Investing

No Movement? No Problem!

By Lee Lowell  |  July 5, 2018

As a stock trader, you need movement in order to make money, right? That’s about as elementary as the stock market gets.

I mean, if you buy a stock that doesn’t move, not only do you miss out on the chance to profit, it’s also a waste of time.

You’re twiddling your thumbs, refreshing your browser over and over… when you could be doing other things with your time and money.

See, this is one of the biggest obstacles stock traders face: the lack of movement. Or, to put it another way: a lack of market volatility.

What if I told you there’s a way to make money when volatility flatlines and your stock goes nowhere?

Would that interest you?

If so, read on…

Being one of the resident options experts at Dent Research, it’s my goal to teach you alternative methods to help increase the size of your portfolio.

And trading options has been a huge source of income for me over the last 27 years.

How do I do it?

By using option-selling techniques.

Let me explain.

There are only two types of option traders: option buyers and option sellers. In my opinion, you want to be in the latter group.

Here’s why…

When you buy an option contract, you’re making a bet that a stock will get to a certain price level by a certain amount of time (the expiration date). If it doesn’t, the option expires worthless and you lose 100% of your investment.

Do you know how hard it is to predict what price level a stock will reach? Pretty hard! And when you have a time constraint breathing down your neck, it makes it even harder. Almost impossible.

So, when you buy a stock option, that’s exactly what you’re doing: predicting the where and when of the stock’s move.

And you know what? Most option buyers fail. And fail miserably.

A study by the Chicago Mercantile Exchange (CME) proves it.

During a three-year study from 1997-1999, the CME’s analysis showed just how hard it is to win as an option buyer, specifically a put-option buyer.

As seen above by the circled numbers, all put-option contracts bought on the S&P500 and Nasdaq 100 expired worthless 93.9% and 95.2%, respectively. That’s huge!

The data is merciless.

Put-option buyers have almost no chance of profiting. This is one of the key reasons why we have such a high win rate in our Instant Income Alert research service. We exploit those statistics to our benefit, and you can join us right here.

Remember, if there’s no stock movement, it’s hard to make a profit as a stock trader. But, as an option seller, you can make tons of money due to the lack of movement.

Let’s once again use an option calculator to prove that point.

We’ll use Walt Disney (NYSE: DIS) as the hypothetical example.

In the first graphic below, you’ll see four numbers circled: stock price, days until expiration, and option price.

The stock price is $104.81, there are 110 days until expiration, and the call- and put-option values are $4.34 and $5.08 per contract, respectively.

In the second chart below, we’ve left all inputs (on the left-hand side) untouched, including the stock price. The only difference? We lowered the days-to-expiration value by 60 days.

You can clearly see, with all else being equal except for time, both the call option and the put option have declined by roughly $1.50 per contract. This represents a loss to the option buyer of 36% and 28%, respectively.

With stock prices unchanged, and due to the passage of time, the option buyers are sitting with a loss while the option sellers are looking at the same number – but as a gain.

And of course, stock buyers haven’t made any money either.

The option seller is sitting pretty while the other two are sweating bullets.

Option sellers just sit back and watch their profits build up. It’s like making money by doing nothing, and all because the stock hasn’t gone anywhere. Pure genius!

As we said, no movement, no problem – for option sellers. Profits like these are being made every day.

Next week I’ll dive a bit deeper into that CME study and discuss how probability plays a huge role in the success of an option trader.

Lee Lowell

A former Wall Street insider and floor trader, Lee Lowell has worked in the market for nearly 30 years now. He began his option trading career in 1991on the floor of the New York Mercantile Exchange (NYMEX) in New York City.MORE FROM AUTHOR