How To Turn $400 Into $150K

This post originally appeared on TraderPlanet.com.

A couple of weeks ago I watched a trader turn $483 dollars into over $150,000 in three days.

He was trading OTM weekly options in $NFLX going into their earnings announcement, and despite how much of an outlier event this seems at first glance, I am starting to think that there might be more to weekly options than meets the eye.

Most people are familiar with the Market Wizard series of books by Jack Schawager, which provide a rare glimpse into the world of some of the greatest traders. Although the profiles are interesting, one of the major takeaways from those books for me is how many of those traders made their initial market fortunes.

EXPLOIT INEFFICIENCIES
Not an insignificant number of them made their money trading products like options, forex, and futures when they were new and pricing inefficiencies existed, which they then exploited. That is where I think weekly options are right now.

STILL NEW
Weekly options are still relatively new and that fact combined with their extremely short life span I believe is providing a window of time where smart and aggressive traders can use them to garner outsized returns.

The irony is that most successful traders stay away from weekly options because they feel too much like a gamble. Traditional money management concepts that are used to trade equities or even longer dated monthly options don’t really work with weekly options. With those products you are trying for a 30-40% win rate and taking minimal losses on the other 60-70%. However with weekly options the win rates are more like 5-10% and you are likely losing your whole investment on the other 90-95% which are losers.

However, just a few wins in weekly options can more than make up for you losses; even if those losses are 95%+ of your trades.

BREAK IT DOWN
Though it’s more like a lottery win, just for fun let’s look at that risk/reward ratio on that $NFLX trade. It comes out to 1:310, which means you would, in theory, only need to win once out of 310 trades to break even. Yeah, crazy right?

But I have also seen a lot of 10, 20, 50, and even 100 baggers from weekly options traders as well. There is something going on with weekly options right now that I don’t think will be there in a year or two as more participants begin to use them and pricing inefficiencies disappear. I don’t know exactly what the strategy is for playing them successfully, but I am working on it, and you should probably be doing the same thing as well.

Who knows, if you figure it out in time, you may end up in a future edition of Market Wizards yourself.

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5 Responses

  1. The phenomenon that this piece discusses doesn’t just pertain to the traits of weekly options. What I think the author is saying is that in this one NFLX example, options were underpriced; but then somehow pins that concept to it being weeklies, in general, that offer some edge because they’re new. Total unsophisticated nonsense. The only thing different about a weekly is time to expiration. It’s no different than an option that had been listed for months and has < week to expiration. And do you really think that the amount of institutional brainpower would miss some mystical edge that Joey McBlueCollar was able to exploit?

  2. This article is b/s.. his theory may be right, but do the math
    he doesn’t even say what strike he bought
    or at what price
    $400 into 150,000 is a x375 gain
    so if he had 0.05 cent calls, they would have to go to 18.75
    and 0.05 calls on nflx are like $100 out of the money on a front month
    if anything, it’s a extremely lucky trade
    the stock on that jump only went from 100 to 170, not even enough levels to hi $100 more
    so i think this article is fake

    • And if you read the article, you will see its less about the exact trade, and more about the weekly options. Whether it said 500 into 2 billion or 50,000, that was not the important piece. Best of luck to you!

    • LoL, I saw this trade after the facts, that is the day following nflx earnings annoucement. I was alerted through an options news provider that i subscribe to but i was too late. And even then, nflx kept moving higher the next 2 days (the earnings annoucement was on a wednesday i believe) causing the weeklies to gain even more. Do your due diligence before calling fake on this article. If I recall, prior to the close on wednesday the 105 or 110 calls were trading at .19 and the very next day they were at 19.50 ish

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