For most people considering a new, profitable investment options might prove to be very challenging, especially if they do not know where to start. Usually, it is advisable to start with the basics, such as learning how the investment you are considering works before putting your money into it. Although this may seem easy, the question of which kind of training should be considered.
If you are looking at option trading as your investment vehicle, it would be prudent to first invest your time to learn how the options market works. Learning options trading may appear complex to many people, especially when you consider the jargon, trading principles, techniques, and the strategies used. On the contrary, this should encourage you to learn as much as possible and to learn everything you need to in order to get into the trading business.
Options trading is highly rewarding, especially if you are knowledgeable about it. However, investing in options without knowledge is also very risky. As an investor, you would want to keep the risks as minimal as possible and to maximize the profits. Well, if this is the case, then investing in good training should not be debatable. Even though your broker may be doing most of the work for you, you should try as much as you can to get a good foundation by learning all the necessary fundamentals of options trading.
Here are some of the benefits of learning about options trading that you need to know:
1. Trading options is very risky and can be complex at times, but with good training you will be able to minimize the risks and maximize the profits.
2. Learning about options trading will help you use the right strategies at any given time. This is because there are many option trading strategies that can be used either independently or in combination. Different market conditions require different strategies and your education will help you know when to use them.
3. Learning about options trading will enable you to avoid making unnecessary mistakes that would prove to be very costly on your end.
4. Ultimately, learning about options makes you a better trader, which increases your chances of increasing your profits.
As you consider putting your time, effort, and money into learning about option trading, it is important to find a good training program that will help you learn a lot. What should your training program contain? This is a good question to ask before enrolling in any particular training program.
The content of your training program will largely depend on your specific needs. If you are a beginner, the course content should be geared towards equipping you with the relevant basic skills to start trading. Your level of knowledge should determine the kind of program you require. To some, learning may require them to attend certain seminars or conventions, while for others it may require going through a more formal options training setup.
I had to wait about 15 minutes or so and then I simply locked in my profits as I showed you on the Qs last week. What I did was I combined both my Q position and my IWM position into the profit graph here on this analyze tab. It shows you that I have both the IWM and the Q positions on the three-legged box and basically this is where we are right now.
The live price is $75.47 which is right in here. Remember that the green line is our expiration and the white line is our current price. What I’ve done is I’ve locked in a profit. I have an open profit of $554 on this position. But what exactly has this combined position of the Qs and the IWM ETF done for me? Well what it’s done, really,is given me not only a guaranteed profit of $478 at expiration,even if it doesn’t move,but it also has given me unlimited upside potential and unlimited downside potential. As you can see.I can’t lose money on this position. It’s impossible. It just can’t happen. I’ve locked in my profits so if the market just stays the same well I’ve got $554 open profit. I’m guaranteed a profit of $478 at expiration.
Now remember that we’re only using a few contracts. This is just fordemonstration. I’m showing how you can make money even with smallamounts of contracts. If I was doing ten times as many contracts, obviously I’d have a guaranteed profit of $5,000. I mean it doesn’t get any easier than this.
The upside to this and the real potential these types of three-legged box in locking the box positions is that not only are you guaranteed a profit if the market doesn’t do anything,but if it starts to go up dramatically or if it starts to drop dramatically, it doesn’t matter. The market can go up or down and you can make an unlimited amount of money. Here’s the profit area. Your zero line is down here. You have nothing but profit whether it goes down or it goes up.
So that’s the power of thekind of trading that we do. You try to hedge your positions asmuch as possible. You try to manage the risk. We manage these risks by the numbers. So in other words, when we first put on our IWMposition, we looked specifically at the delta. I wanted to be long a certain amount of delta because based on the analysis that we doon a regular basis, and you see those in the technical analysis modules, we knew the market was going to go up today. Just like we knew it was goingto go down earlier in the week on Monday and Tuesday. Today is June 5. We knew over the weekend that the market was going to decline.
Wetook a position that gave us an opportunity to lock in these profits. So we locked in the profits on the downside and we knew the market was going up. Now we’ve locked in our profits on the upside and it doesn’t matterwhere it goes because we’re guaranteed a profit.
I have never seen anybody else explain this concept in 20 years of trading and going to all of the seminars and the marketing stuff that these people put out. This is a pretty dynamic way to trade because you can’t lose money at this point. You have no other costs. You initiated the positions. You have no other costs at all because all of these are June expiration contracts and in the next week-and-a-half they are going to expire and you are guaranteed at least the $500 profit. And remember, as I said we’re only doing small contracts.
So that’s how you trade with confidence.
This is the kind of information that you aren’t going to find anywhere else. As we go through these types of trades in the future, especially after we get through Module 11, you are going to see the dynamics of how to lock in profits on just about any kind of position that you have. And not only lock in profits butgive you unlimited upside or downside potential.
