Is the small investor getting priced out of the stock market?

Just look at the largest companies in the market today (based on market cap)… how can someone with a small trading account participate?

 

  • Apple $312 per share
  • Microsoft $162 per share
  • Alphabet $1430 per share
  • Amazon $1869 per share


Attempting to buy shares of any of these stocks can suck your trading account dry…

And that’s why I rarely ever buy high-priced stocks. 


Instead, I’ll trade options, which give me leverage.


For example,
for the same price it costs you to buy one share of Amazon, you can leverage 100 shares from the options market. 


And while most people believe options are just short-term trading instruments designed for gamblers.

They are surprised to tell them that you can actually trade options like stocks.

How?

By trading and/or investing in LEAPS.

What are LEAPS, and how can you add them to your trader’s toolbox?

 

Trading LEAPS Options

First, what are LEAPS?

LEAPS are a special kind of option that allows traders to target expirations greater than 1 year in duration.

LEAPS stands for Long Term Equity Anticipation Security.

You see… buying stocks is expensive, especially when you have a longer-term view on the outlook of the stock.

Let’s take a look at Apple comparing both stocks and options for a 1-year trade between 1/2/2019 through 12/31/2019.

For example, on Jan 2nd, 2019, Apple is trading at $158.  In order to be involved, you would purchase 100 shares which will cost a whopping $15,800.

So how would this trade break down?

Well, you could purchase the stock on Jan 2nd and sell at the end of the year.

The trade:

Buy: Jan 2nd at $158

Sell: Dec 31th at $294

Profit: $136/share x 100 shares = $13,600

Now, this is where the fun begins…

How would you like to be able to own that same amount of stock for a fraction of the price?

Well, you can, using LEAPS!

For example, if you wanted to purchase 100 shares of Apple, you could buy 1 contract of Jan ‘20 LEAPS  $21.55 or $2,155.  

The trade:

Buy: Jan ‘20 $155 at $21.55

Sell: Jan ‘20 $155 at $140.80

Profit: $140.80 – $21.55 x 100 = $11,925

Now, on the surface, it looks like you made less money.

But instead of allocating $15,800 of capital you only need to shell out a tiny $2,155.

In other words…  the ROI is mind-blowing!

The Return on Investment:

Stocks: $13,600/$15,800 = 86.07%

Options: $11,925/$2,155 = 553.36%

Not only do you get to participate in Apple’s price move higher, but you can also return the same amount as you would buying stocks all while paying 86.36% LESS!

And you can do this throughout the course of an entire year and then do it again next year and the year after that!

But wait… there’s more!  It gets MUCH more exciting!

Once you have purchased the LEAPS contracts, which lets us make money when Apple’s stock goes up while paying 86.36% less than stocks…

We can then generate income by selling Call options against our Apple LEAPS.

Here’s what this looks like…

 

 

As you can see on the left side we purchased the Apple LEAPS contract.

Then every month, we sell an “out of the money” (OTM) call option AGAINST our LEAPS contract for added income.

This allows us to bring in an additional $100-$200 or more a month (depending on other outside variables).

Click here to learn how to create your own monthly income stream today!

Eventually, as you see over on the right side, the call options and the price of Apple expires “in the money” (ITM) – meaning our LEAPS contracts must be sold (or they get turned into stock for us).

But here’s the thing…

Not only did we collect $14,080 from selling our call options (less the initial cost of $2,155)…we also made an extra $1,575 from selling our call options!

This is just from buying ONE LEAPS contract and selling ONE call option contract each and every month against it!

Depending on how much capital you have to start with, you could buy FIVE LEAPS contracts and sell FIVE calls against it each and every month.

This will generate a whopping 5 times the income, or $59,625 PLUS $7,875 per year for a total added income of $67,500!  All on initial capital of $10,775 which is STILL LESS than buying the initial stock position of $15,800!

And you can do this on multiple stocks all at once!

My commitment to you

This is an extremely safe strategy, that could see you creating your own monthly paychecks.

And this could even become a yearly income stream to double or triple your current paycheck with your full-time job in no more than 15 minutes per week!

Don’t believe me?

Just check out this testimonial of a new trader I taught how to leverage the Options Profit Planner strategy.

 

 

 

Or how about this one from a skeptical trader…

 

 

If you’d like to leverage the power of options for yourself and use this strategy for yourself…

 

Click here to learn how today!

Author: Dave Lukas

It’s been a wild two weeks in the market thus far—dominated by headlines of geopolitical tensions.

But despite the whipsaw action the market has experienced—I stay true to the core—and rarely let the news drive my trading decisions.

