Options Work Just as Well in a Down Market

Options work just as well in a down market. The option quote table below contains tangible put option prices (thanks to Yahoo Finance) for Hewlett Packard (HPQ). Purchasing put options is a bearish methodology as the value of a put option increases as the cost of the underlying 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 Proven 10% Stock Price Reduce = 900% Option Return

Buying the 30-Strike put option gives us a right to sell 100 shares of HPQ at 30.00. If we were to get the 30-Strike put option we would expect to pay the ‘ask ‘ price of .05 cents or $5 per option (.05 x 100 shares = $5). Lets say HPQ stock decreases 10% in price from the current price of 32.78 to 29.50. With a stock price 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 worth). When you buy options you can sell them anytime before option expiration. So the option we purchased 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 Derive From Stock Price Movement

You'll recall from our previous discussion that options are derivatives that derive their value from the cost of the base 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 techniques 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 secrets are very complicated and need high level mathematical calculations to determine an option’s Alpha, Beta, Delta, Gamma, Theta for example. I never accepted the logic of investing in an option as it was just below valued at the time of purchase. Under valued options can get even more under valued. The price movement of the base stock determines an option’s price and the ensuing profit/loss. When you get a call option your profits are determined by the price movement of the base stock.

Let’s refer again to the example for the Hewlett Packard 35-Strike call bought at .10 points so that you fully understand this vital idea. The table below clearly demonstrates that the price of HPQ stock decides the profit/loss of the 35-Strike call option. If we can choose a stock moving up in price, purchasing a call option on that stock can produce great profits and will permit us to harness the incredible leverage provided from option investing.

Contemporary MVP Call Option Purchase Example

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

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 ended in an $11,945 profit with a 254% return after factoring in commissions. I chose this trade utilising the Trend Line Plan together with the MVP Trend Confirmation Indicators. Precision Castparts was in a Trend Line Technique 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 System Produces

$1,044,065.26 Profit with No Losing Trades

My brokerage account statements that follow show $1,044,065.26 in profits with no losing trades. The average return was 88%. I used the MVP Option Strategy and Option Spread Strategy to generate these profits. We're going to cover option. Spreads in Chapter 7.

Note: The profit for a spread trade is figured out 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 copies of brokerage statements and tax estimates for an additional $1,936,445.72 profit John and I made trading the MVP Option and MVP Option Spread Systems.

Chuck Hughes Stock Trading System

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