Rick’s Picks occasionally offers option trades suited to novices and experienced traders alike. Typically, these gambits go against major trends, since our proprietary Hidden Pivot System is especially useful for nailing turning points very precisely.  Yesterday, for instance, we recommended buying QQQ June 65 calls if this proxy for the Nasdaq-100 index fell to within a dime of a 63.53 price target. That implied a wicked plunge from  the previous day’s settlement price of 64.76. In the actual event, panicky sellers obliged by pounding the bejeezus out of QQQ on Tuesday. It opened 43 cents lower, at 64.33, on its way to an intraday bottom at 63.48 – just a nickel from the low we’d projected.  This allowed us to buy June 65 calls for as little as 0.98; however, we used an official price of 1.03, since that was the worst fill reported by a subscriber in the Rick’s Picks chat room.

Later in the day, the calls rebounded to 1.42 as QQQ trampolined from our downside target. (In the feverish promotion-speak of the guru world, the paper profit on the calls worked out to “AN ANNUALIZED GAIN of 13,800%!!!!!!!!!!”). As QQQ screamed higher, we sent out a bulletin telling subscribers to take profits on half the position. Some reported fills as fat as 1.36, but we used a more conservative 1.25, effectively reducing the cost basis of our remaining position to 0.84.

Our #1 Trading Rule

Now it’ll be hard to lose, right?  In fact, stranger things have happened. And that’s why we always recommend taking at least a small partial profit early in a trade if possible, whether in stocks, options or futures.  Of the three vehicles, options are arguably the toughest game to beat, especially for the retail customer. We say that after having traded puts and calls ourselves for nearly 40 years, 12 of them as a dealer on an exchange floor. Options can be extremely difficult to play because it is not just price fluctuations in the underlying stock that causes them to move up and down, but also changes in supply and demand for the options themselves. For example, if Goldman Sachs were to sell 20,000 IBM June 200 calls for 5.10, the pros who bought them would typically try to spread off the risk by selling other options against them (or perhaps by buying puts). But if the stock were to rally shortly thereafter, you can bet the June 200s would be leaden.  And they might remain so for a week or more if the traders were unable to lay off all of the risk from purchasing the June 200s.

Could you trade options profitably?  We must confess that we need to employ nearly every trick we’ve learned in 40 years just to eke out a small “positive expectation” on option trades. It’s not a game one can beat if you give up a few cents  here and a few cents there.  For your interest, and so you can get the flavor of our recommendations, here’s the “trading tout” that went out to subscribers Monday night.  Judge for yourself if you could have followed the instructions, either by using a broker or a direct-access trading platform to execute the trade.  Here’s the tout (along with a chart that has been reproduced above). It begins with a reference to another, theoretically profitable, trade exited the day before:

QQQ (64.76):  “Occasionally we benefit when we cast our lot with the scumballs who fill market orders on the opening rotation.  Such was the case yesterday, when we exited a single August 68 put for 3.76 — the high of the day — off a 3.50 offer. The purpose of this gambit had been to make  enough to pay for a year’s subscription to Rick’s Picks, and to do so using a strategy simple enough for traders of all levels of experience to employ.  This we did, producing a theoretical gain sufficient to cover the price of a renewal — with enough left over to buy yourself a decent cigar.  Let’s plan on doing it again soon — i.e., if and when this vehicle comes down to 63.63, 10 cents above the ‘D’ target of the pattern shown.  Bid there for four June 65 calls, but stop yourself out if they trade for 20 cents less than you paid. ______ UPDATE (2:14 p.m. EDT):  The 63.53 target shown in the chart was a bulls eye.  As a result, we were able to buy four June 65 calls a few pennies off the low.  I’ll use 1.03, the highest price reported in the chat room, as our cost basis. For now, offer two of the calls to close for 1.22, day order.”

Want to see how we attempt to convert the trade above into a riskless bull spread? Click here for a free 7-day trial subscription to Rick’s Picks.