$2000 to $100,000 using Options

[JROCK]

I'm going to transfer the info from another site where I already did this.

USING FRONT MONTH OPTIONS & OCCASIONALLY STOCKS!

TRADE ENTRY REASONS IN POST #2

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[JROCK]

REASONS
SHLD: Stock fell thru $92 support in March and hit $70. It appears to be in a bear rally, running $20+ in 2 1/2 weeks with an expanded range candle forming today. It has also overrun it's Bollinger bands significantly. RSI at 70; Stochs above 80; MACD near 2; Volume abnormal; I expect a pullback to $82 though I may get out between $87-$85. Will average down tomorrow if it gaps up and confirms a downturn. I want to be out by Friday if possible.

RIMM: Stock appeared to be in an uptrend and coming off of a one day pullback to the bull area. I didn't follow the rule which would be to wait for confirmation off the bounce and get in on the upswing. Instead I tried to time the bottom and catch it low for max profit...which proved that it was not a wise decision to be bottom fishing using front month options so close to expiration!

MBI: Shorted the stock which appeared poised for a drop. I just wanted a quick strike and put my stop-loss too tight. It bounced up to 2 pennies over my stop-loss before dropping $1.50 shortly after.

MA: The charts show a faltering economy and further weakness which point to an impending drop. The DOW has failed to break resistance at it's 200 MA on the weekly chart and MA has been down on it's support continuing to test it. It is under it's 50 MA which has downturned and looks ready to break under the 200 MA. This could be a very profitable play.

MA: Played the corrective bounce after a hard drop of $40 in 4 days! Looking to capture a small gain as the stock runs back up to test the new resistance around the 200 MA.

MA: Jump back on the downside train looking for a bottom falling out as it is now officially in BEAR territory and should head below the next support level of $200 though it will test it first and linger there a little bit. I'll look to exit around that area if all goes well. With expiration coming in two weeks we don't want to push it too much.

GS: Goldman Sachs has fallen $60 in 6 trading days from $173 to $113. It formed a downside exhaustion candle and was significantly below it's lower Bollinger. I'm look for a quick strike on a recovery rally back to the inside of the Bollinger Bands.
NOTE: My initial direction was correct and I would have doubled my money in 10 minutes had I gotten in, but I waited for the pullback and entered. When I did, the market took a sudden turn and GS fell off over $20 in a short time. I had no stops in place and was forced to ride it out in hopes of a corrective bounce from the drastic fall in the financials. I kept averaging down till I was all in (NEVER a good thing to do!) I felt that a recovery was due since the market has fallen almost 1000 points in 3 days, my hope was that the recovery would come by Friday so that my expiring options would return to profitablity. I broke a couple rules in this trade: No stop-loss & putting too much capital in. I don't recommend anyone EVER do that. So I will probably exit today so as to regroup and come back tomorrow. Consistency & Discipline are key.

GS: MONSTROUS MARKET GAP UP! Played the drastically devalued PUTS due to the gap up. Felt that people would take their money out at the first chance of gain which would drive it down.

GS: Played another setup to the downside for a quick gain COBRA STRIKE style.

AAPL: With the whole market dropping over 30% in just over a month, most stocks saw almost a 50% drop in value during that same time. AAPL was at $175 and fell to $85 where a buying frenzy immediately took place. With AAPL being one of the strongest stocks, it was sure to make a solid bounce back to above the $100 level where it just fell right thru though it should have provided some decent support. Looking for a quick strike.

GS: With the whole market rallying a historic 936 points the previous day and GS gapping up the following morning $14 to $128, which is up 77% from $72 just 2 days earlier, I felt there would be some definite profit-taking so I bought PUTS to play a quick downside drop due to undervalued puts due to a huge run and big gap up. After selling for 100% gains, I re-entered later in the day after another setup for the downside occured and closed the position the following morning on the gap down for 50% gains.

CSIQ: Solar stock appeared to have made a double bottom and showed a bullish slant on the daily chart by pushing $11. I figured it'd go to $15 in a few days. It played around with the $11 range before finally making it's move on Friday to the $12 range. It appeared to be tiring at the next whole dollar which normally provides resistance for lower priced stocks so I bailed at $12.03. Might pick it up again next week.

