The Key to Conquering the Wild West of Options
Andy Snyder|September 3, 2020
The Super Trader Rally was a huge success.
In the end, we had the chance to share our message and our latest research with some 50,000 people.
What a feeling it is to have an impact on so many folks.
In the lead-up to the event and during the interactive part of the rally, we received thousands of questions… in several different languages.
But there was one question we saw again and again that deserves a full essay.
It sounds something like this… Do I need to trade options to be a “Super Trader”?
To many, options are the final frontier of the financial world.
They’re the wild west of investing.
They represent big opportunity and freedom… but they can be rough on the new and uninitiated.
Weighing Your Options
The key to surviving in America’s Wild West wasn’t having a single skill. It was having many skills and many tools to choose from.
The uncalloused hands of a city-slicker accountant didn’t do much good if they couldn’t swing a hammer and drive a mule.
It was the fella who could do it all who survived while following the setting sun toward new hopes and dreams.
Modern investors must have the same mindset.
Yes, we can get by just owning exchange-traded funds. And yes, we can survive with a set-it-and-forget it portfolio of blue chips.
But is survival really what you’re looking for?
Did folks really give up life in the East just to “survive” in the West?
Look, some of the biggest and fastest gains of our career came this year… purely from stocks.
In February, for example, we caught on to some unusual volume activity from Novavax (NVAX). We wrote about it in a report we sent our Alpha Money Flow subscribers. Back then, the stock traded for less than $8. Last month, it peaked at $189.
At the peak, that’s a 2,260% gain.
But let’s be clear… investing in small biotechs – or any other penny stock – comes with nearly the same risk as investing in options.
They can both go to zero.
But what options can do that small, speculative stocks can’t is hedge a position, play the downside of a move or allow us to leverage a bit of money for a lot of potential gain.
And yet… most folks we talk to aren’t intimidated by penny stocks in the same way they are by options. In fact, they’re excited to jump into them and eager for our fresh stream of ticker symbols.
Meanwhile, they’re flat-out scared of options.
We say it’s because options come with a fresh vocabulary of their own – strike price, expiration, implied volatility… and, dare we say ’em, “the Greeks.”
There’s a lot to learn.
We can help with that.
But there’s something we can’t help with. And it’s the absolute key to investing in options – smart position sizing.
The Goldilocks Trade
Flat-out… too many folks put too much money into options.
We hear about it all the time.
For example, they’ve got five grand in their trading account… and instead of investing in stocks, they bet it all on the allure of fast-moving options.
Think of it this way. We typically use a 25% trailing stop on our stock plays. That means – given normal circumstances – the most we can lose on a play is 25% of our initial stake.
With options, though, it’s quite possible to lose 100% of our entry stake. It happens a lot.
That’s why you should never put more than 25% of what you’re willing to invest in the underlying stock at risk in options.
In other words, if you’re looking to invest $4,000 in shares of XYZ… invest no more than $1,000 in its options.
That way if your $1,000 disappeared, you’d be out no more than the $1,000 you would have lost if XYZ had dropped by 25%.
You’ve still got $3,000 in your account… and you get in on all the upside fun if XYZ takes off.
Master this idea and there’s nothing to be scared of when it comes to options.
Video Coming Soon
We’re just wrapping up a video about a simple position sizing formula. With some easy math, it’s possible to accurately determine the optimal amount of cash to put into each play. We’ll send you a link to the video on Saturday.
For now, we urge you to watch this recorded version of The Super Trader Rally if you didn’t tune in yesterday.
We talk a bit more about options and detail another video we made that shows viewers exactly how to make an options trade.
To film it, we logged on to our trading account and shared our screen. It shows just how simple it is to trade options.
It’s the video so many subscribers have been begging for.
Like so many of the tools we love to operate… options can be dangerous in the wrong hands and quite powerful in the right hands.
If you want to be a “Super Trader,” you need to trade your first option contract.
It’s not hard.
We detail everything we look for in a trade here.
Are options a part of your investment strategy? Tell us about your experience with them at firstname.lastname@example.org.
Andy Snyder is an American author, investor and serial entrepreneur. He cut his teeth at an esteemed financial firm with nearly $100 billion in assets under management. Andy and his ideas have been featured on Fox News, on countless radio stations, and in numerous print and online outlets. He’s been a keynote speaker and panelist at events all over the world, from four-star ballrooms to Capitol hearing rooms.