Rookie Mistakes (Options)

  • Options frenzy and March market madness
  • Bizarro — and potentially hazardous — pandemic knock-on effect
  • Veteran trader Alan Knuckman on “in the money” options
  • Wind in crypto’s sails: Bitcoin and PayPal
  • Zach Scheidt follows up on 5 high-yield dividend stocks
  • EU trusts consumers with plant-based products

Our lead topic in today’s 5 is partly educational, partly hand-holding, partly hard sell.

Let’s get the hard sell out of the way first…

TPW Countdown

As we go to virtual press, only about 12 hours remain in which you can join our most popular options trading advisory. After that, we’ll be closing access to new subscribers for several weeks, possibly until 2021. We’re taking this message offline tonight at midnight… and it’s not coming back.

Speaking of options, here’s a chart that’s equal parts intriguing and alarming…

Options Frenzy

From mid-July through mid-September, daily volume in options exceeded daily volume in the underlying cash equities for the first time ever.

In other words, more options were being traded on your typical stock than shares of the stock itself.

As you can see in the chart, the leap in options versus stocks coincided with the stock market bottom in March.

Chalk it up as another bizarro second-order effect of the pandemic and lockdowns.

In late spring we took note of all the people with time to spare and money to burn. They were opening brokerage accounts at an unprecedented pace, bidding up shares of bankrupt companies like Hertz, taking the Federal Reserve at its word that it won’t allow stocks to go down — not very far or for very long, anyway.

Clearly the craze extended from stocks into options.

Risky? If you don’t know what you’re doing, yes. In June, a college student trading options on his Robinhood app killed himself because he thought his account had a negative balance of $730,000.

"How was a 20-year-old with no income able to get assigned almost a million dollars' worth of leverage?" wrote Alex Kearns in his suicide note.

Turns out the negative balance was only temporary; Robinhood’s crappy interface didn’t reflect his unsettled trades.

Four months later, we’re not sure the legions of new options traders have taken Kearns’ cautionary tale to heart.

According to figures cited by Jim Bianco from the institutional research outfit Bianco Research, 60% of options trading is in contracts with less than two weeks to expiration.

Uhhh… That’s not a lot of time to “be right.”

In addition, of the 2,200 stocks with options contracts listed on an exchange, a mere seven names account for the overwhelming majority of trades.

If you have even a superficial knowledge of the markets these days, you might be able to guess which seven we’re talking about. They’re the five biggest companies on the market — Apple, Microsoft, Google, Amazon and Facebook — along with the oh-so-trendy Netflix and Tesla.

Uhhh… That’s a lot of people crowding into the same trades.

It’s a tragedy… because done right, “Options are a much better way to trade than stocks,” says Alan Knuckman.

Alan’s the guy on our team who spent nearly three decades in the Chicago options trading pits. He’s also been my partner for the last 16 months on The Profit Wire — our most popular options trading service, which will be closed indefinitely to new members after midnight tonight.

It’s a rookie mistake to trade in options with precious little time to expiration… and it’s another rookie mistake to pile into the same few names everyone else is trading. And the worst rookie mistake of all is to buy “out-of-the-money options.”

“One of my rules is to always buy deep ‘in-the-money options’ when trading,” Alan says.

What does that mean? “Every options contract has a strike price. The strike price is the price both parties agree to use when buying or selling the underlying stock.” If you buy a call option on XYZ Corp. with a strike price of $80, you can exercise that option and pay $80 for XYZ stock — no matter the share price at the time.

“When it doesn’t make sense to exercise the option,” Alan explains, “the contract is considered ‘out of the money.’”

It’s called that because you end up paying more for the stock with the contract than without. But if XYZ is trading for $90 and you can still buy it for $80… that’s “in the money.”

“This distinction between ‘in the money’ and ‘out of the money’ is important because it’s where most options traders go wrong,” Alan goes on.

See, out-of-the-money options look attractive because they’re cheap. And the payoff potential is huge. But you stand a far greater chance of losing your entire investment. There’s a reason Alan and his trading-floor buddies call them lottery tickets.

Your risk-reward proposition is much better trading in-the-money options.

Still a bit fuzzy? Every new reader of The Profit Wire gets access to a five-part video training series Alan has assembled. It’s a plain-English introduction to doing options right. You won’t be left to fend for yourself like the legions of “Robinhoodies.”

Better yet, if you execute the trades the way Alan describes — and every trade comes with step-by-step instructions — you don’t have to wait for guidance from us on when to sell.

Your sell order will be executed automatically once the option reaches the target price we set. That’s as fuss-free and “done for you” as it gets.

So why are we closing off access to our most popular options trading service if it’s, well, so popular?