[JROCK]

INTRO
Though I have made and lost a lot of money in the penny stocks, they are just entirely too manipulated and can have liquidity issues if something goes wrong. So we are not going that route. A friend and I have put up $1k each and will split the profits down the road.

I believe that options are by far the safest BIG reward vehicle that I am familiar with. You can use substantially less capital for the same or better % gain than the stock movement would make you. I'll explain more later.

When I first started trading options a couple years ago, I started on paper and tracked the returns for several strike prices and months.
Obviously I found that the FRONT month OTM (Out of the money) contracts were much more volatile due to "time to expiration" and if the correct one was chosen it could be VERY rewarding.

Though this sounds great, don't get me wrong, there is a lot of work that goes into trading and it's not easy.

I plan to trade in increments rather than the "ALL IN" philosophy, which could wipe out the account in an hour.

I will also utilize a method called "COBRA STRIKE" which is a phrase I coined to describe quick in and outs while daytrading and that also helped me to limit losses if the trade started moving against me. It kept me from being greedy because I would take a 10-15% profit and run like a bandit! :LOL:

I will check the option volatility chart to see if the option is overpriced before buying. The key though is that fast moves or big runs cause an option price to be out of whack, which can be our advantage if we catch it. For instance, AAPL has been in a downtrend, but runs up $10 in 30 minutes causing the PUT options to lose value quickly. If you think there will be a correction of $5 or so then jump on a Front month option 1 or 2 strikes out of the money. Don't stay in too long b/c the stock could reverse and start a new trend so use the Cobra strike method for a quick 10-50% gain.

PLAN OF ACTION
- Find a stock that is in a defined pattern. (High or Low basing triangles/Flag & Pennant/Head & Shoulders/Up or Down Trending)
....Gapping stocks make great reversal plays since there's sometimes an immediate correction and the option is undervalued due to the gap.

- Check indicators for confirmation (RSI/STO/MACD/CMF/MA's/BBands/CCI/WM%R)
....Also know what the DOW/NASDAQ charts look like b/c they may influence the direction.

- Check Option/Stock volatility chart to see if option value is under/over priced.

- Look at Front month options one or two out of the money.

- Determine a good time to get in by watching the intraday charts and buying on the BID (preferred)

- Never more than 40% of the account value on any given play.

- Start with 10-20% then average down if necessary with the remaining amount that makes up 40%.

- Stop-losses are important, however on Front month options they can be a problem due to the volatility of the option.
....So we will use discretion when deciding what to put it at since we need to give the option enough wiggle room.
....We will set a stop-loss at 60% below entry and this is the most we will lose on any trade. If we are using proper money management, then if we get
into a trade and average down 2-3 times with maximum invested being 40% and we take a 60% loss, then it will equate to a 24% loss on the portfolio.
...The whole point of trading is to have more winners than losers & to minimize your losses, so by taking a 24% loss every 5 trades with 4 being an average
of 30% or more, then the odds are stacked in your favor. That's an 80% win rate on trades with a 36% total gain per ten trades on the portfolio.

- Since the greatest gains in options come from big moves in the stock, we will exit when these take place if we are watching at the time.
....Volatility is a big factor and causes an option price to jump if the stock rallies so we'll sell at the ASK when the run is losing steam.

- Don't get greedy! If the option makes a 100% gain, we will immediately sell 1/2 of the position.
....We can let the rest ride or sell when we deem appropriate.

RESTRICTIONS
Since the starting amount of $2k is under $25k, we are only allowed 3 entry positions per 5 rolling business days. So this will allow us to average down twice if necessary. We will probably average 1 stock per week.

[JROCK]

I've been following some guidelines that professional option players have already established. These are worth reading.

10 basic rules
Whether you're just getting started in the options-trading game or if you're looking to enhance your success rate, below are our 10 basic rules for speculating with options:

1) Be patient. Don't invest everything right away. Decide how much you want to risk in options during the next 12 months and spread your purchases over that time frame.

2) Diversify. Don't put all your eggs in one basket. Take at least two or three positions, and try to always own both calls and puts.

3) Minimize your risk. Pay as little as possible for each option. And always be ready to cut your losses.

4) Plan before you play. If you do not have a game plan that tells you when to take profits and when to cut losses, you will have a very difficult time making a profit.

