Frequently Asked Questions
Welcome to Michael Carr’s Precision Profits … a service dedicated to trading on seasonality. Michael and Chris Orr, our in-house meteorologist, study seasonal trends in stocks, and they’ll share their findings each week to help you maximize profits.
To help you get started right away, take a moment to read through the frequently asked questions below.
- Do I have to trade options?
If you wish to maximize your gains so you can rake in a consistent series of triple-digit winners, then yes, you have to trade options. Options provide incredible leverage. For many of the trades in the Precision Profits service, we are looking for only a small move in the underlying stock — between 5% and 15% — but that small move translates into gains of 90%, 100% and even 200% when we use options.
What’s more, options allow you to devote a smaller portion of your overall portfolio to a position. If you wanted to buy 100 shares of Apple, it would cost you upward of $10,000. On the other hand, one call option contract with three months of time at roughly the same price level as the stock would cost you less than $1,000.
In other words, the option contract gives you control of 100 shares of Apple and allows you to participate in the movement of the stock. But you’re now risking only a fraction of your portfolio on one position. You can now better protect and diversify your investments than if you’d devoted $10,000 to one stock.
- Do I have to open an options account?
Yes, but it’s not difficult. If you already have a brokerage account, you might need to request authorization to trade options. However, the process is very simple and often takes less than five minutes to complete. Check with your brokerage firm to see if they will allow you to upgrade your account online.
If you are opening a new trading account, you need only to check a box to indicate that you want options trading authorization. Either way, you will need to complete a simple one- to two-page form that will inquire about your goals, trading strategies and trading experience. For Precision Profits, the only trading strategy you will be using is the purchase of calls and puts.
If you have any trouble getting approval for an options trading account, speak to your broker and inform them that you are aware of the risks involved with purchasing options.
- What level of an account do I need?
You will typically need “Level 2” options trading approval (levels can vary depending on what brokerage you’re using), which allows you to purchase calls and puts. It’s one of the safest strategies because your risk is limited only to the money spent purchasing the option. You’ll never be required to add more money to the account should a position move against you.
- Which brokerage firm should I use to trade options?
We encourage you not to use a full-service brokerage firm because you’ll pay significantly higher fees to get in and out of trades. Overall, most brokers charge a set fee for each options trade (usually around $5 to $9) and then a variable fee per contract (about $0.50 to $2 per contract).
Below, we have listed 10 of the top-rated options-trading brokers as well as some of their commission fees. Keep in mind that many of these fees may be slightly higher or lower based on your trading frequency.
- Why do you have “limit” orders?
Limit orders are a way of setting the maximum price you are willing to pay. If the option is infrequently traded, it will often have a “wide spread” (the distance in price between what someone will pay to purchase the option versus what someone is willing to sell the option for). As a result, you risk overpaying.
With that in mind, Michael has carefully calculated the maximum you should pay for an option, compared to how far he expects the stock to move. Remember, his goal is to hit a triple-digit gain on the position. By setting a limit order, we ensure you pay a fair price for the option without undercutting your ability to hit that triple-digit win.
If the option’s market price is above Michael’s recommended limit price, you should not purchase the option. Otherwise you’re “chasing the trade,” and that’s something we don’t want you to do.
Let’s look at a quick example:
Say we decide to trade a December $80 call option at Michael’s recommended limit order of $3.50. To get a 100% gain, the underlying stock would need to rally 8.8% to $87 ($3.50 x 2 + 80) so that the call will be worth $7.
Now, what if you chase the trade and pay $4.50 to buy the options instead? You need the stock to rally to $89 ($4.50 x 2 + 80) for the option to reach a value of $9, for a 100% gain on the position. In other words, the stock has to rally 11.3% for you to get a triple-digit gain.
Set the limit order. If it comes back down to our price, great. If not, we move on to the next trade. And don’t worry; you’ll have plenty more opportunities to make big gains.
If you haven’t seen it yet, Michael created a great video that walks you through placing an options trade with a broker. Click here to watch the video, How to Place an Options Trade.
