When a person first learns about the stock market, they tend to become excited by the possibilities… and may start building a stock portfolio and may even do a little trading.
They might have a few bumps along the way and may even find long term success with stocks.
But when a person learns about options… sometimes they lose all sense of reality and end up wiped out… or worse…
A few come back scarred from losses and the emotions that go with losing…
Then they turn into winners… sometimes even crazy rich winners…
But no one ever wins 100% of the time with options trading…
If you are going to trade options, you WILL have losses.
Sometimes these losses can be large and emotional.
I’d like you to avoid having to go through that…
And that’s why I wrote this report about what every investor should know about options.
I’ll give you some options facts and some secrets but first, let me tell you who I am and why you might want to listen to me…
My name is Jack Carter. I’ve been in the stock market for over 30 years. I started out in 1984 as a Wall Street-trained stockbroker. Then I became a NASDAQ Market Maker.
After that, I was manager of a “fast money” hedge fund (where I once traded $8 million worth of stock in a single day).
And now, I’m a private, stock trader and mentor to thousands of successful stock traders in over 43 countries worldwide…
All told, I have nearly $1,000,000,000.00 (that’s one billion dollars with a “B”) in trading experience, much of that…
With My Own Money On The Line!
But this isn’t about me, it’s about YOU and how you can use my experience for your gain in the options market…
As I mentioned, options can have a crazy effect on people in a way stocks cannot.
Here’s a weird but true story…
An Ugly Scene My First Week As A Stockbroker…
During my first week as a stockbroker, I witnessed one of the most disturbing scenes I ever saw.
It has to do with options…and… it still kind of haunts me to this day.
Here’s something Wall Street definitely DOES NOT want you to know…
Even after getting a Series 7 license to be a stockbroker… most stockbrokers don’t know shit about options… just enough to past the test but that’s it.
The real world was totally different… I realized that one day when another broker in the office was carried out on a stretcher…
Back when I started, in 1984, most brokerage firms had a “bullpen” setting.
This “bullpen” consisted of a cluster of four desks and one Quotron machine on a swivel in the middle so the brokers could spin it around and look at quotes when they were on the phone with a customer… because customers could not get quotes without calling a broker – imagine THAT!
Anyway…
In the corner of the bullpen, were four desks set up this way.
But one guy… Izzy Glass and his partner… dominated the Quotron machine…
They stared at it all day, every day…
I couldn’t understand why.
On the third day, just after the market opened, Izzy fainted.
Collapsed.
They called the ambulance.
Hauled his ass out on a stretcher.
I never saw him again.
His partner cried like a baby.
He never came back either.
Why Did Izzy Have His Ass Hauled Out On A Stretcher?
As a new stockbroker, this rattled me…
Nobody expects their co-workers to pass out in the office…
And it had a somber effect on the whole office.
I knew the owner of the brokerage firm and asked him what the hell happened.
He said “ Carter, options are a ZERO sum game”…
At the time I didn’t know what the hell that was supposed to mean, but it scared me away from options…
For a little while.
He also told me that most people lose all their money when they buy options.
This turned out to be true but I didn’t understand WHY until almost 12 years later.
Izzy and his partner bought options they expected to soar in price.
Didn’t happen.
Problem was, Izzy basically bet the farm… so did his partner.
They invested more than they could afford to lose.
And when the stock failed to go up, the value of Izzy’s options went DOWN… every day… until they were worthless.
Watching this play out every day… and the stress of this trade damn near killed this greedy bastard.
A Damaging Admission…
You would think that the experience of watching Izzy go down would be enough to scare me away from options forever…
But that was not the case…
I want to share with you a very painful and very expensive lesson I learned on my first option trade in November 1985 when I was a financially broke and desperate rookie stock-broker with Dean Witter.
Myself and another idiot went halves on buying some Calls on a stock he “researched”… “studied”… “analyzed”… “charted”… and thought was…
A “Sure” Bet !
We bought the Call options anticipating the stock to go up and the value of the option to sky rocket along with it.
I was so sure of this trade that I invested money I would need for an airline ticket to go back home to be with my Dad… back in Indiana… for the holidays.
Then came…
Three Weeks Of Pain !
Over the next three weeks, I watched the stock stay at about the same price it was when we bought the Call options .
Yet… the call option’s price declined a little bit almost every day. Just enough every day to piss me off.
Even on days the stock did go up… the call option barely budged.
This went on and on, everyday.
Until…
It Was Worse Than Worthless !
It was worse than worthless because the commission to sell it cost more than the options were worth.
I learned some valuable lessons in this trade…
Lessons that I’ve profited from over the last 15 years and lessons that you can profit from too…
1. NEVER invest or trade more than you can afford to lose. Because anything can and will happen in the stock market.
2. The time decay of options erodes their value enormously the closer they get to expiration. (You want this time decay factor working FOR you… not against you).
I lost for the same reason most option’s traders lose. I bought an option and held on to it ‘til it was worthless
Here’s Who Wins Most Of The Time In The Options Market…
New research indicates…
87% Of Options Expire Worthless !
Regardless of the actual number, it’s important to note that option BUYERS lose money more often than option SELLERS.
And the #1 reason option buyers lose money is because…
They Run Out Of Time !
There-in lies the secret of the most wealthy option’s trader I know of.
You see, years after my first option trade, the irony of that loss was driven home again.
While talking to a former boss of mine… a notorious day trader and short seller… about one of his trader friends, he asks me if I could meet them for lunch.