5) Don't be greedy. The downfall of 90% of all options investors is greed. Putting all your money down on a "sure thing" is a certain recipe for disaster.

6) Maximize your leverage. Try to buy options that will increase in value by at least 100%. Buying cheap options is the first step in this strategy.

7) Buy options on high-volatility stocks. You have a limited amount of time to work with. Your best plays are on volatile stocks.

8) In general, buy out-of-the-money options. These options normally have lower prices, and they tend to carry less risk.

9) Buy undervalued options whenever possible.

10) Be patient. This rule bears repeating. Contrary to popular belief, buying speculative options is not a game that requires action every day.

Successful options-buying requires patience and selectivity. It is the only way to win this game.

[JROCK]

I believe that stock options have the biggest advantage over other investments because they are FORMULA based! This means that you can measure their value and the probability of profit mathematically before you even enter a position. No other type of investment can boast this.

The formula is called the Black Scholes formula and takes several factors into consideration in order to determine the value of the option.

So what is an option?

Though it is explained in exact detail here:
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I will give you a simple answer.
If you believe a stock is going UP, you buy a CALL (CALL UP). If you believe a stock is going DOWN, you buy a PUT (PUT DOWN).

Yes, it is that simple, though I am going to add a little more easy to understand info as we go along!

Just like when you buy a stock and are able to sell it in seconds or years, the same goes for CALL/PUT options. You don’t have to hold them until they expire, you can sell them immediately or right up until the expiration.

[U]Here is some more info from an option pro:
Options, due to the fact they have a time limit and specific contract terms, can be measured mathematically. While most professional option traders mathematically analyze option plays, most individual investors do not.

I'm always in search of that super play on an over- or undervalued option with an excellent risk/reward picture. That is what successful option trading is all about.

Every option investor should do some options analysis before entering a trade, but you do not need to be a math genius to do so.

These four factors are all you need when comparing different option trades to determine the best way to play, or whether you should pass on a trade, because there will always be new opportunities coming along.

If I don't see a solid combination of all of these conditions, I'll pass on a particular trade. Why invest in something that "might" do well when we can instead identify trades that have the odds stacked in their favor?

[JROCK]

1. What is the fair value of the option?
Make sure you buy undervalued and sell overvalued options -- it enhances your probability of profit.

My favorite options to trade cost about $2.50 or less -- preferably much less -- because when you're buying options, the most you can lose is what you put into them. So, if you don't spend a lot and the trade doesn't go your way, then you're not losing much if the trade hits your stop-loss.

But keeping your costs low is only half of this battle. When I talk about undervalued options, I mean those whose true worth (i.e., their potential for profitability) hasn't yet been priced into them.

I am continually mining for those seemingly elusive yet ever-present bargains in the options markets, and for the past 30-plus years, it's been my simple "secret to success" in hitting options home runs.

2. What is your probability of profit if you hold the position to expiration?
Because options can be inexpensive, many individuals don't thoroughly examine their potential performance. Barring some dramatic move in the lifespan of the trade, an option that is too far out-of-the-money to realistically become profitable is probably not worth betting on.

Keep in mind that there's a difference between undervalued options and simply inexpensive ones, as the vast majority of "cheap" options are overpriced or really worthless. You want to look for those stocks that are poised to make a significant move and whose options have yet to reflect that potential.

There's no sense in buying options only because they're cheap -- if they don't have the potential to move in-the-money by expiration, you're better off not spending your money on the trade. A call option might only cost you 40 cents per share ($40 per contract), but if the stock is going down, that $40 would have been better applied to a put option instead.

3. What is your probability of hitting your profit goal (or the stop-loss level) during the life of the option?
While "cheap" options can seem like a "long shot" at face value, it's still real money that you're putting into them -- capital that you need to have a plan to protect and grow.

Options have a limited shelf life, but that doesn't mean you have to hold them until the end of that contract -- you can take profits at any time or close the trade if it looks like it isn't going to go in your favor. But the relatively short time you hold them means that you should keep closer tabs on how your options portfolio is doing.

Even though you can set stop losses to ensure that you're taken out of a trade that's not going your way, you don't want to miss the chance to cash in on a huge upswing if it only ends up being a brief one.

