Cheaper Ain’t Always Better
- Alan Knuckman: Option trades bite…
- … “Even the most seasoned pros from time to time”
- How to launch your portfolio into orbit in 2020
- Quant Jonas Elmerraji on “a bet that’s paid off 81% of the time”
- Jeff Bezos’ awkward moment (and JEDI blame-shifting)
- Why bitcoin’s up 42% since early January
- Australia’s war on cash catches fire
- “X” marks the spot in Florida
Have you ever totally whiffed an options trade?
Agora Financial’s Alan Knuckman — who’s traded options for more than a quarter-century — says: “It happens to even the most seasoned pros from time to time.” But he promises if you tweak the way you pick options in 2020, you might launch your portfolio into orbit.
“Not only will your trades have a greater probability of success right out of the gate,” says Alan, “but you’ll be in prime position to regularly book the outsized returns options are known for.”
First, Alan says: “Before we get started I want to make sure we’re clear on a few basics.” If you’re already an experienced options trader — or a complete rookie — no matter; a refresher on some essentials can’t hurt.
Let’s get the ball rolling…
“Every options contract has a strike price,” Alan says. “The strike price is the price both parties agree to use when buying or selling the underlying stock.”
Here’s an example: You buy a call option for Apple (APPL) with a strike price of $280. “You can exercise that option and pay $280 for Apple’s stock — no matter what the price of the stock is.”
Good idea? That all depends on the price of Apple shares when you exercise your option. Obviously, if Apple shares are trading at $260 and you pay $280… that’s a bum deal. “Why would you voluntarily pay an extra $20 per share?” Alan says. “You wouldn’t!
“The relationship between the strike price and the underlying stock’s price is called moneyness.”
Alan continues: “When it doesn’t make sense to exercise the option, the contract is considered ‘out of the money.’ It’s called that because you end up paying more for the stock with the contract than without.
“But when it does make sense to exercise that option, like when Apple is trading above $300 and you can buy it for $280, the contract is considered ‘in the money.’”
So in the money means it’s a no-brainer to exercise your option. Out of the money? Why bother? You’re learning, grasshopper…
Alan says: “This distinction between ‘in the money’ and ‘out of the money’ is important because it’s where most options traders go wrong…”
The way Alan sees it, a lot of options-trading beginners get tripped up because out of the money options are cheap… particularly, cheaper than in the money options. So noobs “try to stretch their money,” hoping against hope to “pull in even larger gains.”
Greed isn’t good…
“The problem is ‘out of the money’ options are cheaper because they hardly ever pay out,” Alan says.
“My friends on the trading floor call out of the money options ‘lottery tickets,’” he says. And you know the probability of winning the lottery. (We’ll forego the usual getting-struck-by-lightning analogy in favor of this: You might have a better shot at winning an Oscar… having nothing to do with showbiz.)
Alan shares an example: “Let’s say Bank of America Corp. (BAC) is trading for about $35.” Since the company hasn’t fully recovered from its prerecession highs and has been profitable for multiple quarters, you’re betting the stock has a lotta upside.
And it’s just days away from Bank of America’s earnings announcement that you believe will make BAC shares soar. Juicy, right?
You have two choices, Alan says. “A BAC ‘in the money’ option with a strike price of $30 that expires in a couple of months is trading at a price of $5.15… To control 100 shares would only cost $515,” Alan says.
Or “you could buy an ‘out of the money’ option with a strike price of $40. This option is trading for just $0.08 since the contract is betting on an unlikely $5 move within 60 days.
“With such a cheap option, you could buy 64 of these $40 strike price calls for the same cost as buying one of the $30 strike price ‘in the money’ calls,” Alan says. “By doing so, you would have the same dollar risk (~$515) as the holder of the $30 strike price call.”
And that’s the allure of cheaper, out of the money options…
Alan emphasizes: “Even though you could lose the same amount of money with both contracts, there is a greater chance you lose with the ‘out of the money’ option.
“That’s because if Bank of America goes up but doesn’t go up to the strike price of $40, the entire option becomes worthless,” says Alan. “So if Bank of America only goes up to $37, you lose all the money you put into your ‘out of the money’ option.”
