I’ve only been trading options for about three years.
Fortunately, since I’m on staff at Banyan Hill (our publisher), I have access to over 20 research services covering stocks, options, crypto and everything in between.
So I was able to expedite my path to a certain level of expertise fairly quickly.
When I first started, it was all trial and error — the equivalent of throwing a bunch of crap at the wall to see what sticks.
I wasn’t afraid to lose money. Because I realized every time I lost money, I learned something.
Today I want to share the most valuable lesson I learned through my trial and error — one that you can hopefully start employing in your very own brokerage account today.
WITHOUT making a bunch of costly mistakes.
This Is Fine for Stocks. But for Options…?
I probably have 100 different stocks I own in my brokerage account.
I’d love to be able to say I can name them all, but I can’t.
I’m okay with that.
When I buy a stock, I plan to hold it for several months or years.
So I can afford to buy, hold and forget.
My managing editor teases me about this…
We were sitting in the office one day when I about fell out of my chair after noticing I was up 2,148% on a stock called Moxian (Nasdaq: MOXC). I bought this stock last October and had totally forgotten about it.
However, in the 100 or so stocks that I own, I have a few stocks whose price patterns I know very, very well.
As Chad Shoop often tells you in his Thursday dispatches, price is the only thing that matters. I can look at a price chart and tell you where the stock is most likely to go next.
And this brings me to the most valuable lesson I learned on my path to options mastery.
You will never succeed in the options market trading a whole bunch of random, different stocks.
You need a system or approach that narrows the market down to a few variables. If you try to trade and monitor everything, you’ll lose money.
That’s why, in any given month, I may only have three to five stocks I’m trading options on.
If you went to college, you probably remember that your professors really only excelled in one hyperspecific aspect of their field. For an English professor, this might be an author or genre. For a history professor, it might be a specific battle or event and its impacts.
We’re not computers or machines. We can’t excel at everything. Our brains have limited room to store information.
That’s why I only trade options on stocks that I know really, really well. These are stocks I check almost every day, monitoring their price patterns, their trajectories, and support and resistance levels that I can spot with the naked eye.
My “Back of the Hand” Stock
One of my favorite stocks to trade right now is Virgin Galactic Holdings (NYSE: SPCE).
As one of the few pure plays in the emerging space sector, this is a very popular stock among retail investors. That also means it’s extremely volatile.
The stock more than doubled in the first six weeks of the year. Then it crashed over 70%.
(Full disclosure: I own quite a bit of this stock and I also trade options on it. Though at this time, I don’t have any open options positions on the stock.)
I managed to sell at the top in February then repurchased after it fell 20%. Obviously, I could’ve bought back in a lot lower, but hindsight is 20/20.
Naturally, I lost a lot of money after buying in. So I kept my eye on the stock and waited for a bottom so I could make up my losses with some call options.
When it was down over 70% in three months, I knew it was oversold. So I loaded up on call options.
Specifically, I bought the $40 call that expired October 15. I chose a long expiration date to maximize my chance for a gain.
I bought a total of $1,785 worth through the early and middle parts of May and sold for $6,200 on May 26.
A shorter expiration would’ve amplified my gains… But a 247% gain in less than a month is nothing to complain about.
So let’s check in on where SPCE is at today…
(Click here to view larger image.)
While I don’t own any options on the stock right now, the stock is re-testing its February highs. It recently bounced off this ceiling but appears to be making a comeback. I think there’s a good chance the stock will break through the ceiling, but I wouldn’t bet money on it. I would only bet money on the likelihood that the stock returns to the ceiling.
This would represent about an 18% gain in the stock. You may consider buying a call option that expires at the end of the month.
See, I’m able to make calls like this because I’ve been watching (and trading) SPCE for over a year now. I have a good feel for its price moves.
That’s why I’d suggest any struggling option trader to study one stock at a time until they’re comfortable trading it consistently.
And if you’re interested in strategies that only trade a few stocks, check out Quick Hit Profits. Chad has a few filters that essentially cut out 98% to 99% of the stock market.
The performance over the last four years has been absolutely phenomenal, largely because Chad doesn’t trade all stocks, but just a few he knows well.
Chief Editor, True Options Masters
P.S. Over the last week, we’ve seen some awesome feedback from True Options Masters readers.
What we’ve noticed is some of you are taking the ideas presented here and making great money on them.
That’s exactly what we want True Options Masters to do. And we want to keep hearing from you, about whether we’re fulfilling that mission.
So, starting today and moving forward, we’re going to share your feedback in our regular issues. If you have questions, we’ll respond to them. If you just want to say thanks, we’ll share your message. And even if you have a trading idea of your own to share, we’ll take a look and give you our thoughts.
Our goal is to make you just as big a part of this new project as we are. So keep your feedback coming to TrueOptions@BanyanHill.com. And check out our first-ever mailbag section below.
