3/20/2013

There is a neat trick I learned from a hedge fund trader, and that is Swing Trading deep in the money call options.

Here is what this means: first off swing trading means: holding a stock or an option for a time period of one week to one month. Its not day trading but its not buy and hold either, its the holding period that every Billionaire Hedge Fund Manager uses.

Secondly, deep in the money call options, are a great way to trade stocks because they give you super leverage up to 20 times for little or no cost, yet with less risk than trading options outright. Basically when you buy a deep in the money call option, you are buying the stock almost outright, a deep in the money call option is a stock replacement strategy, because the option moves almost 100% in correlation with the underlying’s stock move.

How, well there is a options term called Delta, its simply tells you at the current time how much the option will move in percentage terms versus the underlying stock, if the option has a Delta of .50 its means that the option will move 50% of the underlying stock’s move. For example an option that has a .50 delta will move 50 cents when the underlying stock moves a dollar.

Now a deep in the money option usually has a delta of .60 or above meaning that the option will move $.60 cents for every dollar move in the underlying stock. Sometimes you can even find a deep in the money call option that has a .95 delta meaning that the option and the stock move almost 100% in tandem with each other. A stock replacement strategy is when you get an option that moves $.60 to $.95 cents for every dollar move in the underlying stock.

By using deep in the money options, as a stock replacement strategy you are getting free leverage, (because to margin a stock it can cost you up to 7% an interest a year) an option has zero interest or borrowing costs.

Also a real quick caveat, never buy a option whether its a call or put, unless you know that there is going to be an event (i.e. earnings, merger, corporate announcement, or an economic release etc) because you have time decay on an option, basically the longer you hold the option, the more money you lose, since you lose a little bit of money every day when you hold an option.

So to summarize to make the perfect options trade, that will make you a 100% in a month you need the following things

1) A Swing Trade- an option that you are going to hold for a week to a month time period at most.

2) A Deep in the Money Option with a Delta above .60, so that it moves almost in tandem with the underlying stock

3) An event that is going to occur within the time period of one month or less.

4) and A Cheap Option, and this is very important, basically an option is cheap if the current volatility is below its historical volatility, this sounds confusing, but all it means is this. Is you want to find stocks that have not been volatile or have been trading flat or in a range for the last 2 or 3 months, just pull up a chart and if the stock has been dead or flat, than you know the volatility is low and the option will be cheap.

So here is a trade that I am making today, using this deep in the money option/stock replacement strategy.

I am going to buy 10 deep in the money $6 May Sprint ($S) call options for .20 cents an option, so for 10 calll options my total cost is only $200. So to summarize I am buying a call option on the stock Sprint ($S) and with a May Expiration (so I get to hold the option when Sprint announces earnings on April 22nd) and I am buying the option at the $6 strike price.

Here is why I am so excited about this trade, first off Sprint ($S) has traded flat or dead in a range for the last 3 months, so the options are cheap.

Secondly Sprint ($S) is announcing earnings on April 22, almmost a month from today, so I know there is an event that will create movement or volatility in this option.

Third for just $20 cents or $20 dollars I am controlling 100 shares of Sprint stock on one call option, or in my case I am controlling 1000 shares of Sprint stock for only $200 dollars, that is incredible leverage, since if I purchased 1000 shares of Sprint ($S) stock, it would cost me over $6000 dollars, yet I am controlling that same amount of stock for only $200, thats 30 to 1 leverage.. Awesome..

Also I think based on Spint’s earnings estimates, that Sprint could trade as high as $6.60 after they announce earnings on April 22, that means I would make almost 200% on my option trade in just 4 weeks time. Now thats what I call a Billionaires Trade.

To learn more about this secret options strategy, or what I call the super leverage stock replacement strategy, where you can make 100% in a month using deep in the money option email me at

wmeade@purealpharesearch.com

Will Meade
Editor of The Billionaires Portfolio