So that’s it for today, guys. Hey, trade with confidence
Today is Monday, May 12, and we’re going to take a quick look at our trades for today. Now we’re going into expiration week and, as I mentioned, we had a little insurance policy on the QQQs just in case we got a big drop in the markets over the weekend. It cost us $65 but that’s cheap insurance because we’re already up over $140 for today. We have an open profit of $935 dollars. Let’s take a quick look at our analyze tab. That $65insurance was well worth it because we made up more than that just in the profit today as we open and it really didn’t cost us anything at all and the insurance was very, very good for us.
So here we are today. Like I said, we’re up $135. We are moving back towards the center very nicely on our position. We are going to keep a close eye on this position. Of course we are in expiration week and I normally like to get out earlier. However,we are going to try and squeeze every little bit of profit out of our positions as possible.
We have the positions on the DIA, the EEMs, the IWM, and the SPY. We want to take a quick look at the VIX. Let’s take a look at where we are. We went up here a little bit. If you can take a look down here in thecorner, we’ve been dropping significantly. Well, I didn’t know for sure but I thought possibly we could jump up here and retest this level around $21.50 or $22.00 and that didn’t happen this morningso that’s why we closed out our insurance. We bought the QQQs as insurance and we closed those out early this morning when we saw that, in fact, the market was not going to drop like a rock and retest those VIX levels so we’re falling back down again. I think we’re going to retest these 18 levels so we should be up for the day.
We’ll see exactly and keep monitoring our position but at this time we don’t really have to do anything as long as we stay to the upside. We’ve got plenty of room to move to the upside here and we’re going to continue to make a profit on this position today. We should be close to $1,000 in open profit. Now remember we’re only trading one or two contracts so this is a pretty good profit and all we have to do is just be patient and wait. This white line here which is our current profit and loss position is joining the expiration green line here which is only 5 days away.
Let’s take a look at our monitor tab or our trade tab and we can see there’s only four trading days left in this position. Ideally we’d like to be at the center and all of our positions would expire absolutely worthless and that will give us the maximum profit. So we just have to sit back, relax and just monitor.
Normally during a trade when you’reputting on trades 30 to 40 days ahead of time, you don’t really have to be that concerned with the day-to-day market fluctuations but as we get closer to expiration that’s where you really want to pay attention to your position. So that’s what we’re going to do if you want to extract as much profit as possible. However, I do not recommend holding positions into expiration week. Price is the biggest risk during expiration week.
Let’s take a quick look at our monitor tab for a second and take a look at our numbers. Our delta is a very nice little positive 94, our gamma is 190, and all gamma really means is that it’s the amount that the delta is going to change based on the overall position. Theta has increased to a nice $129 a day.
So going into expiration week we should expect to collect another $128 every single day that we’re in expiration. Our vega is at 121and that’s a positive number, meaningthat if the vega goes up we will increase our profits by $121. However, given that delta is also a positive number they kind of neutralize each other there. So what we want to do in our current profitable open is 925and we want to just take a look atour analyze tab for a second. As long as we can continue to move up, where the Dow Jones is right now up about 30 points, we will be doing very, very nicely. We’re going to keep an eye on the market very closely.
We want to be able to stay in the center position and I think we’re going to be in really good shape to extract some moreprofit. Now let’s take a quick look. We are here and we’ve got $934 of profit in the position and if we go to expiration we’ll have about$1,800 if we stay stable as far as price goes. So we’ve got another $900 in profit that we could extract from this position and we’re going to try to hang in there as long as we possibly can. I mean I don’t want to get too greedy but we’re at 50 percent profit here. We’re also up about 30 percent on our margin because our margin is $3,600. We’ve got $900 profit on $3,600 of margin. That’s a 30 percent return on margin so we’re doing really, really well.
Price doesn’t seem to be too much of a risk right now so we’re going to hang in there. If things start to get a little bit more volatile, we’ll probably close out this position. You know 30 percent return on margin is pretty awesome. We’ve only been in theposition for about four weeks now so that’s a great monthly return.
All right tradeologists, hey trade withconfidence.
As we get closer to the third Friday of May,the chances of that stock moving above the strike price of $27.50 becomes less and less certain, and because of that the option has less value to it.
If you take a look at an optionlike this overtime, let’s say that the stock doesn’t really move. Maybe in a week from now,this option will be selling for 20 cents bidand 35 cents ask; a week after that it’s 15 cents and 20 cents or 25 cents. The week after that maybe it’s 5 cents and 10 cents. So eventually the option that you purchased at 40 cents with great hope that the stock was going to move upis now only worth about 10 cents. You’ve lost 30 cents on the trade.
Well that’s exactly what the person who sold it to you is hoping would happen. That in fact, the stock did not go up in price. That you purchased this option that they know is going to expire and will eventually erode in value over time. That’s how they make their profit because they sold it to you at 40 cents; they can buy it back at 10 cents; and make 30 cents on that trade.
