A Peek Behind the Curtain

by Ken Trester

You all know I'm cheap -- I like to buy cheap options and wait for them to explode for big profits. Boy, do I like that!

What you don't know is that I'm also something of an amateur sleuth. I like to uncover the mystery of how things work.

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I like to watch a magic trick as much as anyone, but I also want to know how the magician did it. I don't care about the mystery -- I want to know how he sawed that girl in half! Well, rather, I'm always curious to know how he made it appear that he sliced her in half.

Every business has its curtain -- even the options business. And today, I'd like to give you a peek behind the curtain and show you how this amazing corner of the financial world works.

STEP RIGHT UP TO OPTIONS

First, the sad reality: The option pros are like great white sharks swimming in bloody water. The pros are the winners, simply because they know where the money is and how to get to it.

Unfortunately, 90% of all amateur or novice option buyers approach the option markets with some misconceptions. They think a stock will move up or down and randomly select any option they can find on that stock without carefully analyzing the position to determine whether it is a good or bad play.

And, unfortunately again, 90% of all novice option traders lose their money to the pros.

There's no reason to be among that 90%. You are among the minority of individuals who are playing the markets with the precision and patience of the professionals.

My job is to even your odds with the pros. The trades you get from me are professionally designed, and here in part is how I do it …

NO SMOKE AND MIRRORS HERE

The one thing I love about options over other investments is that you can measure their value and the probability of profit mathematically. That is not true of any other investment.

How do you measure the true value of a stock? There is too much uncertainty in the future to do so, and the fact that stock prices are all over the map each year (and, recently, on any given day) demonstrates my point. How do you evaluate the true value of gold or silver or commodities, such as crude oil, corn and soybeans?

We all try to guess at their value, but no one knows.

Options prices, on the other hand -- due to the fact they have a time limit and specific contract terms -- can be measured mathematically.

That's right. Pros, including me, actually use mathematical formulas to determine the success of an option trade in advance.

One such pricing formula, the Black-Scholes model, was so accurate that it won a Nobel prize in economics in 1997.

It works this way: Options serve as surrogates for stocks, so I can actually figure the cost of holding the underlying stock. Even if we can't predict exactly what the underlying stock will do, having these formulas helps develop strategies that will show long-term profits.

My goal every week in Fast Options Profits is to mathematically identify underpriced or overpriced situations and to pounce on such opportunities. More specifically, that means searching for low-priced options with big-return potential, and avoiding paying too much for any particular trade.

I'm really not as concerned with fundamentals, like earnings or one-off events such as takeovers, or economic issues -- though sometimes I do consider such factors.

Like me, most professionals mathematically analyze option plays, and the average individual investor does not. I am always in search of that super play on an undervalued option with an excellent risk/reward picture. That is what successful option trading is all about.

It really comes down to mathematical science. It can be arduous, but relax -- you've got me, a pro, doing the heavy lifting for you and giving you the edge you need to stack the odds in your favor in the options markets.

IT'S MORE THAN PULLING RABBITS OUT OF HATS

My process for finding options recommendations for Fast Options Profits is an unchanging ritual.

I have a list of stocks that I know have high momentum -- in other words, they are the current fast-moving stocks. I then filter these stocks and run them through two separate computer programs I designed to uncover the options that, quite simply, have the best risk/reward.

My programs use, in part, the Black-Scholes formula along with my own proprietary formulas, which give me a bundle of information. It's all about statistics -- likelihoods, if you will. Then I go to the charts of each stock and apply technical analysis to each candidate.

The final cut is my personal decision -- it's where I use my 34 years of experience to pick the options with the best combination of low risk and high-potential returns for the current week's trades.

So what's my point, you ask? When you're trading options, your opposition is always a pro. So when you trade, use the pro's tools of mathematical formulas just as they do -- this will even the playing field.

Better yet, take advantage of my time, effort and experience and put your option trading on autopilot. The work that goes on behind my curtain, like that of a magician, requires a lot experience and talent, if I say so myself.