Secret 20SWING FOR THE FENCES

There is an old adage on Wall Street that says, “Never be

afraid to take a profit,” but with options this adage does not

apply. As an option buyer, your major goal should be to hit a

home run. You can’t afford to nickel and dime your way to profits.

Too many of your options will expire or lose most of their

value, and your nickel and dime profits will not be able to offset

those losses.

Home runs are best defined as options that return 500% to

1000% returns. When you buy cheaper options, you have the

ability to hit home runs.

For example, in my newsletter, The Complete Option Report,

in August of 1987, I recommended a December ITT 55 put

at 1/8 when ITT was 65. A price of 1/8 is $12.50 per 100 shares, so

you could control 100 shares of ITT for the cost of breakfast. Why

did I select this item? Because it had a theoretical value of .5 or

$50.00. In other words, it was undervalued, a true bargain. I liked

the position so much I included it in an option article for the

newsletter.

Of course, in October we saw the crash of ’87, and ITT

dropped to 47. The ITT dropped 8 points beyond the strike price

of the ITT 55 put, giving it an intrinsic value of 8 ($800). However,

the panic in the market pushed the price of this option to 16

($1600). As a result, for a $12.50 investment plus commission,

you could have made $1600, over a 10,000% return. That means

your next 100 option positions could expire worthless and you

still would have a profit.

Here is the magic of the home run; just one or two home

runs can pay for a lot of strikeouts and mistakes made by the option

trader. However, hitting the home runs requires tremendous

patience and good trading tactics.

There is an old adage on Wall Street that says, “Never be

afraid to take a profit,” but with options this adage does not

apply. As an option buyer, your major goal should be to hit a

home run. You can’t afford to nickel and dime your way to profits.

Too many of your options will expire or lose most of their

value, and your nickel and dime profits will not be able to offset

those losses.

Home runs are best defined as options that return 500% to

1000% returns. When you buy cheaper options, you have the

ability to hit home runs.

For example, in my newsletter, The Complete Option Report,

in August of 1987, I recommended a December ITT 55 put

at 1/8 when ITT was 65. A price of 1/8 is $12.50 per 100 shares, so

you could control 100 shares of ITT for the cost of breakfast. Why

did I select this item? Because it had a theoretical value of .5 or

$50.00. In other words, it was undervalued, a true bargain. I liked

the position so much I included it in an option article for the

newsletter.

Of course, in October we saw the crash of ’87, and ITT

dropped to 47. The ITT dropped 8 points beyond the strike price

of the ITT 55 put, giving it an intrinsic value of 8 ($800). However,

the panic in the market pushed the price of this option to 16

($1600). As a result, for a $12.50 investment plus commission,

you could have made $1600, over a 10,000% return. That means

your next 100 option positions could expire worthless and you

still would have a profit.

Here is the magic of the home run; just one or two home

runs can pay for a lot of strikeouts and mistakes made by the option

trader. However, hitting the home runs requires tremendous

patience and good trading tactics.