What about the guy who purchased the put option? Theoption that gives him the right to sell the stock at $27.50 and hoping that it would go down so he could buy it back at $22.50. If he could buy it at $22.50 and sell it at $27.50, he’s made a $5 profit. And that’s what his hope is.
Now if the stock doesn’t do anything at all, the same exact thing is going to happen to his put option. Eventually over time, because the actual probability that the stock is going to decline in price decreases as these options get closer to expiration. Then this option will be worth less and less each week. Let’s say next week at this time if the stock does not move then this option will only be worth maybe 45 cents to 65 cents. Another week passes by and it’s only worth 35 cents to 45 cents. Now another week passes by and it’s only 25 cents. As long as the stock does not move, all of these options will continue to decline in price if they have extrinsic value.
Now the prices of theseoptions are called “in the money” options. In the money options have some component of what they call extrinsic value and some component of intrinsic value. The way that you can determine intrinsic and extrinsic value is simply by taking the strike price of the option, in this case we’re taking a look at the May 20 calls, and their price is $7.40. On these 20 calls, if you add the strike price to the price of the call, you get $27.40. At the mid-price you’re probably talking closer to $27.25, which is exactly the price of our current stock. So you can say that this call option has no intrinsic value. In fact, if we look under the extrinsic value, you can see that it is actually zero.
The closer you get to “in the money” or the actual strike price of the stock, you can see that there is, in fact, some extrinsic value left. There is some time value left in that option and that time value is basically saying that “hey you know what, we do have three or four weeks before expiration” so the price of the option may actually increase to the point where it might be actually further in the money.
What is our objective, though?
This is just a very brief. You should already have a basic understanding of options. I probably haven’t told you anything new. Or maybe I have, I don’t know; but that depends on your experience. The important thing to remember, though,is that when we trade for monthly income the stock cannot be in two places at one time. At expiration we’re going to make money on one side or the other. That’s an important distinction tomake because we make money whether the stock goes up or goes down.
Now the types of vehicles that we use in order to trade options on the exchanges are normally going to be,and I’ll go through all those with you in the next series herein portfolio building. What we’re going to be using are(proprietary information edited out) adjustments. Adjustments are everything because as I said, prices fluctuate. That is oneinviolate rule of the market: prices will fluctuate. We don’t care if they go up or down but they do fluctuate.
There are a couple of rules to the option markets and that’s the two I’ve already told you. The third one is don’t lose money. So, the rules are: prices fluctuate,options expire at a date in the future, and don’t lose money.
In order not to lose money, many times we have to do adjustments to our original positions. This is where a lot of option players make a mistake. They do not adjust their positions. They put a position on and they believe that they can just keep it on there until expiration. Well, they forgot about the other rule of the market and that is prices will fluctuate. Options expire but they also fluctuate so if you get into a position, and a lot of option players do this, they just put positions on and they forget about them. They don’t even look at them until they have a loss and then it’s too late to do anytype of adjustment to that position because they are already too far gone.
Our goal is to monitor your positions. You put these positions on and then we will show you exactly what you need to do in order to adjust the positions. That’s where the majority of the real profits come in this business. What happens to a business when it’s not making money all of a sudden?
Well, just like this, if we’re not making money, then we have to take a look at the source of the problem and adjust our strategy in order to take advantage of new market conditions. That’s exactly what any business has to do. Any businessthatis not in a profitable position has to take a look at their business model and that’s exactly what we do in our business of trading. That’s why it really is a business because we manage by numbers and that’s what all good big businesses do. They manage by numbers.
This is an aggregate position ofour demonstration account for the purpose of these videos. You will see this throughout all the videos that we’re creatingon this strategy. We start out in a cash position,but I also want to show you what the profit potential of having more contracts is. Eventually as you get experience in this type of trading as a business, you’re going to be able to have a great deal of confidence in your ability to adjust trades over time.
I suggest that you begin with paper trading. Now the thinkorswim platform has a papertrading account that you can set up for free. It looks identical to this. The only thing that is differentis if you look up in this top left hand corner, this is a live trading account. It has a red symbol here with the thinkorswim symbol and logo.
If you have a paper trading accountopen, this is a green symbol but the platform is absolutely identical. Everything is exactly the same. You can enter trades, you can adjust trades, you can look at charts, and you can monitor your account. You can do everything that you can in the paper trading account with thinkorswim, as you can in this account.
Let’s go back to our trade position here and see what we’re doing. It’s still working and we haven’t gotten filled yet and it’s been about five minutes now so what I’m going to do is I’m going to raise this up to 16 cents and see if we can’t get out at 16 cents. We’ve got$305 of profit open on this and so we’ll capture that $305 as soon as we get out of this position. We made $40 just today on this position. Let’s try 17. So, youdon’t mind giving up a little bit of profit.
We started out at 15 cents. This is a good lesson. Like this morning I had no problem getting out at the price that I wanted which was really I think a penny off the mid-price. Here we had to go up two cents. We got out at17 cents. Westarted out at 15 cents as you can see down here. It went to 16 and then ended up gettingfilled at 17. When you have90 percent of your profit you can afford to give up a few pennies. It doesn’treally matter that much.
