I receive hundreds of emails a week asking me about trading advice, but one email that I received recently really made me think.
It was from a student at one of the top business schools in the world who wrote me a very passionate and eloquent email about options trading, that it took me weeks to think about how to answer him.
His basic question was how do I learn how to trade options?
He told me he had watched videos, read newsletters, books talked to brokers at Morgan Stanley but still felt confused as ever on how to trade options.
So I wanted to share with everyone what I wrote to him plus some other advice that I have learned over 15 years of trading and working for some of the top hedge funds and research firms.
1) Only trade options with money you can lose, meaning never ever bet the house on an option, use 5% to 10% at max of your trading account for options.
2) Do not follow options tips from newspapers, even the prestigious Barrons, and their nice and creative options writer Steven Sears is not a good mentor. Mr. Sears is a good writer, but he is not an options trader, I have written him at least 6 times about mathematical errors in his options columns and mistakes, he seems to think that you can make more than 100% selling an option, its mathematically impossible, yet the editors allow it… Scary huh..
3) Do not follow option tips from Floor Traders, yes traders who worked on the floor of the CBOE or the NYSE or AMEX exchanges
have traded a lot of options, but their scalpers who pay little if any commission or spread on an options trade, so you will
never be able to replicate their trading technique unless you are on the floor. Moreover 99% of floor traders make their
money off deal flow and spread, very few if any take outright positions in options. So their advice is simply not applicable
to the regular investor.
4) Do not trade options or take options advice from full service brokerage firms, for two simple reasons: Brokers are salespeople they make money regardless if you win or lose on your trade, and more importantly they charge huge commissions as much as $100 per trade. There is no worse place to trade options than at a full service brokerage firm.
5) Do not take options advice from newsletter gurus who spam with you promotions, they have no skin in the game and they have blown out more accounts than they have profitable trades. Remember really good option trades are rare, so anyone telling you they can consistently make money trading options is not being truthful.
So where do you go to learn about options or how trade options, let me share with you the letter I wrote to the young business school student the other night.
Dear,…..
It looks like you are on a great path to be a successful options trader.
I honestly think the best way to learn about options is trial by fire. Meaning either paper trade or trade any money you have so you can experience the ups and downs of the market.
Trading is very emotional, you need to see what type of trader you are?
Are you patient and can take drawdowns- then try and use longer dated options where there is a catalyst that could reprice the stock before the option expires. That is how we trade options in our service at The Billionaires Portfolio. But these types of option trades are rare so you have to be very patient.
If you are a short term trader use deep in the money options, 1 to 2 months out maximum and buy calls on popular and market leading stocks (Apple, Google, Twitter, Facebook etc.) after major selloffs and use limit orders and Good Till Cancel Orders. If you don’t know what this is google it and learn it!
Finally there is no magic bullet for trading options, so you have to be flexible and adjust your strategy and temperament to the current market conditions.
Yet options will always be popular, because of the huge profit potential that can be made off a good options trade (100% 500% 1000% and yes many of the greatest hedge fund traders and hedge fund managers started their career and funds with huge options trades that not only made them rich but put them on the map as well.
So stay tuned as I will continue to talk about options trading and strategies on this blog.
Will Meade
President of The Billionaires Portfolio
If you ever wanted to buy Apple (AAPL) now is the time. Technically, Apple has the best short term bullish trading set up I have seen all year.
Apple today just bounced off the psychological $500 round number level. Actively traded stocks always find support or resistance at round numbers, because there is a lot of trading activity that occurs at round numbers.
Secondly, the $500 level is the exact price that Apple broke from in Late October, and as most chart watchers know previous resistance become support.
If Apple can hold above the $500 price today it is a very strong bullish reversal signal, and it also creates a great trading setup.
On Monday morning you can put a stop in $10 below Apple’s current price (at $490.50). If Apple holds above $500 today then I believe there is a greater than 90% chance it will go up to fill the gap to $550. That means you can risk $10.00 to make $50 or a 5 to 1 risk reward if Apple closes above $500 today (Monday).
You should take profits or put a limit order in at $550 as well, in order to achieve the 5 to 1 risk reward trade.
For aggressive traders you can buy a $500 February Apple Call Option, or mini apple call option (remember a mini option is much cheaper and gives you the right to hold 10 shares of Apple’s stock not a 100).
