The big day has come…and passed.
All the fanfare around Apple’s new products led to a bump in Apple stock performance Tuesday, but just how far has it come since May 19, 2012? I will tell you why that date is significant in a moment, but until then the answer is 31.1%.
Over that same time frame I’ve managed to make 79% in Apple…without actually owning one share of Apple stock. That’s 3% a month.
[ad#Google Adsense 336×280-IA]You see, it is extremely important to me that investors like yourself invest time in learning how to use alternative ways to invest your hard-earned money.
It’s important because unlike your typical investment advice, these techniques are tangible.
The strategies rely solely on mathematics rather than the opinions of a few talking heads.
Each month, I give subscribers to my Options Advantage service detailed instructions on how to collect 3% a month in Apple.
So far, so good. As I stated before, subscribers have made roughly 79% since I started the Apple Portfolio back on May 19, 2012 with a win ratio of 85.7% (18 out of 21 trades).
Let me take you through an example of how I evaluate each and every investment I make using one of my recent trades in Apple (Nasdaq: AAPL).
The first question I always ask myself when looking at a potential option trade is, “What is the most I can make or lose on this trade?” Fortunately, in the world of options the numbers can easily be calculated so that you can make a logical decision based on your risk/reward tolerance.
On Dec. 27, with Apple trading for roughly $560 and in an overbought state, I decided to sell a few vertical call spreads in Apple. A vertical call spread is an options strategy for those who are bearish or neutral on a stock. In fact, the stock can actually move slightly higher and you will still make a maximum profit.
I sold the 600/605 vertical call spread for $0.42, or $42 per spread. The maximum risk on the trade was $458. At first glance the risk/reward seems off to those new to options. I always get the same question, “Why would you risk $458 to make $42?”
This is where the second question comes into play: “What are the chances that this will be a profitable trade?”
The answer is simple: The trade has a very high probability of profit of over 90%. In fact, I can cater each of my trades to fit a certain probability of profit so I always have an overwhelming edge. Basically, by selling options rather than buying options like most investors, I can create an enormous margin of error.
In this case, as long as Apple doesn’t push past the short strike of my spread, or $600, I will make a maximum profit on the trade. That’s a margin of error of 6.6%. I challenge investors to find a stock trade that allows you to be directionally wrong 6.6% and still make a profit. Again, this is why I use options. I compare selling options to being the house in a casino, but with significantly better odds. And as we all know, the house always wins over the long term.
Finally, I would ask, “What is the expected return for this trade, taking into consideration the max risk/reward and probability?” The expected return would be 9.1% ($42/$458*100).
I hope a few of you will decide to take the plunge and at least investigate the true power of options selling strategies like the one I use for Apple. Yes, they can be risky, but if used properly they are one of the most conservative and lucrative investment tools available. It’s a combination that is impossible to come by in today’s investment arena.
–Andy Crowder
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Source: Wyatt Investment Research