At this point what I wanted to do was I wanted to pair those positions down. You can see now on the April positions. I’ve got my SPY positions off. I’m not in the April position anymore and that’s the way I want it. I want out of that seven-day position because the closer you get to expiration there’s all kinds of weird things that can happen, especially gamma risk. If the market happened to get to one of our strike prices,then we get some weird stuff going on. I’m going to take my profit at 90 percent.
So we’re out of the SPY. If we take a look at our portfolio nowthe only thing we have left on there is the EEM’s and the EEM’s are looking pretty good. I’m not too worried about them. Because we do build portfolios we had a lot of different positions on here. Let me just refresh your memory.
We had a SPY positionand that’s gone. We had an IWM this morning and we took that off and we still have the EEM. And the DIA we took off this morning as well. So all those other positions are gone and the only one we have left isthis one. This one still shows some profit potential here. We can still move down on this quite a bitand still be in a profitable position. Our current profit on this is $138; with one contract.
Remember I’m talking small contracts. Imagine if we had 10 contracts. Now we’re up $1,300. If we had 20 contracts we’d be up $2,300 just on this one position. I mean how much money do you want to make? That is the only question. Once you learn how to build your portfolio and manage these positions, it’s only a matter of size.
Now this position, because the marketis falling, we’re now down 237 points. When we started out, we were down about 200 points. Now we’re down almost 240. This could go down a little bit more and we’d beeven in a better position. We made about $30 today. We have 136 open but let’s see where the expiration is. The expiration is $351 so we’ve got a couple hundred dollars of profit still in this position that we could take out of it if we hung in there just a little bit more.
Since I do not like to predict price, I only want to manage a portfolio based on numbers. Then you know what, I’ve got upside, I’ve got downside and it doesn’t matter if the market goes up or down from this point, I’m going to be in a profitable position. So I’ve got room to let this ride a little bit and I may do that just to grab a little bit more profit out of this position. So we’re going to leave this fornow but this is how you close out profitable positions. If we ever get into a losing position, I’ll do a video on that, too, so you may find one on your CD.
This is how you trade with confidence because it doesn’t matter if the market goes up or down. What you always want to take a look at is where your current profitable position is and that’s this white line here. Your expiration position is this greenline here. When you hover your mouse over your current position and live price, you can tell what the difference is between your current position and the profit potential that you have availableleft in this position, which is about $200. We’re going to hang in there I think a little bit more because we have room to breathe and this is the last position in our portfolio that we haven’t closed out yet.
Welcome to the art and science of trading as a business!
The objective of the program is to generate money every month. We really want to have a monthly income stream and, in order to generate a monthly income stream, we are going to be using options as our primary trading vehicle. What we want to do here is show you how it’s possible to make a monthly income and build wealth at the same time on very small positions.
As you take a look down here, you can see we only have one contract. But, just to show you what the profit potential is, on one or two contracts, we’ve only got $1,000 of margin up right now and we’re making $407. That’s a 40% return on investment, on margin, return on margin, in just the last two weeks.
When you’re trading with confidence, it doesn’t matter what the market does. As you can see from my position here, I’m right in the sweet spot and the market is down. If you take a look over here, the Dow is down 190 points and my position is beautiful. Right in the center here is where all the profit is made. The market could go down another 200 points and I would still be ok. It could go up 200 points and I would be okay.
You know, that’s why these kinds of positions are so powerful. Because you’ve got a wide range that the market can move in, it doesn’t matter if it moves up or down, and you’re going to be in a profitable position. I’ve got one contract here and I’m making $400 in two weeks. If I had ten contracts, I’d be making $4,000 in two weeks. If I had 20 contracts, I’d be making $8,000 in two weeks.
How much money do you want to make? That’s the only question. And the only way that you can make this kind of money in the market is by learning how to structure your positions, how to manage them on a portfolio basis, and how to adjust them when necessary. You never have to get hurt and if you want to make money, this is the only way I have found to make reliable monthly income from the markets and build wealth over the long term.
I mean this is the kind of stuff that you can hand down to your grandchildren and it will still work for them as well as it works for you. This is the kind of stuff you can hand down, it is something that is so secret that only market-makers who are extremely successful have ever learned about these markets.
This is the kind of stuff that would go into a vault; make personal copies for yourself and put them in a safety deposit box at your bank. Believe me, your children and your grandchildren and their grandchildren are going to profit from these strategies. The same strategies that you can profit from now, they are going to be able to profit from 20, 40, 100 years from now because these will never change. I would say less than 1% of all traders even know how to do this.
The market-makers have been doing this for years and now it’s possible for retail customers like us to be able to take advantage of this. But retail customers in general are not going to even understand these types of positions. They think price is the only way to profit from the markets. You know, prices going up, prices going down. I buy puts it it’s going down, I buy calls if it’s going up. I buy stock if it’s going up, I buy short-stock if it’s going down. But price is not the only way to profit from the markets. In fact, it is probably the least effective way to profit from the market.
