how to buy options for explosive profits

5/24/2018 How to Buy Options for Explosive Profits

1/13

1

How to Buy Options for Explosive Profits

We recently had a trade in AT&T (T) where we bought 36.00 strike put options for

$0.27 ($27) and sold them 5-days later for a profit of 316%. That was a great

trade, but what was really great was that in order to achieve that profit, AT&T

barely made any move at all.

This is the secret to buying options for explosive profits.

1. Buy Severely Undervalued Optionsin

2. Stocks With a High Probability of MovementThis report is going to detail exactly how we easily find, and how you can easily find

severely undervalued options in markets that have a high probability of seeing the

market move enough to generate explosive profit potential in those options.

The first example in is AT&T (T). You can see here that when the market was

trading just above 36.00, we bought 36.00 strike puts for $0.27. 5-days later we

exited those options for 1.13, generating a 316% profit.

The first thing that jumps out is how cheap the option was. This was not an out of

the money option. This was an at the money option. We bought the option for .27,


2/13

2

or $27. If AT&T would have sky-rocketed the next day, we could not lose more

than $27 no matter what. This would have been a loss of 0.75% of the cost of the

stock.

Cost of Option = $0.27

Stock Trading at $36.00Max Loss = .27/36.00 or 0.75%

The max loss is the cost of the option divided by the price of the stock. When this

value is less than 1.00%, this is a severely undervalued option (in most cases).

One way to verify that this option is undervalued, is by taking a look at the Average

True Range. This graph shows the average true range for the market over the last

9-days. At the time we bought the put option for .27, the daily average range in

that stock was .48. This makes the option price 0.56% of the average daily range.

Anything under 1.00% would be considered severely undervalued.

In most cases, if the option price divided by the stock price is less than 1.00%, we

will also see the option price divided by the ATR at less than 1.00% as well.

I do not generally look at the ATR to determine whether to make a trade or not,

simply because the ATR fluctuates. And, when the ATR is lower, it usually means a

higher cycle is about to start. Because of this, if the ATR is on the low end and the


3/13

3

option price divided by the ATR is above 1%, it does not negate the trade. I only

show this as another way to understand how severely the options are undervalued

at these levels based on the option price divided by the stock price.

I bought MMM 118.00 puts for $0.59. The Max Loss was 0.49% while the OP

divided by the ATR was 0.46%, and this was a lower ATR value.

Breakeven Move

There is one other major factor that I look at to determine a severely undervalued

option. This factor insures that the cheap value of the option is not cheap because

it is way out of the money. That is not what constitutes a severely undervaluedoption. Accordingly, I look at the breakeven move required by the stock. The

lower the breakeven move required, the better the opportunity.

Take for example the AT&T example. We bought 36.00 strike puts for .27. If we

held onto that option until expiration, AT&T would have to trade at 35.73 to

breakeven.


4/13

4

36.00 (strike) - .27 (option price) = 35.73.

At the time the option was bought, the price was sitting at about 36.08. This

means that AT&T would have to move from 36.08 down to 35.73 in order to

breakeven on the trade if I held onto the trade until option expiration. This is

a required move of .35, or 0.97%. I like to see this breakeven move at somethingless than 2.00%.

The reason for this is simply to make sure that the option is not cheap because the

strike is way out of the money. So for example, if we were looking at the 34.00

strike put for .20, that would only be a 0.55% max loss, however the breakeven

move required would be at 6.3%. It should be noted that out of the money options

are not necessarily bad, but we are looking for severely undervalued options, not

just cheap options because they are out of the money. This breakeven number

allows us to easily determine this.

PDS Trader

By now, you might be asking yourself how in the world is this an easy strategy to

trade with all these calculations. The calculations are extremely simple and very

logical, but they can be tedious going through all of the various possible

opportunities. This is why I had PDS Trader built. I dont have time to go through

all of these calculations eitherso I had a software program built that pretty much

does everything for me. Check out this screenshot:

The QQQ trade is a 77.00 put option opportunity where the Max Loss is only 0.40%

and the Breakeven Move is only 0.57%. I alerted traders to this opportunity, andwithin a few hours, it had produced a 100% gain. After the close, I emailed and

everyone and stated that this trade was prime to ultimately produce a 300%+ gain,

which it did the following day.


5/13

5

You will notice that the Max Loss and Breakeven columns are on the right and

sorted by the lowest max loss number. I have it set so that this list of

opportunities only shows trades with breakeven levels at 2.00% or below. Any

opportunity where there is at least 5 days left on the trade and the max loss and

breakeven level are below 1.00% should be seriously considered.

