Tuesday, April 22, 2008
Have you ever looked at the actions of someone else and thought, "What were you thinking?"
How would you like to profit off of it?
Well, here's your chance...
Stock options are the single best speculative vehicle ever created. With options, you can speculate with limited risk and unlimited reward. It's the best of both worlds.
But most people lose money trading options. And, the only explanation for that is most people do stupid things with option contracts.
Your job is to take advantage of that stupidity. And you can get rich off of it.
Please understand, I'm not trying to be harsh. And I'm using the term "stupid" in the kindest of ways. But I've seen people lose fortunes at the blackjack tables in Vegas, and those same people do the exact same darn thing trading options.
There is, however, a huge difference between gambling and speculating.
You will ALWAYS lose money gambling. But, if you do it right, you can EARN a fortune speculating.
There are two secrets to a successful speculation...
No. 1 Only speculate when the odds are always in your favor, and
No. 2 never go "all in."
Today, we'll explore secret No. 1 – only speculate when the odds are in your favor... This rules out anything that goes on in Vegas and limits your activity to the stock market, various horse races, and friendly poker games.
The odds are only in your favor when you bet against the trend. And it's the most gut-wrenching bet you'll ever have to make.
Understand, in a bull market everyone expects stocks to go up. In a bear market, everyone expects stocks to go down. Option prices reflect those facts. If you bet with the trend, then you pay premium prices for option contracts. While you may win once in a while, the payoff is relatively small. However, if you bet against the trend, you'll typically be buying inexpensive options. While the odds of success are limited, the payoff more than justifies the risk.
Think of it this way... Everybody expects Tiger Woods to win every golf match in which he competes. The odds of a Tiger Woods victory are so high the bookies have to offer incentives for people to bet on other players. Bets on Tiger often go off at 2 to 1 (win $2 for every $1 bet), while bets on Stewart Cink, Phil Mickelson, and the rest of the field often pay 20 to 1 (win $20 for every $1 bet) or more. Tiger is good, but he's not 10 times better than the A-list pros.
As hard as it is to bet against Tiger, it's the smart bet to make. The odds are in your favor, and you'll be well paid if you're right.
It's stupid to pay up to buy calls in a bull market and pay up to buy put options in a bear market. It's also unwise to bet on Tiger Woods to win every week. You may win on that bet every now and then. But the reward is not commensurate to the risk.
The smart bet is to buy options that go against the trend. They're cheap and they pay off handsomely if you're right.
For example, back in January I told S&A Short Report subscribers to buy calls on a housing stock. It was the most ridiculous idea anyone could consider – but the odds were in our favor. We made 150% on that trade.
We also bought call options on one of the worst performing banking stocks. I didn't like the long-term outlook of the shares, but the odds favored a bounce in the short term and the options were cheaply priced.
We made over 150% on that trade, too.
Last week, I bought calls in the semiconductor sector. Everyone seemed to be betting on bad news out of Intel when the company announced earnings on Tuesday. Put options looked expensive and call options looked cheap.
So, I told subscribers to buy call options and we doubled our money overnight.
I'm looking at the exact same setup with another recommendation I plan to make this week in the S&A Short Report.
The bottom line is, you should only buy call options when everyone else is looking to buy puts... and buy puts when everyone else is looking to buy calls. It's a simple strategy, but it's the easiest way to profit during turbulent markets.
On Thursday, we'll look at the stupidity of going "all in" on any individual trade.
Best regards and good trading,
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