4. What is the delta?
If you are an option buyer, you want a higher delta. If you are an option writer (seller), you want a lower delta. (For more on delta and what it means to your options trades, please see our "Trading Tip of the Week" in Section 4…below.)

[JROCK]

There are many factors that go into determining the value of an option -- the price of the stock, the historic impact of volatility (i.e., how the stock typically trades around regular events like earnings announcements), and dividends and interest, if applicable. After all, options are created, and their available strike prices are set, around the current value of the underlying stock.

Although option values don't always trade directly proportionate to the underlying stock, we can use the delta to gauge the options' sensitivity toward movements in the stock. For instance, you might have held a call option at one time or another with a $35 strike price in your portfolio. But then perhaps the stock traded up through that number, but your option didn't follow it toward profitability. And that can be frustrating because you made the right "call," so to speak, yet the profits didn't follow.

Delta refers to the ratio of change between the underlying asset's price in relation to the change in the option's price, which can help to explain why an option makes corresponding moves with the underlying stock or why it might refuse to go along for the ride in lockstep.

One of the benefits of trading options is that you can capture huge swings (in the double- or even triple-digits) on a simple single-digit spike in the underlying security. An option's delta aims to approximate how much an option will change in price for every $1 move in the underlying stock.

The deeper in-the-money the option is, the higher the delta and, thus, the more likely the option will move in tandem with the stock. (That is, if the stock jumps $1, the option could also go up $1.)

This ratio of change between the price of the underlying asset and the option is reflected as a percentage, where a delta of 1 for the underlying instrument (i.e., stock, index or Exchange-Traded Fund) equals 100%. In turn, an option's delta can never exceed 100% of the stock's movement and is instead conveyed as a positive (with bullish plays) or negative (in bearish trades) number.

In other words, delta measures how much an option's price will change in tandem with every $1 move in the underlying security. If the stock jumps $1 and an in-the-money call option also goes up $1, that option has a positive 100 delta. But if the option goes up 50 cents against the stock's $1 increase, then the option's delta is a positive 50 (or, they've matched 50% of the underlying's move).

A delta of 50 is typical for an at-the-money option; that is, if you're holding a call at the $100 strike and the stock is trading at $100. Simply put, the option has a 50% chance of going in your favor. Thus, the deeper-in-the-money calls have higher deltas because their chances of finishing profitably are, of course, higher, and lower deltas correspond to an option's chance of being profitable by expiration.

But what if the stock goes down 50 cents? Then the delta on that call option is 50. However, if it's a put option that drops 50 cents with a $1 spike in the stock, it would have a negative 50 delta, as it drops 50 cents for every dollar the stock increases.

Delta is one of many tools that can help option investors gain a statistical advantage over other traders, because it helps us to determine whether we have an under- or overvalued situation or a good risk/reward picture.

[JROCK]

To get your best deal,

BUY PUT options on downtrending stocks that are temporarily rallying...

and

BUY CALL options on uptrending stocks that are temporarily falling.

Just like you want to step in to your long stock positions on pullbacks, it increases your profitability potential to buy your options on sale as well.

Most importantly, buy options on stocks that have the potential for surprise volatility. Stocks tend to fall much faster than they rise, so having some long put options in your trading account tends to be a better bet on surprise volatility. Many options traders who had bought puts in advance of the late-February/early-March global market meltdown enjoyed having that part of their portfolio performing well while a number of their bullish positions took a temporary hit.

When you're trading and investing in options, spending the least amount of money on the biggest-potential positions allows you to capture anywhere from decent to mind-blowing percentage returns. Also, having both call and put positions will keep your bases covered, no matter what the individual stocks or the markets themselves might bring on any given day. And in the worst-case scenario, even if your trade doesn't work out in your favor, it hurts a lot less when you've only spent a dollar per share instead of buying the stock itself and having it crack!

[JROCK]

This is a compilation of messages I've given to people with good questions:

I really got started in options successfully in January '08.

I invested heavily in penny stocks for a long time, but kept losing my rear. Then I made over a million with CSHD in 2 months and everyone was giving me money to invest. Then the SEC halted trading on it and filed a fraud lawsuit...I lost it all in the blink of an eye. I thought I was going to die...that was in oct. 06. I've since learned that 99.99999% of penny stocks are crooked scams.

