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Welcome to the art and science of trading as a business. There’s two components to this program. There’s the monthly income – what we call money every month – and then the second strategy is the strategy for massive market profits.
First, I want to talk to you specifically about the program itself, what it hopes to achieve, and what the objective of the program is. The objective of the program, the Money Every Month program, is to generate just what it says – money every month. We want to generate a consistent income, on a monthly basis, in our trades. Just like any other business, we want to generate recurring, consistent monthly income.
Does that mean we’re going to be profitable every month? Maybe not. Maybe we will. The important point to think about, though, is that we really want to have a monthly income stream. In order to generate a monthly income stream, we’re going to be using options as our primary trading vehicle.
Now, every business manages their business based on numbers. This is exactly what we’re going to do in ours. This is a real business. It’s a business in which you are buying and selling. Any business that buys and sells things – and it doesn’t matter what it is. It could be a bakery, it could be an auto repair shop, it could be a parts store, it could be a gift shop.
You have to buy your stock from someplace, and then you sell it to a customer. Well, the very same thing happens in the markets. You’re buying, and you’re selling.
Let me give you an example of how we actually try to make our money, in the markets, as a business. All we’re doing is meeting supply and demand. Let’s take, for example, a stock such as Activision, which we have on our screen right now. The symbol is ATVI.
It’s currently trading at $27.23, down 27 cents today. Now, for the most part, you have people in the market who believe that ATVI, Activision stock, is going to go up. You have other people who believe the stock is going to go down, and that’s what makes a market.
If we’re purchasing, if we take a look at the options on this particular stock, we have what’s called, “call options.” We have puts. Calls are those options that people purchase, if they think the stock is going to go up. People buy puts on the stock if they believe the stock is going down.
If we take a look at the money options, these are the May contracts that expire in 24 days. The 27.5, or 27.50 options. If you wanted to purchase a call option on the stock, because you believe that it’s going to go up in the near future, you would be purchasing this option, for 45 cents.
If you thought the stock was going to go down, you would be purchasing this option for 80 cents. Now, you could try to get a price that was in the middle, between the sell, between the bid and the ask. Maybe you’d pay 70 cents. The point is that you have to buy these options in order to fill the idea that you have, that the stock is going to go down, or the stock is going to go up.
Let’s say you think the stock is going to go up. So, you purchase this call option on the May options for Activision. You get it for 40 cents, almost in the middle of the bid and ask price.
Well, at 40 cents, this option actually has no real value. The current price of the stock is at $27.23. Not only do you have to be accurate as to your timing, because the stock would have to move quickly, in order for you to make money – but you also have to be accurate, as far as direction goes. The stock has to move up, in order for you to make money.
If you were to purchase a put option – let’s say you got it for 70 cents – not only would you have to be correct as to the direction of the stock. It would have to move down in order for you to make money. Your timing would also have to be correct. It would have to move down relatively soon, in order for you to make money.
There are only two absolute rules of the option markets. Those two absolute rules are: Number one – prices will fluctuate. The underlying price of the stock will fluctuate, and the individual option prices will fluctuate.
Number two: The only other absolute rule of the option market is that these contracts will expire. Any option contract that you buy, on any stock, will expire at a certain date in the future.
If we were to purchase these May options… The ones that we’re looking at right now expire in 24 days. Normally the options expire, on equity and index options, on the third Friday of each month. That is the last trading day for those options.
They actually expire the very next day, on a Saturday. You can also pick the expiration dates that you’re interested in purchasing. For example, if you thought there was an imminent move in Activision, you could purchase this option for 40 cents today, at $27.50. If the stock did move up, beyond the $27.50, you would actually start making money.
What happens if the stock doesn’t move? If the stock doesn’t move slowly, day by day, this option that you purchased would slowly erode in value. The reason is that you have the right, as a call buyer, to purchase the stock at the strike price that you purchased – in this case, $27.50 – at any time before the third Friday of May.
As we get closer to the third Friday of May, the chances of that stock moving up, beyond this strike price of $27.50, becomes less and less certain. Because of that, the option has less value to it.
If the probabilities are less that the stock will actually move above $27.50, then obviously, the value of holding that position, that contract, becomes decreasingly less expensive.