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I have an important announcement to make: I’m hosting a free, live event to show you how to trade for income with some of the biggest, and fastest growing internet stocks: Facebook, Amazon, Netflix and Google (FANG). You can attend by clicking here now.
In fact, today’s issue is all about FANG stocks.
But before I go into more detail about how to trade options on FANG stocks, I want you to think about the last stock you purchased.
Now think about why you chose to buy stock in that company.
Certainly, you did your due diligence. You know the revenues, profits and expenses, and of course the company’s five major competitors and main suppliers. You wouldn’t dare buy a stock just by looking at the chart.
Unfortunately, most individual investors can’t answer any of those questions. Yet, investors will invest their life savings in a company they know very little about. But who really knows the answers to those questions? Experts, of course. There are facets of a company that analysts will spew out that you never knew existed.
But frankly, who cares?
Knowing everything you can about a company and making money are two different things. And confusing the two is where most investors, individual and professional alike, are led astray.
It’s all “fugazi.” Those of you who have seen “The Wolf of Wall Street” know what I’m talking about. Sadly enough, most investors are sold a story and nothing more. In many ways, it’s what Wall Street was built on.
And that is exactly why I use options.
I’m not going to allow a story to define how I invest my hard-earned money. I make investment choices based on a “rational” approach of evaluating hard statistics: maximum risk and reward, probability of profit, and expected return. Before I make any investment decision I know the exact percentage of each statistic mentioned above. Again, no stories or the soft data we are accustomed to seeing from the financial community . . . just hard statistics.
Let me take you through an example of how I evaluate each and every investment I make using one of the FANG stocks. FANG stocks consist of Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). I’ve recently started a FANG-based portfolio for my Options Advantage service and will be discussing the details of the portfolio strategy using several trade examples in my upcoming webinar.
Interested in trading FANG stocks? Attend my free event…
For the first time ever, I’m making FANG stocks a big part of my Options Advantage portfolio. In conjunction with the end of earnings season, I’ll be launching brand new coverage of FANG, complete with regular, ongoing income trades.
I’m revealing everything in a special invite-only webinar event.
The first question I always ask myself when looking at a potential option trade is, “What is the most I can make or lose on this trade?” Fortunately, in the world of options the numbers can easily be calculated so that you can make a logical decision based on your risk/reward tolerance.
On Jan. 13, with Amazon trading for roughly $813.50 and in a very overbought state, I want to sell a few vertical call spreads.
Think about a “very overbought” move in terms of the standard bell curve. When something is “very overbought,” it has moved to the outer fringes of the curve.
A vertical call spread is an options strategy for those who are bearish or neutral on a stock. The stock can actually move slightly higher as well and you will still make a max profit. When a stock or ETF for that matter is in an overbought state, I want to sell vertical call or bear call spreads.
I want to sell the 880/885 vertical call spread for $0.92, or $92 per spread. The max risk on the trade was $408 . . . and if AMZN stays below our short call strike of $880 the potential return is 22.5%. However, in most cases, I prefer to lock in 50% of the original premium by buying back the spread early.
At first glance the risk/reward seems off to those new to options. I always get the same question: “Why would you risk $408 to make $92?”
This is where the second question comes into play: “What are the chances that this will be a profitable trade?”
The answer is simple: the trade has a very high probability of profit of over 81%. In fact, I can cater each of my trades to fit a certain probability of profit so I always have an overwhelming edge. Basically, by selling options rather than buying options like most investors, I can create an enormous margin of error.
In this case, if Amazon doesn’t push past the short strike of my spread or $880 I will make a max profit on the trade. That’s a margin of error of 8.2% (the difference between the current price or $813.64 and the short call strike of $880). I challenge investors to find a stock trade that allows you to be directionally wrong 8.2% and still make a profit. Again, this is why I use options.
Finally, I would ask, “What is the expected return for this trade, taking into consideration the max risk/reward and probability?” The expected return would be 22.5% ($92/$408*100).
Basically, as long as AMZN stays below our short call strike ($880) at expiration we will reap the entire premium of 22.5%. There is a 81.40% probability of success that the price of AMZN will stay below our short call strike of $880 at expiration in 36 days.
But don’t forget, we are wrapping a high-probability short-term trade on a stock that has already pushed into a “very overbought” reading. This increases our pot odds on the trade that much further and it’s why I’m not placing trades every other day. It’s a methodical, patient approach.
These are odds that I like to see in a trade.
If you like this kind of idea, I urge you to attend my free upcoming webinar all about trading FANG stocks. I’m going to reveal 3 free trades you can make to earn immediate income from FANG – and I’ll go over everything you need to know to trade FANG stocks for yourself.
Click here to attend.