The Rude Awakening
Dublin, Ireland
Tuesday, May 1, 2007 ------------------------- - Leverage - Best friend or worst enemy?
- "Just don't call it investing."
- Three simple questions for Options Trading success and more…
------------------------- Joel Bowman, reporting briefly from the Dublin International Airport… Wireless Internet is amazing. It means that, despite the fact that I am seated in a transit lounge in the United Kingdom, despite the fact that the EST local time on my clock reads 5:07am and despite the journey through the night being "unexpectedly turbulent," I can STILL work to bring you today's column. Wireless Internet is not merciless…but it IS amazing. Between taking my shoes on and off countless times, removing my laptop from its case and throwing out all containers of liquid over 100ml, I managed to check my email…and good thing I did. Not only are we glad to present the first ever Rude Awakening column (I believe) from options guru, Steve Sarnoff, it is also coupled with a special offer. You may have read yesterday afternoon that our publisher, Addison Wiggin, has decided to make a pretty incredible offer on one of our premier trading services. He's offering Steve's Options Hotline at half-price…until May 14. Not only that, he's guaranteed that twelve of Steve's trades will shoot up 100% or more in the first year, or your money back. As professional traders will appreciate, that's a pretty tall order. So, how will Steve do it? Read on for today's column… ---------------------------- The Anti-Investment
By Steve Sarnoff It's funny how quickly attitudes can change. Just a few years ago, most casual investors wouldn't touch stock options with a 10-foot pole. Now the airwaves and the Internet are clogged with offers to teach the secrets of "options investing." That kind of talk is just plain dangerous. Don't get me wrong - I love the fact that more people are discovering the profit potential of options. I've been analyzing them for a long time. And since 1999, I've been recommending specific option plays for the subscribers of my Options Hotline service. But despite our success at Options Hotline, I would never be naïve enough to call my work "investment advice." When you're dealing with options, you shouldn't use the word "investment" at all. It's speculating. And if you don't understand the difference, you're setting yourself up for a massive failure. You "invest" in things like stocks, bonds, mutual funds, and even real estate. You focus on the long-term. Successful investing is like planting acorns and watching them turn into oak trees. Speculating, on the other hand, is like playing with fireworks on a rainy winter's evening. You light the fuse, and seconds later, it has either fizzled out or a huge colorful explosion high up in the sky has illuminated the whole world. Options trading may sound like gambling. And for people who don't know what they're doing, it usually is. But seasoned traders know how to bend the odds in their favor. Doing that means having a healthy respect for a speculator's best friend - and worst enemy - leverage. Leverage is the magic that turns small price movements into large profits…or losses. It is found in many different guises, but the fundamental design is always the same. The leveraged speculator uses OPM (Other People's Money) in an attempt to make more money than would otherwise be possible with nothing but his own funds. In other words, you augment your position with borrowed money. It sounds dangerous…and if not managed prudently, it can be bad for your wealth. BUT, if leverage can be applied to situations with strictly limited risk, it takes on a more sensible aspect. It becomes…"super-leverage." Super-leverage is the art of profiting from changing prices, with limited risk. No margin calls, no demands for additional funds, no forced liquidations. The instruments of super-leverage are exchange-traded stock options. Options are tradable contracts that give you the right to buy or sell a specific underlying instrument at a specific price within a specific time period. For example, a May $100 Apple Computer call option gives the option-buyer the right to buy one share of Apple Computer for $100, anytime between now and option expiration on May 18, 2007. Today, with the price of one Apple share at $100.80, the June $100 call option costs $2.60. So for less than $3.00, an option-buyer can participate in the upside of a $100 stock…but only until May 18. That means a small move in Apple's stock price can create a huge move in the price of the call option. In fact, that's exactly what has happened over the last few trading days. Since April 19, Apple stock has jumped more than $10 a share, for a gain of nearly 12%. But over the same timeframe, the May $100 call option has soared from 75 cents to $2.60 - a gain of nearly 250%. That's leverage! But on the downside, options are wasting assets. They have strict expiration dates. If, for example, Apple Computer shares close below $100 on May 18, the May $100 call options would expire worthless. That is your risk. It was once calculated that 90% of all options expire worthless. But that doesn't mean you have a 90% chance of losing money. A successful options trader will offset eight or nine losers with one or two spectacular winners…and still have money left over. The trick to always coming out ahead is to develop a strategy and stick to it. My dad, legendary options trader Paul Sarnoff, explained it best: "Every trader with imagination and talent goes into a specific commodity armed with a trading plan." With his help, I developed a system I call my "Complete Game Plan for Trading Success." Followed correctly, it can be a powerful tool to make sure you don't get in over your head. It starts with some simple calculations. Just ask yourself the following questions before you risk a single cent: 1. How much am I willing to pay for the option? As I said, you can lose 100% of the money you put into an option. So never bet more money than you can afford to lose. Once you've set your limit, stick to it. Don't chase an option that's more expensive than you want to pay. Either wait for the price to drop, or look for another one to buy.
2. What will I do if I'm right? Have a profit target in ind for each option you buy, and an idea of how long the move will take. Be realistic - what you honestly think will happen, not what you hope will happen. (If you can't do that, don't buy the option.) Again, stick to your plan - give the option some time to reach your goal. If you meet your goal, either sell right away or watch the option carefully and sell before it falls.
3. When will I get out if I'm wrong? This one's tough. No one wants to admit they're wrong. And everyone hopes they'll eventually be proven right. That kind of thinking might fly in the face of stock investing - but when speculating with options, you're up against the clock. The best thing to do is set strict stop-loss strategies - i.e., orders to sell if the option falls to a certain price. Getting out of a bad position before it's too late is one of the world's most overlooked wealth-protection strategies.
You should always speculate based on what you can lose, not what you can gain. Be prepared to handle trading losses. Never add to a losing position. That is how many players get knocked out of the game. You want to be in there when the market goes your way. You, or your broker, must monitor your positions closely. They don't ring a bell when it's time to get out, so make sure you have an exit strategy in place for each trade. It may sound like a lot of work - but believe me, it's worth it. I've seen options skyrocket 210% in 3 weeks… 472% in less than a month… even 260% in 8 days… Of course, I've also seen a good number of trades go nowhere. But following the Complete Game Plan for Trading Success, the odds are good you'll still come out ahead. Just never make the mistake of thinking that you're "investing." [Joel's Note: As I mentioned briefly above, Steve's publisher is offering a pretty sizable discount on Steve's Options Hotline right now…along with a ridiculous guarantee: Double your money on every trade or your money back, for half the subscription cost. Now, I'm not the copywriter here, but I do see a lot of ads and guarantees in the business. If you are interested in learning more about options, this guarantee and half-price special is available until May 14th, two weeks from now. Check it out here. Steve Sarnoff's Options Hotline --- Expert Options Trading --- Steve Sarnoff, options guru, has not had one recommendation lose value since Aug. 8, 2004. He's on a Red-Hot Winning Streak with a… Double-Your-Money Average on EVERY Trade… With that kind of impressive hot streak going…you could have racked up $513,964.02 in gains since Aug. 8, 2004, with a $5,000 initial stake in each play! Learn How Here. ---------------------------- | 
