But that all changed in 2007, when a ruling from the Options Clearing Corporation opened the market for everyone.

Like most analysts, initially I was skeptical of the profit power of this undiscovered venue. After thoroughly exploring and analyzing these instruments, however, I’m convinced.

This new market is a total game-changer!

If you’ve been burned in the stock market, these instruments could bring you some much-needed income. They offer more than a way out of today’s extreme volatility — they actually let you cash in on the ups and downs that would otherwise rob you blind.

On the other hand, if you enjoy speculating, these instruments are a perfect thrill. They’re inexpensive, pay off quickly (in four days or less) and have strictly limited risk.

If you want a market hedge, this market has you covered, too. With a simple, low-cost trade, you can set yourself up for a payday if news pushes the rest of your investments the wrong way.

In short, these new instruments can help you no matter what your investment style or situation. And I truly believe that everyone should try trading them at least once in their life.

They’re called binary options… and I’ve made it my mission to spread the word about them…

Binary options are simple bets on whether something will happen or not. That’s it.

In a way, they resemble sports bets — like betting which football team will win on Sunday or if a baseball player will hit more than 30 home runs in a season.

Binaries, however, are bets on financial and economic events. They cover things like which way a commodity price will go, how far an index will move, even what a currency’s exchange rate will be.

You pay money to take the bet — called the premium. If your hunch is wrong, you lose your stake. But if your analysis is correct, you get your premium back plus a profit.

Binary options are big in Europe, and big U.S. brokerage institutions have used similar instruments for decades. But they were complicated affairs — created through a mass of jargon and legalese that would make anyone’s head spin.

But an idea this simple — and potentially market-changing — couldn’t be contained. So some brokerages pushed to offer these simple instruments to retail U.S. investors (guys like you and me).

In 2007, they got their wish. The Options Clearing Corporation and the Securities Exchange Commission allowed exchanges to offer regulated binary contracts.

Still, even with the approval, the U.S. binary market remains quite small. The American Stock Exchange and Chicago Board Options Exchange only offer a handful of binary options on a few stocks and indexes. Most brokerages don’t touch them, either.

That’s a real shame, because the global market offers a nearly infinite range of opportunities to put binary options to use.

Fortunately for American investors, one U.S. company understands that potential…

It’s called the North American Derivatives Exchange, or Nadex (www.nadex.com).

Thanks to its pioneering efforts, you now have a chance to make money with binary options — a field that once belonged exclusively to Wall Street’s bigger players.

Nadex offers a full suite of binary options, covering a nearly endless list of strategies and investments.

Until more brokers realize what they’re missing, the easiest thing for you to do is to open an account with Nadex directly.

That might sound like a big deal, but it really isn’t. The site is very user-friendly, and Nadex’s trading platform is one of the most flexible I’ve ever encountered.

(In case you’re wondering, neither my publisher nor I are affiliated with Nadex. We don’t receive any compensation if you open an account or not. It just happens to be one of the few binary exchanges in the United States.)

Another important caveat is that only U.S. citizens can open Nadex accounts.

If you aren’t a U.S. citizen, you will need to look into opening an account with IG Group, Nadex’s parent company, at www.igmarkets.com. It has offices all over the world that may be able to help you.

American citizens have nothing to worry about. In fact, you can instantly sign up for a free demo trading account with Nadex. They’ll give you $25,000 in virtual money to trade as you wish. It’s a 100% risk-free way to learn how binary options work and how quickly you could rack up wins…

Sincerely,

Abe Cofnas
for The Penny Sleuth

How Market Headlines Can Quickly Pay You Triple-Digit Gains was originally featured in the Penny Sleuth.

Let me show you how…

Yes, option investing can be intimidating. After all, the financial press blames derivatives (like options) for a major part of the financial crisis of 2008. Options move violently — and they can expire completely worthless. It’s no surprise, then, that most investors avoid options at all costs.

But when used intelligently, options can significantly increase your profitability by magnifying stock gains while limiting risk to your initial investment (unlike traditional leverage, which can actually leave you owing money).

