Happy Valentine’s Day, guys and gals!
I’m excited to have a lovely dinner with Pamela tonight.
What’s more — February is turning out to be sweeeeet!
I HAVEN’T LOST A TRADE in Weekly Windfalls this month — about $40,000 in realized profits so far!
In fact, a RagingBull colleague created this gif for me:
That said, I’d like to get back to basics with a Fundamentals Friday series, where I’ll go over some basic option terms and strategies.
Because I’m still a coach at heart, and my goal is to educate and guide you to options trading success!
And I get it — options can be intimidating at first.
But I know that with the right fundamentals under your belt, you’ll get the hang of things and be on your way leveraging your education into big bucks.
So today, I’d like to walk those of you still getting your feet wet through the ABCs of call options.
Think of it like this… Buying a call option is basically like betting on a race.
When you buy a call option on a stock, you’re essentially saying THIS STOCK IS A WINNER.
You expect those shares to go higher within a certain period of time.
Now, technically, buying a call gives you the right (but not the obligation) to buy 100 shares of a stock at a specific price (the strike price).
So, if a stock was trading at $100 and you had a 90-strike call, you could exercise that option and scoop up 100 shares of that stock for $90 apiece — a 10% discount to what you’d pay outright.
But for the most part, few traders that I know use call options to actually buy the shares.
When you go to buy a call option, there are a couple of things you have to decide:
Of course, that’s a very simplistic approach — there’s more we could get into, like implied volatility (IV) and delta, but for now I’d like to keep it pretty elementary.
When you figure out how big a rally you’re anticipating, that’s how you’ll determine your strike price.
The timeframe you decide on will determine which option series you want to trade.
For instance, if you expect a stock to rally above $100 by April, you might buy the March 100-strike call, which expires on Friday, March 20.
If the shares don’t go higher like you anticipated, the most you can lose is the premium paid for the call (the upfront cost).
And that’s less money than you’d risk buying the stock outright.
In fact, 100 shares of a stock trading at $100 would be $10,000! Whereas a call option — which controls 100 shares of the stock — might be a couple bucks.
If the stock rises above your call strike (yes!), the option is considered “in the money” (ITM).
However, even if the shares don’t go to $100, you can still make money on the trade.
If the stock enjoys a big rally within your timeframe — enough to offset any time decay it might suffer — your call option should be worth more than you paid.
Then you can close out of your trade by selling the call and pocketing the difference, just like I did with this week’s Jackpot winner (the third win in a row!).
My Call Buying Parameters
Here’s what I look for when buying call options in Jackpot Trades and Jason Bond Picks:
Personally, when buying options — if I think the stock is going to make a move within a week, I’ll look at option series around 3-4 weeks out.
To combat time decay — the rate at which an option’s value declines as expiration nears — as much as I can, I might go with an ITM option.
See, while ITM options are more expensive than ones that are at-the-money (ATM) or out of the money (OTM), they don’t get hit as hard by a ticking clock.
That’s because they’re already ITM, so the stock doesn’t need as much time to make a big swing.
Of course, other things factor into an options price… Ahead of a known event, premiums tend to cost more.
For instance, sometimes buying options ahead of earnings can get expensive, due to higher implied volatility.
However, if I feel the potential reward outweighs the risk on a straight call trade, I pull the trigger.
In fact, this week’s Jackpot was an earnings winner, as I made $3,000 on my call options.
If I don’t feel the cost of the call option is justified, I might instead put on a bull put spread in my Weekly Windfalls service.
If you’re like me, you learn best by looking at real trades, so let me break down this week’s Jackpot win on Crispr Therapeutics (CRSP).
Late Monday, I alerted subscribers that I was buying March 55 calls on CRSP, for $5.79 apiece.
Here’s what it looked like before I placed my actual trade:
Since each option controls 100 shares, remember, I paid $579 (premium paid x 100 shares).
And since I was looking for a CRSP profit in the next couple of weeks, I went to the March series, which expires on Friday, March 20.
So… what was I looking at on the charts?
Basically, the fish hook often happens on stocks that are OVERSOLD after a notable downtrend.
After a sharp sell-off, buyers will begin to hop back in because they think the stock is now a bargain.
That’s when the “hook” part forms.
As you can see on the chart above, CRSP bounced on clearly established support at the $50 level, and then made a strong break above resistance at $55.
Off the charts, meanwhile, I liked CRSP ahead of earnings, which were due after the close on Wednesday.
Now, fast-forward to Wednesday night…
Crispr Therapeutics BEAT EARNINGS ESTIMATES and reported year-over-year revenue growth of 64,000%!
In addition, the company said it has “begun enrolling patients in a clinical trial for our second allogeneic CAR-T therapy,” and believes “2020 has the potential to be a pivotal year” for growth.
On Thursday, CRSP rallied as high as $60.57!
Unfortunately, that peak happened right around the opening bell, and broad-market pressure kept the stock in check — and even had it slightly lower for a minute.
So when the shares moved back above breakeven for the day, I decided to LOCK IN PROFITS.
With CRSP trading between $58 and $59, I was able to sell my 20 March 55 call options for $7.07 apiece — a $3,000 profit total!
In closing, options are so dynamic — they allow you to profit no matter what environment you’re in!
Sometimes it’s best to go with the higher odds, like we do in Weekly Windfalls’ casino strategy…
And sometimes it’s better to roll the dice with a trade that could garner you unlimited profits, like buying a call.
Finally, not to toot my own horn, but if you’re not already signed up for my Masterclass series, you’re missing out on the best stock and options clinic around right now.
Only $7 for the entire Masterclass — and you get recordings of every previous lesson! Seems like a no-brainer to me…
Enjoy your Valentine’s Day, guys and gals!