The first options trading tactic I taught you as part of our case study method was the straight option strategy of buying a call option, aka the Long Call on Game Stock Corp.
Since the trade generated a 63% return, I’d say we’re off to a flying start!
But I promised you not only winners, but continued lessons on how to power returns using my The Money Calendar program.
So let’s continue with the “Learn to Earn” process but this time with a little twist… one that was worth a money “doubler” with just a $500 entry price.
Today I’m going to use the long call’s sibling, the Long Put. This options strategy is useful when we believe the share price of a stock is going to fall.
Remember, we’re not really concerned about if our trade takes a bullish or bearish position. All we’re really looking at is what the data tells us, based on the millions of data points the algorithms have crunched, is the best trade on any, and every, given day.
In continuing with our options for this case, I will go over what it means to be In, At, or Out of the Money and also explain what the term “Intrinsic Value” means.
Now before we go on, keep in mind that there is another way to trade the stock to the downside without the use of an option: sell the stock “short.”
In a nutshell, short-selling involves your broker borrowing the stock to let you sell it. When the stock goes down to a lower price than what you sold it to begin with, you buy the stock back and pocket the difference.
In a minute I’ll show you a real-world example of a short sale, and compare it to our option play.
But right now let’s get down to our Long Put trade by defining some of the terms we’ll need to implement a Long Put trade.
Options are either in, at, or out of the money. This is a comparison of the strike price to the current stock price.
For Puts, “in the money” means the strike price is higher than the stock price, where with “at the money” they are the same and “out of the money” the strike is less than the stock. When the Put strike is higher than the stock, it is said to have “Intrinsic Value.”
For example: If XYZ stock is at $23 and the strike is a $25 put it has $2 intrinsic value. Its remaining cost, its time value, is whatever time is left until expiration based on a formula (And there’s a formula to calculate that.)
But don’t worry about having to calculate that formula on your own! That’s my job in Power Profit Trades and at The Money Calendar!
Now let’s move on to our trade case set-up:
Take a look at the Risk Graph Comparison Short Stock and Put Option Graph I’ve set up for our case:
I mentioned SHORTING STOCK, and here is a graphic representation of how you can pocket a profit as the price of the stock goes down, (goes to the left), the value or price of the trade increases.
If you sold stock at $119 and the stock goes down to $114 you can (replace it) buy it back the stock at that price and pocket the difference of $500 (less commissions).
For the option play, there will be a price point in the stock that, in the case of a long put position, no matter how far above that stock price it goes, the loss amount will not increase; it will remain the same throughout the life of the option.
This is referred to as Max Loss.
You see this max loss amount and the price point in which that can happen on the risk graph by looking at where the green line for the option stops moving downward and goes horizontally to the right.
In this case the max loss is just north of $500… but remember you don’t have to take the option to a max loss situation! You can set up the means to sell the option when the stock hits a higher price at which the option will garner less than that max loss amount.
That is why options are considered less risky than stock in some circles.
In our next issue we will put our “Learn to Earn” lesson into a specific case, and I’ll show you how this easy setup can deliver a 102% return on a well-known Fortune 100 stock.
Here’s “Putting” it to you!
America’s #1 Trader