I kept trying though and God opened the door for me to go to professional trading classes. A 71 year old lady paid out $28k and we had only met that day. That was in 07, which was still a rough year trying to recover from such heavy losses.

I got into options in Jan 07 when I saw how quickly the profits could be made. I didn't know you could lose ur shirt just as quickly though. I took a beating, one after the other b/c I kept investing too much capital and tho I made out like a bandit on most trades, the losers would nail me to the wall.

Then in Jan 08 I told my dad that I could blow away his 2% savings and 4% mutual fund. So he trusted me and gave me $25k, I then made $139k in 9 days and got half.

I still traded too much capital and kept getting smoked, so I stopped doing more than 60% and went to doing 20-30% and compounding like crazy. So that's how it developed to where I'm at today.

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I do have an investing business and I'm working on training DVD's right now, so I haven't had too much time to venture into other aspects just yet tho that is the plan. To charge people you have to have a series 6 license and it's a monster, that I haven't had time to tackle just yet.

Options are easy once you learn how they work. They seem complex, but they're not. You don't have to be a rocket scientist. There is a learning curve obviously, but once you learn then you're well on your way.

THE MOST IMPORTANT trading strategy is MONEY MANAGEMENT! If you don't learn that then you'll get taken to the cleaners until you do.

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Yes, options are by far the best leveraging tool on the market. No, you don't have to hold to expiration...I never do...or try not too. I usually cut my losses if it starts going against me rather than sitting on the toilet and waiting weeks for it to come back. Chances are it won't. Experience taught me.

I like cobra strike in and out plays. I try to find stocks that are moving, that's the only way the option will make big gains, which is why I like AAPL, GS, POT, RIMM, etc. And the current market volatility.

Now if you see an option at $4, it really costs $400 b/c 1 contract is 100 shares of stock so you multiply the option price by 100. But yes, if it goes up to $6, that's a 50% return on your investment, which...IF you are using SOLID money managment and only investing 30% of your portfolio (say $4k), then watch this:

4k x .30 = 1200 x 50%(return) = $600 profit

Then 600/4000 = 15% on your portfolio in one trade and that trade could be several minutes, a few days or a few weeks depending on which option and how you played the trade.

This works on stocks from $5 to $200 or basically a ton!

That blows away any savings, mutual fund or whatever. If you were to buy a stock, you would have to find a really cheap stock (say $12) then you'd get 100 shares for your $1200. You'd need the stock to go to $18 for a $600 gain and we all know that it's hard to find a low priced stock that will take off like that. We'd have to be sitting in one for a while and hoping it does.

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There are federal guidelines covering all traders. If under $25k then with a cash account you can make as many trades in a day as you want AS LONG AS all of your "BUYS" don't exceed your cash balance. (Eg. If bal=$5000, you can make 10 $500 entries and exit 1 time with all, or exit after each entry or exit in small portions after each entry as the stock/option is going up and you're just taking profit in increments along the way.) However, you have to remember about the trade fees so I would only use $4500 so as not to get a restriction placed on your account.

If you have a MARGIN acct. then you can only make 3 entries per 5 rolling business days. The difference here is that with margin, they loan you money on your money. If you have $5k, then they may lend you $5k or $15k depending on who you go with. The danger though is that if you "OVER LEVERAGE" and the trade goes against you, the value of YOUR cash decreases RAPIDLY and you could LOSE ALL of YOUR cash and POSSIBLY start losing the LOANED $, which they would tell you to deposit the difference and then you're screwed!

So stick with a cash account!

Now I don't buy the stock too often, I buy the option, which is a faster money maker using less money so I risk less. Options have different STRIKE PRICES and MONTHS. CALL options are if you think it's going up, PUT options if you think it's going down.

[JROCK]

This is NOT what I do...just an explanation of how it works:

So if a stock is at $90 and I think it will go to $100 by next month, then rather than shelling out $90/share, I can buy the option for Nov. and pay a little markup. (Eg. The NOV $100 Call is going for $5.00 per contract and each contract represents 100 shares of stock so I multiply 100 x $5.00 = $500 for those 100 shares). That means that I'm paying $500 for the right to buy 100 shares at $90 by the expiration of the option come NOV 22nd (which is the 3rd Friday of the month...all options expire at the close of business on the 3rd Fri of the STRIKE MONTH).

