I’m going to give you my three rules for buying options for the wins – not the losses. But first, I need to share with you what happened to me yesterday!
Yesterday I did three major coaching sessions for my new product here at Traders Agency called Insider Edge. That I’ve been letting you know about for the past week or so.
And the attendance for each of the sessions was unbelievable.
Thousands upon thousands of you attended and participated as I explained in detail about how insiders (management and board members) showed me the way to finding my surge stocks.
I had so many of you attending – that the company’s capabilities to process all of the orders was nearly overwhelmed!
I’m completely psyched! And I know that you are now as well! And it’s all about getting my trader’s edge on how to use insider trading to pick the best surging stocks to buy and own.
The demand for access was so great yesterday, that we are hosting amped-up replays for my Insider Edge session – and my special offer for you as a subscriber to Stock Surge Daily is being continued – but not for long.
Here is the special link for Stock Surge Daily subscribers to make sure that you can watch my amped-up session on Insider Edge.
And note this promo code: JOSH
If you use it, you’ll get unlimited access at no extra charge with no renewal fees ever!
You won’t be stopped today from making major gains from my research on tracking insider trades as they lead to more surging stocks.
Now, on to my option rules for the right option trades:
Option Lessons for Gains, not losses
Stock options offer plenty of opportunities for leveraged gains – or worse – leveraged losses.
I know, as I’ve learned a lot over my years in the stock market including with stock options.
The key to successfully buying stock options for the potential of leveraged gains comes down to some key tenets. And today, I’m going to present my rules for buying and not buying stock options.
And to get my full rundown on my rules for buying stock options – particularly on my surging stocks inside my Stock Surge Daily – you need to read my special report: 10X Your Stock Surge Gains that you can download and read for free right now, here.
And to get the week’s current stocks to buy on my Watch List including all of my Surge Stock Indicator (SSI) click here.
Option Rules to Profit
People trade options for lots of reasons.
For me, there is only one reason to buy options.
It is the biggest advantage they offer…
With options, you can risk much less money for the same exposure.
If a stock is $50 a share and you want to buy 100 shares, the cost of that investment is $5,000.
That’s also your risk.
It’s unlikely, but the stock could go to zero and you would lose all $5,000.
Most people wouldn’t let that happen. Most people use a stop loss – an uncle point where they will get out of the trade.
Using the $50 stock example, maybe your max risk is 20%. You plan to sell if the stock goes below $40. So your risk would be $1,000 ($10/share x 100 shares).
Usually, unless it is an extremely volatile stock, you can get the same exposure with options for less money (and less risk).
A $50 call option that expires a few months from now should cost 2 or 3 bucks a share. Each option represents 100 shares, so the total investment would be around $250.
Even if the stock goes to zero, you cannot lose any more than that $250.
So, if you think a big move is coming from an earnings report, FDA decision, or other major news event, options are a way to limit your risk while giving you the same profit potential.
If you’re new to trading options, here are some of my rules:
Option Rule #1
#1 – Only risk what you would on the stock. In the $50 stock example earlier, the trader planned to risk $1,000 on the trade. He INVESTED $5k, but only wanted to risk $1k.
Don’t make the mistake of buying $5k worth of options hoping for a home run if you cannot stomach losing the full $5k.
Because trust me, it is a real possibility.
You are also likely to bail early if you trade them too tight. Options are volatile. They need room to move.
Invest accordingly. Buy $1,000 worth of the options.
Option Rule #2
#2 – Use LIMIT ORDERS. Depending on how popular the stock is, options can be very thinly traded. Especially if it is an out-of-the-money strike price a few months away.
A stock that sees a million shares traded every day may only see a few dozen of a particular option trade hands over the same period.
Because of this, the spreads can be wide. It is not uncommon to see a bid price of $0.50 and an ask of $0.90.
I usually place a buy limit order near the middle of the spread (70 cents in this case) and let it work.
If you want to be even more tactical, you may choose to bid even lower. Let the order work for an hour and see if you get filled. If not, you can always replace the order and enter a higher price.
On a recent trade recommendation, the bid/ask spread was $0.15 x $0.35. By being patient, one of my members bought the calls for 18 cents. A week later, the stock had gone nowhere. But he was able to sell them for $0.35 – almost a 100% gain just by being patient with his buy order.
Option Rule #3
#3 – Watch the IMPLIED VOLATILITY.
The implied volatility, or IV, is displayed next to each expiration month on an option chain. The higher the IV, the more expensive the options.
I like to see this number below 40 if I am buying options.
Stocks like Tesla (TSLA), NIO (NIO), and other volatile names can get much higher. Right now, Virgin Galactic (SPCE) options have an IV of 204%.
Tesla Stock Implied Volatility (10,30,50 & 100-Day) Source Bloomberg
But Procter & Gamble (PG), on the other hand, is at 13%.
Procter & Gamble Implied Volatility (10,30,50 & 100-Day) Source Bloomberg
When the IV is high, you will pay more for the option since the market expects a larger move from that stock. So even if the stock goes in your direction, you will lose money if it doesn’t move enough.
When options have an extremely high IV, I won’t buy the option. These are situations where you want to be SELLING options using bull or bear spreads – but that’s a topic that I’ll be covering in an upcoming issue of my Stock Surge Daily.
An Insider Tip
As I noted above, I am ramping up my insider stock buying research that is part of my Surge Stock Indicator (SSI) with a new product that we’ve just launched here at Traders Agency called Insider Edge. And this is all about stocks with big surges in insiders’ buying their own shares.
And to get the full rundown on how to profit by buying stocks that insiders are buying right now, you can watch the replay of my live event from yesterday detailing how insider trading provides a powerful stock picking tool. Click here to watch the replay.