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Increase Returns and Reduce Risk Trading LEAPS Options

The rich LEAPS (Long-term Equity AnticiPation Securities) option premiums that increase the profit potential of debit spreads can also provide increased downside protection if the underlying ETF declines in price. This can result in a higher percentage of winning trades and the spread can profit if the underlying ETF price increases, decreases or remains flat at option expiration.

The Option Spread Analysis below displays the profit potential for an actual option spread trade we took for the Financial ETF symbol FAS. We purchased the FAS 50-Strike call and simultaneously sold to open the FAS 90-Strike call. This created a bullish option spread. This analysis reveals the profit potential for this option spread trade assuming various price changes for the Financial ETF at option expiration from a 7.5% increase in price to a 7.5% decrease in price.

The analysis reveals that if the Financial ETF remains flat or increases in price at all at option expiration, we will realize a $1,657 profit and a 70.7% return (circled). A 5% decline in the Financial ETF would also result in a 70.7% return as would a 7.5% decline in the ETF (circled). A 70.7% return when the underlying ETF is down 7.5% is a great strategy for navigating volatile or non-trending markets.

Legging Into a Spread Trade

Prime Trade Select has produced a lot of profitable call option trades over the years. When you have a profitable call option trade should you hold the trade for further upside profit potential . . . or do you take profits in case the stock declines in price with the possibility of a profitable options trade turning into a loss?

In this video, you will learn how to manage profitable trades by legging into a spread trade to help protect profits and also increase the profit potential of the existing call purchase. Creating a spread trade for a profitable call option trade also helps us achieve our overall goal of maintaining a better than 3 to 1 Profit to Loss ratio.

We will look at an actual option spread trade for Intuitive Surgical symbol ISRG. We purchased the ISRG 280-Strike call @45.60. ISRG moved up in price and we had a profit on our call option purchase. We then legged into a spread trade by selling to open the ISRG 370-Strike call @ 15.10. This created a bullish option spread. The Option Spread Analysis below displays the profit potential for our ISRG spread trade.

This analysis reveals the profit potential for this option spread trade assuming various price changes for ISRG at option expiration from a 10% increase in price to a 10% decrease in price.

The analysis reveals that if ISRG remains flat or increases in price at all at option expiration, we will realize a $5,950 profit and a 195.1% return (circled). A 5% decline for ISRG would result in a 163.2% return and a 10% decline would result in 101.0% return. A 101% return when the underlying stock is down 10% is a great strategy for navigating volatile or non-trending markets.

Option Trade Management

The overall goal of Chuck’s Strategies is to maintain at least a 3 to 1 profit to loss ratio. This ratio is calculated by dividing your total profits by your total losses and is a good overall measure of reward versus risk.

In order to achieve at least a 3 to 1 profit to loss ratio you must practice sound money management by closing out your losing trades before they develop into large losses and by not limiting your profits by selling winning trades with a small profit.

Most traders do just the opposite and take a quick profit as soon as possible and hang on to losing trades. This results in a portfolio with limited upside profit potential and unlimited downside profit potential.

Once we have our option position established, we will exit trades before they develop into big losses. Cutting losses short is essential to your trading success as it is very difficult to recover from a large loss.

If you take a 50% loss on a trade, your next trade requires a gain of 100% for you to just break even!

In this video we will explore a simple money management rule for exiting losing trades and by not limiting your profits by selling winning trades with a small profit.

These trade management rules have allowed us to maintain a better than 3 to 1 profit to loss ratio with their long-term options trading and gives us the discipline needed to be successful option traders.

Trading ETF's

Chuck uses a three -step criteria for selecting ETFs for cash payouts:

1. The ETF trades weekly options
2. The ETF’s option premium gives you at least a 1 to 2% weekly cash payout
3. The price of the ETF is trending up

In the video below learn how this 3-Step process led to over $9.9 million in actual cash payouts over the past ten years in all types of market conditions including the worst bear market since the Great Depression.

Trading with the Trend

Chuck’s trade selection system is used to take both bullish and bearish trades. When the system is on a 'buy' signal we buy call options and when the system is on a 'sell' signal we buy bearish ETFs and put options. This allows us to profit in both bull and bear markets.

The trade selection system has been performing well during the current market conditions as well as the two severe bear markets in 2008 and 2001 when we were heavily short most global equity markets.

Our trade selection system allows us to 'trade with the trend' instead of trying to predict the future price direction of a stock. Using a system to select trades helps us avoid emotional decision making which can quickly derail a trading program.

Learn how the three-step trade selection process allows you to identify options with the best profit potential and identify a low-risk entry point for your option trades.

We will also learn how to select an option exercise price that only requires a 1% price move in the underlying stock to break even and start profiting on our option trade.

A 1% price movement in the stock to start profiting has a much higher probability of being profitable compared to option exercise prices that require a 10% to 15% price move in the stock to break even which may not happen before option expiration.

Selecting Option Trades

If you can identify a stock moving up in price, you can profit from purchasing call options. This allows us to profit from the tremendous leverage that options provide. Actual option trades will be used to demonstrate the ability of the three-step trade selection process to select profitable options trades.

