When I was in seventh grade we had a big science project. I decided I wanted to do a mouse maze to see if mice could be trained to navigate a real-life maze with increasing speed, given various rewards, etc.
Building the maze required cutting a lot of pieces of wood to fairly exact specifications. My dad taught me how to measure accurately, mark the wood, and make a clean cut with a hand saw.
After an hour, I had about four or five pieces of the maze done – about 35 to go…
My dad, comfortable with my level of care in using the hand saw, showed me the hand-held electric reciprocating saw.
Used correctly, I could cut 10 times as many boards in the same amount.
The problem was that used carelessly, it could make a bad cut or, worse yet, could endanger a whole finger…
So dad took great care in showing me the safety rules and procedures for using the power saw. After significant training and under his watchful eye, I transitioned to using the much more powerful tool, with fantastic results.
Despite the added risk, dad showed me how to use a power tool to get the job done fast and safely. I'd like to reintroduce you to one of our most potent trading power tools today…
I recently put out an options trade idea (QQQ calls) that sprang up 49% within two days and then dropped back to breakeven as I write this. (More on the state of the markets – and your QQQ trade – at the end of this article.) However, many of you are new to options and were having difficulty piecing my instructions together.
Since the "how to" of options trading has not been a recent focus in our articles, I'd like to take some time to do three things:
- Explain the benefits of options
- Give you a special look at the "how to's" of call options, first published in my elite service, Stealth Profits Trader
- Bust some common options myths and explain how to use options properly (getting the greatest reward while managing your risk)
I've enlisted the help of one of my great friends and longtime collaborators, Money Map Press Editor William Patalon III, to help with the mythbusting section. I always enjoy my conversations with him, and I know you will, too.
Here's what you need to know in order to use these very powerful tools to profit.
How to Use Options to Get Incredible Profit Leverage
Options are one of the simplest ways to multiply your money. While they're not right for every trader or investor's risk tolerance, for many people they're the best way I know to take a small underperforming part of your portfolio and multiply it rapidly on the way to your first – or your next – million dollars.
In simple terms, options are tradeable instruments that allow a trader to do the following:
- Use a small amount of money
- To control a much more expensive thing (asset)
- For a set period of time
In the case of options, we use a small amount of cash to control a large amount of stock for a set period of time. Because that stock is under our control, we receive the gains and losses made in the stock while we control it.
The first step on your road to millions starts here… All you need is a computer or smartphone and just 10 minutes of “work” to potentially put $1 million in your bank account faster than you ever dreamed. Read more…
We have a term for this control of a much more valuable thing with a small amount of money. We call this leverage – the same term we use when a lever is used to move a big thing with only a small amount of force.
This use of the leverage of options is a power tool for your trading. And like any power tool, we can be excited about the great benefits it brings us while being very aware of the safety practices needed to use them properly.
Options Myths – Busted
The next time you're talking with a group of "informed" investors, bring up the topic of options trading. Before long, someone in your group will cite the supposedly well-known statistic that more than 90% of all options expire worthless.
And most of the other folks will nod in solemn agreement.
Because options have big potential rewards and substantial risks, regulators want us to believe that options are to retail investors what Kryptonite is to Superman.
Because of that, the "90%" stat is presented as trading gospel and is cited over and over and over again – in speeches, in magazines, and in investing analyses of every type.
In fact, I was at a recent conference where a well-known investor quoted the number he learned in business school as 98% of all options expire worthless.
There's only one problem.
It's just not true.
In fact, it's one of the biggest investing myths of all time.
Here's how I answered this very line of reasoning in a conversation with Money Map Press Editor William Patalon, III, just a few months ago…
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.