To be sure, options can be incredibly complex. Today, we’ll just look at an overview of how options work — and how they apply to your next trade.

How Options Work

Basically, an option is a contract that gives its owner the right to buy or sell a stock at a predetermined price on a predetermined date. Buying call options gives you the right to buy shares of a stock at that price, whereas buying put options gives you the right to sell them at that price.

Time is an important factor for options. Options expire on the third Friday of each month (unless it’s a holiday, in which case they expire on the preceding Thursday) — that date, known as the expiration date, is a major contributor to the option’s value. The further that date is from now, the longer the stock (known as the “underlying”) has to increase in value. That potential value (known as extrinsic value) decreases as time passes.

An option’s real value is the difference between the strike price (the price you can buy or sell on the contract) and the price of its underlying stock. For an oversimplified example, let’s say that today is Jan. 1, and you own $10 March call options on General Electric. If GE currently trades for $15, the difference between the $10 strike price and $15 share price is the stock’s intrinsic, or real, value.

It’s the option’s real value because it’s the gain you’d book if you exercised the option today — think about if you use the option to buy GE shares for $10 and then resell them on the market for $15. That’s a $5 per share profit. But that option doesn’t trade for just $5 — because GE still has months to appreciate, the option may cost closer to $6. That possible extra dollar is the extrinsic, or time, value.

Options are interesting because of the size of their moves. If GE moved $2 higher, the company’s stock would have gained 13% — not bad for a blue chip. But our $6 option would have gained more than 33% in real value alone.

There’s a difference between being an options investor and being an options trader. Generally speaking, traders have little interest in holding onto options plays until expiration — I’m a fan of that camp myself. Instead, we aim to buy for a jump in our options’ prices and then sell for a gain…

So, how do you get started in the options game?

To start, look back at your trading portfolio and see what would have happened if you’d bought an option instead of a stock. By experimenting with how options would have impacted your profits after the fact, you can get a much better idea of how different strike prices and expiration dates impact option prices.

I would strongly advise against adding options to your portfolio until you have some experience paper trading them and understand more of the technical features of options. But as a starting point, experimenting with your past real world trades is a great way to flatten the learning curve.

I’ll show you some more options tricks in the coming weeks. If you have any options questions for me, send them to editor@pennysleuth.com.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

An Option to Supercharge Your Gains was originally featured in the Penny Sleuth.

The first installment covered some big commodities and indexes. Today I’ll apply that lens to currencies, showing what my research of the past year has uncovered and general information on how to interpret it.

The Euro (EURUSD)

For the EURUSD. Reflecting the market turbulence of the continent’s ongoing sovereign debt crises, the euro / U.S dollar pair moves through almost all percentage change gradients.

We can see 18 weekly closes at 0%; 18 weekly closes at plus or minus 1%; five weekly closes at -2%; seven weekly closes at plus or minus 3%; and two weekly closes of 4%.

If we visualize each week’s movements as a horse race, the strategy of betting on several different horses makes sense. The EURUSD provides an excellent statistical support for several one-week option trading strategies including at-the-money, out-of-the-money and deep-out-of-the-money!

The Yen (USDJPY)

The U.S. dollar / Japanese yen pair does not have a high population of frequent moves beyond 2%. Between August 2010 and the end of August 2011, the currency pair closed the week nearly unchanged 13 times. It ended the week up .5% seven times, and down .5% an additional seven. There were eight weeks where it closed up 1% and 14 where it closed down 1%.

The big moves are there, but they are rare. It ended the week down 2% on three occasions; up 2% just once; and more than 3% in either direction a single time.

The lack of big moves means that trading yen binaries requires a lot of patience and political insights. I look for important “event-risks,” such as key Bank of Japan meetings, to trigger movement. In general, it’s best to consider bounce plays using at-the-money positions.

Australian Dollar (AUDUSD)

The Australian / U.S. dollar pair is not a big mover, showing just 14 jumps or falls over 2% within the past year. And moves of 3% or greater occurred just six times!