True Options Masters Mailbag
First up in the mailbag today, one reader thanks Mike Carr for his recent straddle recommendation…
Hi Michael, I wanted to thank you for the option trade opportunity on QQQ you sent me on July 2, last Friday morning.
This was the first time I have used the Long Straddle Strategy. I purchased three contracts with a strike price of $356 and was able to close the option at $358.90 with a profit of $998.00 by end of day on Friday at 3:50 p.m. ET.
Is this a new service in addition to the Quick Hit Profits service with Chad Shoop? If it is, how often will I receive an option trade? I like this service. It is results-oriented and very profitable.
Thank you very much.
Mike: Eric, I’m glad you were able to trade Friday’s straddle recommendation successfully. Like I mentioned then, it’s a great strategy to trade a surge of volatility with uncertain direction.
As for your question: We’re right at the beginning of building True Options Masters into the most useful free options eletter in the market. Reader benefit is at the top of our mind. And we’re excited to share great trading opportunities whenever we find them.
At the same time, True Options Masters is freely available to anyone who wants to read it. Sometimes we’ll publish specific trade ideas. Other times we’ll publish more education-focused pieces. And some days we may even cut loose with something totally unrelated to trading.
As you’ve seen, these trade ideas are highly valuable. That’s why our subscribers pay good money to hear about them in our various advisories each week.
So, you shouldn’t expect to receive specific trade guidance at any specific day or time, or with any regularity, from True Options Masters. But if you are looking for that sort of regular guidance, I highly recommend checking out some of the services Chad and I offer. Check out Chad’s work here, and mine here.
It sounds like you’re already subscribed to Chad’s Quick Hit Profits, and I’m glad you are. We’re just getting into the busy earnings season — a huge time of year for Chad and his readers.
For anyone reading this who’s not, we’re offering a 62.5% discount on it right now. And with earnings season nearly upon us, there’s never been a better time to sign up.
Next, a reader shares their profit from Chad’s Unusual Options Activity highlight last week…
I went with WFC right after I read the notice. I pulled out early in the week for a gain of over $100.
I saw that those insider-bet revelations are concrete. My future respect for the notices should bear real fruit.
Thank you, team.
Chad: We’re happy to hear you profited on that trade, George. Keep in mind, though — the smart money doesn’t ALWAYS have it right.
I’ve seen plenty of big options bets not pan out like the trader clearly thought they would. And that’s okay…
Being a successful option trader isn’t about never taking a loss on a trade. Quite the contrary, losing is an important part of the education experience. Chris’ note today proves that.
It certainly can pay to follow the smart money when they go big on an option trade. Just be sure to keep your position size small on these more speculative trade ideas — small enough that you wouldn’t break the bank if the trade went to zero.
Thanks for sending in your thoughts on this new project. Like Mike said, you’re just as big a part of this as any of us.
That’s why we want to keep hearing (and sharing) your thoughts. Whether you profited from one of our ideas, have a question about option trading or even want to share an idea of your own, write us at TrueOptions@BanyanHill.com.
But that’s not all we have planned. Our focus is on benefitting you as much as possible. That means sharing as many strong trading ideas as we can find.
So also be on the lookout for regular Chart of the Day sections, where we’ll keep the actionable ideas coming. The first one, from our new Managing Editor Mike Merson, is below…
Chart of the Day — Massive Bearish Sign for the Euro … and U.S. Stocks
By Mike Merson, Managing Editor, True Options Masters
(Click here to view larger image.)
In our inaugural Chart of the Day, we’re taking a look at the euro/USD currency pair.
This chart shows the performance of the euro against the U.S. dollar. When the chart level rises, the euro is outperforming the dollar — and vice versa. Likewise, a weak dollar tends to be good for U.S. stocks.
We can see the euro has strengthened against the dollar over the last year. However, the price action has also formed a head-and-shoulders pattern.
These patterns emerge when an asset makes one high (the “left shoulder”), a higher high (the “head”) and finally a lower high (the “right shoulder”). A “neckline” forms by connecting the lows of the head and shoulders.
The one we see today happens to coincide with a series of lower highs on the Relative Strength Index (RSI), as well as declining volume. Both are visible in the bottom of the chart. And both are bearish signs for the euro.
We’re currently testing the blue neckline on the chart. I’m watching to see if the pair falls below this level. If it does, I expect a drop of around 6% — the same as the distance between the top of the head and the neckline. (That might not sound like much, but in the currency markets, 6% is massive and trend-changing.)
Traders should prepare for a strong-dollar environment in the second half of 2021. That means headwinds for U.S. stocks.
You can play this pattern directly by buying put options on the Invesco CurrencyShares Euro Trust (NYSEARCA: FXE). Else, lighten up on any U.S. stock exposure to protect your profits.
— Mike Merson