Sometimes, after a long daily grind, you want nothing more than to flop down in front of the nearest screen and indulge in some mindless entertainment for a while. But in the era of cable, DVRs, Netflix, Hulu, Amazon Prime, YouTube, and dozens of other “cord-cutting” options, it’s likely that you have hundreds (if not thousands!) of shows, games, and movies to choose from at any given moment.
So how do you spend your hard-earned hour of downtime? Zoning out to The Great British Baking Show, or binge-watching The Office all over again? Maybe you could finally start Game of Thrones to figure out what everyone at work is talking about, or just fall down the cable news rabbit hole for a while… but actually, you’ve also been meaning to catch up on the My Favorite Murder podcast. And then again, the big playoff game is tonight, isn’t it…?
With so many choices available, channel-surfing these days has a lot in common with trading options — but we’re here to help you avoid the investing equivalent of updating your Netflix queue for an hour before crashing into bed, exhausted!
Below, we’ll detail how to nail down which option is right for you, and we’ll tell you how you can flex your new options skills with an exclusive new subscriber trial offer!
For stock traders, it’s pretty straightforward to go long when you’re bullish. It’s as easy as selecting an entry point, buying shares, and then waiting for the gains to add up.
But options offer dozens of different ways to bet bullishly on a single stock. Multiple series of weekly options, front-month bets, long-term plays — on any given equity, there might be a dozen or more time frames available to trade. How is the average trader (or, for that matter, a beginner) supposed to decide?
But there’s no reason to be paralyzed by the wide variety of choices. At Schaeffer’s, we’ve developed an easy rule of thumb — the “Add 3” rule — to help you hone in on exactly which options “channel” to choose.
For traders who are new to trading puts and calls, it’s important to point out a key difference between stocks and options — specifically, the fact that options expire.
While a stock position can be left open-ended, options players must select an expiration date for their trade. There’s a wide variety of options series available, which means speculative players can choose between contracts that expire anywhere from a couple of hours in the future to a few years down the road.
As a result, the task of selecting a time frame for your options play can appear daunting. Shorter-term options are cheaper, but longer-term bets allow more time for the shares to move in your favor. So how much time do you really need to buy?
Our favorite insider trick for trading stock trends is: When in doubt, buy more time than you think you need. So, instead of an option with three months to expiration — a fairly typical time frame, for many speculative players — go ahead and add three more months to make it a six-month option. Hence, the “Add 3” rule.
As a general rule, the time component of an option’s premium is always “on sale.” Due to the statistical basis of the options pricing model, the cost to buy a six-month option is not double the cost to buy a three-month option. Instead, the mark-up for the extra time value will typically range from about 30%-45%.
And by purchasing that additional time at a “discount,” you can comfortably ride out any choppy price action or minor adverse moves in the underlying stock. The projected price swing has more time to develop and play out as you expected — which means you don’t need to sweat over a minor bout of seesaw price action, or panic as the stock undergoes a brief period of consolidation!
Plus — even with the extra few months’ worth of time value thrown in — you’re still paying a minimal upfront cost for the option, relative to a comparable stock purchase. This means you’ll be reaping the benefits of leverage, which allows you to collect percentage returns many times greater than your initial investment.
Of course, for those with very short-term forecasts, sometimes nothing but a weekly or front-month option will do. If you’re expecting a quick, volatile move in the shares following a scheduled event, for example, a short-term option may well be the best choice. (On the flip side, if you’re purchasing an option with two years until expiration, it might be overkill to “Add 3”!)
So remember: The “Add 3” approach works best when you’re betting on the continuation of an existing trend, or the reversal of an existing trend, over the intermediate-to-long term. Since this is such a popular approach for so many options traders — beginners and experts alike — we’ve found the “Add 3” rule to be a useful, reliable cure for indecision.
Of course, you may not always be able to add exactly three months, depending upon which series are available to trade. Nevertheless, the concept remains the same — pick up an extra two to four months’ worth of time value, whenever possible, to buy the stock some breathing room. Just consider the “Add 3” motto a helpful device to remind you to expand your time horizons when you’re feeling overwhelmed by all of the choices available.
Are you ready to start buying time “on sale”? Schaeffer’s Weekend Trader Alert issues call and put recommendations with a healthy chunk of time until expiration, allowing the underlying shares ample opportunity to make a move. Plus, every trade is based on our proprietary Expectational Analysis® methodology, which targets stocks that are poised for big breakouts.
Every Sunday at 7 p.m. ET, you’ll receive a new options recommendation direct to your inbox. Each pick will be accompanied by a thoroughly researched commentary, where you’ll learn what the investing crowd is expecting from the stock — and why we think it’s primed for a major move over the course of just a few months (or less!).
And you’ll never have to worry about the details, because we provide everything you need to manage the trade, including a target profit and time-stop date. You’re never left wondering what to do — we’ll guide you every step of the way.
As a special “thank you” for choosing to begin your options journey with Schaeffer’s, we’re offering a special deal on Weekend Trader Alert right now. You can take advantage of our powerful full-service recommendations at a major discount off our usual price!
While a month of Weekend Trader Alert recommendations typically retails for $149 – a fair price, considering the volume of trades and the ambitious target profits – as a new Schaeffer’s member, you can claim a month of these exciting trades for just $10!
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Although there is significant profit potential associated with buying options, there is also the risk of losing one’s entire investment in any individual trade. In any option buying approach, it is expected that losing trades will be more numerous than winning trades. The goal is for the average gain to be significantly greater than the average loss so that the bottom line is profitable. Prior to purchase, ensure that you have a broker that allows the trading of options and that you are approved to trade options.
