December 16, 2017

Trading Strategy

 

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Nails Investments is a stock replacement strategy that uses stock options, specifically call options in order to leverage our position – so that with relatively little, we can buy and sell the world’s top stocks. We normally pay about 10-25% of the cost of owning a stock outright, but still make profits as though we had paid full price. Because stock options expire, this is not a buy an hold strategy, it’s a buy and cash out strategy, where the goal is to ring the register as often and as quickly as possible. We are not building a stock portfolio, we are using stocks to build and increase our cash reserves. It is an income strategy.

Q: What is the “Next Buy” in the Stat Book?

A: The re-buy level is the price the stock drops to before it triggers an automatic re-buy of additional options. It is how the strategy works.

Instead of stop losses, the Nails strategy implements an “average down” system, which allows you to add to your position and improve your chance to win. When you buy more options at a lower price – it reduces your overall average price – and therefore lowers the exit price for a win as well.

And since options are valued by the stock, and the price of the option doesn’t always follow the ebb and flow of the stock price exactly. There are days when the stock can go up and the options go down or the other way around. Most of the time the price of the option lags a bit behind changes in stock price and they usually never suffer as many highs and lows. For this reason, it is easier to calculate where the stock needs to be in order for additional purchases of the option to be ideal.

Also, because of this reason – we ask that subscribers be smart in their rebuying. If for some reason the option prices don’t follow the stock price and the resultant purchase would not improve the average price of the option, we recommend not buying at that time. In other words, unless adding more options will make your overall average price go down, don’t buy.

Q:  I was wondering if it would be possible to list the next buy option price in the scorecard as well as the stock price?

A: I do not include the price of the option for a re-buy for a couple of reasons.

  1. The option price doesn’t mirror its movement with the stock price as regularly or as evenly as needed to list both and not confuse the issue.
  2. We want to watch the stock for the re-buy level, options lag a little, so once the stock hits the right price – you have a bit of room to work with.
  3. If you have the opportunity to re-buy at a lower price – then all the power to you. You want to improve your position with each additional purchase. You should make sure that a re-buy will lower your average. Increasing your average or adding more money to keep the position the same – a waste of resources. Only add to a position if it helps you win faster and win more.

Q:  How much do 10 DITM calls typically cost?

A: Most trades will cost between $5000 and $20,000 if buying 10 contracts at a time. However, the strategy can be scaled back for smaller budgets, and increased for larger budgets. I recommend 10 contracts at a time, but have many subscribers who do very well for themselves trading less than 10 contracts at a time.

It is important to remember that if you scale back the strategy, it is true that you will be spending less money for each trade, and proportionally it is also true that you will earn a smaller amount on the win as well.

If you trade fewer contracts at a time, you will spend less than my recommended purchase amount, but the win will be proportionally less as well or only $100 per contract. If you trade three contracts at a time, your win will come out at $300, and so on.

Even though your profits are less, your return on investment will be the same. My system has been showing a return on investment of about 20% over several years. If you scale back – yet still follow my trades, your return will also be in the 20% range. The percentage stays the same.

Q:  Can you tell me which is the best discount broker?

A: This will be a personal choice. Many brokers will require trading experience before they will let you open a trade account and buy and sell options. Many subscribers use E*Trade or OptionsXpress. I have heard good things about both companies, but there are many other choices available. Regardless of the company you choose, it is a good idea to check with them regarding account limitations and get a green light for buying and selling options before you trade and before you subscribe to my service.

Q:  I made the purchase. How do I place the sell order? I am not sure how to do that.

A:  What you want to do is place an order to sell the options now at a dollar higher than the purchase price. If you bought in at say $7.50 as recommended, then your sell order would be for $8.50 – and set it to stay open until cancelled. Meaning, you set a GTC (good-till-cancelled) order that stays open until executed or cancelled by you. This will lock in a win for you when the option price goes up enough for your trade to fill at the limit you have set. When the option price is reached, your account will automatically trigger the sell and you will be up $1000 in profits.

Q:  How did you make $40K or more on couple trades?

A: My strategy employs an averaging down system when stock prices fall. At key prices points, I recommend the purchase of more options. This lowers the average cost of the trade. It also increases the profit that will be achieved when the position is sold for a win.

