The Simplest Way To Profit From Stock Market I’ll admit, it’s easy to get caught up in sexy stories, involving individual stocks, listening to the chatter on the internet or talking heads on TV. Let’s face it, who doesn’t want to be involved in a stock, right before a major move higher. Being able to tell your family or spouse about your success in the market is a dream; the reason why so many individual investors have decided to manage their own money, studying chart patterns, reading articles, and listening to opinions on TV, etc. They’re seeking that edge. Some investors discover they can get involved with stocks much cheaper, through the use of options. However, they fail to realize that an option price doesn’t move the same way stocks do. For example, if you buy a share of stock, in order to profit, you’ll need the stock price to rise. That’s it…nothing else. On the other hand, you can buy an option that represents a bullish bet,
like a call option…have the stock price rise…but have the option decline in value. You see, stock price movement, alone, is just one of the factors that influence the value of an option. Such variables like time and volatility also play roles in the prices of options. It is probably confusing at first, to understand, because it’s a new concept. However, through education and trading experience you’ll get the hang of it. Unfortunately, not everyone is able to endure the learning curve…which leads them to the belief that options are a suckers’ game or that they are just not good stock pickers. Being a good stock picker is very hard and nearly impossible. After all, there is a reason why nearly every money money manager underperforms the S&P 500 Index. But Josh, if money managers can’t beat the market…what chance do I have as a do-it-yourself investor? Of course, this is a very valid question and one that deserves an answer. Instead of trying to pick the next hot stock and whether or not it will move higher or lower…focus on taking advantage of the uncertainty that the stock market offers. More specifically, selling option premium (non-directionally) when investor expectations are too high. That is, taking advantage of investors fear and greed button. Think about this, casinos stack the odds, to their favor, on nearly every game they offer. For the most part, everyone, who plays casino games, knows this. However, their dreams of possibly hitting it big don’t stop them from playing. The same could be said when investors buy calls (when they are bullish) or puts (when they are bearish) and ignoring the fact that the outcome, they are expecting, is already priced in. Many don’t realize that they’ve put themselves in a low probability trade. They are more concentrated on how much money they’ll make if the stock goes in their favor, but are more likely to see their account value drift lower. I see this all the time, ahead of a binary event, like an earnings announcement. I even see it when investors copy trades from unusual options activity. If you’re paying 15- 20% higher than the “smart money” …guess what? They are probably selling to you. How do I know that? Because I know of several traders at firms that pick off this activity right
when these orders are recorded to the the tap. They then start offering it at higher prices within minutes. The fear of missing out, causes option investors to “bid up” the price of an option. You’ll hear the cheerleaders on CNBC praising the activity, without offering much insight. The demand or heavy buying pressure causes the option volatility to rise–making the options more expensive. Imagine you’re walking with your sweetheart down on the street, heading towards a restaurant for dinner. You’re both decked out and dressed to the nines. All of a sudden it starts raining hard. Not wanting to get wet, ruin your clothes or potentially get sick…you scour around searching for an umbrella. Luckily, you find one, a rather flimsy cheap looking thing, that probably will only last the night if you’re fortunate. You ask the person selling the umbrella, how much? They reply, and say it costs $20. Now, you know this a $5 umbrella (and that’s being generous). However, you need to cover yourselves so it doesn’t ruin your plans. With that said, you purchase the umbrella…even though on a dry warm day you would never pay that much for such a poorly made umbrella.