Instead we see 15 weeks where the currency experienced a near-zero change and 21 weeks with only a 1% change in either direction.

With few big moves, it makes sense to trade weekly AUDUSD with at-the-money strike prices.

In reviewing the weekly percentage moves of the indices and the key currency pairs, the impression that markets are volatile is correct.

But from a trading perspective, that volatility isn’t a negative. In fact, binary options are the perfect tools for profiting from these weekly moves, not to mention protecting your portfolio.

The specific strategies are based on surfing market movements, detecting sentiment waves, and — when appropriate — going against the crowd!

In fact, last week we saw the value of betting against the crowd. On Monday, everyone was in despair over the prospects of a Greek default. By Wednesday, that despair evaporated.

If you haven’t already, I urge you to set up a free demo account with the Nadex here. Try playing some of these currency movements yourself.

And we would love to know how you do. Please feel free to tell us about your trades by emailing editor@pennysleuth.com.

Sincerely,

Abe Cofnas
Currency Analyst for The Penny Sleuth

Currency in Focus: The Biggest Movers in the Currency World was originally featured in the Penny Sleuth.

The answer is, more often than you think.

And today I’d like to share my in-depth research that proves it. The charts below show you the number of weeks that a commodity or index has moved a percent or more over the year.

This lets us see which markets have a tendency to make the biggest moves. And that information can help guide us to winning binary plays.

Today let’s take a look at how often big weekly swings occur in some of our favorite markets, along with some general thoughts on how to use this information.

S&P 500

Between Aug. 6, 2010 and Aug. 26, 2011, the S&P 500 has seen a weekly move of 1% in either direction a total of 17 times. It moved 2% in either direction nine times. It moved 3% in either direction four times. And the biggest moves, jumping or losing 4-5% in a week, occurred just four times in total.

That means we can generally expect 1% moves to happen frequently, which favors at-the-money binary options. On the other hand, it also shows that bigger swings aren’t out of the questions, which can make deep-out-of-the-money binaries smart bets.

Gold

The weekly closes support the sentiment that gold can move big in either direction. From Aug. 6, 2010, to Aug. 26, 2011, gold had 11 weeks where it closed up more than 1%; 12 weeks where it closed up more than 2%; six weeks where it closed 7%; one week where it had a close of 4%; and two weeks it had a close of 5%.

So in general, you’d be better off buying deep-out-of-the-money binaries than selling near- or out-of-the-money gold binaries.

WTI Oil

West Texas crude oil is one of the most interesting in this bunch. It really shows a capability for big moves. There were nine weeks where it closed 1% in either direction; nine weeks where it closed 2% or more; 10 weeks where it closed 3% or more; three weeks of 4% moves; and an extraordinary 11 weeks where it closed 5% or more

That is movement! And it proves that crude oil binaries can have some of the most surprising outcomes of all!

Perfect Conditions for Trading Binary Options

The implications behind this data are huge. It shows we have market conditions where we can “expect” big moves during the business week. The Monday through Friday life of binary options fit perfectly with these market conditions.

A 2% move in these markets during any week, in either direction, with the right binary option strike price, can translate into gains of over 100% returns again and again.

If you haven’t already, I urge you to try a Nadex demo account. It’s an easy and risk-free way to get a real-world feel for binary options.

Just go to www.Nadex.com. It only takes a few minutes to get started.

Sincerely,

Abe Cofnas
Currency Analyst for The Penny Sleuth

Currency in Focus: Big Market Swings That Could Lead to Giant Binary Wins was originally featured in the Penny Sleuth.

Character certainly counts.

But I’m not going to talk about the character of any person.

My topic is the importance of the character of price movement in forecasting direction… and how you can use this information to strive for fun and profit.

There is so much noise out there being blared, spouted, and touted in the financial media. The market is down one day on fear and up the next on hope.

How do you make sense of it all?

