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Tom Yeung here with your weekly Smart Money update.
In the mid-2010s, I attended an advanced valuations class – one of many continuing education requirements that tests your ability to stay awake.
Taking the same course was an options trader from the New York Stock Exchange (NYSE).
Now, this trader knew everything about valuing options. As a market maker, he determined the price of hundreds (if not thousands) of options daily. People like him often become so fast at calculating the underlying math that they act more like human calculators than traders. The NYSE’s parent firm, the Intercontinental Exchange (ICE), now generates $500 million annually from financial options.
But when it came to the underlying stocks… our “human calculator” classmate knew virtually nothing.
AAPL… BAC… CVX… These might as well have been strings of random letters. He was only interested in things like delta risk, theta decay, and other things no ordinary person should ever worry about.
You should immediately sense an opportunity.
Options are directional bets on company stock prices. So, if you believe a stock like CVX (Chevron) will double in the next 12 months, you can profit from that insight simply because the market maker on the other side of the trade does not know… nor does he care.
He’s only interested in getting the average trade correct by sticking to his math.
So, in today’s Smart Money, let’s take a closer look at exactly how you can take advantage of these market makers’ ignorance with a quick look at how options work.
Plus, I’ll show you a specific trade opportunity that smart investors might want to investigate further right now.
Options 101
Now, some of you might be thinking, “What exactly is an option?”
Essentially, these financial derivatives are side-bets on a stock’s price that allow investors to make enormous payoffs if they get things right. The math might be complicated, but the outcome is straightforward.
The simplest of these bets are called call options. It’s much like horse racing when you put a WIN, PLACE, and SHOW bet on the same horse. (Buying stocks, on the other hand, is like buying the horse outright.)
Think back to May of this year…
At the time, you might not have known if Sierra Leone would win the Kentucky Derby… but you might have been confident enough that the winner of the Blue Grass Stakes (by 1.5 lengths, no less!) was good enough to place third or better at the high-stakes race. (The higher they place, the more you win.) And if Sierra Leone came fourth or worse, the most you can lose is your initial bet.
The same principal is true for call options. If a stock is trading at $20, you can often buy “$30 call options for January 2026” for around $1.
- Breakeven (SHOW): If the stock trades at $31 by January 2026, you get the difference of $31 and $30 (in this case $1) and break even.
- Big win (PLACE): If the stock trades at $32, you get $2 instead ($32 minus $30), a 100% gain on investment.
- Enormous win (WIN): If the stock goes to $40, you get $10 ($40 minus $30). And after deducting your initial $1 cost, that $9 profit represents a 900% gain!
These contracts are traded in 100-share lots. So, in practice, if the stock does go to $40, your initial $100 wager would suddenly be worth $1,000! (Or $900 if you want to deduct the costs.)
Put options are call options in reverse, where you bet on shares going down.
Meanwhile, options market makers usually have no idea where the $20 stock will go… or how good of a racer Sierra Leone is. As long as they’re offsetting these bets with clever hedging (i.e., betting on the other 19 Kentucky Derby horses), they don’t mind who eventually wins the race.
The Opportunity in Plain Sight
This creates some obvious opportunities for keen-eyed investors… even those who have no idea how options are priced.
Consider Pfizer Inc. (PFE), a company that Eric recently recommended his Fry’s Investment Report members sell. That came after Donald Trump put forward Robert F. Kennedy Jr. to head the Department of Health and Human Services (HHS).
The drugmaker earns a quarter of its revenues from Covid-19 vaccines and therapies, making it one of the most vaccine-exposed companies in the pharma industry. RFK Jr. is a well-known vaccine skeptic, and Eric rightly doesn’t want to stick around to see what happens next.
On the other hand, even Trump’s greatest critics will acknowledge that many of his intended policies will be good for healthcare stocks. This includes repealing the Medicare negotiation provision of the Inflation Reduction Act, reducing Federal Trade Commission oversight of mergers and acquisitions among corporations, lowering corporate taxes, and more.
That means Pfizer could either go to the moon… or crash to Earth. But it certainly won’t stay in its $25 range forever.
Here’s where options become very useful…
- Pfizer crashes. To profit from a potential Pfizer crash, we can buy put options, the mirror image of the call options described above. The further Pfizer goes down, the greater our winnings. And if Pfizer stays the same or goes up, the most we lose is our initial bet.
- Pfizer surges. To profit from a Pfizer surge, we can buy call options, the WIN/PLACE/SHOW bet we talked about before. This opens the door to exponential upside if healthcare stocks go up.
This strategy of buying put and call options on the same stock is called a straddle – a bet that a stock will break out of a trading range.
And the best part about buying straddles today?
They are unusually cheap.
Market volatility has collapsed over the past several weeks now that we’re in a lame-duck period between presidents. And our “human calculator” market makers are using this low volatility as an input into their math equations. (i.e., their equations don’t account for what happens after inauguration).
That means prices for Pfizer’s $25 straddles for January 2026 have now fallen to the $5.50 range, so traders will break even if PFE shares move either below $19.50 or above $30.50 by that date (that’s $25 plus/minus $5.50). And the further away PFE moves from those two goalposts, the greater the profits will be.
If PFE trades at $40 by January 2026 (as they did during Trump’s first term), every $1,000 wagered would be worth $2,727… or $1,727 of profits. And if shares move higher… then you might see gains of 300%… 500%… or more.
A Way for Even Faster Gains
Not everyone will enjoy waiting around for the next 14 months for Pfizer straddles to mature. The Senate isn’t set to confirm Trump’s nominees until at least January… and it will take many months after that to see whether the new administration’s policies will be beneficial or harmful to the Covid-19 vaccine maker.
That’s why I’d like to introduce you to Jonathan Rose, an options trading expert who has generated 16%… 48%… 156%… 545%… even 1,306%… all within a six-and-a-half-hour period.
He does this by trading options that are expiring today, rather than those expiring a year or more from now. These “zero-day options” are some of the fastest-growing segments of financial markets today.
Within two years, zero-day options have gotten to around $1 trillion a day in trading volume, according to JPMorgan Chase.
And when we start seeing a lot of money flow into a specific corner of the market – that really piques our interest. Because these areas tend to be where you find the most dramatic gains.
Of course, these big potential rewards come with equally big perils. And that’s why you need a proven game plan that manages the downside risk while leaving the door open for upside gains.
That’s why, on Tuesday, November 26, Jonathan will host his One-Day Winners Live Summit to show how his system works. You can click here now to reserve your spot.
In the research Jonathan is preparing for this upcoming presentation, he’ll show you how you could’ve used these trades to TRIPLE your money from Donald Trump’s election victory… in less than seven hours.
Indeed, when it comes to options, Jonathan is our resident master of money flows. His 25-plus-year career trajectory, from floor trader to CBOE market maker to trading mentor, is a testament to the power of understanding these flows – including winners of 126%, 245%, even 463% or more, often in 30 days or less.
So, there’s no one I’d rather have you hear from when it comes to the exploding market for zero-day options.
Once again, on Tuesday, November 26, Jonathan will host his urgent summit on this brand-new moneymaking strategy. It is completely free to attend.
Just click here now to reserve your spot.
Regards,
Thomas Yeung
Markets Analyst, InvestorPlace
The post How to Beat the Market… Even if You’re Bad at Math appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
