Equity Options – Trading Options Video 28 part 1


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Hello, tradelogists. Welcome to Module 11. In Module 11, we’re going to talk about advanced techniques, and explore some wealth building strategies. These are the strategies that, if you have a little bit more capital, you can put that capital to use really productively. I’m going to show you a couple of methods that are explosive strategies. They really are the way to create wealth in the market. If you really want to make a killing in the market, this is how the big players do it.

You’re not going to find a better strategy than this. We’re going to talk about a couple of different things. There are some basic strategies that I want to go over. Then we’re going to talk about adjusting those strategies, just like we did with those option strategies and the monthly income strategies.

This particular module on advanced techniques and wealth building is going to be on stocks. Can we substitute stocks and use options instead of stocks? We’re going to talk about that a little bit as well. We’re going to talk about strategies to protect your investments, and benefit from those strategies of protecting your investments. We’re also going to talk about how to pick stocks.

Then we’re going to get into a couple of advanced strategies that I really find helpful for the times when you’re not really sure if you want to buy stocks, or if you want to sell stocks, or want you want to do in the market. There is a lot of uncertainty in the market at times. You don’t know whether you should be jumping into stocks, or not jumping into stocks, or so forth. So we’re going to talk about a couple of those strategies.

The very first strategy I want to talk to you about is a method to turn a $14,000 trade into $75,000 in profits, in about 8 months. That particular strategy was some time ago. There are a couple of strategies that I did recently, on a couple of different stocks, that produced very good returns. Once again, this particular strategy does not depend on the stock going up. The stock can actually go up or down.

I’m going to show you two examples of stocks that had actually gone in an upward direction. Then I’m going to show you an example of a stock that went in a downward direction, and was still able to make money.

The key here is to understand the management of risk. Just like we did with monthly income trades, management of risk is everything in the market. You can’t have a free lunch in the market. There’s just no such thing. Nobody is going to give you a dime. Nobody’s going to help you with anything. Nobody is going to give you a penny that you have not earned.

You should understand that, and then you should understand the fact that you have to manage your risk, and that adjustments are probably going to be necessary. Active management of your trades is a key requirement.

Now, your monthly income trades – you could probably let those go for a while, or review those every 15 minutes or so, and you’ll be fine. The same thing goes for these trades, only there are a couple of different parameters that you need to look at. There are a couple of things that really would trigger your additional action.

We’ll go through those.

I’m going to set up the basic strategy for you. Then we’re going to go into the advanced strategies. I’m going to try and layer those, as we go along, so that one piece of knowledge that you have builds upon the next piece of knowledge. When you end this particular module, you will have all of the pieces together in a coherent whole, that you can take with you as you study the market and try to pick stocks that you’re interested in purchasing.

Why do we do stocks instead of option? Let me go through the basic strategy. I think the reason we do stocks over options, in this particular strategy, is going to become evident.

Number one is, these are longer-term trades. On a very basic level, a lot of times, these trades will last 1 – 3 months, sometimes as much as 8 months or more. In those cases, sometimes you can’t find those long-term options. You can do leaps, but the downside is that they are going to expire at some point in the future. If you buy a stock, it’s not going to expire in the future.

The very basic strategy that we’re going to start with is actually the purchase of stock. Right now, I have on the screen a chart of Starbucks, going back about 5 years, on a daily basis. As you can see, Starbucks had a tremendous run-up here, and then in late 2006, it got into trouble. It dropped from a high of about $40 a share, all the way down to $15.50, just recently.

That’s a pretty steep decline for this stock. If you go back to a number of different types of stocks, you’ll see the zig-zag pattern of a nice run-up in the stock, and then a little bit of a sell-off here. This is a pretty steep sell-off alone, going down from $39 to about $28 or so. That is a pretty bad decline.

However, as it climbed back up – let’s take the guy who bought it at $40. Right here, right at the tip of that little candlestick right here. Somebody sold it, and somebody bought it, right at $40. Let’s take a look at that, and draw an oval around that. Imagine being the buyer of that at $40. That doesn’t look good, does it?

The person who bought that at $40 immediately woke up, and saw it trading at $37.50, all the way down to $36.50. That’s a pretty steep decline for the first day of trading, after you bought that stock.

Would he have any indication that it would probably trade that low? Not really. If you take a look at volume – if there is technical analysis involved in the picking of stocks, you would have looked at the increase in volume during this time here, this run-up. It wasn’t huge, but at least on the day that you bought it, it was huge. A lot of people bought that stock at $40.

You would have had no indication that maybe, that stock was going to open up dramatically lower the next day. You would have gotten crushed.

Generally, I go in and buy 1000 shares at a time of the stock that I want. You can go in and buy 100 shares, or 200 shares, or 300 shares, or 400 shares. The strategy that I am going to talk about, you really can’t do for less than 100 shares. You need to buy at least 100 shares of stock. 100 shares of Starbucks, at $40, would have cost you approximately $4000.

On margin, that means putting up about $2000 in margin. You have 100 shares of stockĀ  at $40. The next morning you wake up, and it’s trading around $37. You just lost $100 a share, $3 for each share that you purchased, so you just lost $300.

If you bought 1000 shares, you would have lost $3000. That’s not a very attractive thing to have happen. People who bought down here – yeah, they’re pretty happy. They’re around $29, from $40. But there aren’t that many people who can actually pick tops or bottoms of stocks.

Anytime that you buy a stock – and it doesn’t matter what the price is, or what the former chart history looks like. I don’t care where you bought it. You’re taking a risk.

If you just go out and buy this stock, and you have absolutely no way of hedging that position, projecting your position… You just go out and buy stock. A lot of people say, “Yeah, buy stock.” It’s a great strategy if you want to increase your wealth. But you have to be terribly lucky.

Here’s another instance. People bought this stock at $32. I’m sure that there were people who bought right there. Maybe a lot of people. Look what happened over the period of the next month. It dropped from $32 down to $24.

It never got back up to there. It did get back up to there – it had a little bit of a rally here. It came up to $27.50. Eventually, if you waited long enough, you would have gotten your money back up here, which was in December. If you bought this back at the end of 2005, and you’re waiting for that stock to get back up to where you bought it – you would have had to wait almost a year, just to break even.

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