Yesterday, War Room members enjoyed a double win!
Members not only cashed in on another winner…
They learned a valuable lesson on how to beat a market maker, which I’ll get to in a minute.
First, the winner. Members cashed in on a longer-dated put sell with Spirit Airlines (NYSE: SAVE).
A put sell involves selling a put option at a higher price with the goal of buying it back at a lower price. Your profit is the difference in price.
That being said, put selling also comes with strings attached…
There is no free lunch on Wall Street (unless it’s one of our zero cost trades!). When you sell a put, you obligate yourself to buy the shares at the strike price, if it closes below that price at expiration.
The way we do it in The War Room is by using probabilities and discounts. We recommend selling puts only where the probability of being put is 20% or less. And we require a discount to the market price of 20% or higher.
Yesterday, Spirit Airlines reported better-than-expected numbers, and the shares bounced by almost 8%, making it one of the big winners among blue chip stocks. Blue chip refers to large companies with excellent reputations.
Members sold the puts for $0.80 and bought them back for $0.60.
Our put sell portfolio still has a perfect track record since inception! Our goal is an 80% win rate. So as of right now, we’re well ahead of our goal.
The valuable lesson members learned was how to deal with market makers in real time.
I told members to try to close the trade at $0.60 or less and advised them not to pay a penny more to close the trade. At the time, the bid was $0.55 and the offer was $0.70. If you’re not in a group like The War Room, you might have paid the offer price or even $0.65. As professional traders, we are trained to believe the prices that we are seeing as the last word.
Market makers are tasked to do two things…
First, they must make an orderly market for the security. Second, they must figure out how to make money for their firm.
They achieve this by buying low and selling high. That’s their only job, and you better believe they’re good at it – just like you would be good at something if that were all you did all day, every day.
A few War Room members jumped the gun and paid $0.65…
Which made me mad…
I notified members that they were giving money away and that they would in fact get filled at $0.60 if we exercised patience.
You see, there is a formula that allows you to calculate the value of an option. Market makers know this and use it.
They hope you don’t know it and assume you are impulsive.
That option wasn’t worth $0.65 or even $0.70. It was worth less than $0.60 based on the formula, and I tried to explain that to War Room members.
Action Plan: Why pay $0.65 for something worth less than $0.60?
Well, for the majority who listened, the market makers dropped the price to $0.60 a couple of hours later, and the clear majority were able to cash out at lower prices. Members beat them at their own game – that was arguably more satisfying than the win!
About Karim Rahemtulla
Karim began his trading career early… very early. While attending boarding school in England, he recognized the value of the homemade snacks his mom sent him every semester and sold them for a profit to his fellow classmates, who were trying to avoid the horrendous British food they were served.
He then graduated to stocks and options, becoming one of the youngest chief financial officers of a brokerage and trading firm that cleared through Bear Stearns in the late 1980s. There, he learned trading skills from veterans of the business. They had already made their mistakes, and he recognized the value of the strategies they were using late in their careers.
As co-founder and chief options strategist for the groundbreaking publication Wall Street Daily, Karim turned to long-term equity anticipation securities (LEAPS) and put-selling strategies to help members capture gains. After that, he honed his strategies for readers of Automatic Trading Millionaire, where he didn’t record a single realized loss on 37 recommendations over an 18-month period.
While even he admits that record is not the norm, it showcases the effectiveness of a sound trading strategy.
His focus is on “smart” trading. Using volatility and proprietary probability modeling as his guideposts, he makes investments where risk and reward are defined ahead of time.
Today, Karim is all about lowering risk while enhancing returns using strategies such as LEAPS trading, spread trading, put selling and, of course, small cap investing. His background as the head of The Supper Club gives him unique insight into low-market-cap companies, and he brings that experience into the daily chats of The War Room.
Karim has more than 30 years of experience in options trading and international markets, and he is the author of the bestselling book Where in the World Should I Invest?
