Last week I shared some BIG news with you.
In short, after months and months of painstaking research and development, my team and I were about to release our most ambitious TradeSmith product yet:
A powerful set of tools that any investor can use to make significant gains with relatively low risk in the stock market each week.
This project has been my dream for YEARS. And this week, it finally became a reality.
During a special event on Wednesday night, we officially launched CoPilot by TradeSmith.
I am SO happy to finally be able to share this with you. And over the next few weeks, I’d like to tell you a little more about how this product works and what makes it unlike anything else out there.
Of course, as regular Money Talks readers know, my goal in this weekly letter is to educate, inform, and (hopefully) inspire, not to promote TradeSmith products.
So, rest assured, I’ll also give you plenty of actionable information you can use whether you decide to try CoPilot or not.
But first, a word of warning…
When I tell you what CoPilot does, some of you may want to stop reading. You might assume this product is too advanced, too complicated, or too risky for you.
But that would be a mistake. And if you stick with me until the end, I promise to show you why.
Deal? Ok, let’s get to it…
So, what exactly is CoPilot?
CoPilot is a proprietary set of tools designed for short-to-intermediate term options trading.
Now, options tend to have a bad reputation among the general investing public. And rightfully so… when used improperly or carelessly, they can be incredibly risky.
But when used correctly, trading options can actually be safer and more profitable than investing in stocks.
The problem is that trading options the right way used to require hours of careful study… or relying on a high-priced options trading service to tell you what to do.
You see, with CoPilot by TradeSmith, even novice investors can learn to trade options like a pro with minimal time and effort.
But before I can explain how CoPilot does this, we need to review some options “basics.”
First, an option is just a contract that gives the holder the right, but not the obligation, to buy or sell a specific stock (known as the “underlying” stock) at a specific price (known as the “strike price”) on or before a specific date (known as the “expiration date”).
Second, one option contract controls 100 shares of the underlying stock.
Third, the price you pay to buy an option (or the payment you receive to sell an option) is known as the “premium.”
And fourth, there are two general types of options you can buy or sell: call options and put options.
A call option gives the holder of that option the right to buy the underlying stock at the strike price on or before the expiration date.
That means buying a call option is a bullish bet on the underlying stock.
If the stock trades above the strike price on or before expiration, the holder will profit (less the premium paid to buy the option).
However, if the stock closes below the strike price at expiration, the option will expire worthless, and the holder will lose the premium they paid to buy it.
A put option gives the holder the right to sell the underlying stock at the strike price on or before expiration.
That means buying a put option is a bearish bet on the underlying stock.
If the stock trades below the strike price on or before expiration, the holder will profit (again, less the premium paid to buy the option).
However, if the stock closes above the strike price at expiration, the option will expire worthless, and the holder will lose the premium they paid to buy it.
In either case, buying an option has a defined risk (the premium you pay to buy it) and potentially unlimited profit potential. However, due to the way options behave over time — which we’ll get into later — option buyers tend to have a relatively low probability of making a profit.
But this is only one side of options trading.
Just as you can “borrow” and sell a stock you don’t own — which is known as “shorting” or “short selling” — you can also sell an option you don’t own.
In general, selling an option carries the opposite implications, with a few critical differences.
That means selling a call option is a bearish (or neutral) bet on the underlying stock.
In this case, if the stock closes at or below the strike price at expiration, the option will expire worthless, and the call seller gets to keep the premium as profit.
However, if the stock closes above the strike price at expiration, the call seller is obligated to sell the stock at the strike price. To do so, the call seller would need to buy shares at the current, higher market price before selling at the lower strike price for a loss.
(In practice, call sellers are likely to close a losing trade before the option expires and avoid having to sell the underlying stock. They would do this by buying back the same call option they sold at the now-higher price. But in either case, the actual loss to the call seller will be virtually the same.)
Likewise, selling a put option is a bullish (or neutral) bet on the underlying stock.
If the stock closes at or above the strike price at expiration, the option will expire worthless, and the put seller gets to keep the premium as profit.
But if the stock closes below the strike price at expiration, the put seller is obligated to buy the stock at the strike price. To close the trade, the put seller would then need to sell those shares at the current, lower price for a loss.
(Like call sellers, put sellers can choose to close a losing trade before the option expires and avoid having to buy the underlying stock. But again, the actual loss will be virtually the same either way.)
In either case, the general risk-to-reward profile for selling an option is the opposite of buying an option.
Selling an option has a defined profit (the premium you collect to sell it) and potentially unlimited risk. But due to the way options behave over time, options sellers tend to have a relatively high probability of making a profit.
It’s these differences in potential risk-to-reward — combined with simple greed — that get many novice options traders in trouble.
You see, buying call or put options can be a great way to speculate on higher or lower prices in a particular stock or market.
Remember, each options contract controls 100 shares of the underlying stock for a tiny fraction of the cost of buying those shares directly. That gives savvy traders a way to make calculated bets that could earn significant returns while risking just a tiny portion of their overall capital.
But many novice traders see only this profit potential. They start dreaming of riches and forget about the relatively lower probability of profits.
Instead of buying one or two options contracts in place of the 100 or 200 shares of stock they’d usually buy, they buy 10 or 20 contracts.
Then one of two things inevitably happens.
The options expire worthless, and they lose a significant chunk of their hard-earned savings. Or worse, they get lucky and hit it big. They then go on to take bigger and bigger risks until they eventually blow up their accounts.
It’s a similar story when it comes to selling options.
Pros take advantage of the high probabilities of profits in these trades to earn solid, consistent payouts week after week. To use a baseball analogy, they focus on hitting “singles” and “doubles” rather than “home runs.”
It’s not sexy, but over time, these profits can add up to HUGE returns.
But again, novices tend to focus primarily on the returns. They’re only interested in going for home runs and completely overlook the most significant benefit of selling options.
As a result, many folks don’t even give options-selling a chance. But those who do often end up seeking out trades with little regard to their likelihood of success.
They’ll sell an option with a hefty premium without realizing they’re likely to end up having to buy shares of that stock and losing even more than they earned. After a few losing trades like this, they’ll eventually give up.
But this doesn’t have to be the case any longer.
With CoPilot by TradeSmith, every trader can quickly and easily see exactly how likely they are to earn a profit on any options trade AND how much money they’re likely to make if they’re successful.
CoPilot also includes several proprietary strategies — incorporating several brand-new TradeSmith algorithms — to make finding the very best options trades as easy as clicking a few buttons on your mouse.
And for folks with more trading experience, we’ve also built a powerful new Options Screener tool that will allow you to design and execute your own strategies using dozens of TradeSmith and options-specific criteria.
CoPilot is literally a dream come true for me. And I’m so glad to be able to share it with you at last.
Next week, we’ll take a closer look at how you can get started with options trading, walk through some example trades, and share some real, actionable CoPilot trading opportunities you can use immediately (with or without a CoPilot subscription).
In the meantime, if you weren’t able to join me for this week’s launch event, you can still watch the full video replay by clicking here.
And if you have any questions or comments about CoPilot — or options trading in general — I’d love to hear from you at [email protected]. As always, I can’t personally respond to every email, but I promise to read them all.