The kind of positions that we are talking about here are the kind of positions that you can put on that don’t take all of your time. You can put them on, you can let them go, and you can adjust them as necessary and make a great monthly income from them and build wealth out of them. And there are very few people I would say, very very few people who understand this and can teach it. So that’s my goal.
My goal is to provide you with the very very best training; the very best tools; the very best understanding of building these type of portfolio positions, managing them and adjusting them as necessary so that you can draw that monthly income, build wealth, and trade with confidence.
As I’ve mentioned, our margin is only $1,600. I want you to take a look at this green linefor a secondbecause this green-line is our maximumprofit potential in this position. If you look down here in the left handcorner of this picture, you notice that as I move the cursoraround, it gives you different numbers.
Right now, on Total, our position is generating about $20. Actually this is a littlebit different than the monitor trade I show you up here. We’re actually up about$51 but because they take into considerationthe bid and ask spreads, this might be a little bit lower thanwhat you just saw. But it’s still $1,600 in March. If you run your cursor over this green line, this is what happenswhen options expire.
Remember there are only two rules of the market. One is prices will fluctuate. Number two is all options expire.
Well when we put these positions on, theonly thing that we’re interested in ishaving these options expire within thisprofit range. We have a fairly large range thatour prices can move in andthat’s what I mean bythe fact thatprices will fluctuate. While prices can fluctuate upand they can fluctuate down, it doesn’t matter for our position. All we have to do is be patient and waitand collect our money at the end of themonth whenthese options expire or just prior towhen the options expire.
Let’s take a look at thecursor. Down in the left-hand corner you can see, even at this point, if prices were to move down significantly, we would still have a profit of $1,234 on this position at expiration, if prices move down. Now we have a margin of $1,600. What kind of a return on investment is that? That’s close to an 80% return and may even be more. If prices moved up, we might make even more money. We have a maximum profit potential of $1,300 on this position.
If you look down here in the left handcorner, we’re looking at the date of expiration which is May 17, not the current date which is April 29. We’re looking at May 17, which is the option expiration date. We have a profit potential here of $1,327.27 at expiration. That’s close to a 95% return.
Now you might be thinking well gee, Dave, that’s great; $1,600 margin and you’re making$1,300 or whatever. Even if this landed someplace in the middle, you’re talking not less than a $1,000; anywhere from $1,100 up to$1,300 right in the middle. So even if it went up or even if it went down, if it went way down here, well now your profit margins are a little bit lower but I can show you exactly what to do when you need to adjust those. So, your profit potential isactually a fairly wide range here in prices so that you’re really taking advantage of the market’s fluctuations.
It doesn’t matter if the market goes up,it doesn’t matter if the market goes down, because you make money either way. All you have to do is put these positions on three to four weeks before they expire and just sit back and just let them run and cash in a few days before expiration. Let me tell you exactly what the actual potential of this is: $1,600 margin, not much; maximum profit maybe around $1,300. If you were to put let’s say double that,okay now you’re putting up $3,200 of margin; now your maximum profit potential is anywhere from $2,400 to $2,600 for only $3,200 in margin.
Let’s say you did ten times that. I put $16,000 worth of margin up. What’s my profit potential now? My profit potential is $12,030 in this position at the one end and $13,375in this endand if it’s stuck right in the middle, it’s $10,335 in three weeksto four weeks. And even that’s not a very large position. It’s only ten times the margin so if you had $16,000 in margin, yourpotential profit at expiration is close to $11,000 to $12,000 in three weeks.
There’s lots of money to be made in this kind of trading. This is the kind of trading thatthe professionals do. They don’t care if the market goes up and they don’t care if the market goes down. Either way they make money. They pay attentionand respect the two biggest truths of the market: that is that prices fluctuate and options expire. That is exactly what we take advantage of with these kinds of trades.
So, with $1,600of margin and you can make about a $1,000 a month on this. You tell me, is that a good return on your investment? I think so. You’re not going to get this kind of a return on your investment under any circumstances, under any other financial institution; only by doing this on your own.
This is the kind of system that I do. All I do is look at it once a day. I put on my trades 30 to 40days; you know three weeks to four weeks,before expiration of the options. All I do is sit back and monitor them on adaily basis and then collect the money at the end of the expiration period. That’s all I do.
And you know what,if you only have a couple thousand dollars of margin, look at the profits of $1,200 to $1,300 and, atthe very worst, maybe a $1,000 and the market can move up or down and it doesn’tmatter. $1,000 a month is only going to cost you $1,600. You get that $1,600 back in margin plus you make a $1,000. So, I don’t see a situation in which you’re not going to get a huge return on your investment.