Either way if you buy the stock or buy a February Apple call option, the risk/reward of being long Apple here at $500, is just too good to miss.
Furthermore, Billionaire Carl Icahn just spent $500 million of his own money purchasing apple stock at or around $500 as well. Its hard to second guess a man who is averaged 27% a year for over 51 years and is worth $20 billion today.
At billionairesportfolio.com our specialty is finding deep value stocks that have a catalyst at work.
One of our favorite “deep value screens” not only identifies cheap stocks, but also situations where a rich, influential investor has taken a significant stake. As a shareholder, the presence of this type of investor can mean you have a partner on your side, working everyday to push management to unlock value in the company.
Selecting deep value stocks, with the presence of an influential investor that is hell-bent on unlocking value, is a very powerful formula. It’s especially powerful when we find situations where the big investor is down on his investment. That tends to raise their sense of urgency and their aggressiveness with management.
Here are four stocks that currently meet these criteria:
1) J. C. Penney Company, Inc. (JCP) – Billionaire David Tepper owns JCPenney at much higher price than where JCP currently trades today. According to my estimate the average price Tepper paid for JC Penney is around $10 a share. If you bought JC Penney today you are getting a 34% discount to what billionaire David Tepper paid for his shares.
1) Transocean (RIG) – Billionaire Carl Icahn owns almost 6% of this oil and gas exploration company. Icahn’s average cost is $50. The stock currently sells for $47. This means you are getting a 6% discount to what Icahn paid for this stock. To even sweeten the deal, RIG currently pays a 5% dividend.
3) Sony Corp (SNE) –The average price Billionaire Dan Loeb paid for Sony is more than $18 a share. If you bought Sony today you are getting a 5% discount to what Loeb paid for his shares. Moreover, Sony is selling at distressed valuation levels. It has a price-to-sales of 0.19 and price-to-book of 0.61.
4) Hologic, Inc. (HOLX) – Two top Billionaire Activists own more than 10% of this healthcare stock. The two Billionaires, Carl Icahn and Ralph Whitman of Relational Investors paid an average cost of $23.10 for Hologic. That means if you buy Hologic today you are buying it at 6% discount to what these top Billionaire Investors paid for their shares.
To piggyback our actively managed portfolio of deep value stocks that are owned by the world’s best billionaire investors, follow us at www.billionairesportfolio.com
Retail-Apparel stocks have been hit hard due to the extreme cold weather conditions that have plagued most of the United States over the last two months, but a bottom could be finally in.
American Eagle (AEO) one of the biggest and most profitable teen retailers had strong insider buying today. Jay Schottenstein, the company’s interim CEO and Chairman stepped up big and recently purchased over 500,000 shares or more than $6 million dollars of the American Eagle’s stock at around $12.84 a share. This purchase occurred some time over the last two days.
Any insider who purchases over $5 million dollars worth of his company’s stock is always a significant and bullish sign — especially when the purchase comes after the stock has been in a significant decline.
Also, technically it looks like American Eagle has formed a double bottom at $13, with a bullish outside day — a major bullish reversal signal. With this, we may have seen the bottom in all retail and apparel stocks, and if so the risk reward of buying retail apparel companies has never been better.
His fund has generated a 58% annualized return over the past five years.
And he did it during one of the worst stock market crashes in history. In 2008 when the S&P 500 lost 37%, his fund lost only 9%. When the stock market rebounded in 2009, his fund returned 264.38% versus a 26.46% return in the S&P 500. He beat the S&P 500 by more than 10 times. That year, he had 2 stocks that went up more than 1,000%.
To put a 58% annualized return in perspective, no other fund in the world has a better 5-year track record. This means over the past 5 years not one single mutual fund (over 18,000 funds) or a single equity hedge fund (over 4000 funds) has better performance.
Even though he is the best fund manager fund on the planet (literally he has the number one fund in the world), he has completely shunned publicity and has kept his assets base very small around $40 million. This guy is a purist stock picker. All he cares about is his performance not about selling his fund.
He went to Johns Hopkins University — my alma mater. And you might be surprised to learn, he has no formal training in investments. He worked in the medical research field his whole life but according to his colleagues his real passion was always investing. He started his fund in his early 40’s.
