Hello, Profit Takeover team!

In case you missed it, I recently explained my 3 Steps to Taking Over Wall Street, and how I’m looking to put my nearly 20 years in the trading game to work for the little guy, instead of the fat cats.

In this space, I intend to deliver all the education and trading secrets you need to put real money in your account, and I want to answer as many of your questions as possible, so be sure to Ask Me Anything right here — you just might see your question in the next installment!

That said, while I know some of you are already seasoned option traders, many of you have only ever traded stocks or are just beginning to dabble in calls and puts.

And since most of the free trades I’ll be putting on in Profit Takeover will be long calls and puts (meaning I’m a buyer), today I want to take it back to the basics and break down the ABCs of Call Buying.

After all, the Profit Takeover portfolio I’ve built thus far consists of call options that I feel could give me the asymmetric returns I’m hunting in this service…

THEN, we’ll dive into your regular dose of I Spy Impact Money, where I dissect some of the unusual option activity I’m seeing from big-money players today.

Because remember, when the impact money aligns with retail-level interest — that’s what perks MY ears up, as it means there could be enough institutional cash to fuel the stock’s trajectory…

And then, if the stars align, I can get out in front of Wall Street’s momentum trades and beat the big guys at their own game.

Let’s get to it.

What’s a Call Option?

A call option gives the buyer the right — but not the obligation — to purchase 100 shares of the underlying stock for the strike price, before the option expires.

However, most option traders I know don’t exercise their calls — meaning they don’t use them to buy the actual shares.

Rather, they look to buy the call option on a stock they think will rise, and then sell the option at a higher price, for a profit, when it does.

For instance, Johnny might buy 100-strike call options on Stock XYZ trading around $100 — meaning the options were at the money (ATM), or close to the strike price.

(A call option with a strike that’s HIGHER than the underlying stock price is considered out of the money, while a call with a strike that’s LOWER than the stock price is in the money.)

We’ll say Johnny’s calls have three weeks until expiration, and he bought them for $3.50 each, or $350, since each option controls 100 shares of the stock.

Fast-forward one week, and let’s outline a few scenarios:

  1. Stock XYZ moves lower, dropping to $95.

In this case, the value of the calls would fall, due to time decay — the rate at which an option loses time value as expiration approaches — and would harbor no intrinsic value, which is the difference between a stock’s price and an IN-the-money call strike.

With a couple weeks still left until expiration, Johnny could let it ride and see what happens… but at risk of the call price continuing to drop.

Or, if he thinks a move into triple-digit territory isn’t in the cards by expiration, Johnny could go ahead and sell to close his 100-strike calls for a loss, eating some of that $350 premium — though this risk, compared to the potential reward on the trade (theoretically unlimited), is still relatively minimal, because as you know, I am hunting asymmetric returns.

  1. Stock XYZ stays glued to $100.

This situation is essentially the same as if XYZ sank, because until the shares make headway north of the century mark, they’ll have no intrinsic value. Meanwhile, they’ll continue to suffer from time decay.

Once again, Johnny could sell to close the calls and take what he can get to make up for the $350 premium, or he could let the trade play out a little longer and hope for a move higher by expiration.

Either way, the most he can lose is capped at that $350 paid out of the gate.

  1. Stock XYZ explodes to $115.

This is the best-case scenario for our hypothetical call buyer.

In this instance, the call now has $15 in intrinsic value ($115 stock price minus $100 strike price), which more than offsets the time decay suffered in the past week.

If Johnny sold to close the calls for $16 (assuming $1 in time value left), or $1,600, that’s a healthy profit of $1,250 on a $350 investment!

Of course, there’s much more to options trading than all that, but we have plenty of time to get into the nitty-gritty — including how I manage risk and select my strikes, which I’ll outline for you here soon.

But hopefully this primer on call buying helps any of my fresh-faced (or at least new-to-trading) Profit Takeover members!

And don’t forget — if you have any questions, you can Ask Me Anything right here. I’ll be selecting some to answer in this space tomorrow, and regularly beyond that.

That said, it’s time to check in on those fat cats and what they’re speculating on in the option pit today…

I Spy Impact Money

Here’s an unusually large option trade that crossed the tape this morning, pointing to potential institutional-level activity:

Unusual volume on MOS – Courtesy of Trade-Alert
Fertilizer concern Mosaic (NYSE:MOS) — which has more than tripled since its May 2020 lows — is attracting major interest ahead of earnings next week.

Intraday call volume is running at seven times the average today, with massive volume spotted at the June 40-strike call. More than 35,000 calls traded in two big blocks, and it looks like possible institutional buying here.

The next most-active MOS option is the closer-to-the-money June 39 call, with just over 2,000 contracts across the tape so far.

By purchasing the 40-strike calls, the trader expects MOS to extend its quest for new highs and top $40 before June options expire. At last check, the shares — which are often sensitive to higher crop prices — were flirting with $36.

Again, this “impact money” is just one side of the two-factor authentication trading technique I outlined this week, so if MOS begins to trend on the retail side — which I’ll be watching like a hawk — consider me intrigued.

That’s it for today, Profit Takeover crew, but I’ll be dropping even more knowledge tomorrow when I get to some of your excellent questions!

Talk to you soon,

Mark Sebastian


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