Nowdoes this always work? I’m going to say that many strange things can happen in the market, there’s no doubtabout it. Prices can fluctuate wildly and in those cases then you’re not going to be able to say well maybe we’re not going to have a profit; however, I’m not going to guarantee that you’re always going to have a profit. What I am going to guarantee is that I’m going to show you everything that you need in order to create an environment where it doesn’t matter. Even at one point,the market ran way against me and I had one position that was almost in a losing position and, guess what, most traders would probably just close out that position. I turned it into a profit.
There are lots of situations that, if you know what you’re doing,you can really turn a losing situation into a profitable situation. This is where the majority of traders in options just go wrong because theydo these one-dimensional trades. They put on either a spread, they just let it go,they don’t know how to adjust,they don’t know how to manage their position by thenumbers, and they’re not treating their investments as a business. You know every business has maybe amonth out of the year and the other 11 months may be profitable if they’re running their business the right way you’re going to make a profit at the end of the year.
If you listen to the videos and I show you exactly how I do my trades and exactly how you can do your trades, too, then you’re going to have the knowledgeto trade with confidence. That’s what this is all aboutbecause it doesn’t matter if the marketgoes up or down or even if it runs against yourposition, you’re going to have the knowledgeof what you need to doin order to turn that position around and make it profitable.
So, I wish you the best always. This is the real deal. This is how professional traders actually trade positions in large quantities. This is how market makers who know what they’re doing and floor traders who know what they’re doingrun their investment business.
This is, in fact,probably one of the most secret and really hiddensystems. You might know how to trade calls and puts, butputting them together into an investment portfolio, into a business situation where we are only managing by the numbers,is extremely rare.
Hope you guys are trading well here and you’re all paper trading. I hope you have all paper traded beforeyou started actually allocating real money to trades. I have a very special presentation today.
Basically there are four risks to this type of business and I’m going to share all four risks with you today. These risks are something that you really need to keep an eye on as you develop your business. They’re not something that are terribly intuitive, but these are the things I’ve learned while doing this business and by creating these business opportunities.
When creating an investment business,we manage by the numbers. The numbers are everything. Every business understands what their product is. You have to have a very good, firm foundation of understanding what your product is. In this business your product is calls and puts. This is the stuff that we deal with, the product that we deal with. We’re selling options and we are buying options. We are a business that buys and sells.
Anytime you’re in business, you have risks. The four risks that I’m going to talk about todayare concentration of risk, overlapping trades, allocation of capital, and finally over trading or over adjusting positions.
Let’s take the first one, concentration of risk. What I mean by concentration of risk is that you have almost all of yourprofit potential centered around a single strike price. For example, I have currently on the screen our portfolio with the symbol IWM so it’s weighted against the IWM. As you can see, we have a fairly wide range in which the IWM can move and we could still profit from this position. Concentration of risks means that at the 73 strike price you have a very large position at the 73 strike price. I guess size all depends on the capital that you’ve allocated forthis business.
Let’s say $5,000 is a lot of money to you. Well, if you have $4,000 of your money tied up in marginand they’re all centered aroundthe 73 strike price, what you’re doing is you’re concentrating your risk at that point. If prices move way down or they move way up, you’re probably not going to have the same type of profit potential as if you had a wider range in which you could profit from. So that’s concentration of risk.
Concentration of risk means having a lot of contracts or size position for you at a single strike price. That could be if your capital allocation for the businessis $5,000or $20,000, or $50,000, or $100,00, or even $500,000, it doesn’tmatter. If you have a large position that you would consider large at a single strike price you have concentration of risk and that’s very dangerous. Prices can move dramatically against you very quickly and if you have a concentration of risk at a particular strike price, you’re going to get hurt.
The third thing I want to warn you about and the third risk of really this type of business is the allocation ofcapital. Allocation of capital means that you have so much capital available to you even if you had $200,000, you don’t want to spend $200,000 on opening these positions. If you have $20,000, you do not want to use all $20,000 opening these types of positions. If you have $5,000, you do not want to use all $5,000 opening these types of positions.
The reason for that is let’s say a gift store, like any other business, had an opportunity to buy stock to put in their store at a very low cost. This opportunity is only availablefor just a few days because there are other people who are interested in the stock. But you could get it very cheaply, maybe 50 percent cheaper than you can normally buy it, you would need the capital available tomake that purchase as the opportunity became available.
That’s what we need to think about in this business. When our prices start to run up towards our breakeven points in our portfolio,we don’t need to make changes to our business to take advantage of those opportunities because many times a position that runs up against our breakeven pointsis an opportunity to add to our current positions. It’s a smart allocation of capital.
We start our portfolio out on some basic positions but we always make sure that we have capital available, working capital. In any business it’sextremely important that we have the working capital to take advantage as necessary.
The fourth risk that I want to talk about is over trading or over adjusting. If we take a look at a current chart of the Dow Jones Industrial Average, you’ll see that yesterday we had an extremely large run-up in prices. In fact they were up almost $200 yesterday. Today they were up another $115but now they’ve backed down quite a bit. In fact, they backed down to the point where it’sbelow this 208 day moving average which we had kind of determined to be somewhat of aresistance points, as well as the 13,100 level.
