Here is a copy of a report I wrote for some people I trained to use my strategy…
How To Make Weekly Income With Weekly Options
Hi Perry,
It was great seeing you.
After the training session on how to make weekly income with weekly options, many people asked me for a blueprint to follow.
So I wrote this report.
I’m going to walk you through the blueprint and the steps of the strategy.
The first thing to understand is that this takes you having some pre-existing knowledge to make it work.
( You can get all this in the first 4 Modules of the Weekly Options Profits System).
The main reason this works is because options sellers make the most money… most of the time… by taking advantage of time decay.
If you asked me to walk you through “how to do a stock trade” I could do it in about 5 to 10 minutes; and you could copy that forever.
But this is different. This strategy is a Bull Put Spread. There are 3 components here: the stock and two Put options. So it takes a little more explaining.
A Bull Put Spread is a credit spread. It works by taking advantage of time decay and that is great because most options expire worthless.
In a Bull Put Spread, we are selling a Put and buying a lower strike priced Put as a hedge. If we didn’t buy the lower strike priced Put, we wouldn’t be hedged and we could be financially ruined for life. In this scenario, the stock could go to zero and never recover and we would own it at the price the stock was “Put” to us. Plus our capital to do the trade would be huge.
Because we buy the lower strike priced Put, the most we can lose on any trade is the capital required to do the trade.
Let’s say we are using strike prices 5 dollars apart. If you are trading $5,000, you can trade 10 options contracts with a difference in strike prices of 5 dollars. So we could sell 10 Puts and buy 10 lower strike priced Puts with $5,000.
The capital required in this example is $5,000. ( Of course you can trade with as much as you like, $150,000 or more, but this example explains the important principals and concepts.)
Our profit is the difference between what we received for selling a Put and what we spent buying the lower strike priced Put. The difference is called our net credit.
Since the Put we sell is closer to the market price of the stock than the lower strike priced Put we buy as a hedge, we receive more for the Put we sell than we spend on the Put we buy and we end up with a net credit.
Never execute the trade as a net debit by the way. You would be paying to put on this trade. I tell you this because the first accountant I ever had as a member of my options service executed this trade as a net debit. Then he called me wondering why it didn’t work. Geeze, you’d think an accountant would know the difference between a net credit and a net debit. Anyway, this is your warning.
Let’s move on….
With weekly options, I like to try to make 2% -3 % per week. This means I try to get a net credit of .12 -.13.
You can make way more than this. Sometimes 15% or more, but the problem is that you end up with strike prices that are too close to the market price of the stock. If the stock drops below your strike prices, you will lose 100% of your $5,000.
To avoid losing and taking too much risk, I am conservative and stay deep out of the money. But if you want to make more you can find spreads that are closer to the money and make higher returns. I showed you the one on GLD that made 20% in 5 days, but that had more risk than I like to normally take.
That being the case we want to do 6 extra special things to avoid losing money. This is what makes my way different…
To avoid losing always do these 6 extra special things…
1. Put your fingers on the Pulse of the Broad Market. We do this so that we are only using the Bull Put Spread if the broad market is bullish. Research has shown we can increase the odds of our success on every trade simply by trading in the same direction as the broad market. This is the Number One way to avoid losing money with this. By the way, if the broad market is down, we would use the Bear Call spread, which is the same as this but upside down. So….. no matter what the market is doing, we can trade weekly options.
2. This is the most important part. Find a stock that is more bullish than the broad market, has volatility and a directional bias. If the stock is flat, the options won’t have any “juice” in them and if the stock doesn’t have a directional bias, we could get wiped out. ONLY using stocks in bullish trends is the Number 2 way to avoid losing money with this.
3. Once you find a stock, look at it in your chart set up (Module 1) and find a Put that is at a strike price you think the stock will stay above through Friday’s close. I pick a Put that is below all three levels of support. The reason is because if the stock has not hit this level in the last 6 months, the probability is very high that the stock will NOT drop to this price by Friday. This is a critical part to not losing money. Don’t pick a Put that is too close to the market price or above any levels of support. Stay DEEP out of the money.