I strive to block out all that noise and listen to what the market is saying. I believe all the best information is reflected in the movement of market price. Determining the character of that movement is vital to gaining an advantage in your market intelligence.

The name of my research firm is Sarnoff’s Samurai Strategies, Inc. I always get a laugh when restaurant equipment catalogs appear in my mailbox, because I don’t operate a Sushi Bar. My specialty is successfully applying ancient Japanese charting techniques to today’s markets. I’ve been lending that service to bolster the Superleverage power of the Options Hotline since 1995, taking the helm as sole editor in 1999.

How is it that I can use techniques developed for the rice market in mid-18th century Japan to help my subscribers stay a step ahead of the crowd in today’s world of high technology, high frequency, trading?

The answer lies in the fact that all the key information available today was available then: price, volume, and open interest.

When you get a report on the market, you’ll hear the price compared to yesterday’s close. But the Japanese are more concerned with where we are compared to today’s opening price than where we are compared to yesterday’s close. Back in the 1980s, when I first started studying the Japanese methods, it struck me that their technique was simply a superior way of looking at price movement. Japanese candlestick charts provide much more timely and valuable information than typical western bar charts.

My Japanese method focuses on the character (positive, negative, or indecisive) of each day’s trading. This helps reveal the human behavior (buying and selling) that drives price direction. I use the character of the behavior of market price movement to:

• Identify key levels of support (demand) and resistance (supply).
• To determine who is stronger (bulls or bears).
• When that balance of power is likely to shift.

I view each day’s trading as a struggle between buyers and sellers. The intraday action is akin to the second quarter score in an NBA basketball game… but the close, that’s like the final 2-minutes. The closing price determines the winning side on that day.

The news may report that the market is down 30-points and you would consider that negative. But, if the market opened on its low, down 150-points, and came back to close on its high, only down 30, I would view that as a positive session and be looking for higher prices to come.

A closing price above the opening is positive and means buyers were stronger on the day. A close below the opening tells me sellers were stronger in that session. When I see consecutive days of positive character, it tells me buyers have the edge. Consecutive session with a negative character can point to lower prices down the road.

If the market runs up, runs down, and closes back where it started that reflects indecision. This can often stand as the signpost of a turn. Sometimes, such action can catapult prices in their current direction.

I like to say that technical analysis is as much art as it is science. Over the years, I’ve developed something my father had… judgment based on experience.

The Japanese have a saying that a chart is like a cat’s whiskers. I use my charts the way a cat uses its whiskers: as antennae to sense and track the movement of a mouse.

We don’t catch the mouse every time. False signals do occur… they provide valuable information, and lessons, as well.

But if you don’t use the chart, you are like a cat without its whiskers.

Sincerely,

Steve Sarnoff
Penny Sleuth

Options Rundown: How You Can Unlock Unlimited Wealth… was originally featured in the Penny Sleuth.

The rally back to 11,400 in the Dow and 1198 in the S&P brought stocks full circle back to pre Standard and Poor’s downgrade levels.

But, the road to get there was treacherous and emotionally upsetting… especially for short-term traders.

I feel the best approach to this market has a couple of main keys to success:

• Buy limited risk high probability option plays that have enough time to be right.

• Manage the position by watching the weekly price charts for new relative highs and lows. Make exit decisions based on trend evaluation.

One key to my evaluation of the markets is by using the most appropriate data set.

In this case I’m talking about weekly analysis.

By using weekly analysis we can diminish outlier events. This in turn helps to evaluate trends. The goal is to look at investments using a marathon view game plan unlike the short-term focus of the 100-yard dash.

A quick scan of thirty commodity markets – the ones that have enough liquidity for option strategy execution – identifies the overall trend. Up, down or sideways are the only possibilities. When looking for new opportunities either a pullback or breakout on the weekly price charts can trigger a trade decision for entry or exit.

Overall, respecting long-term established trends has treated my Resource Trader Alert members very well over the years.

