Options Myth #8

Buy for $1, Sell at $10. That's a Great Trade!

TRANSCRIPT

Buy for $1, Sell at $10. That's a Great Trade!

While it’s true that you want to make the most money when you buy an option.

It’s how you make the profits that’s important.

If you buy an option for $1 and think it’s going to 10, you also have to think about how it gets there.

You see if the option goes from $1 to 10 overnight… then that’s a GREAT Trade! But usually there’s a story somewhere between $1 to $10. 

Risk Reward

Let’s assume $1 to $10 is your initial expectations. 

Red is the current price of the option. 

Green is Your Expected Profit. 

And to simplify the explanation, let’s say the option goes up $1 for the next 10 days. 

Can you see what’s happening here?

Let me ask it another way…

What if I told you that the Red bar represents your Risk and the Green bar represents the Reward. Now, can you see what’s going on?

As the Options Price increases, you have more at risk and less possible reward than the previous day. 

With options, EVERY DAY is a NEW DAY. 

This means that each day you have to decide whether to hold or sell the options. You'll have to judge if the expected reward you’re looking for in the future is enough to compensate you for the amount of risk you carry TODAY.  

In other words, is that balance of risk reward in your favor?

If it is, then you can hold the options.
If the risk reward is not in your favor, then sell the options.

Here's the Main Question

Listen, one of the easiest ways to get fired at a Hedge Fund is not understanding this principle when using options.

So the question then becomes: How do you know when that risk reward is no longer in your favor?

Ahhhh...

Now you’re thinking!

At OptionsGeek.com, I’ll provide all the answers in a way you understand.

• With New Options Education. 
• A Simple yet powerful tool that gives you the answer.
• And Great Ideas targeting 150-400% returns.

I’ll see you in class!