I’m Elisea Frishberg and I’m going to go into more detail than usual today. Because I know you’re being lied to, and I’m going to show you how.
Today, in 2017, way more options are traded everyday than stocks. In fact, option volume passed the stock market back in 2015.
This is happening because the brokers have found a huge bonanza. Options feel cheap. Their prices are much lower than the prices of the underlying stocks… so investors who are intimidated by the prices of stocks, think they can be “traders” with options, whose prices they FEEL they can afford.
The brokers love the options because the investors are taught to buy weekly options or monthly options.
That means they trade a lot, and the brokers earn their commissions, whether the trader wins or loses.
The commissions feel cheap, so the traders don’t even consider the cost.
So the brokers promote the hell out of them, and put on free seminars constantly, making option trading increasingly popular.
The novice traders instinctively buy the short-term out-of-the-money options just because they’re cheap…
They think cheap means affordable.
The truth is, out-of-the-money options expire worthless at least 75% of the time. That means they are really very expensive…
they are a much worse deal than they appear to be.
In those free seminars by the brokers, the “traders” are taught that option prices are determined by 4 sensitivities.
They are taught that the return on an option investment is simply the change in price of the option over the time that it is owned.
The wannabe option traders are taught that to be a good option trader the good news is that it’s no more complex than stock investing, once you’ve learned a few formulas.
Here is a typical lesson. I’m going to tell you in advance. This completely misses the point, and it’s why the traders end up losing money.
That’s right. The traders lose money and quit. The broker gets paid every time.
So, here’s what they believe. Maybe you’ve learned it this way, too.
Now, don’t let your eyes glaze over. I’m telling you right now, this is not the point.
They learn that the price of an option is determined at any given time by the four factors that make up the Black-Scholes Model.
Remember that the professors who invented the Black-Scholes Model and won a Nobel Prize for it, were on the board of LONG TERM CAPITAL MANAGEMENT…
a famous hedge fund that went bankrupt in the 1990’s following this very pricing model in the relationship between Treasuries and Mortgage Bonds.
This model is still taught, and it works great, except when it doesn’t!
Traders, hoping for a simple formula, don’t really make the effort to get to know and understand the underlying stocks they are trading options in.
Instead they focus on the relationship of strike to stock price, the time to maturity, the implied volatility, and the interest rate.
They believe the change in the option price can be simply decomposed into the impact of the change in each one of these variables.
These sensitivities are called the “Greeks” because they are typically represented by Greek letters:
Delta for the sensitivity of the option price to the change in stock price,
Vega (which is actually not a Greek letter, but a poorly made Chevrolet from the 1970s) for the sensitivity to the change in implied volatility,
Theta for the sensitivity of the option price to a change in the time to maturity as the contract matures, and
Rho for the sensitivity to the change in interest rates.
Again, don’t glaze over, because you don’t have to study this now.
Those would-be traders focus on the short-term volatility in the options formulas, and miss the real point…
that in some cases, the company itself is in a very predictable position. The short term fluctuation of the price is irrelevant. Google, right now is an example of this.
Based on the perceived volatility of all those Greek concepts, and the fact that they think the stock market is very volatile and unpredictable, they pay inflated prices for options on a stock whose fortunes are really VERY predictable.
Google, now called Alphabet, has been steadily rising in price and will most likely continue to have very stable and predictable growth for the near future.
Our market XRAY indicator is telling us that demand for stocks is holding up, and selling pressure is actually falling steadily.
My analysis of intermediate term supply and demand is that the bull market is set to continue for at least several more months, and Alphabet’s position as a stock and as a company, is secure for at least that time.
So the simple conclusion is that the traders are paying too much for PUT options on Alphabet (GOOGL).
The arbitrage opportunity for an experienced is that when they’re paying too much for something, I want to be the one that sells it to them.
And that’s the way it’s working.
Over the last years, selling the overpriced PUT options has been much more profitable than owning the stock, which has also been a good deal.
For example: over the past 2 years, here’s the result of simply selling a PUT option every 40 days, continuously, 1 strike out of the money:
For the past six months, selling that same 40 day PUT option has made 42.7%…
even with a stop loss in place to prevent the possibility of a big loss on any trade.
The bottom line is simple. In order for us to make big money in a very efficient market, somebody has to make a mistake.
In this case it’s those amateur option traders, and we’re there to take advantage of the mistake.
If you want a FREE lesson on this trade…click here!