… I taught why this strategy is better for trying to build a small account compared to penny stocks.
Now let’s examine HOW it works.
Options trading BLUEPRINT for traders with SMALL ACCOUNTS.
HOW to get 3 ways to win on every trade.
NFLX is at $348.
When a novice trader buys the $340 out-of-the-money put there’s only one way to win.
NFLX must fall below $340.
This gives them low probability, let’s say 30%.
That $6.10 price of the put option they bought has no true value.
It’s only made up of time.
Every minute NFLX is above $340, that $6.10 loses time value like a leaky bucket.
Time value leaks on the weekends too.
Time value always heads toward $0.
And it does so at its fastest rate in the final 5-7 days before expiration.
Bad for the buyer.
Great for the seller!
Time value of the option ‘leaks’ faster and faster as expiration approaches.
And right into the account of the seller.
This is why I like to sell puts 1-2 weeks away from expiration.
My order entry, as the seller, would look like this.
And I can do this with as little as a $2,000 margin account.
And it’s a limited risk trade with a high probability of winning.
If you are new, don’t sweat what the order entry image above means. Understand the concept for now. Order entry is easy and I’ll teach you that later.
The buyer of the low probability out-of-the-money $340 put only has 1 way to win → NFLX falls well below $340.
The seller has 3 ways to win:
- NFLX can head lower, but as long as it’s above $340, the seller wins
- NFLX trades sideways, the seller wins
- And of course the seller wins if NFLX heads up
Buying that low probability out-of-the-money put is betting NFLX will go down i.e. bearish.
Which means the seller is neutral to bullish.
Do this on recent earnings winners with strong guidance and probability increases more.
So why on earth would anyone buy a $340 out-of-the-money put option on NFLX when MIT warns you’ll lose money?
Because most traders are not educated.
But not you, you’re still reading.
No more option buying.
Time to turn the tables and start taking high probability trades.
I’ll even send you my entries and exits before I get in and out of these trades.
No strategy is perfect. I will have losses here. But this is the best one I know.