The Options Game

Ken Trester — Mon, 25 Feb 2008 20:40:24 GMT

I love the options game because it is all about the preciseness of statistical science.

Options are not about earnings... not new product development... not cash flow... not PE ratio... not dividends or yields as stocks are.

Frankly all of those fundamentals are subject to intellectual argument. And that uncertainly obviously leads to uncertainty about the true value and price of a stock.

Options are a game apart. Options can be dissected by math; good old fashion unarguable math. The number "2" will always be "2; "18" will always be "18."

In the beginning stages of my weekly research I look for a few numbers that inevitably lead me to the recommendations I make weekly recommendations that profited like this last Friday:

Amylin Pharmaceuticals Put for a 122% profit
Capital One Financial Put for a 100% profit

But there is another difference -- unlike a stock which in theory you can own forever -- options are more like renting a house than actually owning a house.

Now before I continue detailing how I make my option trading decisions I have a major announcement.

Soon we will introduce a new trading service -- called Ultimate Options -- which will quite simply be unique and so potentially profitable we will be forced to limit the number of subscribers to about 800 world wide.

I know this is an unusual step and will leave many of you out but we have no choice. Why am I doing this?

The options market is relatively small and cannot handle a large number of investors making the same trade.

The stock market can easily absorb millions of investors because the average stock volume is in millions even tens of millions every day. But the options market is much smaller.

You'll only see only hundreds of perhaps a few thousand traded daily. Too many traders chasing the option will upset the apple cart

So no matter how good a trading system - too many investors employing the same tactics, at the same time will ruin our winning scientific formula.

Perhaps a better way to put it is that no matter how good the sailors - if they all lean in the same direction at the same time they will capsize the boat.

Volume is the fatal flaw in options trading. To solve that built in problem we have established a limit of 825 traders world wide to Ultimate Option Strategies.

Obviously we are limiting our income but at the same time we believe 825 happy traders will stay with us year after year making Ultimate Options also a long term success.

So please understand once we have reached our limit we will close the door and put you on a waiting list. No exceptions. NONE!

More about Ultimate Options in a few days...

Now Back to My Analysis...

One of the aspects of an option I look at is how much time is left before the option expires - obviously the more time left before expiration; the more the option will cost.

I also look at how far the stock is currently trading from the option's strike price. Again the closer it is to the strike price the more the option will cost.

I also look at the stock's volatility which is basically how fast and how much the underlying stock moves up and down. In options this volatility is rendered as a scientific number.

Now putting all of this together and selecting a few trades for you from an options universe that reaches into hundreds of thousands of potential trades - is precisely what I do for a living and frankly it's not all that easy.

It's taken me decades to perfect.

Now I know many of you often are paralyzed by information.

Let's Take a Breather - Option Traders Have the Upper Hand

This is a tough market to figure right now with inflation... recession fears... the national election... the sub-prime mess. That's exactly what has lead to 300 point spikes only to be followed by 300 point collapses.

The mathematical nature of the options game in combination with the unpredictable nature of stocks can create a large trap for the option trader. Many traders suffer from information overload.

They cannot decipher the good information from the bad information, and they get lost in the trees.

Many investors overanalyze to the point that they are unable to make a decision. Many technical analysts get lost in the jungle of statistics of the price charts. Again that is why there are so many different opinions about the same stock.

Our Salvation: My 60% Rule

Try to keep things simple. Stand on the sidelines instead of in the middle of the jungle. Take a lot of the information with a grain of salt.

Remember my 60% rule which assumes that I (yes, me Ken Trester) will only be right 60% of the time no matter how I feel about a position. Yeah I know many gurus say they are right 90% of the time but frankly that is bull.

The 60% rule is our salvation since it forces me to design option strategies that will pay off even if I am only right 60% or less of the time.

And more often than not those 60% winners come at you in 3 weeks or less and in double and triple digits.

When it comes to option trader, decide on the important input and ignore the other details.

Don't get lost when doing your analysis. Besides I've down the heavy lifting by the time you get this report and my recommendations.

Also, avoid using too many analysis programs and too many option advisory services. Too much information can be as dangerous as too little.

Try to keep it simple, and try to develop a simple consistent methodology that suits your personality and style. Of course, a simple methodology takes practice as you get comfortable with the type of trades and analysis that you find successful.

That's it for now but please be on the watch for our newest publication Ultimate Options. It will be limited to 825 option traders. That's it. Once we fill up we will close the doors.

The Options Report : Analysis

The Options Game

Now Back to My Analysis...

Let's Take a Breather - Option Traders Have the Upper Hand

Our Salvation: My 60% Rule