Well, there’s definitely a certain allure to the strategy: Usually we’re talking about a company or a sector that’s getting a ton of negative attention from the media. But using a proprietary indicator we call QIT-4, we can uncover when connected insiders are making bullish bets on that company or sector in the derivatives markets. When those bets pay off, the media are left with egg on their faces. (Who can pass that up these days, right?)

By riding the insiders’ coattails using in-the-money options, The Profit Wire has delivered impressive gains going back the last six months — 31 winners out of 39 closed trades, with an average gain of 43.7% in 46 days. (Yes, that includes the losers.)

That’s why our informal slogan is, “If you can beat the media, you can beat the markets.”

But if too many people jump into the same trade, that can artificially juice the price. Inevitably that price comes crashing back to Earth. Bad for readers, which is bad for us.

So that’s why we have a cap on the number of subscribers. We thought we were bumping up against the cap a few weeks ago. Then we re-ran the numbers and realized we could buy ourselves a little more time to give as many people like you as possible the chance to get in.

That time is now almost up. As in, hours from now. Clock’s ticking. We won’t be able to reopen membership for several weeks — and more likely, not until 2021. Here’s your last chance to have me show you how The Profit Wire works… and the difference it can make to your portfolio. The link goes dead at midnight tonight — and this time, it won’t be coming back.

To the markets… which are in the red, with the tech names holding up best.

At last check, the Nasdaq is down only a quarter percent at 11,514… while the Dow is down nearly 1.4% and back below 28,000. Lacking any obvious explanation, the media have latched onto “record daily coronavirus cases” in the United States.

Gold hovers a hair above $1,900. Silver has slipped to $25.40.

At over $13,000, Bitcoin sits at multiyear highs — with wind in its sails from PayPal.

Perhaps you heard the news last week: “Now you won’t just be able to use PayPal’s service for payment systems using dollars and euros,” explains our Ray Blanco. “You’ll be able to pay in crypto like Bitcoin, Bitcoin Cash, Ethereum and Litecoin.

“Cryptocurrencies tend to be very volatile, making them unattractive as a means of payment due to the risk of a rapid and sudden change in value. But with PayPal backing the transaction and settling in traditional currencies, the risk to vendors will be virtually eliminated.

“That’s right… with PayPal’s service, a buyer might pay you in Bitcoin, but your account will be credited in good old fiat.

“With the new service, you’ll be able to buy, hold or sell crypto in your PayPal account. You’ll be able to buy goods or services from PayPal’s global network of 26 million merchants.”

Is there a catch to PayPal’s crypto gambit? Of course.

“Although the news is certainly a big step in the right direction,” says our crypto evangelist James Altucher, “PayPal will enforce certain controls as it tiptoes into the space.

“For one, customers will only be able to buy and sell cryptocurrency within their account, but will not be able to deposit, withdraw or transfer cryptocurrency for the time being. Also, any purchases made with cryptocurrency will be converted to U.S. dollars before transfer to the merchant.

“These controls reduce some of the utility of cryptocurrency by preventing certain features that make it truly unique, such as the ability to freely transfer and make irreversible transactions.”

But for a $237 billion company to make this kind of move is still a big deal. “Over time, it is likely that PayPal will begin allowing users to send and receive cryptocurrency, and for merchants to accept payments in cryptocurrency, as well.”

One potential catalyst: Next year, the peer-to-peer payment app Venmo will add the option to pay in crypto. Says Ray Blanco, “The potential impact from bringing crypto to the company’s 60 million-plus users could be huge.”

On the heels of our exposé on Friday about how “current yield” is a terrible way to look at your dividend-paying stocks… our income maven Zach Scheidt wishes to draw your attention to five names that just raised their dividends.

“In some cases, income is increasing by 30%… 60%… or more!” he says. Let’s dive right in…

  • Crown Castle International Corp. (CCI): “The company leases space on its 40,000 cellphone towers,” Zach says. CCI is raising its quarterly dividend from $1.20 per share to $1.33. “Investors will be getting a 10.8% raise in the amount of income they receive”
  • American Electric Power Co. (AEP): “In today's low interest rate environment, utilities are becoming popular because of the reliable income they generate.” AEP just raised its quarterly dividend by 5.7%
  • Brunswick Corp. (BC): “BC makes all kinds of boats and boating equipment,” says Zach, “which have been wildly popular with consumers this year. The company just announced a 12.5% increase to its dividend payment”
  • Infosys Ltd. (INFY): This firm is a leading consultant to companies looking to use artificial intelligence and machine learning to stay competitive. “Just this week, the management team at INFY announced a 32% increase in the company's dividend”
  • KB Home (KBH): A familiar homebuilding name, KBH just jacked up its quarterly dividend by 66.7%. “That's exactly the kind of dividend hike we would expect to see from one of the strongest areas in the economy right now,” Zach says.