So how did he do it? How does he do it? He has a rather simple stock picking formula. He rarely buys more than 10 to 20 stocks in a year. His formula is so rigorous and selective that very few stocks meet his requirements. But he has more 100%+ winners than any fund manager I have ever seen.
As someone who has spent more than 15 years analyzing the world’s greatest hedge fund managers and billionaire investors, I have never seen a fund manager that has these stock picking abilities.
Because this fund manager is so reclusive and his fund is so small, information is hard to find on him. I spent over 100 hours analyzing and pulling up every document I could find on his fund, and researching and documenting every stock pick he has ever made. For my Billionaire’s Portfolio service, this is a new manager I’ve added as a candidate to our stable of the world’s best investors that we follow — even though he doesn’t fit my typical mold of the ultra-rich activist. He has a record of picking stocks that produce multiples on his investment, and that’s precisely what we look for in our portfolio.
Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
What continues to be one of the most obvious trades in the world, yet many investors are missing, is to short gold.
Today Morgan Stanley cut their price target for gold in both 2014 and 2015.
Earlier last week Goldman Sachs cut their price target.
Japan has come out and said they are selling gold and will continue to sell gold throughout the year.
Anyone long gold here is playing a fools game. Stocks are and will continue to be the only game in town. Holding gold or buying gold will only lose you money. It’s a QE fear trad — a hyperinflation fear trade. QE has come (three times) and now is nearing an end. Guess what? No inflation. Sell it now before you are selling it at pre-QE levels ($800).
So next time that gold newsletter huckster tells you gold is bottoming for the 8th time in the past year. Throw it in the trash. Pull up a gold chart from the mid 1980’s to late 1990’s. Gold gave you negative annual returns for almost 15 years. That’s like paying a tax, holding an investment that loses money every year.
The Biotech stocks in our Billionaires Portfolio have returned an annualized 129%. One of our biotech stocks up almost 270% and another biotech stock up more than 70% in less than 2 months.
These stocks have the ability to produce multiple returns, but they have little if any correlation to the overall stock market. Last week, the stock market had its worst one day performance since November. Yet, the biotech stocks in our portfolio gained on average 6% versus a negative 1.5% for the S&P 500.
In 2008 when the S&P 500 lost 37%, the small cap biotech sector actually gained a positive 9%. In 2011 when almost every fund lost money and the market was up a meager 3%, the biotech sector was up 10%. I have two top billion dollar biotech hedge funds in my database that have produced an average annualized return of 45% a year since 2002, without one losing year.
I honestly know of no other investment vehicle that can claim those results. Why? Because biotech stocks are the ultimate event-driven investment. It’s all about FDA approvals, results from clinical data and news of partnerships. That’s the driver and it can unlock value in a rising or falling stock market — it doesn’t matter.
The secret to investing in biotech stocks: follow the smart money. That is to only invest in the biotech stocks. You want the stocks owned by the world’s best billionaire biotech investors and hedge funds.
Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
Everyone knows Twitter (TWTR) has been one of the most volatile IPO’s in decades.
Twitter shares went public at $45, slipped to $40, and then went on a huge run $75 in less than a month.
Now TWTR has formed what traders call a bullish flag or pennant pattern. This pattern occurs after a huge run up in a stock, then the stock pauses and drifts down slowly, as the stock becomes oversold and buyers become exhausted.
The stock will complete the pattern if Twitter rises above $62.50. Once it moves above that price, it should rapidly back up to $75, the stock’s recent highs. Moreover, Goldman Sachs has just raised its price target on Twitter from $46 to $65, a 41% increase on 1/13/2014.
Everyone knows price targets are just made up numbers that analysts create. But the one important thing you should pay attention to when an analysts move their targets, is the percentage move in the price target. In this case, a 41% price target hike is huge move and is extremely bullish.
Now, Goldman is known to move stocks, especially the sentiment on a stock. And as I said, technically, I believe Twitter will trade back up to test its recent of high of $75 very soon, probably before the end of the month is over.
Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
If your sitting in cash and scared to come back into to the stock market, I have some advice for you.
Let’s be honest the markets have become complicated. The so called safe haven investments, treasury bonds and gold, lost 8% and 28% last year, respectively. And the stock market is sitting at all time highs making it more difficult to find value.
