From Down Big to Up Big

Tech options trades have roared back to life… the power of trading LEAPS on elite companies… blending options with fundamentally-superior stocks

 

When’s the last time you had a position go from a double-digit loss to a 50%+ gain?

If you’re invested in stocks, this type of reversal of fortune isn’t a regular occurrence. After all, the math can be a stiff headwind.

For example, a loss of 10% requires only an 11% gain to recover. But if you increase that loss to 25%, then it takes a 33% pop just to get back to break-even.

If you go down 50%, now you need a 100% gain to return to whole.

An 80% loss? You need a 500% rally to get back to where you started.

And remember, this is what’s required just to return to even – it doesn’t include the rally needed to push gains to 50%+.

But that’s with stocks.

With options, it’s a different ballgame.

What appears to be a losing trade – down double-digits – can stage a furious rally in only a matter of weeks, sometimes days.

In doing so, it can turn what seems to be a hopeless loser into a double-digit winner.

***Case in point, a position recommended by legendary investor, Louis Navellier, in his options service, Power Options

In late June, Louis recommended his subscribers close out their trade on Veeva Systems (VEEV).

Veeva is a cloud/data company that had been caught up in the tech-selloff this spring. The trade went underwater by double-digits – that is, until tech began to reassert itself this summer, turning this one-time loser into a 50% winner.

From Louis, in a recent update to subscribers:

Veeva Systems, Inc. (VEEV) has been on a strong run since posting a stunning first-quarter earnings report on May 27. Our call position has rebounded significantly, going from a double-digit loss to a more than 50% gain.

VEEV is up again this afternoon, so let’s take advantage of the strength and collect our profits.

The same thing happened with Louis’ Power Options trade on DocuSign (DOCU). After a strong earnings report in early June, the stock leapt more than 40%. This flipped Louis’ trade from a loss to a 70% gain.

There were similar reversals in CrowdStrike, NVIDIA, Pinterest, and Himax, just to name a few.

In light of these rags-to-riches trades, today, let’s revisit why options can be a powerful addition to your investment toolkit – especially when you combine them with fundamentally-superior stocks.

***Why Louis launched his Power Options service

For newer Digest readers, Louis is a market legend. Over the decades, he has developed a high-tech trading system guided by preset algorithms – basically, step-by-step computer instructions.

It’s a program designed to digest vast quantities of market data, from which it identifies attractive stock investments.

But over the years, Louis received requests to blend his quant-based approach with long-dated call options. That’s because a well-timed option trade can turn a respectable move from a stock into a triple- or quadruple-digit winner in the related option.

Earlier this spring, Louis finally complied with the requests, launching Power Options.

To illustrate how lucrative this market approach can be, let’s look at a hypothetical example that uses the actual type of option Louis prefers – a LEAPS – which stands for Long-Term Equity Anticipation Security.

What a LEAPS does is give its owner the right to buy a stock up until some specified date in the future (usually between 12 and 24 months) at a specified price.

For instance, imagine your call option gives you the right to buy, say, Coke at, $51. In 10 months, it’s trading at $63 – you still buy it at $51. So, that $12 per share difference is pure profit (minus what you paid to buy this option).

So, LEAPS give investors exposure to the long-term upside in a stock, without having to buy the actual stock itself at the outset.

As you’re about to see, this can mean big returns-on-capital with less risk.

***Take the hypothetical, Acme stock, trading at $242.50

Let’s say that you think Acme is going to climb to $270.

You could buy 100 shares of Acme. That would cost $24,250.

If Acme’s price climbs to $270, then you’d make $2,750 ($270 – $242.50 x your 100 shares).

But let’s say Acme surprised you, and instead, lost 20%.

Well, suddenly, you’re out $4,850 (20% of your initial $24,250 capital).

Not good.

Compare that to a simple call option…

Instead of spending $24,250 to buy 100 shares of Acme, you could spend, call it, $630 to buy a single call option at Acme’s price of $242.50.

