I get asked a lot how I come up with ideas for option trades. There is no clear cut way to explain how I do except to say that it comes with experience. When you are an option trader there are things you see in the market that other investors don’t. We teach these things here at OptionsMentoring.com and the point that I’m trying to make is that you need to learn options and you need to “learn how to trade in the top 1% of all traders.”

My inbox has been filling up this morning concerning the HSBC Holdings (HBC, $41.16, down $4.69) trade. I will try and take you through the process of the trade because many of you are excited.

If you are new to options it can be hard to figure out what options to buy. You have to follow the market, you have to follow sectors, and you have to decide if you want to go long or short. You have to make Watch Lists and you have to know how to read a chart. If you are bullish and you think the stock will go up, you buy call options. If you are bearish and you think the stock is headed lower then you want to buy put options. You can also sell options…

On Tuesday morning I had mentioned the heavy put action in HSBC on Monday. It was the “unusual” option activity that attracted me to the stock. I profiled quite a few option trades and the chart was telling me HSBC was on the verge of a major breakdown. I also looked at the option activity from the December puts the week before expiration. All the stars we aligned for a trade.

I gave another update last night on HSBC and the negative brokerage report that had come out after the market closed. Before I went to bed I was watching the pre-market activity in the European markets at 2am EST. HSBC was down 5%. It was easy to sleep because I knew there was a pretty good chance that weakness would carry over into the US markets and the trade had a good chance of being profitable.

Bingo. The stock is down 9% and is setting new lows as I type. The hard part of the trade is done. We have a profit. Our stops will protect those profits. It’s that simple.

Here’s a look at the options I mentioned and how they are trading:

February 45 puts (HBCNI, $5.70, up $2.50)

March 45 puts (HBCOI, $7.45, up $2.35)
March 40 puts (HBCOH, $4.90, up $1.50)
March 35 puts (HBCOG, $3.15, up $1.00)

The March 25 puts (HBCOE, $1.15, up $0.30) are up 33% as well.

Now all you have to do is set stops. If HSBC continues lower, you make even more money. If the stock reverses course and makes a huge rebound by the end of the day (which I doubt) then the stops will protect our profits.

Of course there were a lot of other factors that had to be accounted for in the trade but I wanted to try and give you a thought process for how I came up with this trade. If you are new to options, you should really do yourself a favor and give us a call. Our mentoring program teaches you the in’s and out’s of option trading and teaches you how to use options to your advantage. If anything, you should get the free CD we offer which is full of option information. You can also give Mike Albright a call if you have any questions about our mentoring programs. 1-877-709-8716.

The market is getting punished which is helping our other put option trades. I’ll be back later with an update on them.

Rick Rouse