- How much should I put in each trade?
First, it’s critical that you do not have your entire trading portfolio dedicated to options. You must stay diversified so you are not only protected against unexpected market volatility, but also so you’re well-positioned to profit from any significant moves higher. You should still have your staple investments while dedicating a small portion of your total portfolio to options trading.
Second, you need to plan accordingly when trading the Precision Profits service. We have an average of four to five positions open at any given time. However, there will be times when we can have as many as 10 trades open at once or as few as two or three positions open. If you are allocating $10,000 to this service, you might consider devoting $1,000 per trade.
This will help build your confidence and experience. And it is always best to do some of your own research, even if you are using a service like this one, because the risk/reward for a certain position might not be at your tolerance level. Either way, we’ll help get you going in the right direction.
Ultimately, the decision is up to you.
You should only trade the number of contracts you feel comfortable with. Michael suggests purchasing at least two contracts for each trade, because he frequently suggests selling half the position to lock in profits, while letting the other half “ride” for bigger gains down the road. But if you can only trade one contract, no worries. Just sell that contract when he recommends selling the first half of your position.
Whatever strategy you apply, stick to it religiously. You never know when a loser will come along, and if you’ve put too much of your profits into the wrong trade, you could erode your returns.
In the end, it’s up to what you feel comfortable with. For the purposes of our portfolio, though, we value each holding as being equally weighted.
- Do you use stop-loss orders?
Stop-losses are a great way to limit losses with stocks, but options are a different matter.
We don’t use stop-losses often for one reason: Options are incredibly volatile. They can make quick, violent swings based on temporary or even irrelevant news. So an option’s stop-loss can be triggered even if the underlying stock is performing the way we want it to. That means we could be stopped out of a great trade that would eventually bring us profits if we had waited just a little longer.
Mainly, Michael will only send you a stop-loss recommendation when an event threatens to capsize a seasonal trend just to make sure you are preserving capital.
Naturally, if you wish to set stop-losses on positions to match your trading tolerance level, that is certainly your prerogative. But as a strategy, it is not something we do when we initiate a position. We do, however, set protective stop-losses after a significant gain (+100% at least) to preserve profits so that we don’t give back all of our gains in a downdraft.
- What risk tolerance is needed for Precision Profits?
Precision Profits is for risk-tolerant investors who are able to stomach losing 100% on some trades. We don’t frequently lose that. But more often than not, if a position is a loser, it’s a 100% loser — and that’s on purpose. We generally hold positions to the bitter end because on more than one occasion we’ve seen a position that is down sharply in the final days of trading quickly reverse course and give us a profit. We will gladly take a few 100% losers when we have a long string of 100%, 150%, 200% or more gains.
The 100% losers are part of the game when it comes to options. And our strategy has shown time and again that we can easily absorb those when we’re cranking out such large gains elsewhere over and over again.
- What is the average holding period?
In general, a specific trade will last less than two months. Some options will move quickly, maybe because of a certain earnings report that has a history of moving shares. In those situations, you’ll book profits fast, sometimes within weeks or even days. In other cases, we may roll over positions and sell one option in a stock to buy a new one with a later expiration. Shorter-term options cost less and it is usually less expensive to buy three one-month options rather than one three-month option.
- Should I reinvest my gains?
In general, we think it’s best if you do not reinvest your gains. With options, there is always the risk that the underlying stock moves sharply against you in a single day and your position suffers a 100% loss. However, as you develop confidence in the service and with trading options in general, you might consider reinvesting a small portion of your overall gains.
- Why don’t you use trailing stop orders?
Not all brokers allow you to place a trailing stop. More importantly, a trailing stop is calculated using the highest price of your asset while you’re holding it — meaning the trailing stop follows the movement of the option. If the price rises, so does the trailing stop. Since options can swing widely day-to-day, we could get thrown out of a position before we want to.
A stop-loss order is calculated using your buy price. It’s a fixed point, so we don’t have to worry about it as much if the option begins whipsawing.
