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How to Buy Options for Explosive Profits

We recently had a trade in AT&T (T) where we bought 36.00 strike put options for
$0.27 ($27) and sold them 5-days later for a profit of 316%. That was a great
trade, but what was really great was that in order to achieve that profit, AT&T
barely made any move at all.
This is the secret to buying options for explosive profits.
1. Buy Severely Undervalued Options
in
2. Stocks With a High Probability of Movement
This report is going to detail exactly how we easily find, and how you can easily find
severely undervalued options in markets that have a high probability of seeing the
market move enough to generate explosive profit potential in those options.

The first example in is AT&T (T). You can see here that when the market was
trading just above 36.00, we bought 36.00 strike puts for $0.27. 5-days later we
exited those options for 1.13, generating a 316% profit.
The first thing that jumps out is how cheap the option was. This was not an out of
the money option. This was an at the money option. We bought the option for .27,
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or $27. If AT&T would have sky-rocketed the next day, we could not lose more
than $27 no matter what. This would have been a loss of 0.75% of the cost of the
stock.
Cost of Option = $0.27
Stock Trading at $36.00
Max Loss = .27/36.00 or 0.75%
The max loss is the cost of the option divided by the price of the stock. When this
value is less than 1.00%, this is a severely undervalued option (in most cases).

One way to verify that this option is undervalued, is by taking a look at the Average
True Range. This graph shows the average true range for the market over the last
9-days. At the time we bought the put option for .27, the daily average range in
that stock was .48. This makes the option price 0.56% of the average daily range.
Anything under 1.00% would be considered severely undervalued.
In most cases, if the option price divided by the stock price is less than 1.00%, we
will also see the option price divided by the ATR at less than 1.00% as well.
I do not generally look at the ATR to determine whether to make a trade or not,
simply because the ATR fluctuates. And, when the ATR is lower, it usually means a
higher cycle is about to start. Because of this, if the ATR is on the low end and the
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option price divided by the ATR is above 1%, it does not negate the trade. I only
show this as another way to understand how severely the options are undervalued
at these levels based on the option price divided by the stock price.

I bought MMM 118.00 puts for $0.59. The Max Loss was 0.49% while the OP
divided by the ATR was 0.46%, and this was a lower ATR value.
Breakeven Move
There is one other major factor that I look at to determine a severely undervalued
option. This factor insures that the cheap value of the option is not cheap because
it is way out of the money. That is not what constitutes a severely undervalued
option. Accordingly, I look at the breakeven move required by the stock. The
lower the breakeven move required, the better the opportunity.
Take for example the AT&T example. We bought 36.00 strike puts for .27. If we
held onto that option until expiration, AT&T would have to trade at 35.73 to
breakeven.
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36.00 (strike) - .27 (option price) = 35.73.
At the time the option was bought, the price was sitting at about 36.08. This
means that AT&T would have to move from 36.08 down to 35.73 in order to
breakeven on the trade if I held onto the trade until option expiration. This is
a required move of .35, or 0.97%. I like to see this breakeven move at something
less than 2.00%.
The reason for this is simply to make sure that the option is not cheap because the
strike is way out of the money. So for example, if we were looking at the 34.00
strike put for .20, that would only be a 0.55% max loss, however the breakeven
move required would be at 6.3%. It should be noted that out of the money options
are not necessarily bad, but we are looking for severely undervalued options, not
just cheap options because they are out of the money. This breakeven number
allows us to easily determine this.
PDS Trader
By now, you might be asking yourself how in the world is this an easy strategy to
trade with all these calculations. The calculations are extremely simple and very
logical, but they can be tedious going through all of the various possible
opportunities. This is why I had PDS Trader built. I dont have time to go through
all of these calculations eitherso I had a software program built that pretty much
does everything for me. Check out this screenshot:

The QQQ trade is a 77.00 put option opportunity where the Max Loss is only 0.40%
and the Breakeven Move is only 0.57%. I alerted traders to this opportunity, and
within a few hours, it had produced a 100% gain. After the close, I emailed and
everyone and stated that this trade was prime to ultimately produce a 300%+ gain,
which it did the following day.
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You will notice that the Max Loss and Breakeven columns are on the right and
sorted by the lowest max loss number. I have it set so that this list of
opportunities only shows trades with breakeven levels at 2.00% or below. Any
opportunity where there is at least 5 days left on the trade and the max loss and
breakeven level are below 1.00% should be seriously considered.
You will also notice that there are a lot of opportunities. The screenshot above is
listing only put options. Just because an option is severely undervalued does not
mean it is an opportunity I am going to take. Since there are so many
opportunities, I am only going to take the opportunities where I feel the potential
for a market movement in that direction gives me the greatest potential of seeing a
300%+ return. Remember, since these are weekly options, I am looking for quick
moves. Since the move does not have to be very big at all for me to see a
significant profit, I am not looking at long-term trends. I am looking for higher
probability short-term moves.
This next part of the report shows the general process I go through to determine
which of the PDS Trader opportunities I take advantage of and why.
First, I do not buy options if the options do not meet my cheap guidelines.
Generally, 5 10 days out, the Max Loss must be less than 1.5% and the
breakeven level must be less than 1.5%. There are often opportunities where the
max loss is less than 1%. I dont consider any opportunities that are not listed in
PDS Trader.


The QQQ option was 5-days out (4 technically), so it was right on the edge of the
time frame I will trade. Had this been one day later, I would have looked at the
9/6/13 options. When the market is closer to 5-days, I like to see the max loss and
breakeven numbers lower than 1.5% if at all possible. And, as you can see, the
QQQ 77.00 put options were extremely cheap.
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Next, I look at a chart. Below is the chart of QQQ on a daily basis. In addition to
yesterdays trade, I have marked off six other potential trades based on buying put
options at resistance and call options at support. The first thing you might notice is
that we do not win on every trade. We are not trying to win on every trade. We
are trying to take advantage of the opportunities that provide the biggest profit
potential in the least amount of time, with the lowest risk.

Trade 7 (which was listed in PDS Trader) worked out perfectly. The resistance line was right around the
77.00 level. The market moved to 77.20, and then within a few hours, moved back down to around
76.70, just above the previous days close.
So the first thing I do when I consider an opportunity is I look to see whether prices are close to
resistance or support levelswhich I solely determine by previous price pivots. I KNEW the day before
that I would be looking to buy QQQ 77.00 puts. I knew this for 2-reasons. First, PDS Trader had already
determined that QQQ put options in general were cheap and listed the 76.50 puts at a possible buy.
This alone is NOT enough for me to buy. So, I opened up a chart of QQQ and simply drew a line at the
last pivot level, which very clearly showed resistance at the 77.00 level with this chart. Accordingly, I
knew that if QQQ moved to 77.00 the following day, I would be looking to buy puts.
I have marked the support and resistance levels that have been hit. Support is marked by a blue line,
resistance is marked by yellow line. Here were the orders:



In this scenario, it was either all or
nothing on these entries. The ones
that didnt work out, never gave us
a chance. The ones that did saw
immediate market movement in our
direction. After 7-trades, +$900 if
you were to risk $100 on each
opportunity.
Trade 1 Buy 72.00 calls > 300% in 3-Days or Less (+$300)
Trade 2 Buy 73.50 puts > 300% in 3-Days or Less (+$300)
Trade 3 Buy 72.00 calls Loss of 100% in 7-Days (-$100)
Trade 4 Buy 73.50 puts Loss of 100% in 7-Days (-$100)
Trade 5 Buy 75.50 puts Loss of 100% in 9-Days (-$100)
Trade 6 Buy 77.00 puts > 300% in 3-Days or Less (+$300)
Trade 7 Buy 77.00 puts > 300% in 3-Days or Less(+$300)
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I have been able to do better than 50% wins, but if that is all I do from now on out, I will be perfectly
happy because I know that it only takes a single 300% winner to offset three 100% losses. That is a 25%
win rate and I still breakeven. That is why the cheap options are so important (and again, when I say
cheap, I dont mean the ones that cost the least, I mean the ones that require the least amount of
movement to generate significant profits).
Here is a recent screen shot of cheap call options listed in PDS Trader:

By end of 1-Day, Trade 7 was sitting at
a 567% Profit. It should be noted that
many traders think that the purpose of
buying calls at support or buying puts
at resistance is to accurately predict
market direction. This is absolutely not
correct. The reason for this strategy is
because these areas provide increased
volatility. Accordingly, on the winners,
we have a greater probability of seeing
larger wins. Buying cheap options
allows us to take advantage of the
increased volatility on the profit
potential, but that increased volatility
does not hurt us on the loss potential.
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First one on the list is MCD (McDonalds). I discount UNP since it did not have any volume. These are
sorted by lowest Max Loss, and not listing any opportunity with a breakeven over 2.00%. Below is a
chart of MCD:

Here, we see that there is some support at the 95.00 level. Accordingly, I know that I am not going to
buy calls until the market comes close to the 95.00 level. The market closed at 95.31 after reaching a
high of 96.00. At the height of this move, 96.00 calls (which were at the money at the time) traded as
high as $0.45 ($45). These calls have 11-days left, and tomorrow would be 10-days left. Accordingly, if
MCD moves down to 95.00ish, the 95 calls should trade for around .45. So, for the following day, If I
deem this a good enough support area, I will place my initial order to buy the 95.00 calls at .45 or better.
Support/Resistance - Personally, I am a little more aggressive with support and resistance, and will often
establish a support resistance line at any time there is a) an island bar reversal after a short term
trend; or b) 2 bars in opposite direction of last short-term trend. Here, the short-term trend was
down, there were a couple of bars up and that was good enough for me to establish a potential short-
term support area. If you are new to this, or have a smaller account, use more caution in choosing the
opportunities you get involved with. Start slow and build a consistency.
(There is one caveat with MCDthe ex-dividend date is on 8-29-12 of $0.77, which PDS also alerts you to
as well, but I have that column hidden in this screenshot for the sake of space).



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Next on the list is PFE:

The two purple lines represent a very aggressive approach to support & resistance. If I am going to be
aggressive, I like to see a little better preceding trend and I dont like to be between to major support
and resistance areas. I figure when the price gets to one of those, there will be a better opportunity.

GE Aggressive support
line is between a major
support and resistance
line. If it moves down to
23.25 and then posts
another aggressive
support line, Ill consider
an opportunity then.
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WMT Bumping up against major support. I bought 73.00 calls.

TGT I will be waiting for a support line to set up. Market needs to post another positive bar or two
before I look to get into this one. The one green bar is an inside bar and shows nothing with regard to
support. This one is on my watch list though. On a side note, you see the major support line at 67.80.
Buying a call on that day would have realized a 100% loss the following day. If you plan on using longer-
term support or resistance lines, you can require a minor support line to form at around the same place
help you avoid some of these types of situations.
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KO This is a weak possible support area forming. I would normally not do anything in this situation
unless the market established a better pause or small retracement, except for the fact that there is a
company conference call scheduled for 9/4/13so I will be looking to take advantage of this at any
opportunity with the 9/6/13 expiration option (so as to be open on 9/4/13). I will be looking to buy the
38.50 aggressive to establish a position, and then if the market moves down to around 38.00, I will
establish another position at that level. (PDS Trader has blue shaded earnings event if it is a conference
call and a red shaded cell if it is the actual earnings date)


I have an order to buy 47.00 calls at .35 or better. This is an aggressive buy, but that brings me to the
graph below the chart. This graph is the Average True Range for a 9-bar period. My call option is priced
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at .35 and the Average True Range is double that. Anytime you have a solid ratio like that, means that
you have a higher probability of seeing a small move (by the cost of the option standards) create a larger
profit. If VZ moves up .73 tomorrow, my options will easily more than double based on the value of the
46.50 call which is in the money and priced at .72. Theoretically, my option will double tomorrow if VZ
moves .50 higher.
BAX There was a weak opportunity to buy the 71.00 calls a few days ago at .50 that I did not take as it
was between a major support and resistance line. A better play would be to buy 69.00 or 70.00 calls if
BAX moves down closer to the 69.50 level (or slightly below) as that is a greater support area.

MMM We sold puts last week and made a 300%+ return. Nothing to do right now.

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You get the idea. These are just one days examples, updated in the middle of the afternoon, of calls
that are listed that meet my minimum criteria. There are also puts, but what you will often find is that if
the call options are cheap, so are the puts.
Since this is the case, you can easily prepare for potential trades during the upcoming week by taking a
look at where the charts are and then glancing at them at the end of the day to see if they started to
move toward your support or resistance line. As they approach, you can determine at what strike you
will place your order, and at what price based on other options in the chain. You dont have to wait until
the market hits the price and PDS Trader alerts you to the right option (which could be in the middle of
the day).
Each week, there are usually 4 or 5 really solid opportunities that line up with support and resistance.
Of course, you can use any charting analysis technique with this option buying strategy.
Remember, I am not trying to always be right with the direction. I am just trying to give myself the
greatest probability of producing a big win in as little time as possible when I am right. Diversify, trade
small and allow proper money management to grow your account.
If you have not obtained your copy of PDS Trader, be sure to go to the following link today:
http://www.paydaystocks.com/weekly-stock-options-order-PDS-trader.html