How many jobs offer regular pay increases of 5.7%? And that’s the most conservative dividend increase of the five listed here.

“All five of these stocks deserve consideration in your retirement account,” Zach concludes, “to help grow your wealth and income.”

From the “what’s in a name” department, we see bureaucrats in the European Union actually have more sense than here in these United States.

Over the last couple of years we’ve chronicled how Arkansas banned the marketing of cauliflower rice because it’s not rice… as Virginia tried likewise to do with soy milk because it’s not milk.

But in Europe, lawmakers are giving consumers credit for at least some level of savvy: “European lawmakers said Friday that plant-based products that do not contain meat, including veggie burgers, soy steaks and vegan sausages, can continue to be sold as such in restaurants and shops across the European Union’s 27 countries,” reports The Associated Press.

Europe’s big farm lobby was pushing hard for the ban… but the European Consumer Organization welcomed the “common sense” move.

“Consumers are in no way confused by a soy steak or chickpea-based sausage, so long as it is clearly labelled as vegetarian or vegan,” says a statement from the group. “Terms such as ‘burger’ or ‘steak’ on plant-based items simply make it much easier for consumers to know how to integrate these products within a meal.”

But common sense goes only so far. Since 2017, terms like “almond milk” and “soy yogurt” have been banned.

Which goes to show only that Europe’s dairy lobby has more clout than the meatpacking lobby, no?

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Without going into great detail, tomorrow’s Profit Wire trade has a massive pre-election catalyst.

The election is only eight days away now… but well before that, we’re closing off The Profit Wire to new readers as of midnight tonight. Last chance to get in, here.

Overtime

A personal story, if you don’t mind…

In 2017 I flew in to our firm’s Baltimore headquarters for a week’s worth of meetings. At the time, one of the sensations in the financial publishing biz, offered by a competitor, was an options trading service with an over-the-top promise — “In on Monday, out by Friday.” Every trade would play out in the space of a week.

Alan had just agreed to join our firm and he was being urged on to develop a similar trading service with a similar promise.

And he refused.

I don’t remember the particulars of the conversation more than three years later, but Alan basically said, “Will this service sell? Yes. Will the readers who buy it get burned? Hell, yes.”

For Alan, it was more important to do right by readers and generate long-term goodwill than to just make the quick-n-dirty sale.

That discussion stuck with me when last year I was asked to team up with Alan on The Profit Wire — me for my skill at unpacking media narratives after 20 years in the TV news racket and Alan for his second-to-none knowledge of options trading.

Would I be comfortable with such an arrangement? Knowing firsthand how Alan’s a standup guy, I said “yes” with no reservations.

I tell you that story just in case you’re still reluctant about a subscription to The Profit Wire — even knowing we’ll be closing off access to new subscribers just hours from now. Maybe that’ll make you comfortable enough to pull the trigger.

One more time, the link goes dead at midnight — and it’s not coming back. We won’t be accepting new readers for several weeks and maybe not until next year.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

First Is Not Always Best (Vaccines)

First isn’t always best? Our science-and-wealth maven Ray Blanco thinks so: “Other vaccines, earlier in development, could eventually win the race.” Read More

Central Bank Audit!

The U.S. government is demanding a forensic audit of Lebanon’s central bank or risk sanctions similar to those leveled at North Korea. And the irony isn’t lost on us… Read More

Low Blow for Work From Home

First, we had the geniuses at Deutsche Bank… Now the cranks at Comcast? Here comes the next front in the war on remote workers… Read More

Biden’s A-Team Spells Trouble

What to Expect From the Next Presidential Cabinet… Read More

Speech Regulation (Happening Now)

We return to our theme of social-media censorship… and a rather dystopian pre-election headline we missed. Read More

Cold Reality

With new mRNA vaccines in the pipeline, we can go on the offense. But “the issue,” Ray Blanco points out, “is… transporting the vaccine.” Read More

Mainlining Hopium

It turns out the post-election fundraising grift is common to both major parties: the “Biden-Harris Transition” panhandles from broker Americans. Read More

Rigged!

Here’s an indisputable proposition: If Donald Trump mounts a credible effort to serve a second term, markets won’t see it coming… Read More

Fed in the Crosshairs

A California congresswoman puts the screws to a Federal Reserve stuffed shirt, and a former Lehman Bros.’ insider makes a cynical case for gold. Read More

Media Blackout: Lockdown Demos

“A hell of a lot of Germans are fed up,” says a reader from Bavaria, reaffirming our Election Day forecast on the breakout of social disorder. Read More