How I Trade Options

Mike is one of our marketing people. He follows Google’s ever-changing content algorithm so that what we write can actually survive on the internet.

Believe it or not, Google is very picky about how articles are structured and stored on the internet. If you don’t meet the Google standard, you will be essentially banned. Google accounts for 95% of internet search and 20% of all email delivery. If you can’t make it on Google, you can’t make it anywhere.

From my perspective, Google is absolutely a monopoly. It basically runs the internet. And now that I’ve openly questioned Master Google, I’ve probably ensured some kind of probationary status for Angel. Sorry about that…

Anyway, I love the fact that Mike is starting to trade options. And I’m flattered that he came to me to see what I thought. I realized that some of you might have similar questions, so I decided to make this the topic of today’s Wealth Daily.

So here’s Mike’s message from Monday (hopefully Google likes alliteration):

Now, don’t worry about the details of Mike’s question. He’s simply saying that he thinks PNC Bank (NYSE: PNC) is gonna rally after it reports earnings on Friday and that he thinks he can make some loot with an upside trade.

The crux of Mike’s question isn’t really stock options; it’s about PNC stock itself and why it’s going to go up. It’s a trading question. The call option is simply a vehicle — a simple way to put real money down on the trade. It’s Just a Trade

So here’s the next part of our little discussion:

Again, at this point of our discussion, Mike and I are barely even talking about stock options. 90% of making money with options has nothing to do with options at all. It’s about getting a handle on where a particular stock is headed.

Once you get a feel for where a stock is headed, it’s easy to use options to turn a 3–5% move for a stock into a huge 100–200% gain.

Let’s Go to the Charts, Mike

Back in the old days, when there were actual live human beings on actual exchange floors in New York and Chicago, there were people called “specialists.” A specialist covered only a few stocks (two to five, depending on how much volume there was), and all buy and sell orders for a particular stock went through the specialists. Needless to say, the specialists were experts in the stocks they covered.

I learned much of what I know about trading from watching the Qualcomm options specialist in 1999. Back then, Qualcomm was among the most heavily traded stocks on the Nasdaq. That specialist made millions. And I still follow his example and make myself an expert in just a few stocks.

Like I told Mike, usually when I trade a stock I don’t know like the back of my hand, I lose. And as it turns out, if I had chosen a PNC trade based on those earnings expectations, I would have no better than a 50–50 chance of making money.

Check out this PNC chart with just a couple lines on it:

The purple lines are what you call a trading channel. PNC has been pretty consistent within that channel: It hit the top or bottom line and goes the other way. But see where the price is right now? Smack in the middle. The next move is an absolute crapshoot, and that’s what I told Mike.

I consider myself a specialist with Bank of America, and so I showed him the chart that got my Real Income Trader subscribers a 210% win last week:

Now, Bank of America is in a sideways pattern. But the action is the same: It hit the bottom of the channel (highlighted in the bubble), and we jumped on for a 210% gain in a couple days.

Here’s the AMD chart that got us 276% in about a week:

Again, all you have to do is draw a couple lines and have some patience, and you will see this very same trade set up again and again and again.