The Options Market is Way Out of Balance
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Note from Michael Salvatore, Editor, TradeSmith Daily: Here’s the truth about “passive income.”
The only true passive income is sticking your money in a savings account or Treasury bills. And that’s never going to be enough to beat the market or float you in retirement.
Dividends? There’s plenty of risk there… whether it’s the dividends being suspended or cut, or capital losses nullifying them.
So what to do? Get active.
Here at TradeSmith, we’ve come up with an algorithmic method to help you earn active income by selling options. Every day, our data finds opportunities to earn this income with calculated, low risk.
It involves active trading. And it’s not for investors just getting started. But if you have a healthy account balance and a few minutes each week to place some trades, you can significantly improve your income situation using our Constant Cash Flow advisory.
Read this updated dispatch from Mike Burnick, first published in Inside TradeSmith, to learn more…
The Options Market is Way Out of Balance
Thirtyfive years ago, as a young stockbroker just getting started in the business, I was drawn to options trading and the high potential payouts.
More like highrisk gambling, as I soon found out, only with even worse odds than Vegas offers.
I quickly learned that speculative options trading – buying put and call options – could wind up being a quick ticket to the poor house.
That’s when I learned the fine art of selling options to earn consistent, repeat income. I soon realized that I want to be on the other side of speculative trades, as a seller of put and call options.
The reason is simple: That’s where the easier money can be made, and that’s where the odds are more stacked in your favor.
And right now is a great example – because the bullish speculation with call options has just gotten too extreme.
On the Chicago Board Options Exchange (CBOE), the Put/Call option ratio is at about 85%. This means roughly four put options are being bought for every five call options that trade.
Normally, that ratio is more like 1to1. So, calls are outnumbering puts by a pretty wide margin, which means – no surprise – investors are very bullish right now.
This chart below shows that, in the megacap growth and technology stocks that are driving the market action these days, net calloption volume has gotten to nearly five times the calloption volume in the rest of the S&P 500 stock options:
That tells me a lot of speculators are betting big on the likes of Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), and the rest of the “Magnificent 7” stocks. Will those bets pay off? They sure have in the past – but that’s no guarantee of future success.
That’s why I’m a big fan of nonspeculative options trading. Specifically, being on the other side of the trade, as a seller of put and call options.
With those positions, you get:
 Paid cash upfront from selling the option, and even better …
 A lowerrisk, higherpotentialreward trade, with the odds of winning at 80% or better.
And that’s where TradeSmith comes in. When I joined this firm a few years ago, it was a perfect fit for an options trader like me.
That’s because they took the fine art of selling options, something I practiced on my own for years, and turned it into a hard science backed by years of data analysis into what makes a winning option trade.
These option trades can earn you consistent income with high odds of success on a daily basis!
But this isn’t rocket science, by any means. In fact, with the TradeSmith Options360 screener I use, these trades are as simple to find as one, two, three. I just have to make sure they fit my objectives.
And to illustrate, here’s a peek at an actual trade alert I sent to my Constant Cash Flow members.
Just three data points at the top of each trade email are all you need to confidently take advantage of each trade:
And that little graph underneath … that’s the secret to our 80%plus success rate, as I’ll explain next.
First, here is the exact option trade alert we emailed to members:
Sell TSLA $143.33 Put Expiring 21 June 2024
You could have easily found this Tesla (TSLA) option in your online broker account. (Or, even easier, you could have called a live broker and simply read this aloud to place the trade.)
Now, here’s where our TradeSmith option analytics comes in.
1. Probability of Profit (POP). Our proprietary algorithm sorts through thousands of stocks, and tens of thousands of options, to find the handful of options with the highest odds of success…
In this case, an 80% probability of profiting from this TSLA option by the expiration date.
2. Return on Investment (ROI). This algorithm tells you exactly what your expected return will be on the trade: in this case, 3.18%. And the returns of Constant Cash Flow are much higher than you may realize at first.
3. Max Profit. In this case, earning $47 of income for each option contract sold works out to a 3.18% Margin ROI (for traders doing this in a margin account, of course).
But remember: That’s 3.18% in just 26 days – from the time this trade was sent (on May 26) to the June 21 option expiration. Less than a month.
If you place a similar trade every month, the $47 (or 3.18% ROI) per trade adds up to a potential gain of $564, for a 45.6% return on investment over a full year. So, that’s about five times what the S&P 500 typically gains in a year.
And if a picture is worth a thousand words, this simple graph certainly is. It’s our exclusive price forecast graph for the underlying stock – in this case, TSLA:
This is our secret to option trading success. It shows you visually just how high the odds of winning are for each trade.
 Your breakeven price for the put option at expiration is marked with a solid horizontal line.
 The shaded blue area is our pricerange forecast for TSLA from now through option expiration (dotted vertical line) and beyond.
Our TradeSmith algorithms sift through all sorts of fundamental and technical data, seasonal trends, and tradingcycle patterns for every single stock in our database.
The result of crunching these thousands of data points is this shaded cone that shows you the most likely price range of TSLA stock.
And, as you can clearly see above, almost none of the shaded area falls below the horizontal line marking our strike price.
In other words, TSLA shares had an 80% chance of staying above the $143.33 strike price by expiration. Those are extremely high odds that you would have pocketed your max profit of $47 in less than 30 days and moved on to the next Constant Cash Flow trade.
After all, you get a new moneymaking option trade sent to your email inbox every single day of the year… including weekends and holidays. Money never sleeps!
Good investing,
Mike Burnick
Senior Analyst, TradeSmith