introduce you to a framework that gives ideas on how to think about options and reasons on why you shouldn’t or should trade options. Once you understand the “WHY”, you can find tons of options trading books in the market which can introduce you to options language should you decide to trade those.

    The Objective of this series is to tell you, in plain simple language, the pros-n-cons of options.

    The BIGGEST Mistake of All

    Most people are familiar with stocks. Usually, you find someone either within your family or close proximity who “knows” stocks. You are also taught about stocks in traditional educational system. It’s been there for 100+ years. Even our grandparent knew what stocks are. We all understand “Buy Low, Sell High”. It’s just so easy. We are told to buy it for the long run. Buy and Hold is the Mantra. Just keep it and over the long run stock market will deliver 6% annual gains*.

    When it comes to stocks, we know it all. Even though within the stocks there are different type of investors e.g. a) Value Investors, b) Technical Analysts, c) Pattern or Momentum traders and a few more, the end result is same i.e. Buy Low, Sell High (and/or keep collecting dividends if the stock pays it). And it makes money if goes up, and lose if it drops.

    Plain simple. Everyone knows what stocks are.

    But when it come to options..Huh!!! What the heck is that?[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/4″ animation=”none” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ centered_text=”true”][vc_pie value=”90″ label_value=”90″ color=”#007ee5″ units=”%” title=”90% Beginners Trade Options Like Stocks”][/vc_column][vc_column width=”3/4″][vc_column_text]You see, by the time, we get to hear what options are; we are pretty much done with the “traditional learning phase” of life (generally speaking). We start to learn using “comparative language”. options compares to…stocks…and since there are hardly handful of people surrounding us who understand (leave aside trading) what options are…..it makes it even more challenging to familiarize with options.

    So the first thing typically a new option trader does is to TRADE OPTIONS LIKE STOCKS. Because it what he or she understands best. He buys the options with “Buy Low, Sell High” objective and if the underlying asset doesn’t move, he becomes a long term trader, just like buying and holding the stocks. Or worst, he is right about the direction, but his option still doesn’t make money. Ouch!! Needless to say, the story doesn’t end well. And immediately the conclusion is, OPTIONS ARE COMPLICATED. Over 90% of the new options traders I met or talked with fall into this category. They started trading options like stocks.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/1″][vc_column_text]

    The Recipe for Disaster

    Let’s see. We assume that you know something about a particular undervalued stock that others don’t (that’s why you purchased the stocks at first place, right?). After buying “that” stock, it is either going up or down. Your stocks make money or doesn’t make money. It’s easy to understand. You don’t have to deal with numbers (right? We assume that you are on top of financial statements and business projections every quarter).

    But with options, you have many more tools at your disposal. You can still make money even if you are wrong (just not too wrong)!! Ouch? How’s that possible? We never heard that before? It must be a scam? It can’t be true? There must be a catch?

    Oh by the way, did I say that depending upon your knowledge level, you can create a stock position without ever buying stocks? Or how about being paid to buy your favourite stock at much lower prices than current market prices?

    No way, you are making my head spin. It’s confusing. You are talking non-sense. Isn’t it? You have given me too many choices. I don’t like it, let me keep it simple and straight (KISS) and trade options like I trade stocks. I know how that works.

    That’s THE RECIPIE FOR DISASTER.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/1″][vc_column_text]The more the choices, the more confusion. On one hand we want simplicity; on the other hand, we want flexibility.

    Stocks are like simple pocket knife; while options are like a Swiss knife.

    It offers you many more tools, much more flexibility than plain simple pocket knife. Stock traders trades with “certainty” i.e. he thinks he knows the future and thus he needs only knife, but option trader trades with “uncertainty” i.e. anything can happen in the markets and thus he will use appropriate tool as the market situation demands.

    Ebook by OptionPundit

    The Key Question

    Do you want to be the majority that loses money or minority that makes money?

    If you want to be the minority, then you have to do what that minority does. They treat trading as business. And operating a business requires understanding of everything that touches your business. You can’t leave it for chance. If you are so sure that so-and-so stocks are going up but you don’t want mumbo-jumbo of options trading, just trade the stock and forget about options.

