That’s wrong. That’s the exact opposite of what options were designed for.<\/p>\n
The options market was created so investors could reduce risk<\/em>. Options allow investors to hedge their positions… and to risk much less money than they would buying a stock outright.<\/p>\n Let’s say you want to buy stock in Company X. It trades for $10 a share. You could put up $1,000 to buy 100 shares… But you can control the same amount of stock with one option contract. You can buy a contract for, let’s say, $50… and leave the other $950 in your account.<\/p>\n If Company X’s stock goes up, you’ll make money. If the stock goes down, the most you’ll ever lose is that $50. That’s a 100% loss… but it’s a lot less than potentially losing 20% or more of the $1,000 you risked buying the stock.<\/p>\n This is a simple example. And it’s the simplicity that proves my point. Options allow you to risk much less and profit just as much as buying stocks.<\/p>\n But that benefit disappears if you overleverage the trade and take on a larger position with options than you would otherwise take with the stock.<\/p>\n That’s the biggest mistake most novice option traders make. Instead of replacing a 100-share purchase with one call option<\/a>, they take the entire amount they would have allocated to the stock and buy a much larger position with the options.<\/p>\n Rather than buying one call option for $50 and leaving the remaining $950 in the bank, novice traders take the entire $1,000 and put it into buying more call options.<\/p>\n They end up buying 20 call options to try to get more bang for their buck. What would have been a 100-share purchase has turned into control of 2,000 shares. Instead of using options to reduce risk, they’ve increased their risk 20 times.<\/p>\n Losing 100% on an overleveraged trade would be a disaster. And it’s why most folks think option trading is dangerous. But it’s not dangerous if you trade options the way they were originally intended… as a way to reduce risk<\/em>.<\/p>\n Limit your option exposure to control just the number of shares you would normally purchase. Leave the rest of the money in the bank. Then it won’t be so bad to lose 100% on an option trade.<\/p>\n It will almost always turn out better than what you could have lost on the stock.<\/p>\n Best regards and good trading,<\/p>\n Jeff Clark<\/p>\n P.S. <\/strong>Tonight at 8 p.m. ET<\/a>, editor of Postcards From The Fringe<\/em> Tom Dyson is hosting a webinar where he’ll be giving away one of his highest-conviction trades for you to act on right away.<\/p>\n I’ve known Tom a long time. He’s maybe the most brilliant writer I’ve known. And his writings are wonderful to read.<\/p>\n But he’s also a sharp investor with an eye for big trends. In fact, Tom believes there’s a massive shift playing out right now in the financial world – and he’s gone “all in” on an asset class he believes will outperform everything else. It could even make you enough money to retire early.<\/p>\n His presentation, called “The Black Label Video from the Fringe<\/a>,” tells a disturbing truth about our financial system right now, and what it means for your investments. Don’t miss this – click here to join for free<\/a>.<\/p>\n In today’s mailbag, Jon shares his appreciation for Jeff…<\/p>\n I appreciate Jeff Clark, his expertise, and personal touch to the market – very down to earth.<\/p>\n – Jon<\/strong><\/p>\n<\/blockquote>\n And here, Jeff answers Todd’s question about negative divergence…<\/p>\n Hello, I really enjoy Jeff Clark and my subscriptions. I have a question for him. In this morning’s update, Jeff says, “I’m looking to short stocks into that move.<\/p>\n But only if the intraday charts show negative divergence.” What is he speaking of when he says, “negative divergence?” Thanks.<\/p>\n – Todd<\/strong><\/p>\n<\/blockquote>\n Hi Todd, thanks for writing in. And, thank you for being a subscriber. When I say, “negative divergence,” I’m referring to the various momentum indicators I often use on charts (MACD<\/a>, RSI<\/a>, CCI<\/a>).<\/p>\n Basically, if the indicators are making lower highs, while the market itself makes higher highs, it’s a sign of a near-term downside move. The reverse is also true, where a falling market with positive divergence on the momentum indicators can lead to an upside move.<\/p>\n So, if you’re looking at the intraday charts, you could watch the indicators for divergences throughout the trading session, and look to make trades on those divergences.<\/p>\n![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
<\/p>\nReader Mailbag<\/strong><\/h2>\n
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