Profitable Option Investing
Profitable stock option investing requires:
- A system to select profitable investments
- A critical mass of funds to invest
- Risk management strategies
Selecting Profitable Option Investments
The vast majority of stock options are priced "fairly".
By definition a "fairly" priced option is one whose
premium price is set so that neither the buyer nor the seller
has a profit advantage. If hedging or insuring a portfolio
is your overriding objective, then there is nothing wrong
with paying or collecting a fair price for an option, but
if your objective is to consistently profit from option investments,
you must find investments where the pricing is not "fair".
Only market makers (via their bid/ask spread) and brokers
(via their commissions) make money on fairly priced options.
Select.Options.com can help you find options that are not
fairly priced, but rather are priced in your favor, "advantaged
option investments".
We believe that identification of "advantaged option
investments" requires analysis of how news events should
affect a company's fundamentals. Data related to "technical
indicators" and earnings expectations can be processed
by automated computer analysis algorithms and therefore are
instantaneously built into the current option price. The key
to finding "advantaged option investments" is to
identify information that is important but not easily processed
by these automated systems. This type of information can usually
be found in company news stories, but you must read beyond
the headlines to find it. A human must spend time digging
into a news story, build an understanding of how the company's
stock will act when the meaning of the news becomes clear,
and determine that the news is not properly priced into the
company's stock. The universe of companies and news stories
is very large, so an enormous amount of time can be spent
in unproductive analysis.
SelectOptions.com makes this process more efficient. SelectOptions.com
analyzes hundreds of stocks and tens of thousands of option
positions daily looking for situations where pricing has become
significantly different from the pricing that should occur
based upon the investments recent price history. This difference
in pricing indicates a potential profit opportunity. The investments
with the most significant potential profit opportunities are
published in the site's Hot List reports. By using the Hot
List as a guide, news analysis becomes much more efficient
and productive.
A common scenario is that a significant news event occurs
for a company and drops its stock price by 5%. The news event
results in a bipolar reaction in the company's stock options.
Both Call and Put premiums significantly increase. Call option
prices have significantly increased because a large portion
of the investing population believes that the stock was overly
punished and the probabilities of future stock price increases
are high. Put option prices have also increased because a
large percentage of the investing population is worried that
the probabilities of further stock price decreases are high.
This lack of consensus results option pricing that will give
a profit advantage to the investor who correctly determines
the significance of the event. SelectOptions.com identifies
the difference between the current pricing and trended pricing,
and identifies this situation as a potential opportunity.
You research the news event and determine that although the
headline was negative, the effects of the bad news are limited
and not as serious as the recent price drop indicates. You
expect that the stock will rebound when some of the fear around
the news story dissipates, so you open a Bull Put Vertical
Spread at a strike price a few percent below the current stock
price. By placing the spread (short option) strike price below
the current price you create a safety margin for your judgement.
You don't need to be right. You profit as long as you are
not very wrong.
SelectOptions.com's analysis rates these opportunities by
"annualized net expected return on risk". First
a probability analysis is performed to compute "expected
profit" based upon the underlying stock continuing to
move based upon its historical characteristics. This profit
is adjusted for typical brokerage commissions and is then
divided by the risk of the investment and annualized. This
rating makes it easy to compare potential investments and
direct your attention to the investments that provide the
highest returns and the least risk.
Investments reported in the SelectOptions.com Hot List feature
have historically trended return on risks that are both significant
and in your favor. If your news analysis determines that the
historical trend should continue, then you should expect to
realize this significant profit. If you are totally wrong
in your analysis and the news is properly priced into the
options (the options are fairly priced), then your expected
loss amounts to the brokerage commission paid. If your analysis
is partially right, then your expected return will be somewhere
in-between.
Since investments identified in the SelectOptions.com Hot
List have expected "annualized net return on risks"
that are no worse than "fair" and could be significantly
in your favor, SelectOptions.com succeeds in presenting you
with a system to select profitable option investments.
Next Section: Critical Mass - (It takes money to make money)
Previous Section: Do Options Fit In Your Portfolio?
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