Options work just as well in a down market. The option quote table below contains precise put option prices (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying put options is a bearish methodology as the value of a put option increases as the price of the essential stock decreases. Hewlett Packard stock is presently trading at 32.78. Let's assume that HPQ stock declinesin price 10% from 32.78 to 29.50. Let’s focus on the March 30-Strike put option (circled).
Chuck Hughes Proved 10% Stock Price Decrease = 900% Option Return
Purchasing the 30-Strike put option gives us the right to sell 100 shares of HPQ at 30.00. If we were to get the 30-Strike put option we'd expect to pay the ‘ask ‘ cost of .05 cents or $5 per option (.05 x 100 shares = $5). Let's make the assumption HPQ stock decreases 10% in price from the current price of 32.78 to 29.50. With a stock price of 29.50 the 30-Strike put option would be worth .50 points or $50 (strike cost of 30.00 minus 29.50 stock price = .50 option worth). When you buy options you can sell them anytime prior to option expiration. So that the option we purchased for .05 points may be sold for .50 points. Selling the 30-Strike put at .50 would produce a 900% return (.50 sale price minus .05 cost = .45 profit divided by .05 cost = 900% return).
Option Profits Come From Stock Price Movement
You may recall from our prior discussion that options are derivatives that derive their worth from the cost of the underlying stock. The inbuilt value of a call option will increase one point for each point its underlying stock increases above the strike price.
A lot has been released about option techniques that invest in options based mostly on whether a choice is under valued or over valued according to the Black-Scholes Pricing Model. These option secrets are really complicated and require high level mathematical calculations to work out an option’s Alpha, Beta, Delta, Gamma, Theta etc. I never understood the logic of investing in an option as it was just below valued at the time of purchase. Under valued options can get even more under valued. The price movement of the base stock determines an option’s price and the ensuing profit/loss. When you buy a call option your profits are determined by the price movement of the essential stock.
Let’s refer again to the example for the Hewlett Packard 35-Strike call purchased at .10 points so that you completely understand this crucial idea. The table below obviously demonstrates that the price of HPQ stock decides the profit/loss of the 35-Strike call option. If we can select a stock moving up in price, purchasing a call option on that stock can produce massive profits and will allow us to harness the amazing leverage provided from option investing.
Contemporary MVP Call Option Purchase Example
The Trend Line Technique measures the purchasing and selling pressure for a stock which enables us to understand ahead the likeliest future price direction of a stock. Combining the Trend Line Strategy with the New High and Price Level Trend Confirmation Signals ends in an excellent system for buying call options on stocks that are moving up in price.
The brokerage confirmation below shows that I purchased 9 of the Precision Castparts (PCP) 115-Strike call options at 5.20 and sold them 5 weeks later at 18.50. This resulted in an $11,945 profit with a 254% return after accounting for commissions. I chose this trade utilizing the Trend Line System in combination with the MVP Trend Confirmation Indicators. Precision Castparts was in a Trend Line Strategy buy mode and was in a leading industry group. It was also making New 52-Week Highs and was trading above 70 at a Price Level Confirmation.
MVP Option Methodology Produces
$1,044,065.26 Profit with No Losing Trades
My trading account statements that follow show $1,044,065.26 in profits with no losing trades. The average return was 88%. I made use of the MVP Option Method and Option Spread Plan to generate these profits. We will cover option. Spreads in Chapter 7.
Note: The profit for a spread trade is figured out by mixing the profit/loss for the long and short position to derive the net profit for the spread
The Appendix contains copies of my brokerage statements that confirm my $1,023,174.93 profit in 26 days utilizing the MVP Option and MVP Option Spread Strategies. There are copies of brokerage statements and tax returns for an extra $1,936,445.72 profit John and I made trading the MVP Option and MVP Option Spread Strategies.