If you buy 10 contracts of an option at $12 and then later purchase more for $8 – you now have 20 contracts, and it will be as though you paid $10 for each, which is the average of the total. Some options end up being stubborn picks, and the trades will hit a re-buy level many times before it will bounce up enough to grab a win.

Each additional purchase chips away at the average cost. When it is all over, the total average cost is usually well below the original purchase and the win will be much more than $1000.

Each time a stock hits a re-buy level it improves its chances of winning an increases the potential win amount. If a stock re-buys once, then the win total will be approximately $2000; a thousand for the first 10 contracts, and $1000 for the second 10 contracts, and so on.

And if you use the example above, if you have 20 contracts, now at an average price of $10, you then only need the options to trade at $11 for a win; they close out for a win at a LOWER price than originally purchased and the return doubles.

Q:  I have yet to be able to buy any of the calls that have been recommended.  The suggested bid prices are so much lower than what is showing at the time that I find it almost impossible to ever buy any calls using your system.

A:  With options – prices can move pretty quickly. Many times I have been able to get into a position – that was previously trading much higher – because it is the stock price that drives the option price and many times some options will not trade daily. Therefore, the current price displayed isn’t always what the option can be purchased for.  I will not EVER overpay for an option. We use a strict formula for it. If it can’t be bought for the price we want – we let it go. This means there will be positions that get away. But I’d rather be left with no option vs. having one that is too expensive to convert to a win easily. Please remember the strategy calls for patience. There are plenty of opportunities for profits – but we have to be smart about it.

Q:  Do you ever recommend buying Puts in a down market?

A: The system calls for buying deep-in-the-money calls and nothing else. However, once in a while we may throw in a bonus put and once you learn the system, you could use the same principles to buy puts as well – finding stocks that are overvalued instead of undervalued.

Q: I wanted to know how and when you will be sending the stock picks.

A: We publish stock picks every Monday, Wednesday and Friday’s. Each morning, usually between 6:00 am and 7:00 am (PST) – you will receive an email alert once the forecast is posted to the Nails Investments website. If the alert doesn’t arrive in your mail box, we do recommend that you check the website for a current article with the market open.

At times and due to different email platforms, we cannot guarantee the timely delivery of the email alert. However – that doesn’t mean the day’s recommendation hasn’t been posted.

At any time, you can contact us by email or leave us a message – we will get back to you ASAP.

Q: How are the Nails trade documented?

A: The DITM call recommendations on the site are virtual – but it is accurate and can be tracked through the Stat Book Scorecard.

The strategy is a sound one. It doesn’t need a list of completed trades to work. Stock and option prices can be tracked and documented.

Q: I was wondering what the suggested minimum starting amount of capital need to make a good effort with your system?

A: When most potential subscribers ask this question – the typical response is: “How much do you have?” For the most part the answer is a sliding scale, as the strategy works well if you trade 10 contracts at a time as Lenny recommends or if you scale it back and purchase only one at a time – of course scaling up works too.

Although we recommend buying in blocks of ten contracts at a time, it is very easy to scale it to fit your budget. Here is how it works, if you were to buy one contract at a time, the win goal would be $100 instead of $1000. If you were to buy two contracts at a time, then the win goal would be $200; $300 for three at a time and so forth; even $10,000 if you were to trade 100 contracts at a time.

It is important to note that the percentage gain is equivalent – regardless of how many contracts you are able to trade at a time.

Now to get to the amount you’d want to start with:

I will usually recommend a starting balance of at least $10,000 – $30,000 for each single contract you want to trade with. More is always better. So if you have $50,000 to work with, then plan to trade 2 contracts at a time. If you have less than $10,000 to work with, say $5,000 then plan to trade a single contract at a time – and be sure to wait for the position you have open – to close – before you get into another trade. In other words, trade one contract at a time and only one trade at a time.

You want to have enough cash available to re-buy when becomes necessary. Re-buys are very important to maintaining a successful portfolio. About 50% of the time, no re-buy is needed and the trade moves to the win column without additional investment. However, the other half of the time, additional cash is needed to keep you in the game.

For more information, subscribe now or contact us with additional questions.

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