And for some to hear that… It’s shocking.

I don’t need a Bloomberg terminal, a squawk box, or half a dozen monitors to execute my strategy.

And neither should you!

You see, the tools I apply to tell me what to trade are far superior than any screaming mad man on the tv.

These tools I developed will tell you a far truer story than the fake news they are spitting out…

As a professional business owner and investor, I can tell you less is more.

I can narrow in on the stocks I want to trade and place all my orders all while spending only 15 minutes PER WEEK.

How do I do this?

By putting the odds in my favor each and every day.

For example, today, I’m going to teach you about a strategy that when executed properly—will give you some of the best risk to reward setups out there.

Want to learn a little known but powerful credit spread that takes advantage of markets that move either up or down?

 

 

The Short Butterfly

This strategy profits if the underlying stock is outside the wings of the butterfly at expiration.

What is it made up of?

This strategy can be comprised of calls, puts, or as an iron butterfly, using both calls and puts.

For this article, let’s focus on the Short Call Butterfly.

The Short Call Butterfly is a credit spread that consists of two long calls at the middle strike with one short call at each of the lower and upper strikes.

The upper and lower strings (or wings) must be equal distance from the middle strike price (the body), with all of the options having the same expiration date.

Here is a sample payoff diagram for the Short Butterfly.

 

 

As you can notice, at points A and C you will receive a max profit and at points B you will see the max loss on this trade.

Characteristics of a Short Butterfly

A short butterfly is a net credit trading strategy. Meaning that a trader will be paid up front to take this risk.

This is a great addition to a credit put spread or credit call spread strategy since it removes the requirement to pick a direction in which the underlying stock is going to move in.

Make sure to learn more about how I have gone 6 months and counting without a loss and stack the house odds in my favor.

 


Profits

Maximum profits for a Short Butterfly is obtained when the underlying stock price rally past the higher strike or drops below the lower strike price by expiration.

If the stock ends up at, or below, the lower breakeven price, the options will expire worthless and the trader will keep the initial credit when entering the position.

Alternatively, if the stock ends up at, or above, the upper breakeven price, the options will expire worthless and the trader will keep the initial credit when entering the position.

However, if the stock at expiration falls between the two breakeven prices the trader will suffer the max loss on the position.


Limited Risk

The formulas for calculating the maximum loss are:

Max Loss = Strike price of long call – strike price of lower strike short call – net premium received.

The max loss occurs when the price of underlying equals strike price of the long call.


Breakeven Points

There are 2 break even points for the short butterfly position. These breakeven points can be calculated by the following:

Upper breakeven = strike price of higher strike short call – Net premium received

Lower breakeven = strike price of lowest strike short call + Net premium received


Volatility

An increase in implied volatility, with all else equal, will have a neutral to slightly positive impact on this strategy.

 


Time Decay

Days until expiration decreasing, with all else equal, will have a positive and negative impact on this strategy.  


Positive Impact:

If the strike price is aligned past either breakeven threshold, time decay will be forcing the trade to realize its gains.  

Negative Impact:

If the strike price is inside the body of the butterfly, time decay will be forcing the trade to realize its losses.


Assignment risk:

The short calls that form the wings of the butterfly are subject to exercise at any time, while the investor decides if and when to exercise the body.

The components of this position form an integral unit, and any early exercise could be extremely disruptive to the strategy.

There are many factors to consider when short options that may negatively impact the strategy.

It is best to remain aware of the situation when a stock is being restructured or there is a capitalization event.

Such events are mergers and acquisitions, spin offs, or special dividends as this could significantly move the underlying stock price and cause early assignment. 


Expiration/Pin risk:

This strategy at expiration will continue to carry risk.

If at expiration the stock is trading right at either wing, the investor will be facing uncertainty as to whether or not they will be assigned on that wing.

If the stock is near the upper wing, the investor will be exercising their calls from the body and is fairly certain of being assigned on the lower wing, so the risk is that they are not assigned on the upper wing.

Likewise, if the stock is near the lower wing the investor risks being assigned at the lower wing.

The real problem with assignment uncertainty is the risk that the investors position when the market opens after expiration weekend is other than expected, subjecting the investor to events over the weekend.

Although the risk might be small, it is still present as you could be long/short stock through major events without realizing this.


Conclusion

As with everything, this strategy comes with some major trade offs. And that’s ok!

The short butterfly is a fantastic position to trade if you believe there is going to be a market move and you are uncertain about the direction.

Another added benefit is this is a credit spread, therefore able to be utilized in a positive cash-flow trading system!

