Options are priced as if it were a Zero-Sum Game. In theory the stocks should only be in a position to move in one particular direction the total price of the Call and Put premiums for the period of time. So if a stock is at $50 and the $50 Options are both priced at around about $2.50, the Options price say that the stock should stay in a go from $45 to $55. That?s the math, will not go into in great detail here. By purchasing both, we look for a move below $45 or above $55.
If the $50 Call and Put cost 25 cents each, the market is expecting a move not much larger than lows of $49.50 to highs of $50.50. This is the basis for our Straddle strategy. Where we actually begin to earn a little money is when the stocks move larger than the market’s predicted move. By using a Straddle, we don't care what direction it moves so long as it moves!
The losing team can never go below 0. So if the winning side moves sufficiently large we get an additional profit. This profit kicks into overdrive when an Out-of-the-Money (OTM) option moves In-the-Money (ITM). You should have seen in the videos or read in this newsletter countless occasions when a choice moved more than 100%. For that matter, you ought to have seen and will get the possibility in the future to observe options move more than 1,000% in just one day. We try and pick those stocks well in advance and perhaps as significantly, those days far in advance!
How high can a tree grow? The obvious answer is, only as high as its roots will allow. The more detailed answer analyzes the soil, water content, and surrounding foliage. I am thinking some trees are getting too big for their root structure. I digressed from talking stocks. How high can a stock go? Only as high as its structure remains firmly rooted. Please understand this is a course on trading options, not a technical research course (I could make one if enough of you wanted). Without going into the explanations behind my faith structure now, I am thinking FAS is getting too high in price. I think it will eventually drop. I could be wrong in the short term, but I believe I’ll be particularly right in the long term. I have developed a technique to exploit its eventual drop. Instead of trading a Straddle or Strangle, we will look to trade only Put options.
In a sense it's like a Martingale Plan, but we have tried to get rid of the randomness out of the equation. And more importantly, we will take away the bad cashflow control that's the financial death of Martingale betters. Casinos know eventually all even cash offers will land on the other side. Heads will flip tails, percentages will spin even, black will land red. As described early, the death knell of Martingale strategist is a long unlucky streak. If the casino limits will not stop him, the economics of constantly doubling and losing a bet will run him out of cash.
The Martingale system is founded on even-money gambles, win what you wager. Double the bet on a loss. Continue till you win or are broke. With weekly options we have demonstrated countless examples of superb returns. These “Excessive Returns” permit you to be on the incorrect side of a trade for some time, before being made full on a single move. Please understand the best leverage is the end of the week and this one is from an option on Tues. March 6 th . As you can see, the gain was over 300%, much more than the Martingale system needs. What you may not have realized is how far Deep-Out-of-the-Money (DOTM) this actual option was. The low on the stock over this period was $85.62. The Stock ended the day before at $92.37. The issue I see for readers of last week’s update is this move came sooner than we forecasted. It is possible that some missed this trade and then came in on our expected schedule looking for a continuation of the move, only to see the stock bounce back up. A case of Double Back on a large scale as demonstrated by a number of the great moves FAS Call options made on Expiration Friday.
Here’s a shot of the $95 Call on expiration Fri.. Buying at the open gave us a chance to make a massive return. This is the kind of leverage that is not present in any other sort of auto one may try to make use of the Martingale system on. I believe the Put side of FAS will make some great returns. So huge they are going to make the above Call option look quite tiny. The question is can we catch it? I am going to look to risk a touch on FAS DOTM Puts early the week after next, if I catch a nice move, I could take the money and run. If I miss out, I?ll throw extra money at the trade the subsequent week and try and catch a big move. Because of the leverage of DOTM options, mixed with the. Almost certainty of a FAS price pullback, this trade will eventually work.
The big questions are, do you have the resources to throw additional money at this trade till it does and do you have the stomach for it if it takes a while?
If you do not have the resources to throw serious money after bad and buy more options next week if these do not work, don’t start. Maybe you should follow this trade forward and learn. These setups appear continually. If you aren't the gambling type, do not be disturbed, we'll have other trades for you. But please study this trade. I sort of don’t need it to work immediately so I am able to show you how we will be able to still win, even when we're down. Perhaps I shouldn't have tested fate; I desire this to work immediately!
Chris Verhaegh
Stock market