I want you to think about the last stock you purchased.
Now think about why you chose to buy
in that company.
Certainly, you did your due diligence. You know the revenues,
profits and expenses, and of course its five major competitors
and main suppliers. You wouldn't dare buy a stock just by looking
at the chart.
Unfortunately, most individual investors can't answer any of
those questions. Yet, investors will invest their life savings in
a company they know very little about. But who really knows the
answers to those questions? Experts, of course. There are facets
of a company that analysts will spew out that you never knew
But frankly, who cares.
Knowing everything you can about a company and making money
are two different things. And confusing the two is where most
investors, individual and professional alike, are led astray.
It's all fugazi. Those of you who have seen "The Wolf of Wall
Street" know what I'm talking about. Sadly enough, the majority
of investors are sold a story and nothing more. In many ways it's
was built on. Believe me, I worked on the floor, I've heard the
fine-tuned pitches based on nothing but an attention-grabbing
And that is exactly why I use options.
I'm not going to allow a story to define how I invest my
hard-earned money. I make investment choices based on a "no
nonsense" approach of evaluating hard statistics: maximum risk
and reward, probability of profit, and expected return.. Before I
make any investment decision I know the exact percentage of each
statistic mentioned above. Again, no stories or the soft data we
are accustomed to seeing from the financial community…just hard
Let me take you through an example of how I evaluate each and
every investment I make using one of my recent trades in
The first question I always ask myself when looking at a
is, "What is the most I can make or lose on this trade?"
Fortunately, in the world of options the numbers can easily be
calculated so that you can make a logical decision based on your
On Dec. 27 with Apple trading for roughly $560 and in an
overbought state I decided to sell a few vertical call spreads in
vertical call spread
is an options strategy for those who are bearish or neutral on a
stock. In fact, the stock can actually move slightly higher and
you will still make a max profit.
I sold the 600/605 vertical call spread for $0.42, or $42 per
spread. The max risk on the trade was $458. At first glance the
risk/reward seems off to those new to options. I always get the
same question, "Why would you risk $458 to make $42?"
This is where the second question comes into play, "What are
the chances that this will be a profitable trade?"
The answer is simple: the trade has a very high probability of
profit of over 90%. In fact, I can cater each of my trades to fit
a certain probability of profit so I always have an overwhelming
edge. Basically, by selling options rather than buying options
like most investors I can create an enormous margin of error.
In this case, as long as Apple doesn't push past the short
strike of my spread or $600 I will make a max profit on the
trade. That's a margin of error of 6.6%. I challenge investors to
find a stock trade that allows you to be directionally wrong 6.6%
and still make a profit. Again, this is why I use options. I
compare selling options to being the house in a casino, but with
significantly better odds. And as we all know the house always
wins over the long term.
Finally, I would ask, "What is the expected return for this
trade, taking into consideration the max risk/reward and
probability?" The expected return would be 9.1%
I've been doing trades like this in my Apple portfolio for my
service. So far, so good. Since May 19, 2012 I've made over 40%
in the Apple portfolio using this same strategy while the stock
has moved lower. A buy-and-hold strategy would have failed
miserably in comparison.
I hope a few of you will decide to take the plunge and at
least investigate the true power of options. Yes, they can be
risky, but if used properly they are one of the most conservative
and lucrative investment tools available. That is a combination
that is impossible to come by in today's investment arena.
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