Happy Friday, Evolvers!
Unsurprisingly, this week has been muted for the major indexes as traders anxiously await next week’s massive catalysts…
On Tuesday, December 13 the consumer price index (CPI) report will be released. This is one of the Fed’s favorite metrics for gauging inflation.
If the CPI is cooler than forecasted (like last month), expect the S&P 500 ETF Trust (NYSEARCA: SPY) to rally.
But if it’s hotter than expected, we could see a huge move to the downside. (You should have a solid game plan for either outcome.)
Then, on Wednesday, December 14, the Fed will announce its decision about interest rate hikes.
How these two days play out will likely determine the direction of the markets for the next several weeks … so, pay attention!
The Fed’s not all we have to look forward to next week…
On Thursday, December 15, Tim Sykes is FINALLY revealing a once-in-a-lifetime secret. Discover the trading loophole that produced $336,000 for one of his students last year … click here to sign up BEFORE it’s too late!
But now, it’s time for our Friday Q&A! Let’s answer your questions…
“How did you first get into trading options?”
Back in my first few years of trading, I noticed a lot of IPO stocks would get overextended while having lock-up agreement dates (when insiders in the company could start selling their shares).
These stocks would sell off 10%–20% over a few weeks as they got closer to the lock-up date … a predictable catalyst.
That’s when I started experimenting with put options to make money when these stocks would go down.
I realized that, by trading options, I could get more leverage in my trades while simultaneously risking less money … a win-win.
I saw the potential to bag 100-300% gains very quickly if the stock moved in the right direction. I had never seen that before with trading stocks.
In the beginning, I took small positions to grow my account using this options-trading strategy. I was able to take advantage of the volatility without tying up too much capital, all thanks to options.
Even better, options allowed me to expand beyond penny stocks…
Beforehand, I thought I could never get the gains I was looking for trading large caps. But once I realized the power of options trading, a whole new world of tickers opened up to me.
When I started trading large caps with my new options strategy, a light bulb went off.
I finally grasped that if stocks were in a hot sector, I could potentially play options both ways.
I made about $150,000 in six months and haven’t looked back since.
“Why are my calls red when the stock is up?”
It’s hard to say without knowing the specifics of your position…
But regardless, it sounds like you might need a better understanding of how options are priced.
You see, option prices aren’t exactly parallel to the share price of the underlying stock.
The directional moves in the underlying have a huge effect on the price of your contracts … but that’s not the only thing that affects it.
Implied volatility and/or time decay can also change the value of options.
For example, let’s say you buy $100 calls on Stock XYZ expiring today, December 9.
If XYZ is trading at $95, your $100 calls will rapidly lose value throughout the day due to time decay.
If XYZ doesn’t start moving toward $100 quickly, your contracts will be worthless, even if it’s a green day for the stock, and even if XYZ trades up to $99.99.
You can avoid these problems by buying contracts that are closer to the money.
If you look at my trading, I usually buy contracts that are very close to the money for this exact reason.
Don’t try to be a hero by buying far-out-of-the-money contracts. There’s no reason to risk more than you need to.
Final Thoughts
I can’t stress this enough, Evolvers…
The next three trading days are utterly crucial for determining where the market is headed in the near term.
Spend this weekend studying hard and developing a game plan for every possible scenario.
I want you to be prepared for anything that may happen next week!
