A Simple Key To Stock Options Gains Of 306% And 122%
Trading stock options is the best way I know to quickly make large sums of money.
So today I’m giving you a key to successful option trading. I use this key time and time again. It’s one of my guiding principles. And it serves me well as editor of Elite Option Trader.
You see, Elite Option Trader doesn’t use any crazy, hard to understand option strategies.
I stick to simply buying long call and put options. And by following this one key principal, I’m able to be successful.
I always look for stocks with momentum or changing momentum.
In other words, the stock must be poised for a quick, continued move one way or the other. Once I find a stock with momentum, I buy the options tied to the stock. More on that in a moment…
The momentum I look for can be either technical or fundamental in nature.
For example, last year I identified fundamental momentum in tech stocks. At the time, the economic data, industry news, and quarterly earnings reports indicated a new phase of increased personal and business demand was just beginning.
It’s the kind of momentum that can drive a stock higher for weeks, months, or even years at a time.
However, momentum isn’t always about major changes in fundamentals. Often times I’ll identify a stock with momentum by using technical analysis.
I use a few different tools to identify stocks with momentum or changing momentum. A few of my favorites are moving averages, stochastic oscillators, and relative strength index (RSI). How to use these indicators to indentify changes in momentum is a story for another day.
Here’s the key for option traders. Only target stocks with BIG momentum.
Why is momentum important? Because the options we buy always have a built in time limit.
Once you’ve found a stock with momentum, picking an option with the correct expiration date can make or break your success.
Remember, when buying an option, you’ll always pay more than what the option is intrinsically worth.
For example, a call option with a strike price of $25 on a stock price of $30, has an intrinsic value of $5 ($30 – $25 = $5). But the option itself may cost $7. The extra $2 is a time premium.
As time goes by, the time premium sinks; it’s known as time decay.
The closer you get to the expiration date, the faster the time premium disappears. And in the 30 days before expiration, you’ll see the most rapid decline.
Needless to say, keeping time decay to a minimum has a huge impact on the success of any long option strategy.
Let’s take a look at an example.
Last year, tech stocks were building fundamental momentum. And the semiconductor giant Intel (INTC) is no exception.
From listening to Intel’s management, watching industry trends, and using technical analysis, I was convinced INTC was heading higher. I recommended the INTC October 2009 $16 call options on May 13th of 2009.
You can see INTC ran from $15.12 to a high $21.27. That’s a gain of 40% over five months. But over the same time, the option rocketed up to a 306% gain!
After an incredible five month rally, INTC’s momentum had cooled off a bit. But the momentum behind tech stocks was just getting warmed up. So I kept an eye on INTC for signs momentum was once again building.
That day came a little over a month ago. On February 11th, I recommended the INTC July 2010 $20 call options.
You can see INTC is up 15% from $19.69 to $22.75 in a little over a month. Our option’s already hit a peak gain of 122% and we still have four months left until the option expires.
In both cases, I chose an option with about five months until expiration. Based on my analysis, it was enough time for the momentum to move the stock before accelerating time decay cut into profits.
Its explosive gains like the 306% and 122% on INTC options that will always make options part of my trading arsenal. And you too can harness the power of options. Just remember to trade options on stocks with momentum and to give your options enough time.
Category: Options Trading
