As I’m sure you know, President Trump signed an executive order on Friday that halted enforcement of the Dodd-Frank fiduciary rule requiring financial advisors to put their clients’ best interests before their own.
This reminded me of when I used to travel all over the country to teach trading seminars. And in every one, my students would tell me all the horror stories their financial advisors would share with them to convince them to stay away from the most potentially lucrative trades in the market.
But keep in mind… there are the advisors who already act in a fiduciary capacity by keeping your best interests at heart, and then there are the “wolves of Wall Street” who only care about draining your bank account to fatten their own wallets.
The latter is who my students were referring to – and who I want to talk to you about today. These “advisors” only act in their own interests and have cost Americans $17 billion per year in retirement savings due to bad financial advice. And in a survey conducted by the Financial Planning Association, most of these advisors confessed to knowing very little about investing… beyond reading investment sheets.
Because of them, investors are being lied to about the easiest – and fastest – way to capture thousands in profits every single week.
So here’s the truth…
Don’t Hate the Options Game, Hate the Players…
One of the reasons option trading has a bad reputation is because the “Wall Street” financial advisors simply never spent the time to learn how options actually work. In turn, they can’t advise their clients on how to trade them successfully. Now in order to become an advisor, you’ve got to pass a series of regulatory financial licensing exams. One of these exams, called the series 7, includes a small section on options. But as I said, it’s a very tiny portion of the exam, so you really only need to know just enough about options to pass the test in order to get licensed.
For that reason, these advisors won’t allow you to trade options, citing they’re too risky. But really, they simply don’t know enough about them and don’t want to risk losing clients – and money – because they can’t explain how to trade options the right way. Of course, they won’t tell you that – they’ll just repeat that options are too risky.
But I’m not going to sugar coat things – they’re dead wrong.
Options are actually vehicles used to mitigate, or hedge, your risk in the stock market. They allow you to take part in a stock’s price movement with significantly less capital, which reduces your risk on the trade. Options, when used the right way, can make you more money on your trades faster (and with less ris) than simply investing in the stock.
The “problem” with options isn’t options themselves… it’s not knowing how to trade them the right way (or at all).
So I’m going to tell you the three biggest mistakes options traders make that ill-informed financial advisors won’t (or can’t) tell you:
- Buying Out-of the-Money (OTM) Options
This happens more often to novice traders, but even the seasoned trader can fall back into this mistake. In the case of buying (or going long) a call option, an OTM option is one in which the strike price of the option contract is higher than the stock price. For example, if you buy a $50 call option on a $47 stock, you’re three points OTM.
But why on Earth would you exercise your right to buy a stock at $50 when you can buy it on the open market for $47? It just doesn’t make sense from a profits standpoint. Not to mention… if the stock doesn’t get higher than the $50 strike price or enough so to offset the cost of that call option, the value of that option could fall to $0 – and you could lose all the money you spent on the trade.
- Buying Options with Extremely Short Expirations
Options are a fixed time investments, meaning they expire. So you need to be able to exercise your right on the option or close the option before it expires. Using our example of a long call, the has to move high enough in price, preferably prior to expiration, to offer profits. And if it doesn’t, the value of the option can decline, which means you’re stuck losing money simply due to the passage of time.
- Trading Options with Zero Liquidity
For options, many people look at the number in the “OI” column. “OI” stands for open interest, which is the number of options that have been bought- or sold-to-open and have yet to be closed (profitably or not). Some may also trade based on volume, which is the number of contracts traded so far during the day.
Now these are great measures of liquidity, but the best measure is the difference between the bid and ask spread. The tighter the spread (or the closer the numbers are), the better the liquidity. The bid is the price at which you can sell the option, and the ask is the price at which you pay for the option. You want to be able to cover the spread as quickly as possible. For example, if an option is quoted at 2.00 x 2.40, then that typically means you’re buying the option for $2.40 and can only sell it at the time for $2.00. That’s $0.40 difference or a $40 per contract difference you have to make up ($0.40 x 100 shares from the option contract).
If you believe the stock will move enough to cover that spread, God bless. But there may be times when the stock moves in the direction you want and the option spread in our example rises to 2.00 x 2.10. this means that that bid/ask spread tightened, but you still can’t get more than $2.00 for the option.
Contrast that to an option quoted at 2.00 x 2.05. This is MUCH better because you only need the option to move 0.05 to cover or break even on that $5 difference. Remember, the tighter the spread the better the liquidity. One way you can track the optionable stocks with high liquitidy is to use the Penny pilot list from the Chicago Board Options Exchange (CBOE) website, www.cboe.com.
So rather than relying on the horror stories and opinions provided by the “advisors” who aren’t even interested in your financial goals and needs, I encourage you to commit to earning while you learn. And I’ll be right here with you each step of the way to show you exactly what to do (and not to do) when it comes to trading options.
To your continued success,