    But if you are not certain about future but still want better returns via trading options then You have to trade options like options NOT like stocks.

    Mindshift is THE prerequisite.

    What do you think? What other topic would you like me to cover on Options? Let Me Hear From You In The Comments Below 🙂

    Profitable Trading, OP

    P.S. Next I will talk about why beginners lose money in options.[/vc_column_text][/vc_column][/vc_row]

  • Warren Buffett

    Rule #1: Never lose money. Rule #2: Don’t forget Rule Number 1.

    Amongst all the investing rules you could find, I think above rules are the most famous and most quoted rules.

    Could there be such thing as “NEVER LOSE MONEY”?

    Even Oracle of Omaha has lost money several times. So what is it? what’s your take on these rules? How do you interpret it?

  • Can You Afford to Ignore This Divergence, Now?

    Can You Afford to Ignore This Divergence, Now?

    The last time I mentioned this divergence was in November 2007 and it did flash future turbulence, later to be known (and still is) as The Great Recession. This 100 year old indicator can’t be used for day to day market movements but it can define turning points on the macroeconomic level.

    Are things different today vs 2007? Yes and No.

    While this divergence is technically the same, there are some abnormalities in the stock markets today. And the top of the list is “role of central banks” around the world and various “plunge protection team(s)”. The “unlimited” supply of money, in the form of QEs markets, does act like an inherent PUT option which might also explain why markets haven’t suffered even a 10% pullback for quite some time now. In fact, this is one of the longest Bull runs in the entire history of US stock markets.

    Still, even after factoring those differences, we can’t ignore this glaring divergence between Dow Jones Industrial and Dow Transports. In fact, it is so vivid that yesterday after Fed announcement, Dow briefly scaled to all time high, while Dow transport was slipping almost 2%!!!

    Dow Theory Latest

    The price movement analysis based on these two indices i.e. Dow Jones Industrial and Dow Transports is called The Dow Theory.

    There have been other instances of Dow Industrial and Dow Trasnports divergence during the past few years. However, one that clearly stands out is Sep/Oct 2013 when Dow Jones was making a higher high but Dow kept on drifting lower i.e. non-confirmation and we all can see what happened in next few months.

    So what does this mean? what do I need to do? Should I sell my stocks and convert to cash?

    [testimonial_slider disable_height_animation=”true” autorotate=”5000″] [testimonial name=”Anna, Singapore” quote=”As a direct result of learning under him, $7000 profit during the last three months alone . My trading skills as well as results have improved significantly.” id=”t1″] [testimonial name=”J, Spain” quote=”0% to 50% with a quite high success rate. As a direct result of OP’s strategies I have made a positive cash flow of $34,000/- within a short period of time.” id=”t2″] [testimonial name=”Luis González, USA” quote=”..16 years witnessing my capital being managed by different brokers….Option Pundit is well tuned with the market and exhibit option trading techniques far more sophisticated than my previous options brokers…” id=”t3″] [/testimonial_slider]

    I am NOT suggesting that there is market downtrun right here even though I think we have at least short term peak here (SPX 2140+/-). However, As someone who has been trading these abnormal markets, you have to keep in mind all the flashing red signs so you can PREPARE your plans. No one can pick the top or the bottom. At the same time, one may have to keep dancing as long as music is being played too…but…dance as close to exit door as possible. The exit door is getting smaller day after day.

    Here is a bit of Dow Thoery history (source- Wikipedia) – The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851–1902), journalist, founder and first editor of The Wall Street Journal and co-founder of Dow Jones and Company. Following Dow’s death, William Peter Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented Dow theory, based on Dow’s editorials. Dow himself never used the term Dow theory nor presented it as a trading system.

    Profitable Trading, OP

  • Jesse Livermore

  • Apr +27.8% and May +3.4% (Open)

    Apr +27.8% and May +3.4% (Open)

    Just like Jan 2015 (+27%), we had an excellent repeat in April 2015 as OP Income Newsletter delivered +27.8% (x-commissions). For the Month of May 2015, we are up +3.4% and are nicely positioned for any pullback using our specialist VIX and SPX portfolios. These results come after a terrific first quarter Jan +27%, Feb +3% and Mar +4.3%.