Conversely, almost any move to the upside with the in the money option will have you humming the Fred Astaire classic “We’re in the Money.”
See for yourself…
Wow… that outsized payout on the out of the money options is tantalizing for sure, Alan says, but “the unlikeliness of those payouts is why I stay away from them.”
Like trying to catch lightning in a bottle, in other words.
Alan’s takeaway: “I would much rather double my money on a regular basis with ‘in the money options’ instead of losing my money over and over by chasing astronomical payouts that hardly ever happen.
“That’s why one of my rules is to always buy deep ‘in the money options’ when trading,” Alan says.
“So make sure you’re trading wisely in 2020 and steer clear of blowing up your capital with those ‘lottery tickets!’
“If you do that,” Alan concludes, “you’ll be sure to stack the odds for a successful trade in your favor.”
[Ed. note: “Has any Agora service ever had 12 50%-plus winners in ONE week… with four of them clocking in 100% gains?” So says an email sent from Alan Knuckman last week…
And the answer is — among the many outstanding Agora Financial offerings — we can’t recall one with this impressive a hot streak.
Just last Friday, Alan’s readers at Daily Double Club had the opportunity to bag three winning trades in one day.
Since mid-December? Alan’s closed 23 winning trades out of 25 — with 6 trades locking in over 100% returns.
“And we’re just getting started,” he says.
Agora quant Jonas Elmerraji says: “The big S&P 500 index has been [on a] tear in recent years…
“The index, which tracks the biggest stocks in the market, is itself up around 50% over the course of the last three years, hovering at all-time highs.
“And plenty of folks are wondering when the other shoe is going to drop…
“But what most don’t realize,” says Jonas, “is that all-time highs aren’t an unusual event for the stock market… In fact, they’re downright normal.
Looking at the last three decades, “the S&P has spent around 50% of all trading days within just 5% of all-time highs.” And that includes the tremendous bear markets in 2000 and 2008.
“So it turns out record highs are the rule, not the exception,” Jonas says. “Even more interesting, they’re a great time to buy!” Seems counterintuitive, but Jonas has the stats to prove it…
“On average, you’d end up with returns of 8.2% just six months after the high,” says Jonas. “That’s nearly a half-again better performance than buying stocks on days when the market isn’t breaking new records.
“It’s a bet that’s paid off 81% of the time,” Jonas drives home.
While it’s out of line with conventional market wisdom, “buying at highs ensures that you’re buying into an active uptrend rather than trying to pick a bottom,” says Jonas.
“That’s good reason to buy stocks with confidence as markets soar in 2020.”
To the markets, where the major markets are in the green… and the Nasdaq’s hitting another record high, up 60 points to 9,581. Meanwhile, the Dow’s up 60 points to 29,160, while the S&P 500 index is up 10 points to 3,338.
Oil continues to skid, down 1.5% to $49.59 for a barrel of WTI. Gold — the safe haven that it is — is up $6.40 to a shade under $1,580 per ounce.
Bitcoin’s lost 3% at the time of writing to $9,845.
One snarky aside: Did you see the moment at the Academy Awards last night when Jeff Bezos was acknowledged from the stage… and no one clapped for him? Awkward.
Today we learn the company Bezos built — Amazon — wants to question the president about the $10 billion JEDI contract Amazon Web Services lost. We’ll see…
“Bitcoin (BTC) is up more than 42% since early January,” says our crypto-loving investor James Altucher. The two biggest drivers? One won’t surprise you at all — the coronavirus — while the other’s a little more under the radar…
James notes first: “Domestic stock markets have seemingly shrugged off coronavirus concerns with… the S&P 500 and Nasdaq hitting record closing highs,” he says. “However, outside of U.S. equities, the situation looks less optimistic.”
The oil industry, for example, has been hammered by the coronavirus panic; the price of oil is down 23% since the early days of January. The reason? Less ground, air and cruise ship travel means less demand for oil.
But economic uncertainty has given a lift to bitcoin “as investors work to shield traditional assets from global volatility,” says James.