The thing with using any stop is that a temporary turn in the share price may stop out your position, only to see profits continue to rise after it. If we use a standard stop-loss order, it’s because Michael is willing to set the price he wants to sell shares at, while allowing them to fluctuate at any price as long as it remains above our stop-loss.
- There was no volume on one of your recommendations until after the alert went out. If all of that volume is from Precision Profits subscribers, isn’t that problematic?
No, because of changes in market structure driven by high-frequency trading, volume on an option no longer matters. All contracts in liquid stocks will trade in line with their fair value under the put-call parity formula and the liquidity of the stock now determines whether or not an option is tradable.
- I understand your strategy of selling half of the investment once you hit 100%, and therefore you recommend buying contracts in intervals of two. If I can only afford one contract, can I place a trailing stop once we hit 100%?
You can certainly do that. The way we manage each position, as pointed out, is to sell half the position at a 100% gain, and then allow the other half to ride. That way, we’re working on house money. In practical terms, it is exactly like the strategy of trading just one position and setting a stop-loss at 100%.
In that strategy, a stock is up 100% and you set the order and let it ride higher, knowing you will at least get back your initial investment. In our strategy, we’re locking in our initial investment by selling half, and letting the other half potentially generate bigger gains for us.
The reason we don’t use the actual stop-loss strategy is because options are so volatile to begin with, and many of the ones we trade have wide spreads between bid and ask prices, so there is a very strong likelihood that if we set a 100% stop when the shares reach that level, we’d be stopped out of the entire position at 100% quickly, without the opportunity to ride the position higher. By closing just half, we stay in the game.
After the second half rises more, then our team begin to manage the downside with stop-loss orders.
- You sometimes buy call options [a bet that a stock will rise], even though many indicators show the market is overbought. Do you ever consider market conditions when issuing a new long or short position?
Michael doesn’t look at broad market trends. They aren’t generally relevant to the Precision Profits system because seasonal trends don’t really care about overbought or oversold conditions. That’s a psychological indicator, and seasonal patterns are about the weather issues and consumer issues that impact various companies for various reasons.
The market can be overbought and, yet, if Michael’s meteorological partner, Chris Orr, knows in August that the Rockies will get hammered with snow starting in late October/early November, then we know the ski season will arrive early and that will be a boon to Vail Resorts. Vail’s shares will respond positively to that factor and will totally disregard broad-market sentiment.
So we follow specific company trends, and there Michael does look at certain technical indicators.
- Can you send trade recommendations after the market closes or before the market opens?
We don’t put out recommendations before the market opens or after it closes. Options are way too volatile for that. And the overnight spreads — the difference between bid and ask price — can be enormously wide, giving us a horrible indication of the market.
If we put out a recommendation overnight, news could occur after hours or before the market opens that radically shifts the value of the options up or down, and then we may have investors putting in wrong orders and potentially getting filled at bad prices.
So we don’t price options before or after market hours.
We do have a text-alert service — it’s free — that lets you know when a new recommendation has been sent. If you haven’t signed up for that and have a U.S. carrier, I encourage you to do so. You will know instantly when our alerts are released. Once you’ve clicked “submit,” just remember to check your phone for the final step. We immediately text you directions to get your confirmation.
- If my order doesn’t get filled, what do I do? Will you send an update on the trade?
For our official position to get filled and placed into the portfolio, the option price has to be within our buy range from the time the email leaves our office until we decide to cancel our orders.
If the price is in our buy range, even for a little while, then at least some of you are able to get in, and that’s when we have to start tracking the position officially. We try to set the buy limit slightly above the most recent high price for the particular contract. That way, we expect more investors to have an opportunity to get into the position.
So, let’s look at this in practical terms. We have option XYZ trading at a bid/ask spread of $2.70 by $2.90.
So we recommend paying up to $3 per contract in a dispatch that goes out at 11:30 a.m. Our team begins watching that contract at 11:30 to see how it’s trading, paying particular attention to trading volume. We can see as trades are filled and at what prices they’re filled.