4. This next thing is a very special trick and is not public knowledge. I would never have known this if I wasn’t a market maker. When you enter your order, it does not matter what the individual Puts are being bought and sold at, the only thing that matters is the net credit. So rather than messing around with limit orders on each option, simply enter both orders at the same time and enter a limit on the net credit. In addition to this, the biggest trick of all is to squeeze out a net credit where you don’t see it in the natural spread between selling a Put and buying the 5 dollar lower strike priced Put. There is a video that explains this in Module 4 (located at the bottom of the page.) The video explains it better than I can write about it.
5. Get in after the party’s already started. These weekly options are listed on Friday and expire the next Friday. The volume doesn’t really pick up until Monday or Tuesday and the pricing is also firmer then. I don’t like to hold over the weekend so I usually pick these trades to enter on Monday or Tuesday before noon. Entering the trade later in the week means we have less days of market risk. Rather than being in the trade for 7 days, Friday to Friday, we shave off a bunch of risk by getting in on Tuesday. Over the course of a year, you’ll end up with 20% less days of market risk. This is a HUGE, HUGE secret to success.
6. Always know how to get out. The mechanics of getting out are simple. You unwind the Bull Put spread by buying back the Put you sold and selling the lower strike priced Put you bought. That’s it. Now you’re flat and you’re out. If you ever have to unwind at a loss, you will give back your net credit and lose some or all of your capital required to do the trade.
When to get out is up to you. As long as the underlying stock closes on Friday at a price that is higher than the strike price of the Put you sold, both Puts will expire worthless and you will keep 100% of the net credit as your profit.
Since we ONLY use stock in trends for this, you can decide to get out by looking at the chart. Is the stock’s trend broken and about to blast through your strike prices? Get out. Is the stock simply trading down a few days within the context of an uptrend and will it close above your strike prices? Do nothing and let the option’s expire.
You can get out at any time. You can even get out early if you have a profit before Friday.
I don’t do any “defending” or “adjusting” of the trade after I get in… even if it is going bad… because defending or adjusting will only cost you more money and I don’t believe in putting more money in a bad trade. If it goes against me, I would unwind or get out based on what I said earlier.
These 6 extra special things make all the difference in the world to your bottom line.
OK, here is a step by step “walk through” of my last weekly options VIP pick…
Step 1: Put my fingers on the broad market…
Here’s a snapshot of the broad market right now. You can always check this in your charts by using ticker symbol DIA for the Dow Jones. …
( to set up your charts, see Module 1 in the Member’s Area )
You can see that the trend is up and it’s above all three trend points so it’s OK to use the Bull Put spread this week.
Step 2: Find a stock. Hey, here’s a great tip. There are about 200 stocks that have available weekly options now. However, Apple (AAPL) and Google ( GOOG ) together make up the lion’s share of volume in the weekly options market. So I always like to look at these two for great trades first. Regardless of what stock you pick, it must be in a trend and trading above all three levels of support as you learned in Module 1.
This week GOOG looks good…
It has volatility and a directional bias. That is as good as it gets for trading.
OK, now I look at that GOOG chart and I find a level that is far below where the stock is trading now. Pick a strike price to sell the Put at a price that GOOG will stay above through Friday. When you sell a Put, you are selling someone the right to “Put” the stock to you at anytime during the week. It won’t happen if the Put you sell is at a strike price below what GOOG’s market price is all week. This is why we use this chart set up so we can go deep out of the money on our spread.
OK, GOOG is at 825 right now. So I would like my spread to be at 790/785. This is below support and at a price GOOG will likely stay ABOVE through Friday’s close.
After you find a strike price below support, look at the option’s quotes and check the prices.
To create my net credit, I want to sell the 790 weekly Put and buy the 785 weekly Put with a net credit limit of .12
Now go up and look at that 6 month chart again and you’ll see that GOOG is not likely to hit 790 by Friday. The odds are heavy that it will stay ABOVE 790 and close above 790 on Friday. If it stays above 790 through Friday’s close you will have made a profit of 2.4% in 4 days.
This is a great example of how to use weekly options to create weekly income.
I know this can really add up. It came out to 145% last year.
To me, they absolute most important thing is to avoid having to unwind a trade and take a loss.
You MUST pick a spread between two Puts that are below support at a level the stock is not likely to hit through Friday’s close.