Crypto… the other safe haven?
“Meanwhile, bitcoin has had an explosive start to the year for another reason,” James says. “One of the largest fintech firms promised to provide resource support to developing the network.
“In a blog post on Jan. 21,” he says, “Square promised to allocate resources to the continued development and improvement of bitcoin.
“Specifically, the company will tackle areas of the technology that might not be as immediately lucrative to standalone businesses but will benefit the entire ecosystem.”
James contends, “These functionalities promise to improve the usability and security of bitcoin, enabling better use of the cryptocurrency for small transactions and rapid payments.
“Square’s involvement in bitcoin [is] significant for the crypto,” James says. You can say that again…
He says: “Square’s commitment of an entire team of resources will allow the cryptocurrency to advance more rapidly as it seeks broader recognition in financial markets.”
Not only that but “Square’s Cash App is the No. 1 finance app in Apple’s app store… [surpassing] Venmo to become the largest peer-to-peer payment network in North America.” Plus, millions of merchants use the Square app to accept payments.
James’ studied opinion? “With the shadow of coronavirus still hanging over the market and Square’s piqued interest in bitcoin, cryptocurrencies may be setting up to grow rapidly as a safe haven and usable tool in the year to come.
“Add it all up,” he says, “and the opportunities within cryptocurrencies are set to expand in 2020.”
In Australia: “A push to ban cash payments of $10,000 or more could hurt small businesses and bushfire victims,” says an article at the Daily Mail. Yet another domino falls in the war on cash…
We bring you the contentious “cash ban bill” that Australian officialdom claims will crack down on tax evasion and black markets across the continent. You know… the usual government twaddle.
“Under the proposed legislation, cash transactions of more than $10,000 would carry a fine of up to $25,500 and two years’ jail.” (The government’s since backed down — marginally — allowing for the purchase of a vehicle in cash.)
But you can imagine the backlash; the Australian Taxpayers’ Alliance (ATA) says: “Many Australians still use cash and wish to continue using this legal tender for their privacy and security.” (Emphasis added because… exactly.)
To add fuel to the fire… I’m so sorry… the worst bushfires in Australian history have only underscored the need for legal tender as law-abiding citizens across the country have been forced to loot gasoline and food during widespread ATM and credit card outages. The problem? A cash shortage. And small-business owners are the ones left holding the bag.
The ATA concludes: “This bill would cost Australians dearly without addressing the problems it claims to fix… Restrictions on cash fail to impact money laundering, tax evasion and terrorism.”
We’ll keep you up to date as this bill makes its way through Australia’s Parliament…
Two men charged with drug trafficking in Florida couldn’t have been more conspicuous…
First, the wannabe narcos were driving 95 mph down Interstate 10… and pulled over by Florida Highway Patrol. When the trooper found one of the men had a felony arrest warrant, the trooper called for backup, including a K-9 unit.
Bad news for the speed demons. The dog made haste to alert to drugs — a panoply of the greatest hits, in fact: meth, date-rape drug GHB, cocaine, fentanyl and MDMA (aka ecstasy or molly).
But it’s not so much the variety and quantity of drugs police found… it’s where they found them. (No, not there!)
Sometimes “X” does mark the spot…
Florida police recovered two of these bags — aptly labeled — from the dunderheaded drug dealers. (We found the bag on sale at website Look Human for $22.99, in case you’re wondering.)
A drug mule with a cheeky sense of humor? Gotta love it…
The 5 Min. Forecast
P.S. Every trading day our colleague Alan Knuckman sets his alarm for 9:29 a.m.
This 60-second window right before trading begins separates the successful traders from the wannabes…
Alan used it during his time on the Chicago trading floor and he still uses it to this day.
You see, if you do it right, you can potentially DOUBLE your money or more within a month.
It doesn’t matter if you’re a veteran trader like Alan… or a complete beginner.
As long as you know what to do during the 60-second window, you’ll be able to get your shot to profit just like the top traders on Wall Street.
Click here and Alan will show you how this 60-second window could potentially DOUBLE your money or more.