Now if the stock rallies to $100 or more by then I can EXERCISE my right to take those 100 shares from the person who sold me the option. The thing now though is that I get the stock at $90/share x 100 = $9000, but the stock is now at $100/share x 100 = $10,000 so I am up $1000. (I have to have enough money in the account to pay for those 100 shares at $90) Then I subtract the cost I paid for the option..$500 and I have a profit of $500. They made $500 off of me in the beginning by selling me the option, but they missed out on the other $500 by making the gamble that the stock wouldn't go up until after the expiration date had past and they'd keep their shares and the $500 and I'd lose my whole $500.

If I got it right and took the shares I could continue holding them or sell them immediately into the market and be done with it.

THAT IS HOW OPTIONS WORK IF PLAYED OUT...BUT I DO WHAT MOST PEOPLE DO:

NOTE: 85% of options expire worthless or don't hit their target so it's not wise to hold til expiration. The option writers are making the big bucks, but they have to ensure they can cover if the option they write(sell) hits it target and the person EXERCISES and takes the shares. The option writer either has the shares in the account or has to buy them at the current market price and sell them at a loss from the difference of whatever strike the sold to where the stock is currently.

I don't exercise the option. When I bought that option for $5 and the stock starts moving up, then the option moves up too. So the quicker and closer the stock gets to it's strike then the quicker the option value increases so let's say it runs up to $7, then I could turn around and sell that option for a 40% gain on my $500 = $200. That could happen in a few minutes, days or weeks.

You really don't have to know all of the mechanics behind the workings of the option though it gives you a greater understanding. The main thing is that you pick a play that is about to move strongly one way or the other and get in and out.

Since options are formula based, their prices change quickly due to volatility. So if volatility is slow then the option is slow. I try to get out when a stock is making a strong run in my favor b/c the option value shot up due to volatility and will decrease quickly in value if the stock slows the run and starts turn back.

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When I said we were going to close green, we were watching AAPL stock and it was down on the day (in the red), but making a strong move up. So it could have closed up on the day or in the green.

The guy was holding PUT options which meant he only made money if the stock came down and he was up for a few seconds as the stock did come down, but then it turned RAPIDLY and started going up, which was giving him a loss more and more as the stock continued up. It looked like it was going to be a mad dash straight up with no stopping so I told him to dump his PUTS and take the loss or his option could go to zero and he'd lose that investment if the stock never came back down by the time the option expired.

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Really and truly...I always prepare to average in if necessary, which I generally hope that the trade goes MONSTROUSLY in my favor after I get in on the first entry, but a lot of times it doesn't, which is why dollar cost averaging is so important with options and NOT going "ALL IN" on the first shot.

Once you get blindsided and have to average in a couple of times, the KEY is to look for a speedy exit on a rally even if it's a loss b/c of the NATURE of front month options with time decay and heavy losses that can occur to the option value should the trade continue to move against you.

When averaging in, you never want to put more than 50% of your portfolio at risk (Most PRO's say 30%, but we're dangerous overachievers here :D ). So you have to start with 5-10% increments from the first entry.

I stopped averaging down since my investments are now at 51% and I have to be disciplined not to go beyond that. I will look for an exit before the weekend since that is a hit on time value and MORESO if it gaps down on Monday. If it gaps up, the option may not increase in value due to the loss of time value from 2 weekend days.

The other thing that has worked well for me thus far is PATIENCE. If you ask Bazooka, he'll tell you something else that he has been calling me from the beginning...:LOL: Though patience doesn't always work when trading front month options there will come a time when I'll take a signicant loss to bail out if it's increasingly evident that the trade will continue to defect. That's when WISDOM takes over ;)

[tronik]

I remember the 2K to 100K thread it was very interesting indeed. I was very skeptical at first as i believe most people should be but you did manage to pull it off. GS what a roller coaster eh? You win some you lose some lets just hope we win more than we lose. I'm going to start paper trading options too. More so in the summer when i have more free time.

[jezzicaz789]

Thank you for the post.
Hi guys, Im a newbie. Nice to join this forum.