In this particular example, if we see hundreds or thousands of contracts filled between $2.70 and $3, we know our readers are getting in. But then the position closes that day at $3.10. Our official price is $3 — even though we know trades were happening well below that price, and we start tracking it from there.
Unfortunately, there may be times when some people don’t get in at the recommended price for any number of reasons.
So, we’ll include a small update on a new trade in the following Thursday’s dispatch. We’ll let you know if we did or did not get in. If we got in, but you were unable to because the price moved before you could get filled, we’ll let you know if you should hold onto your limit order for a while longer.
- For a new member, do you still recommend entering recent open positions?
There are two factors to consider in this question:
- How far away is the option price from the recommended buy price? If the option is in the red, meaning we have a paper loss, there could be an opportunity — but that opportunity would be at a lower strike-price, since that would give you a greater chance to profit.Conversely, if the option’s price is well above the recommended price, then there’s probably no reason to buy the option Michael has recommended because the price will be more expensive and your returns will be limited.
How long do we have until the option expires? If we have just a few weeks left — say, less than a month — we’d probably not recommend you buy. If we have longer, then the option could still be a good position to own, so long as you apply the first factor above.
- How does seasonality affect businesses and the economy?
What most people don’t realize is that hedge funds and sophisticated investors spend millions of dollars researching weather patterns to determine where and when to invest. That’s because seasonality can have a huge impact on the bottom line, as Michael has seen time and time again when analyzing his list of stocks.
But taking a wider view, weather causes billions of dollars in damages a year. In the winter of 2013 to 2014, severe winter weather caused 15% of all insured auto, home and business catastrophe losses in the U.S., and overall winter losses from winter-related disasters totaled $3.7 billion.
In 2013, Coca-Cola blamed weaker-than-expected second-quarter earnings on one simple reason: a colder-than-expected spring. As its chief financial officer, Gary Fayard, said on CNBC: “I hate to use the weather [as an excuse], but a lot of it was weather.”
And Compass Minerals, a leading miner and seller of road salt, said in an early 2015 conference call that it benefited from robust winter-weather demand and elevated salt prices.
The point is that when you know in advance if it’s going to be a cold or mild winter … a dry or wet summer … you can make a lot of money in the markets because certain businesses are definitely going to feel the effects.
- How will you alert us about your forecasts and trades?
Michael will make sure to reach out to you every week, either with an update on your portfolio, a trade alert or a weather nugget. Every season, Chris also releases his quarterly forecast, which he and Michael use to dictate their stock picks. And occasionally, when something particularly unique is stirring up in the atmosphere, Chris will send you a weather update.
Either way, you’ll always be updated on what’s happening with our recommendations and how the weather will affect them. But make sure to keep an eye on your inbox. When we send a trade alert, it’s important to move on the trade as soon as you’re able. But we understand that sometimes a trade will move quickly, and the price will change from the time we send the alert to the time you receive it.
That’s why Michael is always sure to include a limit order price in his recommendations, which sets the maximum you are willing to pay for the option contract. That way, you have some room for your orders to execute.
- What if I have other questions?
If you have a question that wasn’t answered, be sure to check out Michael’s Q&A webinar here. In it, he addresses questions including:
- Is there any possibility of getting text messages instead of emails?
- How much can I reasonably expect to make?
- What happens if I miss making a great trade?
- How do I recoup big losses while following the Precision Profits system?
- How fast do I have to react to your trade recommendations?
We also suggest looking for the answer in the Precision Profits Trading Manual or the Options Trading Tutorial video that can be found here. In addition, we have a team of well-trained, highly knowledgeable customer service representatives ready to answer your questions about the service and your subscription.
You can send us an email by clicking here, or call us toll-free at 866-584-4096.
During the business hours of 9 a.m. to 5 p.m. Eastern Time, you can chat with a live agent online as well by going to BanyanHill.com. In the lower left corner of your computer screen, you will see a window that says: “CHAT NOW with a Live Agent.”