Technical analysis is fairly simple. You have support and resistance points. You have support. You have resistance. You have resistance and you have support. That’s pretty much all you need to know as far as technical analysis goes for the type of business that we run. That’s pretty much it.
But prices do tend to fluctuate. Sometimes they go up, sometimes they go sideways, and sometimes they go down. Adjusting positions becomes really an art of knowing when exactly to make those adjustments. You want to try to keep yourprofit picture and your price pretty much centered. And if it goes off maybe you do want to do a little adjustment. You don’t have to do a large adjustment.
So those are the four risks of this business and I think it’s important that you understand those risks. I’ve talked about concentration of risk, allocation of capital, overlapping trades, and over trading orover adjusting but the key point is they’re only necessary because of price risk.
Price risk means that the price is going to move up and down against you. If there was no price risk, you would have absolutely no problem with concentration of risk. You’d have absolutely no problem with overlapping trades because you would not adjust anything. You would have no problem with allocation of capital because you could simply put your positions on at one price and remain there until expiration and you’d have no on risk of over trading or over adjusting.
All four of the risks in this business really have to do with price. Prices will fluctuate sometimes wildly, sometimes moderately, but they always fluctuate. They never stand still. So if it wasn’t for price risk, none of these other four risks would even be a consideration. And those are the four primary risks of this business. All of them are easily managed.
Our DIA position we still have our oneposition on. We didn’t make any adjustments to the DIA. If we take a look at our SPY position, we had to do one adjustment which was there’s really an art and a science. The science is the numbers and the art is knowing when to adjust.
Welcome to the art and science of trading as a business.
First, I want to talk toyou specifically about the program itself, what it hopes to achieve,and what the objective of the program is.
The objective of the program for the first part is the money-every-month program, is to generate just what it says: money every month. We want to generate a consistent income on a monthly basis in our trades so that,just like any other business, we want to generate recurring, consistent monthly income.
Does that mean we’re going to be profitable every month? Maybe not, maybewe will.
The important point to think about is that we really want to have a monthly income stream. In order to generate a monthly income stream,we’re going to be using options as our primary trading vehicle.
Now every business manages their business based on numbers and that’s exactly what we’re going to do in ours. This is a real business. It’s a business in which you are buying and selling. Any business that buys and sells things,it doesn’t matter what it is. It could be a bakery. It could be an auto repair shop. It could be a part store. It could be a gift shop. You have to buy your stock from some place and then you sell it to a customer. Well, the very same thing happens in the market. You’re buying and you’re selling.
Let me give you an example of how we actually try to make our money in the markets as a business. All we’re doing is really meeting supply and demand. Let’s take for example a stock such asActivision, which we have on our screen right now. The symbol is ATVI. It’s currently trading at $27.23,down 27 cents today.
Now for the most part,you have people in the market who believe that ATVI stock is going to go up. You have other people who believe the stock is going to go down and that’s what makes a market. If we take a look at the options on this particular stock, we have what’s called “call options” and we have “puts”. Calls are those options that people purchase if they think the stock is going to go up. People buy puts on the stock if they believe the stock is going down.
So let’s say you think that the stock is going to go up. So youpurchase this call option on the May options for Activisionand you get it at 40 cents, almost in the middle of the bid and ask price. Well at 40 cents this option actually has no real value because the current price of the stock is $27.23. So not only do you have to be accurate as to your timing because the stock would have to move quickly in order for you to make money, but you also have to be accurate as far as direction goes. The stock has to move up in order for you to make money.
Ifyou were to purchase a put option, let’s say you got it for 70 cents. Not only would you have to be correctas to the direction of the stock as it would have to move down in order for you to make money,but your timing would also have to be correct. It would have to move down relatively soon in order for you to make money because there are only two absolute rulesof the option markets.
Those two absolute rules are: Number 1: prices will fluctuate. Yes, the underlying price of the stock will fluctuate and the individual option prices will fluctuate. Number 2: these contracts will expire. Any option contract that you buy on any stock will expire at a certain date in the future.
If we were to purchase these Mayoptions,the options that we’re looking at right now, they will expire and we have the expiration date right here. They will expire in 24 days. Normally the optionsexpire on equity and index options the third Friday of each month. That is the last trading day for those options. They actually expire the very next day on a Saturday.
You can also pick the expiration dates that you’re interested in purchasing. For example, if youthought there was an imminent move in Activision, you could purchase this option for 40 cents today at $27.50. If the stock did move up beyond the $27.50, you would actually start making money.
But what happens if the stock doesn’t move? Well if the stock doesn’t move, slowly, day by day,this option that you purchased, if the stock doesn’t move, will slowly erodein value. Why?