    EARNING ANNOUNCEMENTS OFFER INCREDIBLE OPPORTUNITIES

    Earning months are one of the best months for OPN members due to unique Implied Volatility Structures (IVS) AND Underlying Stocks Behaviour prior to the earning announcement. Some stocks have predictable repeating behaviour. Besides, using simple mathematics your edge can be calculated in advance. When you combined a good structure of trade, the odds are nicely in favor for a winning trade.

    We have already shorted chinese stock market via selling calls on April 30 which are profiting nicely since then. Also we have already aniticipated the pullback in SPX and positioned via short term broken wing butterfly risking only $65 with potential to deliver as high as 10x should SPX stays within +2050 and 2100 during next two weeks.

    WHY SO MANY TYPES OF SPREADS

    During a recent private consult, once of the student asked why there are so many different style of trades in OPN e.g. Iron Condor, Credit Spreads, Broken Wing Fly, Calendars, Naked Calls, Verticals, Digonal spreads and so on? Why don’t just stick to either buying calls/put or trade simple credit spreads?

    Let me tell you something that you already know. Mr Market cares for no one and give a damn to what OP or anyone else think. Simple calls/ puts and credit spreads enjoy better gains for DIRECTION. But it’s difficult to be right about direction and also requires greater efforts. You have to keep searching for that next trade.

    Options Trading is about capitilizing on implied volaitlity structures as much as it is about leveraging for directions.

    Options offers so much of flexibility then why not structure trades that are more favourable? By utilizing a combination of Theta/IV we strcuture cash flow positive trades which will not only deliver consistent results but also won’t have big drawdowns. These trades are HIGH PROBABILITY trades to bring consistent money.  And we don’t have to keep searching. For example, RUT Iron condor is something we have been doing in OPN since 2007!!! By focusing and understading the “character” of RUT we have worked out specific parameteres that have been working absolutely great.

     

    MANAGE THE RISK AND TAKE PROFITS

    As a trader, the first and foremost thing is to manage the risk and take profits when markets are delivering it to you. You position youself for short wins and continously work for buiding portfolio for the long run. Making money is not easy and is not a short term goal. It’s a journey that everyone has to master in one way or the other; and until unless you have gone through one complete market cycle (at minimum one), it’s prudent to be skpetic at extremes. These short term gains help like milestones that helps you reach to the final destination.

    At beginning of 2015, I mentioned that 2015 is going to be an interesting year. After Jan, April now I expect Jun-July to be another excellent months. Besides, volaitlty profiles for several underlying assets are become more and more interesting offering dynamic opportunities in the coming months. Are you ready to profit from the next market leg?

    If you are still not part of OP Income newsletter, I invite you to join and expereince the unltimate options trading yourself.  Position yourself in right way to profit for the upcoming opportunities.

    Profitable Trading, OP

  • Jan +27%, Feb +3%, Mar+2.7% (Open)

    After an excellent Jan’15 for +27%, Feb performance was slower but still positive. OP Income Newsletter delivered +3.15% gains on 48.7% capital utilization while for Mar it is already up +2.7% on 68.8% capital investment.

    I am expecting Mar 2015 to be an interesting month and you will read more about this on members’ section on forum. I have already started a market commentary thread and you might have plenty of opportunities to trade during this month…make sure to check it on time to time.

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    As VIX dropped> 35% in Feb, we have already structured our Mar portfolios to benefit from Implied Volatility (IV) surge. Even if IV doesn’t rise, theta positivity will continue to bring profits to these market neutral trade ideas. We have also added two ideas VIX/RUT which will gain nicely should market pullback and won’t lose much even if market continues to rally. That’s the power of income trading.  That’s how I will keep it for Mar. However, come April/May we’ll add earnings play as well.

    Overall 2015 is set to be a different year and don’t left behind. If you are still not part of OP Income newsletter, you may want to do so now before new memberships are closed soon.

    Profitable Trading, OP