Let me show you what I mean…

Here’s an example that compares daily action in gold versus the three-month data, take a look:

With such a short-term snapshot the above chart doesn’t give us much help in determining a profitable trend.

Now, notice the consistent new highs each week to support the overall uptrend. That’s the power of keeping your eye on the broad picture through weekly data.

So… what now?

Volatility may very well continue. Indeed, it may be technology and information driven – there’s a lot to be said about the psychological difficulties processing the newfound abundance of financial data.

But it is important to keep an eye on the weekly trend.

The extreme lows last week put stock indexes at 20% off the recent highs. The recent buying recovery has placed prices a reasonable 12% from the peak. One week does not change the trend, not yet anyway.

This market action isn’t so crazy after all. Keep your eyes on the major trends – this philosophy has treated my elite readers well so far and looks to continue.

Sincerely,

Alan Knuckman
Penny Sleuth

Collect Consistent Gains in Any Market was originally featured in the Penny Sleuth.

Understanding that change will be the key to bigger profits in the months ahead…

To get into what I mean, take a look at these headlines from The Financial Times about today’s Greek austerity vote.

Before the vote: Greece Faces Suicide Vote on Austerity

And now? Stocks and Euro Rise as Greece Passes Austerity Package

To me this indicates that the currency markets have undergone a significant change. Traditionally, currencies increased in value when they reflected more growth and greater interest rates than another currency. The major force was interest rate differentials.

Today, however, things have changed. Since the financial collapse in September ’08, the challenge has been more daunting. As countries pushed their interest rates near zero, differentials became largely irrelevant. Traditional economic-based fundamentals collapsed and were trumped by psycho dynamics of market fear.

While the era of zero interest rates is essentially over, the magnitude of fears as a force remains predominant. Traders have to detect and filter those fears in order to shape a trading strategy.

Let me show you what I mean…

Today there are three predominant fundamental fears influencing weekly price action:

• Greek debt problems – Fear mongers have been making doomsday scenarios if Greece defaults. Economist Martin Feldstein has written that Greek default is inevitable. Esteemed investor George Soros has speculated that the eurozone may break up. And that’s led to headlines like the Greek suicide voting.

• Fears over US debt – Investors are on guard for a downgrade of US bond ratings, if not actual default. The fruitless finger-pointing and fear mongering between President Obama and Congress aren’t doing investors any favors. Any nervousness about a negotiated approach to the US debt financing has resulted in market gyrations.

• Fear of China – There are actually two things investors are afraid of. First, China could dump its US dollars, driving down the greenback’s value. Second, the country’s bubbling economy could slow down. Any time a rumor occurs about China’s economy, it cascades around the globe and causes market moves.

So how do we as traders approach these fears?

I say with a contrarian point of view and a little bit of political science. Whenever fears are at such extremes that only one point of view pervades, the best approach is to go the opposite way.

Think of it this way – Greece defaulting and the eurozone collapsing would be extraordinary events. Everyone is working hard to make sure it doesn’t happen. Yet the crowd thinks these are both strong possibilities, making betting against it far more rewarding.

Similarly, fears over the US debt offer opportunities in the dollar and stock market. Yes, if the United States defaults on its debt, there will be chaos leading to a new financial collapse. But the politicians know this, and no political leadership wants to see it happen. It would stain the reputation of the political party responsible for the lack of an agreement.

The bet is that it won’t happen. It will certainly be tense with a lot of last minute panic. But that will be the extent of it. The trading strategy should be to buy US dollars when the worst is feared or bet on an oversold market.

Looking ahead, you can take these lessons and apply them to China.

First, let’s apply a little political science to the fear that China is getting ready to dump the dollar. China’s greatest value is stability. A precipitous decline in the US dollar destroys that stability. China holds over a trillion dollars of US debt, and more than that in its cash reserves. It reminds me of the old adage that when someone owes the bank a lot of money, the bank is in trouble.

China won’t abandon the US dollar, but rumors of that will persist.

