When most people think of options, they think of risk, dangerous leverage, speculation, or gambling.
For novice investors, it certainly may feel that way.
But you see, most people don’t understand options.
They were created to reduce risk. In fact, options were designed to help investors hedge their portfolios against big declines in the market.
And since we’re in one of the most unpredictable markets we’ve seen in years, options need to be part of your toolkit… because the truth is that if you’re buying and holding stocks in a market like this, you’re bound to lose money.
And because we’re just days away from a powerful event that could cause the market to “snap,” holding stocks is even more dangerous than ever. (If you want to know how to prepare ahead of time, click here.)
However, while using options can make you a lot of money, it won’t happen overnight.
Trading options is a process. And if you want to be in the options market for any length of time – and protect what you’ve earned – you must do it the “right way.”
The “right way” involves a little extra effort. But I can help you master the basics, as I’ve been trading options for over three decades.
Even in the worst markets – like 1987 and 2008 – I had some of my best years. During the lead-up to Black Monday, I multiplied my money 10 times. And in 2008, you could’ve doubled your money on 18 of my recommendations.
For years, I’ve been teaching folks just like you how to reduce risk with options and add a little bit of “pop” to an otherwise conservative portfolio.
So before you get started, here are a few things you must keep in mind…
Truth No. 1: Buying and selling options is about the least risky and potentially most rewarding game on Wall Street.
Options master Victor Sperandeo racked up a nominal rate of return of 70.7% without a losing year between 1978 and 1989. With his remarkable track record, we’d be foolish not to pay attention to what he has to say…
Now, many investors believe options are the riskiest game in town… and certainly, they are by far the most challenging, flexible, and potentially profitable financial instruments available.
But if you trade them prudently, apply sound principles of money management, trade only when the risk/reward ratio is highly in your favor, and execute your trades with diligence and patience… Then, in all likelihood, you will be profitable over the long term.
I can say, conservatively, that at least 40% of all the returns I’ve made in my life have been with options.
Truth No. 2: Want to be a winner? Watch your losers!
To succeed in trading options, you need to limit your trading to opportunities with at least a 3-to-1 payout. At minimum, you want to have the potential to pocket $3 in return for every dollar you risk.
This also forces you to think in terms of reward and risk, which is extremely important.
Most failed options traders – even ones that may have had good trading systems – fail because they didn’t pay enough attention to risk. If you’re willing to lose 50% on a position, you’d better expect a gain of 150% or more – at least. That’s a tall order.
If you’re willing to lose it all (meaning have the potential for a negative 100% return on a position), you’d better be expecting a 300% to 500%-plus gain in that position.
When you see it in terms of risk versus reward – and realize that 500% winners don’t come along every day – you can see that “risking it all” is a bad bet.
Options are a lot like poker – your hand is only a small portion of the battle. Betting appropriately for the entire game is really what’s important, which leads us to…
Truth No. 3: Big winners make small bets.
You’ve got to know when to hold ‘em and when to fold ‘em. But you’d sure hate to fold ‘em and take a total loss with a big bet on the table… So don’t ever put yourself in that situation. Limit the size of your positions.
You should only have 2-3% of the money you’ve set aside for trading at risk on any one trade… and I really can’t imagine any circumstances where you should consider putting more than 10% of your trading money on one play. So don’t do it!
To end up like Victor Sperandeo over the long run, you’ve got to stick to the program, limit the size of your positions, and limit your downside by never allowing a small loss to turn into a big loss.
Traders who follow this have a chance of being winners in options over the long run. Those who don’t will be quickly taken for every penny.
Best regards and good trading,
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Jeff Clark
Editor, Market Minute
P.S. If you care about your wealth, the worst thing you can do right now is nothing. Now, more than ever, is the best time to trade options…
Because something in the market is about to “snap,” and $4 trillion could change hands overnight. Most people will be caught off guard and will panic.
But if you understand what’s going on – and you follow the simple steps I’ll go over during my presentation tonight at 8 p.m. ET – then you could recoup all the losses you suffered this year… but only if you’re on the right side of this major market “snap.”
During the presentation, I’ll even reveal the name of three stocks I’m paying extra close attention to – for free.
Just click right here to take action.