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This happens in the markets as well. Investors sometimes know that they are paying up for options…but it’s the fear of missing out that makes them chase. Also, most mutual funds and hedge funds have bias towards stocks. That is, they’re long the stock market. When volatility enters the market, the fear of taking big losses in their portfolio causes them to buy protection in the form of put options. This panic, causes them to pay up for options…the demand causes option volatility to spike and the value of options to increase in value. Profiting off the uncertainty in the market is actually something that can be achieved with options. Something that can not be done with stocks. In other words, you’re not limited to being a stock picker…after all, guessing on whether or not a stock will go up or down
consistently…is a tough game. I’ve often said, instead of trying to beat the market…I want the market to beat me. Instead of hoping for an extraordinary move…I would rather have an extraordinary move beat me. I’d rather try to take advantage of the human emotions that investors have…try to find opportunities where they’re pay up for options…because they are fearful or greedy. When I’m able to find those type of opportunities… …I take the other side of their trades ….and you should as well. First, whenever you decide to be the casino in the options market…you’ve decided to be short volatility and accept risk. With that said, I don’t believe in blindly selling option premium…in fact, you want to be compensated for taking on risk. Unlike the casino that takes every bet, you have the luxury of choosing which trades you want to participate in. The platform I use, thinkorswim, by TD Ameritrade, has a feature called Current IV Percentile. I use it to start my filtering process. The feature compares the current implied volatility to the range it has been in over the last 52 weeks.
Current Implied Volatility Percentile – thinkorswim platform
Without getting overly technical, it quickly tells me if option premium is on the high, low or mid point of the range. If it’s above the 50% range, it typically means that option premiums are elevated and could be an opportunity to put on a position. The closer we get to 100% the more elevated the options are and provide the better opportunity. The great thing is, you don’t even need to look at at chart or know how to. The best opportunities are sell options which you can identify why the premiums are elevated. This could be a binary event, like an earnings announcement, an investors conference…or
plain ol’ fear and greed. For example, there has been a lot of buzz around Apple lately…which has drove the stock price up over 30% over the last six months. However, there is no fear to the downside, this has a lot of euphoria. Now, I’m not saying you should short Apple, but if option volatility continues to contract like it has on the euphoria…then taking the other side of that trade will make sense. (Currently, option volatility in Apple is very low). The best opportunity short term would be be on the other side, which is looking for a pullback. If the stock does pullback, it’s very likely worries start to increase and put options will increase in value as well. Again, the idea is to take advantage of investors love affair or complete hatred with specific stocks. Over the last year, we’ve seen this in names like GoPro, Tesla, Facebook, Yahoo and Netflix, just to mention a few. The more eyes on a stock…the more opinions investors have on it…the better the chance that their emotions get the best of them and bid up the price of options. Of course, there are certain stock options that almost never make sense to short volatility in… and those are mainly pharmaceutical companies. These types of companies can move 50% or more on certain types of drug announcements. Bottom line…sometimes a stock can actually move more than it’s expected. Just like a player can leave the casino with more money than they walked in with. Overall, we know that the house wins. This is why it’s important to size positions small enough…that if an extraordinary move does occur…you can handle the loss in your account and be able to recover. The stock market is driven by investor confidence, fear and greed. Instead of chasing, and following the herd. Take a step back, and try to profit off this uncertainty. If you’re ready to learn more about this approach and how to stack the odds in your favor…just like casinos have been doing for so long. You’ll want to read my new book, ‘Fearless Investing With Options’. Are you still stuck in trying to find the next hot stock or have you moved on to having the market trying to beat you? Let me know what you think and if you’re ready to stop fighting the market?
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Hi I’m Josh, and I’m a finance guy. I cut my teeth in the markets on the Chicago Mercantile Exchange, so I saw firsthand how the “sausage was made” – and it usually wasn’t pretty. Because I quickly realized that fund managers only care about getting their fee's first even though 95% of them underperform the overall market. That didn’t sit right with me, so I left that world – And I discovered how to use my financial know-how to empower the little guy by using high-powered investing techniques – including the only “real time” market indicator the pro’s use to spot future price direction. Now I’ve shared my message with over 129,000 people like you, and everyday investors have suddenly started making money in the market for the first time. Make sure you visit http://www.OptionSIZZLE to access your FREE report and eBook that will teach you how to trade options successfully to help you create wealth, freedom & options for you and your family.