And, after learning that it was his “options guy,” I said “of course”…
“We’ll pick you up out in front of your building,” he says.
“How will I find you,” I ask him.
“My friend Mike only travels in a limousine, so look for us in his big ass limo out in front of your building,” he says.
“What kind of trading does this guy do that he only rides around in a limo,” I ask.
“My friend makes millions trading options…
“He sells options on the floor of the CBOE,” he says.
I laughed to myself as I thought about how naive I was when I bought that worthless option on my first option trade.
I and countless others allowed this guy to rake millions of dollars… and… put his son through a prestigious university at “out-of state” prices… and… pay for his limo.
And we did it all by buying overpriced options from this guy and holding them until they expired worthless while he cracked up laughing all the way to the bank.
The real people making money in options are the options sellers.
The #1 Options Secret is that options sellers make the most money, most of the time.
This is a little known fact in the options market.
But here’s the thing…
Even if it was common knowledge that options sellers made the most money… that would not stop traders from buying Calls and Puts…
Here’s why…
Here’s Who Makes The Biggest Profits In The Options Market…
Options buyers make the BIGGEST profits!
Speculators use options because they want a huge return in exchange for little investment.
Here’s an example…
Let’s say you discovered Google (stock ticker symbol GOOG) was great to trade because the stock was in a powerful trend when you found it.
And you bought 1000 shares of the stock.
Since each share is trading at $510 a share, it would cost you $510,000 to buy 1000 shares of GOOG.
Now let’s say that right after you buy GOOG it jumps up in price by thirteen dollars ($13.00 ) per share.
When the price of the stock went up thirteen dollars per share, you made $13.00 on each of your 1000 shares… for… a gain of… $13,000 !
That’s a nice profit on one trade.
But let’s start over and say you want to use options on GOOG instead.
An “option” gives you the right… but not the obligation… to buy shares of the stock.
Let’s say you can buy an option to buy shares of GOOG for $3 each.
Each option contract equals 100 shares of stock so 10 contracts controls 1000 shares.
And this would cost you $3,000. Staying with the real example, when the stock price of Google jumped up by thirteen dollars in one day…. the price of the options to buy Google went from $3.00 to $12.00.
Your profit in this example is $9.00, not as much as on the stock, but since you controlled 1000 shares of stock… you end up with a profit of… $9,000 !
And since you only put $3,000 into the trade, you made…
300% Return On 1 Trade In 24 Hours !
That’s the hook.
That is the power of leverage and it’s the main reason why so many speculators prefer trading options rather than stocks.
What’s The Best Way For You To Trade Options?
Remember when I said that in the options market, there were winners and losers?
If you want to win most of the time…
Be An Options Seller!
Options selling strategies give you a huge edge.
But because the odds are so dramatically in your favor, the rewards are less than you get buying options.
If you want to get the biggest bang for you buck…
Be An Options Buyer!
The guy that made the most money was an options seller. He would sell options while they had some time value left and let them expire worthless.
He made millions doing this.
His returns were small but the probability of success was high… and that’s how he got rich – putting probability on his side.
There are people now who use a version of his method and make income every week. The returns can be 2%, 4%, 7% or more.
You get to decide what yield you want based on your risk tolerance.
On the other hand, I know a guy who buys Call options and tries to make 100% or more in less than a week.
One of the options he bought went up 600% in 2 days.
Sometimes he loses about half of his investment.
So what’s the best way?
If you want the odds on your side every time, use options selling strategies.
You’ll get lower yields… but… much higher probability of success.
If you want the biggest bang for your buck, buy Calls or Puts… but… only with a small amount of risk capital.
For some people, the best way is…
Do Both!
Use This “Trade Allocation” Secret
Here’s how…
My friend, the real secret is in “trade allocation.”
In other words, how much money you invest in each trade.
You allocate more money to trades that have higher odds of success… but still keep some “dry powder” for the rare times you can buy Calls or Puts to make a killing.
The reason you want to use this “trade allocation” model is because, no matter what strategy you use, you WILL have losses.
To avoid getting wiped out use this tip…
The most successful options trader I know uses a unique “trade allocation” technique…
He mostly sells options and gets 6% – 20% in 5 days or less.
To do this, he will find four stocks every week.
Then allocate just 20%-25% of his trading capital to each trade.
Each trade is designed to make 6% or more in 5 days using an options selling strategy.
And he always has a little cash on hand to buy Call or Put options for the rare times that buying an option could produce a gain of 100% or more.
When a great Call or Put buying opportunity comes up, he will allocate just 2% to 5% of his capital to this trade.
The reason is because if it doesn’t work out, he’s only out 1% to 2% maximum.
If it does work out, the trade could pay off 200% or more.
And the bulk of his capital is in high probability trades with great weekly yields.
I like this model.
This way, the bulk of his capital is allocated to trades where the odds are dramatically in his favor… but still produce a nice yield… and… he has a chance to hit a home run once in a while.
This trade allocation model will give you better results. It’s been proven to work.
OK, let’s have a quick re-cap of the 7 things every investor should know about options …
- Options are a zero sum game.
- Most options expire worthless.
- Options expire worthless because of time decay.
- Option sellers win most often.
- Option buyers make the most profit when they win.
- Options buyers lose the most when they lose. Usually they take a 100% loss.
- Using an allocation model can help you get better results.
Trade Well,
Jack
