Here’s the Proven Options Trading Strategy That’s Delivered 922 Winners in Just Nine Years…
Don’t Fight the Momentum – Ride It
The first step to all technical trading is identifying the trend you’re in. In a bull trend, you go long via call options. In a bear trend, you go short via put options. As an options trader, it’s critical that you understand that you can — and should — trade bear markets. When markets go down, it’s not the time to be on the sidelines, and you shouldn’t necessarily try to get bullish trades “at a discount” because prices might drop further.
Trade what the market gives you and don’t fight the momentum, whether that trend is up or down.
Of course, it’s easy to see trends once they’re over, but the only way you can truly profit is to identify the direction of a trend before it has run its course. That’s why I let the charts tell me where the momentum is.
One of my favorite parts of what I do is sharing the charts’ signals with my readers to help them see what I see so that they don’t waste their time or money fighting the momentum. I spend a lot of my time researching the market, but I really do keep things simple: I identify the broader trend, and then I look for stocks that are breaking out or breaking down to take advantage of that trend.
A 3%-5% up or down move in the underlying stock can mean a return of 100% or more if you’re in the right options — and choosing the right option to ride the momentum has a lot to do with price.
The secret to riding the momentum is this: Buy higher priced options when the market is breaking out or tanking because that is where the explosive profits are. In a trading range, go for cheaper options because you can put on more trades and increase your chances of making money. LEARN MORE
2. Find the Catalyst
Once you understand the trend and commit to making the most of the bullish or bearish momentum, the next step is identifying which stocks are going to move the most — and why. There are any number of catalysts you can trade, but the ones I act on most often are:
* Earnings reports
* Mergers and acquisitions
* Economic reports
* New product releases
You’ll hear a lot of pundits say that news around product lines or mergers or financial woes is already priced into stocks, and perhaps that’s true — but what you’re really trading is investors’ reactions to the news. LEARN MORE
Plan the Trade, Trade the Plan
There’s a reason that I’ve been able to consistently rake in big profits year over year — I make sure I always have a plan before I initiate a trade, and I stick to it.
Emotions are the enemy of every options trader and, along with the distractions broadcast by pundits in the 24/7 circus that is the financial media, are largely responsible for many of the bad trading decisions investors make every day. In order to combat these two major issues, I spend over 60 hours every week performing technical and fundamental analysis on the underlying stocks for each option I recommend. This kind of stock analysis is essential in making sure that you’ve chosen the right side of the trade to take a position on.
Having a detailed trading plan is extremely helpful in making sure that you reap the greatest possible profit from each trade you make, and the first step towards that goal is to analyze the charts. Charting gives you the confidence to stick to each trade with conviction through the ups and downs of the market while ignoring the so-called experts on CNBC that don’t care if you’re actually making money or not.
Once I’ve done the technical analysis, eliminated any irrelevant market news from my investing perspective and identified the objective signs that the stock charts are showing me, I set entry and exit points for each of my trades. These are designed to lock in profits when they appear and protect portfolios against sudden trend reversals.
For example, when I recommend a trade, I often set it up to sell a fraction of a given position at my initial target price. Then, after entering the trade, I evaluate each position’s trends every day, and adjust targets and stops accordingly. Once the first target price hits and I close a portion for profit, I adjust the next target and stop so the rest of the position can ride. This way, you can protect some of your profits while playing with only a slice of your original position on the back end of the trade.
If all goes as planned, each successive portion will reap bigger and better gains. If not, at least you have stops in place to ensure that you still make a profit, even if the trade — or the market as a whole — reverses direction. LEARN MORE
Stick with Options Under $2
As a general rule of thumb, you should try to only buy options that cost under $2.00 ($200 per contract). Options that trade for under $2.00 provide a greater amount of leverage; can earn you higher percentage returns and limit the amount of risk your portfolio is exposed to. I mentioned previously that I like to keep my options trading as simple as possible, and buying undervalued options is one way to do that. When you pay too much for an option, the odds of earning a substantial return are already stacked against you.
Buying undervalued, low-priced options is advantageous to the individual investor for a few important reasons. First, you are able to decrease the amount of risk involved because you are putting less money into each trade. It is much easier to swallow and bounce back from a loss on a cheap option than it is on an option above $2.00. You are also increasing your upside potential. If the price of a certain stock moves above the strike price of the recommended option, the percentage gain reaped from that position will likely be substantially higher than if you purchased a more expensive option.
However, before looking for undervalued options, you’ll need to find a stock with relatively high volatility. After you’ve targeted a stock that looks as though it’s ready to make a 5%-10% move, your next task is to choose a cheap option that has the potential to make an upside surprise. This coincides with my goal to earn a return of 100% on each trade, as undervalued options are more likely to make a big move than ones that are more expensive.
Finding underpriced options is simple in theory but, in the real world, it takes a huge amount of work, which is why I spend hours upon hours analyzing stock charts and options chains to find trades that have a high probability of returning a profit.
5. Set an Exit Target Before You ever Place the Trade
I’ve learned over the years that not every trade will play out according to the plan — something you’ve probably realized, too. That’s why one of my top trading rules is to set entry and exit parameters for each trade before I get into it. I know exactly what I’m expecting for each trade so that if it doesn’t go according to plan, I take the cue to get out.
Getting out of a trade sometimes means taking a loss, but most of the time it means exiting with your profits intact.
While targets are hypothetical and profits are real, one of the ways to keep yourself honest as a trader is to have your profit targets set before entering a trade. Once you see a positive return, it’s easy to get irrationally greedy and think that an option’s value will keep going up to infinity. If you know what you’re aiming for before you get in, it’ll be easier to stick to your plan and take the money when your targets are hit.
I said “targets” with an ‘s’ because, as I mentioned previously, what’s worked for me is to close out a half or a third of the contracts when my first target is hit in order to lock in the gains, and then setting additional targets for the remaining contracts. The goal for each trade is a return of 100% or greater. Once the 100% mark is reached, it may be prudent to sell half of a position, set that cash aside and then simply play with the house’s money.
Whether you close out the trade at once or in stages, it’s important to protect the profits you have on the table at any given time. This is why stop targets can come in handy, too. Stops can be designed to take you out of a winning position with a solid gain, even if the trade turns south after a brisk run-up. They also serve to protect losing trades from incurring excessive losses.
For example, let’s say that you are in a trade that has returned 125% since it was initiated. You may want to set a stop slightly below current prices to ensure that the position will close with a return of at least 100%. I’ve seen many traders get greedy if they see a return of 200%, for example, and give back a major portion of their gains by not having a stop in place — I don’t want you to fall into the same trap. LEARN MORE