OK, now when you go to enter your trade, here’s the biggest trick in the world… and the part most people get hung up on so I’m going to explain in detail here…
When you look at a quote, the “bid” is the price the sellers get and the “ask” is the price buyers pay.
So the 790 quote is Bid .30 Ask .50
And the 785 quote is Bid .25 Ask. 35
How could you sell the 790 and buy the 785 and have a net credit of .12?
If you look at the natural spread, you couldn’t. Because you’d be selling the 790 at .30 and buying the 785 at .35 and that would create a net debit of .05. But things aren’t always as they seem. Here’s why…
The options specialist at the exchange quotes the prices on each option with a wide spread. However, he can and will execute trades that are placed to buy and sell between the bid and ask. So, in essence, when we place both trades at the same time with a limit, our limit on the net credit itself such as .12, there is plenty of room between the two spreads on each options quote to get .12 buying one and selling the other.
When you enter the net credit on a limit, what will most likely happen is that you would sell the 790 Put at .42 and buy the 785 Put at .30 and you would make a net credit of .12. This is pretty much doable because of the spreads between both quotes.
Remember, it does not matter what the individual Puts were bought and sold at, the only thing that matters is the net credit.
After I get it, I check the quote each day on GOOG. If it drops, the spread will start to widen on the two Puts and I will start losing money when this happens. So if the stock starts dropping, refer back to what I said earlier.
Normally the options expire worthless and you keep 100% of the net credit.
In 2012, I made every pick using this blueprint. We had a total return of 145% without a losing trade.
So far in 2013, we have not had a loser either.
However, no system is perfect 100% of the time and there is no “Safe” trading system… so losses can and will happen.
The keys to my success with this have been the 6 extra special things we do on every trade.
Here are a couple of “theory” issues that came up after the training. I met a guy that was shocked that I don’t use “Greeks” to analyze options. Some people are surprised by that and some are relieved. But let me tell you why I don’t use the Greeks. The Greek’s were originally developed for institutions. These institutional investors hold stocks and analyze options prices relative to the stocks they own. Options were originally designed for institutional and professional investors. They bought options as a hedge against their stock positions. For example, if you had 1,000,000 shares of stock, you could hedge your position simply buying 10,000 Puts.
Here’s what people don’t understand – When buying these options, they planned on losing every penny they spent on the options because they bought the options for insurance. Not to make a trading profit.
They insured themselves against losses in their stock positions by buying options. To decide which ones to buy or sell, they used the “Greeks” to help them analyze the insurance they were buying when they bought the puts or calls. If you have a massive position of stock then analyzing which options give you the best hedge is probably a good idea.
But the secret to making money with options is not analyzing options…
The secret to making money with options is learning to analyze the underlying stock.
Get that part right and you will be successful with options.
Another guy that worked as a CFP asked about the risk/reward ratio. He said that we would be risking $5,000 to make between $150 and $500 (depending on where you select the strike prices) and the risk reward ratio was too high. This is the kind of thing “professionals in the financial industry” learn that I really hate because it makes no sense. Anyway, I explained that the risk reward ratio was the worst way in the world to measure a trade because it leaves out the biggest factor of all… probability.
I went on to explain that if risk/reward was a good way to decide strategies to use then buying options would be the best because they have the highest risk/reward ratio.
But the fact is that the majority of options expire near worthless which also means that most options buyers lose 100% of their money.
Buying options has the lowest probability of making money. Selling options has the highest probability of making money.
In the stock and options markets, everything is possible… but… not everything is probable.
It’s possible that you could be struck by lightning tomorrow, but it’s not probable.
It’s possible that Google could go down 15% this week… but… it’s not probable.
Risk/reward ratios won’t make you money.
Putting probability on your side every time makes you money. Selling options increases your probability of making money in options and the Bull Put spread is an option selling strategy that takes advantage of “time decay.”
Add my 6 extra special things on every trade and you will increase your probability of success dramatically.
Trade Well,
Jack
PS. Consider this. There was an older guy there from New Jersey that almost dozed off several times during the training. When I mentioned “3% per week” he woke up like somebody poked him with a cattle prod. After the training, he waited around until almost everyone left to tell me how great it would be to make just 2-3% per week in the options market and that he knew some guys that knew some guys that charged 3% per week on loans they made. It made them rich but the interest rate was so high… it was illegal.