Even a bigger problem, interest rates and savings rates are so low that even putting your money in a savings account or a CD will still lose you money. Saving accounts, money market funds and CD’s are yielding less than inflation.
This environment is telling you, you must invest in stocks. But you can’t just buy some index fund or mutual funds that exposes you to potential losses of 20% to 30%. Instead you need to invest tactically in strategies that have good risk/reward profiles.
One of these low risk-high reward strategies is buying deep value stocks – but only when there is a catalyst in play.
Undervalued stocks are usually beaten down in price, selling at their 52 week low or even a 3 or 5 year low. They are usually selling at a discount to the value of their assets, their future cash flows or revenues and they have usually have a lot of cash.
Now, a catalyst is what helps reprice the stock and narrows the gap between the stock’s intrinsic value and its current undervalued share price. The strongest catalysts are when activist or influential investors own the stock and are pushing on the company and management to instantly create shareholder value by: 1) forcing them to buy back their stock, 2) sell some of their assets or 3) even sell their company. Other catalysts can be both significant insider buying and companies that have hired investment banks to help them find a buyer for their company.
When you combine these forces together, deep value stocks with catalysts, you get one of the strongest risk/reward investments out there.
Also for people who are scared to get back in the stock market these levels, these types of stocks should make you feel comfortable. You are buying stocks that are cheap in price, and you also have a catalyst present that can put a floor under a stock and begin pushing the stock higher. And that mix can quickly change investor perception surrounding the stock.
Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
I found that if I took a basket of the biggest and best billionaire activist investors and hedge funds (many of the names we follow in our service, The Billionaires Portfolio) and bought just the stocks they owned, whereby they had initiated an activist campaign against a company, that basket returned 31% annualized over the past 12 years. The S&P 500 returned just 6.1% in the same period.
This means a $20,000 investment 12-years ago, would be worth over $500,000 dollars today. The same investment in the S&P 500 would just be worth $40,000 today..
More importantly, the stock picks of these top activists had only one losing year during the period and that was of course 2008.
In 2008, the stocks in this basket of the top activists lost 18.2% versus a loss of 37% in the S&P 500. So in our study, these activist investors beat the stock market by more than 4 times on an annualized basis or nearly 23 percentage points. But they lost significantly less than the stock market in a losing year (in fact, a terrible year).
To put this return in perspective, no other mutual fund, ETF or private money manager on the entire planet has a returned anywhere close to 31% annualized over the period. The best performing mutual fund in the world returned 14.5%, which is not even half of the annualized performance of our basket. And that same mutual fund lost more than 45% in 2008!
Bottom line: By just following my Activist Select Strategy, you would have outperformed over 20,000 mutual funds, 5,000 money managers and 1,000 ETFs. And you would probably be considered the best investor on the planet.
Yet my next study has even better news. In my next study I took the same top Activist Billionaire Investors and Hedge Funds but this time I only tracked the performance of the activist stocks that fit the following criteria: 1) They had to be a small cap, meaning a market cap under $2 Billion and or 2) had to have a low share price under $15 combined with a market cap of at least $500 million and the results were astonishing.
The average annualized 12 year return for, what I call the Activist Small Cap Strategy, was an amazing 52% annualized over the last 10 years. Again this compares to only a 6.1% annualized return in the S&P 500.
Therefore a $20,000 investment in the activist small cap strategy would now be worth more than $3,000,000 million dollars today!
Let me repeat that, because I know it sounds too good to be true, but by only selecting the lowest priced and smallest cap stocks owned by the best activist investors and hedge funds $20,000 investment in 2002 would be worth more than $3,000,000 million dollars today. Of course these huge returns come with a more volatility, yet this activist small cap strategy still had only one down year (2008) over the last 12 years, another amazing statistic.
So there a couple of conclusions you should come away with from this study. First as I have told you before there is no more powerful strategy in the world from a risk reward perspective than piggybacking the stock picks of the world’s best activist investors and hedge funds. Secondly Activist investors do not need the stock market to produce these huge annual returns as proven above, even when the market went through a 10 and 12 year period of low to medium single digit returns, the stock picks of these activists still produced huge market beating returns of 31% to 52% a year!!
Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