The video below will show you how the three-step trade selection process will allow you to identify stocks and options with the best profit potential and profit in any type of market condition.

Prime Trade Select Part 2

The video below will explore three trade management rules:

  1. Exit losing trades quickly before they turn into large losses.
  2. Don’t exit winning trades with a small gain.
  3. Use options to protect profits with winning trades

Using these rules, we will demonstrate using actual trades examples how to profit even if you win on only 1 out of 8 trades.

Prime Trade Select

Prime Trade Select allows us to identify stocks and options with good profit potential with low risk. In this video, we will learn how Prime Trade Select produced $1.2 in open trade profits with an average return of 177.5% and no losing trades.

 

Directional Option Trades

Options are derivatives that derive their value from the price of the underlying stock. Option profits are determined by the price movement of the underlying stock. If you can identify a stock moving up in price, you can profit from purchasing call options.

Conversely, if you can identify a stock moving down in price you can profit from purchasing put options.

The first step of Prime Trade Select allows us to quickly determine if a stock is on a ‘buy’ signal or ‘sell’ signal. We purchase call options on stocks that are on a ‘buy’ signal and put options on stocks on a ‘sell’ signal.

The second step of Prime Trade Select allows us to select a low risk entry point for our option trade.

A low-risk entry point helps prevent being stopped out of a trade and increases the accuracy of our options trading. Actual option trades will be used to demonstrate how low-risk entry points can help you become a more profitable option trader.
 

Sector Spread Trading

In our last video we looked at a simple technique for selecting ETF options with high-profit potential.

In this video learn the advantages of ETF option spreads over ETF option directional trades.

ETF option spreads have a long position and a short position. The long position profits as the underlying ETF moves up in price. The short position profits as the underlying ETF moves down in price. The short position provides downside protection if the market moves against the long position.

It’s possible for ETF spreads to profit if the underlying ETF increases in price, remains flat or declines in price.

Directional ETF call option trades can only profit if the underlying ETF increases in price above the strike price of the call option. For example, the Utilities ETF is trading at 50.96 The Utilities ETF one month 51-Strike call is trading at 1.20. The Utilities ETF must trade above 51 at option expiration or this option will expire worthless resulting in a 100% loss of the option premium paid.

Chuck Hughes currently has a Utilities ETF option spread trade that will produce a 111.3% profit if the Utilities ETF is flat or increases at option expiration. The spread will still profit 36.1% if the Utilities ETF declines 10% at options expiration. Learn how to set up ETF option spreads that can profit if the underlying ETF increases in price, remains flat or declines in price.
 

Selecting ETF Option Trades with the Best Profit Potential

This video will explore the three ETF option money management rules: 

1) Exit losing trades quickly
2) Don’t exit winning trades with a small gain
3) Use options to protect profits with winning trades

These rules allow you to hold on to winning trades and cut short your losing trades which is the key to successful ETF option portfolio management.

The overall goal of these Strategies is to maintain at least a 3 to 1 profit to loss ratio. This ratio is calculated by dividing your total profits by your total losses and is a good overall measure of reward versus risk.

In order to achieve at least a 3 to 1 profit to loss ratio you must practice sound money management by closing out your losing trades before they develop into large losses and by not limiting your profits by selling winning trades with a small profit.

Most traders do just the opposite and take a quick profit as soon as possible and hang on to losing trades. This results in a portfolio with limited upside profit potential and unlimited downside profit potential.

Once we have our option position established, we will exit trades before they develop into big losses. Cutting losses short is essential to your trading success as it is very difficult to recover from a large loss.

If you take a 75% loss on a trade, your next trade requires a gain of 300% for you to just break even!

This video will explore the simple money management rules for managing ETF options trades.

Discovering the Strongest Market Sectors

In this video let’s explore trading ETF call options in the strongest market sectors. ETF options are derivatives that derive their value from the price of the underlying ETF. If we can identify an ETF moving up in price, we can profit from purchasing call options. Learn how our Sector Option Trade Selection process allows us to identify ETF options with the best profit potential.

Actual option trades will be used to demonstrate the ability of our Sector Option Trade Selection process to select profitable options trades.

Let’s also take a look at how to identify the weakest market sectors so we can initiate short ETF option positions allowing us to profit in both bull and bear markets. This strategy has been performing well during the current market conditions as well as the two severe bear markets in 2008 and 2001 when we were heavily short most global equity markets.

Sector Trading

The video below will look at a simple indicator that will allow you to quickly and easily discover the strongest market sectors so you can initiate long ETF and ETF Option positions with a high probability of success.

You will also learn how to identify the weakest market sectors so you can initiate short positions. Sector trading allows you to profit in both bull and bear markets. This strategy has been performing well during the current market conditions as well as the two severe bear markets in 2008 and 2001 when we were heavily short most global equity markets.

Let’s look at actual sector trades that were taken recently that demonstrate the profitability of this simple strategy.


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