You will also notice that there are a lot of opportunities. The screenshot above is

listing only put options. Just because an option is severely undervalued does not

mean it is an opportunity I am going to take. Since there are so many

opportunities, I am only going to take the opportunities where I feel the potential

for a market movement in that direction gives me the greatest potential of seeing a

300%+ return. Remember, since these are weekly options, I am looking for quick

moves. Since the move does not have to be very big at all for me to see a

significant profit, I am not looking at long-term trends. I am looking for higher

probability short-term moves.

This next part of the report shows the general process I go through to determine

which of the PDS Trader opportunities I take advantage of and why.

First, I do not buy options if the options do not meet my cheap guidelines.

Generally, 5 10 days out, the Max Loss must be less than 1.5% and the

breakeven level must be less than 1.5%. There are often opportunities where the

max loss is less than 1%. I dont consider any opportunities that are not listed in

PDS Trader.

The QQQ option was 5-days out (4 technically), so it was right on the edge of the

time frame I will trade. Had this been one day later, I would have looked at the

9/6/13 options. When the market is closer to 5-days, I like to see the max loss and

breakeven numbers lower than 1.5% if at all possible. And, as you can see, the

QQQ 77.00 put options were extremely cheap.


6/13

6

Next, I look at a chart. Below is the chart of QQQ on a daily basis. In addition to

yesterdays trade, I have marked off six other potential trades based on buying put

options at resistance and call options at support. The first thing you might notice is

that we do not win on every trade. We are not trying to win on every trade. We

are trying to take advantage of the opportunities that provide the biggest profit

potential in the least amount of time, with the lowest risk.

Trade 7 (which was listed in PDS Trader) worked out perfectly. The resistance line was right around the

77.00 level. The market moved to 77.20, and then within a few hours, moved back down to around

76.70, just above the previous days close.

So the first thing I do when I consider an opportunity is I look to see whether prices are close to

resistance or support levelswhich I solely determine by previous price pivots. I KNEW the day before

that I would be looking to buy QQQ 77.00 puts. I knew this for 2-reasons. First, PDS Trader had already

determined that QQQ put options in general were cheap and listed the 76.50 puts at a possible buy.

This alone is NOT enough for me to buy. So, I opened up a chart of QQQ and simply drew a line at the

last pivot level, which very clearly showed resistance at the 77.00 level with this chart. Accordingly, I

knew that if QQQ moved to 77.00 the following day, I would be looking to buy puts.

I have marked the support and resistance levels that have been hit. Support is marked by a blue line,

resistance is marked by yellow line. Here were the orders:

In this scenario, it was either all or

nothing on these entries. The ones

that didnt work out, never gave us

a chance. The ones that did saw

immediate market movement in our

direction. After 7-trades, +$900 if

you were to risk $100 on each

opportunity.

Trade 1Buy 72.00 calls > 300% in 3-Days or Less (+$300)

Trade 2Buy 73.50 puts > 300% in 3-Days or Less (+$300)

Trade 3Buy 72.00 callsLoss of 100% in 7-Days (-$100)

Trade 4Buy 73.50 putsLoss of 100% in 7-Days (-$100)

Trade 5Buy 75.50 putsLoss of 100% in 9-Days (-$100)

Trade 6Buy 77.00 puts > 300% in 3-Days or Less (+$300)

Trade 7Buy 77.00 puts > 300% in 3-Days or Less(+$300)


7/13

7

I have been able to do better than 50% wins, but if that is all I do from now on out, I will be perfectly

happy because I know that it only takes a single 300% winner to offset three 100% losses. That is a 25%

win rate and I still breakeven. That is why the cheap options are so important (and again, when I say

cheap, I dont mean the ones that cost the least, I mean the ones that require the least amount of

movement to generate significant profits).

Here is a recent screen shot of cheap call options listed in PDS Trader:

By end of 1-Day, Trade 7 was sitting a

a 567% Profit. It should be noted tha

many traders think that the purpose o

buying calls at support or buying puts

at resistance is to accurately predict

market direction. This is absolutely ncorrect. The reason for this strategy

because these areas provide increased

volatility. Accordingly, on the winners

we have a greater probability of seein

larger wins. Buying cheap options

allows us to take advantage of the

increased volatility on the profit

potential, but that increased volatility

does not hurt us on the loss potential.


8/13

8

First one on the list is MCD (McDonalds). I discount UNP since it did not have any volume. These are

sorted by lowest Max Loss, and not listing any opportunity with a breakeven over 2.00%. Below is a

chart of MCD:

Here, we see that there is some support at the 95.00 level. Accordingly, I know that I am not going to

buy calls until the market comes close to the 95.00 level. The market closed at 95.31 after reaching a

high of 96.00. At the height of this move, 96.00 calls (which were at the money at the time) traded as

high as $0.45 ($45). These calls have 11-days left, and tomorrow would be 10-days left. Accordingly, if

MCD moves down to 95.00ish, the 95 calls should trade for around .45. So, for the following day, If Ideem this a good enough support area, I will place my initial order to buy the 95.00 calls at .45 or better.