You’re able to do this because options provide investors leverage. One call option controls 100 shares of an underlying stock. Basically, options enable your money to go further.

Now, first, let’s start out with the bad possibility – say Acme’s stock plummets…

Even if Acme’s stock goes from $242.50 to $0, you only have $630 at risk with your call option. That’s the most you can lose. Compare that to the Acme shareholder who is down $4,850 if Acme drops just 20%.

***But it gets even better when we look at returns…

Let’s say Acme climbs to $270 as before.

This time, your call-option profit is $2,120 (the same profit as earlier, $2,750, but this time we have to subtract the cost of your option, which was $630).

“Wait,” you say, “my profit is less when I use the call option than it was when I bought the stock outright. How is that better?”

Here’s how…

The Acme stock-owner put up $24,250 and made a return of $2,750. That’s return on capital of 11.3%.

Meanwhile, the Acme call-option-buyer put up $630 and made a return of $2,120. Yes, this is fewer dollars in the pocket, but on a percentage-basis return, the investor just made 337%.

And remember, this happened with less capital exposed to a complete loss.

That’s the power of call options used wisely.

Now, there are other details we’d need to cover before you should ever make your own trade, but this gives you a general overview.

***How Louis blends long-dated calls with his quant system

With this basic understanding of calls behind us, let’s turn to Louis.

As you likely picked up on in our description above, call options can make you a lot of money, way more than just the stock itself – if – the stock rises to the price you want, within the timeframe you want.

If it doesn’t, then you’re out the money you paid for that call option. That’s the risk for a buyer.

This means that picking solid-performing stocks that are able to climb to a specified price-target (and hopefully, well-beyond) is critical for this system to generate big returns.

That’s why Louis’ options approach is rooted in fundamental strength – the same quantitative metrics that underpin his regular stock recommendations.

But let me show you rather than just tell you.

Last week, Louis recommended a new Power Options trade on Danaos Corporation (DAC). As part of the recommendation, he walked subscribers through Danaos’ numbers, illustrating its underlying strength.

From Louis:

Danaos Corporation (DAC) is one of the largest containership companies in the world, and it boasts long-term charters with leading liner companies.

The containership operator reported first-quarter adjusted earnings of $58 million, or $2.83 per share, which was up 74.2% from the $33.3 million, or $1.34 per share, achieved in the first quarter of 2020.

First-quarter revenue increased 24.4% year-over-year to $132.1 million. The estimate called for earnings of $ $2.90 per share on $135.04 million in sales, so Danaos Corporation posted a 2.4% earnings miss and a slight revenue miss.

I do look for the stock to bounce back, as the company is expected to post 90% annual earnings growth and 25.4% annual revenue growth in the second quarter.

***Full transparency, the value of an option can be very volatile – for good or bad

That’s just a reality of trading options.

We saw this with some of Louis’ recommendations when tech took a beating this spring. And this is why you always want to be measured in your position sizing.

However, as we’ve pointed out today, since options are basically a leveraged play on a stock, they can help investors make vastly greater percentage returns on a trade compared to buying the stock outright – and with fewer dollars exposed to the market, which reduces your risk.

It’s a powerful market strategy when used wisely – which, to us, means rooting each trade in fundamental strength.

Here’s Louis on that note:

The key to a successful options trade hinges on picking the right stock, based on superior fundamentals.

Most investors get caught up in “hunting” for the perfect option at the perfect price. But they fail to consider the most important element to the entire equation: the underlying stock.

The reality is when options are used improperly, that trade is nothing short of gambling.

It’s why it’s critical that before we pick the option, we pick the right company that we know has the potential to climb higher because of its strong fundamentals.

To learn more about Power Optionsclick here. At worst, you’ll be a more-informed investor – at best, you’ll have a tool that could help you make returns that are multiples higher than normal stock gains.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2021/07/from-down-big-to-up-big/.

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