Think Options Are Too Risky and Complicated? Not Anymore…

Jul 09, 2021

Options trading.

Just mentioning this phrase in a publication like Money Talks is often enough to send readers running for the hills. And for good reason…

Options can be dangerous if you don’t know what you’re doing.

And unfortunately, learning to trade them the right way has traditionally required a lot of time, effort, and expense. For many non-professional investors with work and family obligations, it’s practically out of reach.

But not anymore…

As I explained last week, our brand-new CoPilot by TradeSmith tools were designed to empower anyone to trade options the right way, with minimal time, effort, and expense. And today, I want to show you exactly how it works.

Now, before we dive in, I should point out that CoPilot isn’t only for beginners.

These powerful tools offer something for everyone, from complete novices to advanced traders with years of experience. In fact, I’d argue CoPilot’s Options Screener is among the most powerful tools for experienced options traders available on the market today.

But now, I’m going to focus on one in particular — the CoPilot Opportunities tool — that is best suited for folks who are just getting started with options.

And because this is Money Talks, I’m also going to share several actionable trading ideas you can use whether you decide to try CoPilot or not.

Introducing CoPilot Opportunities

The CoPilot Opportunities tool was designed to take all the guesswork out of finding the lowest-risk, highest-return options trades available in the market at any time.

Opportunities currently offers three different options-trading strategies: Sell Puts, Sell Calls, and Buy Calls.

But we will be adding several additional strategies soon. These include Buy Puts and several different “spread” trades, which involve combining two or more options in a single trade to reduce your risk or increase your profit potential.

Let’s take a look at each of these three strategies in a little more detail.

CoPilot Sell Puts

As I explained last week, selling a put option is a bullish-to-neutral bet on the price of an underlying stock.

When you sell a put option on a stock, you receive the value of that option (the “premium”) as an upfront payment. If that stock then moves higher, stays about the same, or in some cases even moves a little lower, the option will generally expire worthless, and you’ll get to keep the premium as profit.

On the other hand, you’ll generally only stand to lose money if the stock falls significantly below the option’s strike price before expiration.

That means an excellent put-selling strategy should be able to identify options that have a very high probability of expiring worthless.

That’s precisely what our CoPilot Sell Puts strategy does.

Now, the process this strategy uses is a bit technical, but it works like this:

  • First, it looks for options that are expiring in the next 60 days or less. Because of the way options prices are calculated, they tend to lose value over time. And this “time decay” really begins to speed up over the last several weeks before an option expires. So, focusing on options expiring within 60 days ensures we have that advantage on our side.
  • It then screens out any options with poor “liquidity” based on factors like trading volume and the bid-ask spread. This step ensures we can easily get into and out of our positions without moving prices.
  • Next, it uses our proprietary algorithm to calculate how likely each remaining option is to expire worthless (what we call the “Probability of Profit” or POP) and how much money we can make if it does (the “return on investment” or ROI).
  • It then selects only those options with a POP of 80% or higher and an ROI of at least 0.05%.
  • Finally, it chooses the one option with the best combination of POP and ROI for each underlying stock in the sample, and then ranks the results in order of highest ROI by default.

Now, you could potentially follow most of these steps yourself with sufficient knowledge and access to the necessary data sources. (Though, as I mentioned, you won’t be able to replicate our proprietary POP and ROI calculations exactly.)

But it would take considerable time and effort, and frankly, it wouldn’t be cheap. (Trust me… You don’t want to know how much we pay for data each month!)

The real power of CoPilot Opportunities is that it will do this all for you automatically, with just a few clicks. With CoPilot, anyone can trade options like a pro.

I’ve included a couple of the best current CoPilot Sell Puts trades below.

CoPilot Sell Calls

Selling a call option is a bearish-to-neutral bet on the price of an underlying stock. (As I mentioned earlier, I covered the mechanics and risk/reward potential of different options trades in more detail last week if you’d like to review.)

If that stock moves lower, stays about the same, or in some cases moves a little higher, the option will generally expire worthless, and you’ll get to keep the premium as profit.

And you’ll generally only lose money if the stock rises significantly above the option’s strike price before expiration.

So, our CoPilot Sell Calls strategy uses a similar process to the one I just described to identify call options that are most likely to expire worthless.

Again, I’ve included a couple of the best current CoPilot Sell Calls opportunities for you below.

Now, there is one more thing you should know before you consider selling calls.

While selling either puts or calls technically carries similar risks, selling calls tends to be riskier in practice. There are a couple of reasons for this.

First, because the market’s long-term trend is up, most stocks tend to have an upward bias.

Second, because there is no limit to how high a stock can potentially rise, your maximum loss is theoretically unlimited.

For these reasons, we recommend most folks only sell calls when they also own shares of the underlying stock. This strategy is known as selling “covered calls.”

When you own the underlying shares, your downside risk is limited. In a worst-case scenario — where the stock closes significantly above the strike price at expiration — you’ll simply be required to sell your existing shares.

In other words, you may miss out on some potential upside in those shares, but you won’t lose money on the trade.

That benefit makes covered calls an excellent strategy for conservative traders and folks who are just getting started with options.

CoPilot Buy Calls

Finally, buying calls is a bullish bet on a stock.

As I explained last week, the risk-to-reward potential when buying calls is essentially the opposite of selling puts or calls.

To make money when buying calls, you need the underlying stock to move significantly higher before the option expires. If the stock moves lower, stays the same, or moves just a little higher, the option will generally expire worthless.

As a result, this strategy uses a slightly different process than our Sell Puts and Sell Calls strategies. Again, it’s a bit technical, but it works like this:

  • First, the strategy looks for stocks that have a great chance to jump higher. It does this by using two of the stock-specific strategies from our Ideas by TradeSmith tools: Low Risk Runners and Kinetic VQ.If you’re not familiar, Low Risk Runners identifies otherwise healthy stocks that have pulled back more than halfway to their Health Indicator Stop Loss (hence the “low risk”). And like a rubber band that’s been stretched, these stocks tend to rebound higher in the near term.

    Kinetic VQ identifies healthy stocks that have a higher-than-usual volatility quotient (“VQ”). This extra volatility acts like stored up “kinetic energy” that can push prices significantly higher.

    Combining these two strategies gives us a great chance of finding stocks that are likely to start moving higher quickly and continue to rally for some time.

  • Like the first two strategies, it then screens out options with poor liquidity.
  • Next, it uses our proprietary algorithm to calculate how likely each remaining option is to expire worthless (the POP) and how much money we can make if it does (the ROI).
  • It then selects only those options with a POP of 50% or higher and an ROI of at least 50%.You’ll notice this is a much lower POP and a much higher ROI than our Sell Puts and Sell Calls strategies use.

    That’s because buying a call option is more speculative. You generally have a much lower chance of success when purchasing an option than when selling one. So this strategy looks for a higher ROI to compensate for that lower POP.

  • Finally, like the other strategies, it chooses the option with the best combination of POP and ROI for each underlying stock in the sample, and ranks the results in order of highest ROI by default.

Below, you’ll find a couple of the best current Buy Calls trades from our CoPilot Opportunities tool.

Again, this is just a small taste of what CoPilot can do. But I hope you can see why I’ve been so excited to share it with you.

I’ll be back next week with more on how you can safely and profitably trade options even without our tools.

In the meantime, 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.