Support/Resistance - Personally, I am a little more aggressive with support and resistance, and will often

establish a support resistance line at any time there is a) an island bar reversal after a short term

trend; or b)2 bars in opposite direction of last short-term trend. Here, the short-term trend was

down, there were a couple of bars up and that was good enough for me to establish a potential short-

term support area. If you are new to this, or have a smaller account, use more caution in choosing the

opportunities you get involved with. Start slow and build a consistency.

(There is one caveat with MCDthe ex-dividend date is on 8-29-12 of $0.77, which PDS also alerts you to

as well, but I have that column hidden in this screenshot for the sake of space).


9/13

9

Next on the list is PFE:

The two purple lines represent a very aggressive approach to support & resistance. If I am going to be

aggressive, I like to see a little better preceding trend and I dont like to be between to major support

and resistance areas. I figure when the price gets to one of those, there will be a better opportunity.

GE Aggressive support

line is between a major

support and resistance

line. If it moves down to

23.25 and then posts

another aggressive

support line, Ill consider

an opportunity then.


10/13

10

WMTBumping up against major support. I bought 73.00 calls.

TGTI will be waiting for a support line to set up. Market needs to post another positive bar or two

before I look to get into this one. The one green bar is an inside bar and shows nothing with regard to

support. This one is on my watch list though. On a side note, you see the major support line at 67.80.

Buying a call on that day would have realized a 100% loss the following day. If you plan on using longer-

term support or resistance lines, you can require a minor support line to form at around the same place

help you avoid some of these types of situations.


11/13

11

KOThis is a weak possible support area forming. I would normally not do anything in this situation

unless the market established a better pause or small retracement, except for the fact that there is a

company conference call scheduled for 9/4/13so I will be looking to take advantage of this at any

opportunity with the 9/6/13 expiration option (so as to be open on 9/4/13). I will be looking to buy the

38.50 aggressive to establish a position, and then if the market moves down to around 38.00, I will

establish another position at that level. (PDS Trader has blue shaded earnings event if it is a conference

call and a red shaded cell if it is the actual earnings date)

I have an order to buy 47.00 calls at .35 or better. This is an aggressive buy, but that brings me to the

graph below the chart. This graph is the Average True Range for a 9-bar period. My call option is priced


12/13

12

at .35 and the Average True Range is double that. Anytime you have a solid ratio like that, means that

you have a higher probability of seeing a small move (by the cost of the option standards) create a larger

profit. If VZ moves up .73 tomorrow, my options will easily more than double based on the value of the

46.50 call which is in the money and priced at .72. Theoretically, my option will double tomorrow if VZ

moves .50 higher.

BAXThere was a weak opportunity to buy the 71.00 calls a few days ago at .50 that I did not take as it

was between a major support and resistance line. A better play would be to buy 69.00 or 70.00 calls if

BAX moves down closer to the 69.50 level (or slightly below) as that is a greater support area.

MMMWe sold puts last week and made a 300%+ return. Nothing to do right now.


13/13

13

You get the idea. These are just one days examples, updated in the middle of the afternoon, of calls

that are listed that meet my minimum criteria. There are also puts, but what you will often find is that if

the call options are cheap, so are the puts.

Since this is the case, you can easily prepare for potential trades during the upcoming week by taking a

look at where the charts are and then glancing at them at the end of the day to see if they started tomove toward your support or resistance line. As they approach, you can determine at what strike you

will place your order, and at what price based on other options in the chain. You dont have to wait until

the market hits the price and PDS Trader alerts you to the right option (which could be in the middle of

the day).

Each week, there are usually 4 or 5 really solid opportunities that line up with support and resistance.

Of course, you can use any charting analysis technique with this option buying strategy.

Remember, I am not trying to always be right with the direction. I am just trying to give myself the

greatest probability of producing a big win in as little time as possible when I am right. Diversify, trade

small and allow proper money management to grow your account.

If you have not obtained your copy of PDS Trader, be sure to go to the following link today:

http://www.paydaystocks.com/weekly-stock-options-order-PDS-trader.html
http://www.paydaystocks.com/weekly-stock-options-order-PDS-trader.htmlhttp://www.paydaystocks.com/weekly-stock-options-order-PDS-trader.htmlhttp://www.paydaystocks.com/weekly-stock-options-order-PDS-trader.html

how to buy options for explosive profits

Documents