Pros of a Short Butterfly

  • The risk is capped.
  • Credit spread so you receive capital up front.
  • Bi-directional profit opportunity
  • Less risk than long straddle
  • Narrower breakeven compared to a Long Butterfly


Cons of a Short Butterfly

  • The returns are capped
  • Unlike short calls, if the stock does not move you will have max loss
  • Potential for large commission rates with 4 legs being traded.

 

Click here to sign up to Options Profit Planner today and start putting trades like this to work for you as early as tomorrow!

Author: Dave Lukas

Do you know that some of the biggest winning trades I have ever seen came from people who bought options?

No joke – I’m talking about stocks that rocket after news… causing the options to just explode!

Heck, the other day someone bought 1,000 call options in Beyond Meat (BYND), forking over around $90K in options premium that could have turned into $1.7M in just a few short days.

But when the music stops… boy does it stop.

Gambling is fun and people make a lot of money … until they hit that wall and lose it all and more.

I know people who have turned $20K into $50k from buying options… but I’ve also seen the same traders give it all back.

Some wiping out their accounts, and even their most prized assets—their home.

How did this happen?

They start making bigger and bigger bets without considering the risk.

That is, until one day it all catches up to him.

This is the kind of story that scares people from trading options, and why so many never take advantage of their income-generating strategies!

You see, when someone buys an option there are a lot of things that have to be perfect for the trader to make money.

The stars must align just right for profits to be seen.

First, they have odds against them from the second the trade is put on.  There is about a 33% chance that options buyers will ever make money.

This is worse than flipping a coin!

And the main reason why I play this game differently.

You are better off going to play blackjack than buying options since you’d have better odds of winning.

 

The other thing options buyers have working against them is TIME

 

Now, when you buy an option there is a term, time decay, also known as Theta working against you.

And the closer you get to the expiration of the contract, it loses value even faster… until it’s worthless!

That’s why you can even be RIGHT with your option and still lose money!

Did you know that more than 75% of all options contracts in the markets expire worthless?

With so many obstacles to overcome buying options why are traders willing to gamble looking for thrills in the options markets?

After all, isn’t trading supposed to be a long-term career and a business source of reliable income and growth?

Well, it can be!  That is, as long as you take the opposite side of the trade!

That’s right – you want to be the options seller!  

Think about this as being the insurance company or the casino.  They might lose once or twice but they rake in the cash with steady positive cash flows every single day!

The Casino:  

Every day thousands of people give you money (buy options) in hopes that they win big on their bets.  That’s ok, sometimes they do.  

But the odds are in your favor.  The amount of people giving you money far exceeds the number of people winning.

The Insurance Company:

Just like the casino, the insurance company takes money from thousands of people every year who pay for insurance to protect against a future event.  

For example, every month people working pay an insurance company a premium for their health care as protection against an expensive surgery they may need.  

But the insurance company knows that the majority of the health care buyers NEVER use the insurance for major healthcare bills.

This allows the insurance company to keep the collected premium as an income stream from their millions of payers!

As both a casino and an insurance company – the odds are always in your favor!

Both of these examples are how options sellers have the advantage over option buyers!

In fact – when we sell options we have both time and the house odds in our favor!

House odds:  As an option seller, you have well over 50% chance of winning on your trade.  Closer to 75% to 90%, to be exact.

Time:  When somebody buys options, time decay or Theta immediately starts to destroy the value of the option contract.  And if you are the option seller, time decay works in your favor!

Remember:  If 80% or more of the options expire worthless, that means 80% of the people selling options are making money!

Here’s how you can put time and the house odds to work for your portfolio.

So why isn’t everybody selling options if it’s so great?

In short…

It’s easily the most boring strategy you could come up with.  The thrill of making 100% or 200% or more in a matter of minutes or days just is not there.

The adrenaline rush is missing.  The feeling of winning is gone.

And the feeling of winning is what keeps the gamblers going back to the casinos for more.

But that’s ok.

As a business owner, I know the importance of cash flows and steady income streams…. And selling options is no different.

I have multiple sources of revenue and this is just one more to add to my portfolio, making a consistent 30% to 50% and even 90% gains.

Don’t believe me just yet?

 

In October 2019, we locked in 4 solid winning trades for consistent returns.

Now, I don’t know about you, but knowing that I can create a revenue stream that wins month over month, year over year, is far more appealing than gambling and losing my house in the off chance to turn $25k into $1,000,000!

In fact, I go into even more details about the Options Profit Planning system I have created and the advantages of selling options in this video.

Click here to learn more about the Options Profit Planner.

Author: Dave Lukas

Related Articles: