Our Profit Strategy
by Ken Trester

But it is not the best way to approach options trading. Options are not primarily vehicles for speculation. Their main job is to hedge risk and enhance profits from positions in the underlying stocks.

A good way to think of options trading is to equate it to a trip to Las Vegas. Before you hit the casinos you need money, which you accumulate with the help of a steady income.

Then once you are at the casinos you can bet this money on a variety of games, ranging from games somewhat favorable to the bettor to other games where your odds of winning consistently are not as good.

The least risky way to trade options is to use them as vehicles to generate income. Option novices may be surprised by that statement, but it is true.

 Options can be used to generate regular income, and the strategies you use to generate this income are among the least risky of all option strategies.

The easiest of all option trades is to sell (write) covered calls. Anyone who owns at least 100 shares of a stock can do this. You can even do it in tax-sheltered retirement accounts. 

We recommend stocks to buy and covered calls to write regularly in The Complete Option Report.

After you have mastered these easy techniques, you can move on to more advanced trading. In Vegas talk, you have garnered some trading capital by writing options, and now you have entered the casino. 

Here you have a wide choice of games to play. The game most people will play first is to buy short-term call and put options.

But before you start doing this you should realize that it is a very tough game to win over the long run. In addition to battling the stock market you will also run up commissions and other trading costs on a regular basis.

Buying short-term options is similar to playing the slot machines or the roulette table -- you will have fun doing it and you always have a chance of hitting a big payout, but you should only use money you can afford to lose. 

However, there are games in a casino where with some skill and a little luck you can win over the longer term. Blackjack (twenty one) is an example.

In the options game, buying long-term (LEAP) options is similar. A LEAP gives you several months and even years to wait for a payoff. This tilts the odds of winning much more in your favor, and also reduces your trading costs. We recommend LEAP options in The Complete Option Report. 

In short, that is our profit strategy but there is more...

Start by using options to generate income, then move on to buying long-term LEAP options, then, after you’ve become more familiar with the options world and honed your trading skills, try your hand at short-term options. 

However, just as most players in a casino head to the slot machines, the majority of option traders want to start out by buying short-term options. There is nothing wrong with that, but you had better get some inside tips before you plunge in.

I have used the following strategies to trade short-term options since I started trading options nearly thirty years ago. I have been immensely successful. Follow these strategies and profit...

This point can‘t be stressed enough.

Commission costs are also an important consideration -- they can run from $15 to $40 per trade, so start with enough capital to be able to buy at least four option contracts per position. That way you‘ll reduce commission costs per trade, giving you a chance to stay in the game longer and increasing your chance of profit.

Your ability to manage your money will determine whether you succeed as an options speculator.

The main drawback to buying options is that because they have a predetermined time limit options are a "wasting asset." Every day that passes costs you, and your option could expire worthless.

Cheaper options are usually the best plays. They give you the most leverage, the percentage returns are better, and if the market goes against you, you are risking less. More important, you‘re able to spread your capital over more positions, increasing your odds of winning.

The allure of buying cheap options is that they are potentially the most lucrative way to profit with options. And importantly, your risk is defined in advance. 

You simply pay your money (the premium) and wait to see if the stock does what you think it will -- rise if you buy a call option, fall if you buy a put option.

If the stock price rises above the strike price specified in your call option, you win your bet. If the stock falls below the price specified in your put option, you win your bet.

If the stock does not behave the way you thought it would you lose your bet, as well as the premium you paid for your option. Don’t be dismayed by this. Even the pros only win their bets about 20% to 30% of the time when they buy cheap options. Fortunately, we know how to increase your odds of winning.

So you have a better chance to profit if you follow our strategies. And our Number 1 Rule for buying options is this -- only buy underpriced options, like the ones we recommend in The Complete Option Report.

Sticking with undervalued options gives you two advantages. First, you are risking less money when you buy a cheap option. It is much easier on the pocketbook to lose $50 than $500 if the option expires worthless.

Second, if the stock crosses the strike price (putting it "in the money") before your option expires, you not only win your bet but your percentage gains will be more than had you bought a more expensive option.

Price is the key to success in the options market. When you pay too much for an option the odds are stacked against you.

Finding underpriced options is simple in theory but in the real world it takes an enormous amount of work. We have developed a computer pricing model that does this better than anyone else.

This model is to put to work every week in The Complete Option Report. Take advantage of it. You could soon be reaping the kind of oversized returns that successful option buyers strive for.

For more information on all of our trading strategies click here.

Our twice weekly fee based newsletter, The Complete Option Report, offers you personalized trading advice, and proven profitable.  For more  click here.