The reason is that you have the right as a call buyer to purchase the stock at the strike price that you purchased,in this case $27.50, at any time before the third Friday of May. As we get closer to the third Friday of May,the chances of that stock moving up beyond this strike price of $27.50 becomes less and less certain and because of that the option has less value to it.
Ihad a lot of questions guys are asking me what I do in my real account because all the sample videos that I do are in a trading account. It’s real money. I do trade real money but I’m only trading one or two contracts because I want you to get an understanding and a feel for what we’re doing. But a lot of guys are saying, well gee, you just do small numbers and I’m just wondering what you do in your regular account.
Well, this is my regular account and you can see what my balance is and what kind of positions I put on. These are the exact same positions I put on in the demo account that you guys have seen the videos on. It’s the DIAs and the IWMs. I do have anMNX position in here and the SPYs. I trade with my own money.
Now this is the beginning of the month because it’s just May 15. This is the expiration week for the May options. What I like to do is put on some positions now, especially in the Indexes and then come Monday, after the May expiration,all of the July options will become available on stocks. There area few stocks that do haveJuly optionsnowbut normally they only have the front two months. So right now if I wanted to trade in a stock position today,I would only be able to get the May and the June options for back-to-back months, the two front months. Once the May expiration happens tomorrow,Monday morning,I’ll have the June and the July options for most of the stocks that I want to trade in.
I want to give you an idea that you can trade any size account and you know your profits are going to be based on the amount of capital that you put into these positions.Now all positions have risk, obviously, and you want to have smart allocation of capital but I’m beginning to build my positions now for the June expiration.
I just closed outmy May positions and now we’re rolling those into the June positions and so every month you’re going to be doing this. You’re going to be allocating your capital towards some initial positions right about at this time during that week of expiration. It’s always good to know exactly when your options are expiring. Remember they expire the third Friday of each month,so this is the time to put on positions.
Now I’ve just started putting on positions. I know exactly what my profits aregoing to be if I keep everything the same. They don’t stay the same because what I do is adjustments over the next three to four weeks before the June expiration date. Right now, though,I have a potential profit of close to $5,000 just on this very, very small…I mean I’m talking about if you take a look down here in the right hand corner, I have $10,000 in margin requirements and that is pretty low right now. I will eventually bump that up significantly as I add additional positions, but I stress diversification.
I’ve got the DIAs, the IWM, the MNX, and the SPY, which are all indexes so far because those are the options that I can get June and July in. Once Monday comes, I’m going to start putting on positions in individual stocks where I can get the June and July’s on the individual stocks. I’m going to diversify using stocks in my portfolio. There’s other ways to diversify which I talk about in the videos in the course. There’s several ways you want to diversify your risk and diversify your portfolio so you can get the maximum profit.
Now remember, this white line eventually, as we get towards the June expiration, will rise up as you’ve seen in other videos. It will rise up to the point where it meets this green line which is our June expiration. We’ve already got a small profit. We’re anywhere between $60 and $100 today. That’s going to change overtime and it doesn’t matter. What matters is the fact that we know that there’s a reverse gravity going on here. This white line is going to eventually move up to this green line.
I’m going to try and capture the majority of the potential profits in this position by the June expiration. Anywhere from 30 to 40 percent of my position and margin is going to be pure profit. So if you have the account, if you do have the funds, once you learn this business there’s really no limit to the amount of money that you can invest in the system. But you have to know what you’re doing first.
That’s why I suggest,strongly, that you paper trade for at least a couple of months. Start getting into real money using one or two contracts until you understand the system that you need to understand to manage this business by thenumbers. Get in there and do this and you will have the confidence going forward.
This is very different than speculating or trading based on what you think a stock is going to do. I’ve done that stuff. I’ve day-traded. I’ve bought a stock and, man, this thing has got to go upand all of a sudden it doesn’t do anything or goes down a little bit and I losesome money.
Or you’re taking a directional position.You buy a single option hoping the stock is going to go up or the index is going to go up, whatever you bought the option on. And you’re sitting there, you know, watching the screen every second.
This is thekind of business that you don’t have to sit in front of a screen. You don’t have to sit in front of a computer every single day. You can put these positions on. Sometimes the market does crazy things but you haveplenty of room to move either in the downside or the upside of these positions. You don’t have to sit there and watch this thing every single minute of every single day. That’s why I say you can manage this businessin 15minutes a day and you really can.
I tell you exactly what happens when this position goes against me. I show you. In fact, there are several live videos in the course itself that shows you exactly what you need to do in order to actually make more profits. It’s very easy to do; to add to these positions.
The price going against you is an opportunity for you to not only increase the amount of money that you are going to make for that month,but also to get the experience and confidence that you know what you’re going to be doing if the price does go against you. You don’t have to abandon the trade. You can defend the trade and you can make additional profits.
I hope this was instructional for you and I really do hope that you join us in the class because this is the real thing. You aren’t going to find this kind of training anyplace else and I really appreciate you watching this video.
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