Fear of a China slowdown is the only fear that is valid from an economic point of view. China cannot sustain nearly double-digit growth without inflation, and it cannot suppress pressures of wage inflation as its middle class increases. China will slow down; it’s just a matter of timing.

But for now, both fears about China seem overblown, creating contrarian opportunities for us. My currency of choice is the Australian dollar (AUSUSD), which acts as a surrogate for Chinese growth expectations. It will be severely impacted on any change in China growth… and has the most to gain if investor fears are too early.

So keep a close eye on the AUDUSD for contrarian DOOM plays to cash in on investor fears!

[The Sleuth’s Note: As you may know, Abe’s favorite way to play currency movements is by using binaries.  If you missed his tutorial on binaries, just click here. We suggest you give binaries a shot. They’re exciting. Fast paced. And potentially very profitable. For a great tutorial, check out the Nadex binary exchange. You can find its step-by-step, interactive guide right here.]

Sincerely,

Abe Cofnas
Currency Analyst for the Penny Sleuth

Currency in Focus: Turning Investor Fears Into Big Gains was originally featured in the Penny Sleuth.

What exactly does this mean?

Some will tell you to spread your investments over different industries and markets.  This is good advice.

Others will tell you to have a portfolio that holds both large and small-cap stocks. Also good advice.

And then there are those who will tell you to have both long and short-term strategies within your portfolio…

None of these ideas are wrong. It is all good advice. And, with a little time and research, you can certainly follow all three.

Today I want to talk to you about a new short-term strategy. A way you can collect profits weekly on swings in the market.

Last week, Steve Sarnoff joined us to talk about how you can profit with options using Superleverage. As you may remember, Superleverage allows you to profit on a stocks price movement.  Options are the key tool. You can collect profits whether the price of a stock goes up or down.

But most options you buy are for months out. If you buy an option today, you may not see profits until August. And—in order to profit, you have to analyze and decide what that market is going to do over the next few months.

What if you could shorten that time frame? What if you could still use Superleverage to profit… but you only had to decide what you thought a certain stock was going to do over the next week?

Just within the last few years, the Chicago Board Options Exchange (CBOE) started testing a new way of investing that allows you to do just that.

Weekly options, or weeklys, are a brand new way to profit from the ups and downs of the market. They behave just like monthly options, except they only last for a week. This allows you to focus on short-term price movements.

Just like with options, with weeklys you buy puts or calls. You would buy a put if you think the stock is going to go down.  You can purchase a call if you think the stock is going to go up.

Unlike monthly options though, you only have a week. New weeklys are listed every week on Thursday.  They expire the following Friday. Please note that weekly’s will not expire the same day as monthly options (the third Friday of the month). So weeklys will not be listed for that week.

Also unlike monthly options, weeklys aren’t as widely used. Because of this, weeklys aren’t listed on every stock. But more and more are added every week.

Weeklys are listed for many underlying financial securities. They allow you to bet on the price movements of market indexes, ETFs, and some stocks.  (You can find a list of available weeklys right here.)

Because weeklys last only one week, you have the opportunity to profit from very short-term price movements from something in the news, a earnings release, or a sudden price movement.

These short-term plays not only allow you to focus on short-term movements… but they are also generally cheaper than a regular monthly option.

Although interest in weeklys has grown since 2009, it is still a very new investment tool. I would check with you broker to see if they allow trading weeklys. (Some discount brokers, like TD Ameritrade and Interactive brokers, do.)

Granted, every type of investment carries risk. Weekly options are no different. And I would never recommend jumping into this arena without doing a little more research. The Chicago Board Options Exchange has a great tutorial on weeklys right here.

Sincerely,

Jessica Comitto
Associate Editor, Penny Sleuth

Why Wait? How You Can Collect “Weekly” Profits… was originally featured in the Penny Sleuth.

If anyone ever tries to tell you that you can earn a high return with low risk, zip your wallet!

But if you understand options, and it’s easier than you may think, you’ll quickly realize just how powerful a means to making profits they can be for you…

Imagine putting down $187.50 on an investment and getting back a $1,700 return in three months.  If that sounds unrealistic, I’m sorry.

