Justin’s note: Today we’re handing over the reins to our colleague, master options trader Jeff Clark…
By Jeff Clark, editor, Delta Report
I was only 19 years old when I made my first options trade.
I had a gut feeling the market was going to go higher… so I bought four S&P 100 call options at $1.50 – a total investment of $600. A few hours later, the options were trading at $4.50. I sold and took the $1,200 profit – a 200% gain. And I was hooked on options forever.
[A stock option is a contract to buy or sell a stock. Each contract represents 100 shares. And each contract is fixed at a certain price… and expires on a specific date.
A call option is an agreement to buy a stock. A put option is an agreement to sell.]
My next trade was in tech giant IBM (IBM). I bought 10 $1 calls for a total of $1,000. This time, it took a couple of days to double my money. Next, I bought Digital Equipment put options… which nearly tripled in just a few days.
I made 17 trades during my first six weeks as a trader. Every single one was a winner.
Going 17 for 17 was a remarkable feat for a rookie trader – especially since I wasn’t using any sort of fundamental or technical analysis. I was just going with my gut. But I was careful not to put more than $1,000 or $2,000 into any single trade. And I still managed to turn my $5,000 brokerage account into $50,000 in just six weeks…
And then I decided it was time to get serious. No more tiny trades. I was too good for the small stuff. For whatever reason, I had figured out a way to beat the market. Heck, I had just rattled off 17 straight triple-digit winners. So I decided to take the $50,000 in my account, add to it my $25,000 in savings, and put it into a handful of options trades.
You can probably guess what happened next…
The stock market has a habit of humbling folks who think they’ve figured it out. For me, the humbling started right away.
At first, the positions started slightly moving against me. It was nothing to be concerned about. One good day would put everything back in the profit column.
But then, one by one, each position blew up on me. It was too painful to watch. I kept the television off and avoided reading the newspaper for fear I’d see something bad about the stock market and my positions.
When I finally got up enough courage to call the branch manager and check on the status of my account, I learned all the gains I had built up over the previous six weeks were gone.
"Just sell everything," I said.
That was an expensive lesson to learn. But it’s one every options trader learns at some point. I was just fortunate it happened to me early in my career.
You see, that experience changed how I looked at trading. Instead of using options as vehicles for speculation – a way to juice my returns and get more bang for my buck – I started using them the way they were intended to be used: as a way to reduce risk.
Options allow investors to hedge their positions… and to risk much less money than they would if they bought a stock outright.
Rather than purchasing 100 shares at $10 per share, an investor could buy one call option for $50 and have the right, but not the obligation, to purchase the same number of shares at an agreed-upon time in the future.
This is a simple example. But the simplicity proves my point. Options allow you to risk much less and profit just as much as you would by buying stocks.
Today, I still do my fair share of speculating. But I’m not focused on how much money I can make. I’m focused on how little I can lose.
That’s a huge difference. It has allowed me to trade options successfully for three decades. And it allowed me to retire at 42.
P.S. For the past six months or so, I’ve been refining what I consider the single best idea I’ve come up with in over three decades of trading. I’ve tested this idea with my own money on 35 trades… and have averaged 50.14% gains.
I’m now nearing the finish line on this project. If you’d like to receive updates on it as well as my morning market commentary, Jeff Clark’s Market Minute, you can be added to my list by clicking here.
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