Doc's note: Today, I'm sharing an excerpt from my special report, "Doc Eifrig's Master Course: Guide to Advanced Options."
In it, I explain the biggest mistake most option traders make and the two factors that make it difficult to trade options successfully.
If you want the full details on what investors do wrong and how to use options to boost your gains, click here.
Most option traders lose money.
As traders or investors, we're all driven by earning that higher return. In search of big, greedy gains, nearly every option trader will start with buying out-of-the-money call options. It's a big mistake.
An "out of the money" (or OTM) call option has a strike price that is higher than the current underlying share price. The stock price has to rise before the expiration date for the option to be worth anything.
This sort of strategy is based on the expectation that you've found a great stock set to rise, so why earn 10% when you can earn 100% by leveraging with an option?
Let's look at a specific example...
In January 2018, let's say you examined American Express (AXP) and figured that shares were bound to rise. With the stock trading around $100, you bought a set of January 2019 $110 calls. They cost you about $5 each.
The calls were a bet that American Express would rise. And that's exactly what happened. Shares even climbed past $110 for a bit in September.
However, your options returned nothing...
If you timed it perfectly, you could've gotten out around even when American Express shares peaked... but for the most part, they went straight down.
What happened? The "time value" on shares wore away. (We talked about this in Chapter 1 and will discuss it more later.) And when you place a speculative bet by buying a call, you need a big move in shares to really earn any profits. Even American Express jumping from $100 to $110 barely put you in the money.
Here's the trouble with buying speculative options...
No. 1: You've Made Trading More Difficult
Picking stocks that will go up someday is hard enough. But by buying an option, you need a stock to rise a specific amount within a specific time. You've got to be triple right for that to occur.
That's tough, but it's really the next factor that gets you...
No. 2: Options Lose Value as Time Goes On
As time ticks by, options lose value. You can see it in the example above. The stock kept marching upwards, but the price of the option – a bet that the stock would rise – kept sliding downward.
In other words, you can be right and still lose money.
That doesn't seem fair. But it is fair. It's just that options trades take a little more thought and understanding to design and profit from.
This is why so many investors have a bad experience with options on their first attempt. It's why brokers and advisers will warn you away from starting an options account.
We understand. Most people won't use options correctly. Most won't take the time to learn how to earn better returns with less risk. They do the opposite. They ramp up their risk and don't take the time to understand just what they've invested in.
That's why my team and I recently released our latest service – Advanced Options.
It's a new way to take the very best investment recommendations that Porter Stansberry, Steve Sjuggerud, and I make in our regular advisories... and then "boost" the gains using advanced strategies in the options markets.
If you think options are too risky or expensive, we're going to show you that trading options isn't as hard as you think.
Using our strategies, we'll show you how we use options to generate 10 times higher returns with limited downside.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig