Options Work Just As Well In A Down Market

Options work just as well in a down market. The option quote table below contains precise put option costs (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying put options is a bearish methodology as the value of a put option increases as the cost of the essential stock decreases. Hewlett Packard stock is currently trading at 32.78. Let’s assume that HPQ stock declinesin price 10% from 32.78 to 29.50. Let’s focus on the March 30-Strike put option (circled).

Chuck Hughes Proved 10% Stock Price Reduce = 900% Option Return

Purchasing the 30-Strike put option gives us a right to sell 100 shares of HPQ at 30.00. If we were to buy the 30-Strike put option we would expect to pay the ‘ask ‘ cost of .05 cents or $5 per option (.05 x 100 shares = $5). Let’s assume HPQ stock decreases 10% in price from the current cost of 32.78 to 29.50. With a stock cost of 29.50 the 30-Strike put option would be worth .50 points or $50 (strike cost of 30.00 minus 29.50 stock price = .50 option price). When you purchase options you can sell them anytime prior to option expiration. So that the option we bought for .05 points may be sold for .50 points. Selling the 30-Strike put at .50 would produce a 900% return (.50 sale price minus .05 cost = .45 profit divided by .05 cost = 900% return).

Option Profits Are Derived From Stock Price Movement

You'll recall from our previous debate that options are derivatives that derive their worth from the cost of the underlying stock. The inbuilt price of a call option will increase one point for each point its underlying stock increases above the strike price.

A lot has been printed about option strategies that invest in options based mostly on whether a choice is under valued or over valued according to the Black-Scholes Pricing Model. These option strategies are very complex and need high level mathematical calculations to compute an option’s Alpha, Beta, Delta, Gamma, Theta and so on. I never understood the logic of making an investment in an option because it was just below valued at the time of purchase. Under valued options can become more under valued. The price movement of the base stock determines an option’s value and the ensuing profit/loss. When you purchase a call option your profits are set by the price movement of the underlying stock.

Let’s refer again to the example for the Hewlett Packard 35-Strike call purchased at .10 points so you fully understand this crucial concept. The table below clearly demonstrates that the price of HPQ stock determines the profit/loss of the 35-Strike call option. If we can select a stock moving up in price, buying a call option on that stock can produce enormous profits and will allow us to harness the amazing leverage provided from option investing.

Up to date MVP Call Option Purchase Example

The Trend Line Strategy measures the buying and selling pressure for a stock which can enable us to grasp ahead the most probable future price direction of a stock. Combining the Trend Line Plan with the New High and Price Level Trend Confirmation Signals ends in a superb system for purchasing call options on stocks that are moving up in price.

The brokerage confirmation below shows that I bought 9 of the Precision Castparts (PCP) 115-Strike call options at 5.20 and sold them 5 weeks later at 18.50. This resulted in an $11,945 profit with a 254% return after allowing for commissions. I selected this trade using the Trend Line Strategy together with the MVP Trend Confirmation Signals. Precision Castparts was in a Trend Line Methodology buy mode and was in a leading industry group. It was also making New 52-Week Highs and was trading above 70 at a Price Level Confirmation.

MVP Option Strategy Produces

$1,044,065.26 Profit with No Losing Trades

My trading account statements that follow show $1,044,065.26 in profits with no losing trades. The average return was 88%. I made use of the MVP Option Strategy and Option Spread System to generate these profits. We will cover option. Spreads in Chapter 7.

Note: The profit for a spread trade is calculated by mixing the profit/loss for the long and short position to derive the net profit for the spread

The Appendix contains copies of my brokerage statements that confirm my $1,023,174.93 profit in 26 days utilizing the MVP Option and MVP Option Spread Secrets. There are also copies of brokerage statements and tax returns for an extra $1,936,445.72 profit John and I made trading the MVP Option and MVP Option Spread Systems.

Chuck Hughes

Stock Trading System