But—that was an actual trade my elite Options Hotline members could have made using a technique I call “Superleverage.”

What is “Superleverage”?

You grasp that speculators make their fortunes from changing prices. Chances are, you are also familiar with the benefits of leverage.  Leverage is an important tool for speculators.

Leverage involves using OPM (Other People’s Money) to try to make more money than you can with your own.  Using OPM may augment rewards when you are right, but it may also greatly accelerate the risk of additional losses when you are wrong.
If leverage can be applied with an always known and strictly limited risk, it takes on a more sensible aspect.  It becomes…

Superleverage, the art of profiting from changing prices, with limited risk AT ALL TIMES, without ever getting a margin call, asked to put up additional funds, or forced to liquidate your position.

The instruments of Superleverage are exchange traded put and call options.

Buyers of puts and calls are the ONLY ONES who possess the full profit power of Superleverage.

Option buyers have several advantages:

• You don’t need to be a financial wizard or have large sums of money to participate.
• Only as an option buyer do you have all the benefit of using OPM when right, without the concomitant costs and risks when wrong.
• Total risk is ALWAYS known and limited to your cost of taking a position (making your bet).

While the option buyer has an always known and strictly limited risk, you will be well-served to remember that the risk is still extremely high, as it should be for the opportunity to earn unlimited gains…it’s the full amount of your bet, but not one cent more.

Here is an example:

Let’s say you’re looking at Chili Co. (I’m making up this names…as far as I know, there are no company called Chili Co.)

Chili Co. In October, the stock is trading at $38.  You’re thinking the stock will rise to $50 by the end of the year. In volatile market conditions, the stock could also collapse or it could settle down and move quietly sideways.

There are many things you could do, because there are many options to choose from. They come with a variety of strike prices and monthly expirations, and each of those options cost a different price—and therefore offer different opportunity to profit.

Let’s say you buy a Chili Co. January $40 call option for $200 (or $2 a share, since each option represents 100 shares).

The price you pay for the option—in this example, $200—is called a premium. The premium depends on a wide range of factors, including the actual price of the stock, time until expiration, and volatility.

“Chili Co.”, in this example, is the underlying instrument, the specific security the option gives you the right, but not the obligation, to buy or sell.

“January” is the expiration month for the option.   Equity options last trade on the third Friday of the expiration month, with the Saturday immediately following being the official expiration date.

“$40” represents the strike price, the price per share you have the right to buy Chili Co. at.

And buying the call option means that anytime before the third Friday in January, you can buy 100 shares of Chili Co. stock for $40 a share…no matter what the market price of Chili Co.   If Chili Co. is trading at or below $40 on the third Friday in January, your option will expire worthless.  That is your risk.

You are monitoring your position daily.  Chili Co. has just made a major announcement, and its shares have moved up sharply…to $50 a share.

Back when Chili was trading at $38 per share, your option had no real value.  The $200 premium you paid was for time and volatility only.  But, with Chili Co. trading at $50, your call option, your right to buy 100 shares for $40 has a real, intrinsic value of $1,000 (the right to exercise your option and buy 100 shares at $40 and immediately offset by selling them for $50).

But you don’t have to exercise options to make big profits. Most of the time, you simply resell the option to close your position.  You’re looking at a 400% return, minus commissions and taxes.

Congratulations! You just used Superleverage to turn $200 into $1,000. Throughout the transaction, your risk was completely known and strictly limited.

By the way, if you had bought the 100 shares outright at $38 (for $3,800) and sold at $50 (for $5000) your gain would be just under 32%.  Still nice, but paltry compared to the return on the option.

That’s the power of Superleverage!

Options offer their owners the power of Superleverage—the potential to make spectacular profits in a short amount of time, on relatively small moves in the underlying shares, with an always known and strictly limited risk.

Combining the tools of Superleverage with a disciplined method, sound money management, and a good understanding of your personal tolerance for risk gives you the cornerstones of a complete game plan for trading success.

If you still a little nervous about how you would fair in the options market, there are many resources out there for you. The Chicago Board Options Exchange has an option simulator that will allow you to research and place option trades without putting up real money, just click here.

Sincerely,

Steve Sarnoff
Penny Sleuth

Options Rundown: How You Can Use “Superleverage” to Turn $200 into $1,000 was originally featured in the Penny Sleuth.

Today, I want to show you how we netted 45.5% gains in a recent trade with a low risk buying strategy… And how you can do the same thing on your next trade.

Any active investor would likely admit that the last couple of months have provided an incredibly difficult trading environment. Stocks have mostly traded sideways since the end of February, only to be met with a brutal selloff in the last week that’s left the S&P 500 a mere 1.74% higher than where it opened this year. More speculative indexes, like the NASDAQ Composite, are up even less.

They key to success in this sort of challenging market is to constantly keep your eyes open for trading opportunities. That means maintaining a watch list of potential plays, and monitoring the preset price level when they should become active trades. That’s exactly how we found this quick trade.

The trade was one I recommended to my Penny Momentum Trader readers for shares of Zale Corporation (NYSE:ZLC). So, to be clear, we’re not talking about hypothetical examples here – we’re looking at a real world trade that many of my subscribers book real cash on…

If you’ve followed my Chart Smarts articles here at the Sleuth in the past, the setup that spurred this trade is hardly exotic; it’s a double bottom:

A double bottom is a setup that identifies strong support for shares. Think of it as a sort of “price floor” that share prices have trouble moving below. The reason for the existence of a price floor is the fact that a large pocket of demand for shares exists at that price – it’s a level where people start thinking “…that looks cheap, I’ll buy some.”

On a double bottom, the buy trigger comes when shares move above the intermediate peak between the two bottoms. But in the case of Zale Corp., an upcoming earnings call after the breakout occurred substantially increased the risk of the trade.

For a pre-earnings trade, there are generally two ways to approach it. The first is to take a small starter position in advance of the earnings call – and expose a smaller chunk of shares to the risk of an earnings miss. And the second is to wait for earnings to get released, then take the trade…

We opted for the second, waiting to see how earnings panned out the next morning before taking on the risk of a new position. Because earnings came in above Wall Street expectations, we entered early in that day’s market session, taking advantage of the buying strength that resulted from new investors taking notice of Zale’s strong numbers.

I recommended that readers either buy shares outright, or pick up a particular call option on the trade for a higher-risk alternative. Most importantly, we set our maximum risk and reward before actually taking on the trade. Maximum risk came in at the stock’s previous resistance level of $4.28 (the breakout level for shares), and maximum profit came at just shy of $5.88 – the stock’s previous 52-week high.

These numbers were the “high probability” outcomes for the trade…

In the end, shares rallied hard, reaching our target price just two days after we entered the trade. Readers who opted to take the low risk stock approach had the chance to book 17.8% gains – while those who bought the call option I recommended had the opportunity to make 45.5% (or more, in some cases) in that two day window.

There are a few key takeaways from this trade that traders should be taking note of:

Build a Watch List: First is the importance of constantly keeping an eye out for emerging trades – the double bottom setup in Zale looked attractive, and we were ready to make a move when it triggered.

Watch Our for News Factors: Another important factor was adjusting our trade entry to avoid added risks of Zale’s earnings numbers. While we left some gains on the table by doing so, we significantly reduced our risk exposure, and still walked away with large profits.

Set Your Targets First: Finally, we set our stop loss and price target ahead of time, ensuring that emotional trading wouldn’t keep us from speculating on what was a high-probability technical setup.

While the trading environment continues to be challenging in June, following those three factors ensures that we’re ready to take advantage of the next high-probability setup when it comes along.

Cheers,

Jonas Elmerraji
Penny Sleuth

Chart Smarts: Generating 45.5% Gains With a Low Risk, 2-Day Trade was originally featured in the Penny Sleuth.