Option Trading College
Options 101

Subject: The power of the Options

               Compounder TM Calculator

Instructor: The donFranko
Length: 2 sessions

Training  Home

Entry is Key...Exit is Everything! TM

Session 1 The power of compounding  


How many times have you heard this statement, "Money does not grow on trees," and you actually believe it? If that is the case, then get ready to learn how to plant a seed that will indeed build you a money tree to continually pluck from!


If you went through my session on Controlling Losses, then you have begun to understand the power of compounding. If you have not, then STOP right here and start there first!


Compounding your profits at a reasonable rate of 20%ROI is very doable with option trading. In fact, just about every trade I have placed has had, at some point, a 20% profit. The trick is actually taking that 20% because we, as option traders, often get caught up in making hundreds to thousands of percent ROI. Sure, that is possible but you need to go for that with my  Lotto or White Whale strategies. As for a consistent gain, we apply compounding to Swing or Monthly strategies.


In fact, here is what you can make with a starting capital account of $1,000 and 20 successful trades at 20% ROI.




It's a simple concept that just about everyone misses because they focus on the dollars they will make and not the percentage. Sure, you can make huge dollar gains with options, but then again, you can lose too. What is missing in most of the education out there is the realities of the "dark side" of options trading. Why? Because the "guru's" of the investing education world will sell you plenty of "sizzle" about 100–500%+ returns, but not necessarily give you the steak about losses. Even I have posted several of these types of suggested trades—of course we know I am very good at picking them—but remember, these high percentage winners are just a piece of the options pie; and once you understand the power of compounding, you may change your viewpoint on what type of option strategies you choose to invest in.


I attest, that if you start to understand this concept I am teaching, you will be able to build your account so fat with profits that it will allow you to hit some of those home run type plays without the fear of loss. Why? Because you will have grown your money tree with a solid foundation of profits vs. a false belief of winning at the expense of gambling on potentially huge percentage plays.


Here is a spreadsheet compounder calculator I made for you:


Compounder Calculator (ws).xls


Follow the instructions in the spreadsheet.


I plan to develop an online calculator in the future.


Back to the training:


Let me explain a typical options trader.


Most traders (me included) fund an account with less than we actually have to risk and begin to trade. After suffering a few losses, we may actually take a course or two on trading seriously. Once we think we have it all figured out based on all the sage advice from the "guru" types, then we continue to hit the buy button with enthusiasm giving no regard for the risk we are taking with our money. After all, the course instructor showed us all kinds of huge winners right?...Wrong!


I have found that most would be investors are nothing more than gambling speculators who will never make a consistent profit with options. In fact, most novice investors fail miserably because they are unwilling to practice sound money management and rock solid discipline to trade with a purpose.


More often that not, they buy and hope it works out instead of using a well defined trading plan; and then apply careful implementation of that plan. Let me offer you some sound advice my trading friends: "In the fast paced world of trading (especially with options), hope will NEVER float your financial boat!" You must approach this venture as a diligent investigator with discipline and knowledge first; then you can fund an account and start the journey of trading for profits.


The biggest mistake most investors make when trading stocks and options is under capitalization of their trading account. We start up accounts with the expectation that we can leverage our money into huge profits by using options; however, the challenge with undercapitalization is that you are are dabbling with trading—which translates into gambling.


There is a lot more to trading than gambling; and if you take the time to learn the secrets to properly trading options; you will benefit immensely; however, if you continue to gamble, you are guaranteed to lose all of your trading capital!


Why do we approach trading with a gambling instinct? Because we come to it from a position of greed due to the "sizzle" of guru's promising quick riches. Once we start down this road, we realize it's a very tricky one to navigate; and when the losses pile up, fear takes over....been there done that way too many times!


I want you to learn from my very expensive and hard earned experience and avoid trading from a position of fear...or better said, fear of loss. There is a very common saying in the trading/gambling world and that is this: "Scared money never wins!" It's true in every sense of the word, and if you start your journey into trading based on the illusion of quick riches, you will find yourself trading from a position of fear that will ultimately lead to a busted account!


I have been trading in the options market for over 17 years now and I have had some great success as well as some dismal failures. Over the years, I have made hundreds of thousands in profits only to lose hundreds of thousands more because I became greedy trying to hit the home runs on just about every trade.


In total, I have put on well over 3,000 options trades with real money; and I have learned many things about trading options in the trenches of hard and expensive experience that a course will never be able to teach you; and nothing but experience in the chair will prove that education is just the beginning.


Of all of my successful trades (and even my losing trades) the one constant I noticed was just about every option trade I have ever placed, I have had, at the minimum, a 20% profit at some point in the trade. The challenge with this was I did not accept a 20% profit as a good thing because I was trading with a small percentage of my capital, so I did not take those little profits and in fact, many times those profits became a stopped out loss—a total loss including my initial capital.


For example, if you used $500 of a $10,000 account to purchase some options contracts; a 20% gain is equal to $100.00; and after you deduct the cost of the trade you make less than $80.00 net. It's hard enough to trade the markets, and the time and effort it takes to land a good trade will hardly be rewarded (in your mind) by making less than $80 for that trade. This is why so many traders try to leverage with OTM options or they let a winning trade go longer than they should have trying to hit those 100–500+% home runs. Sure, you can hit them, but take if from somebody who has lost substantially more than I have made on those home run trades...it does not work in the long run with a small trading account. (You need to use my  Lotto Strategies strategy if you want to hit the home runs.)


The biggest reason it does not work is that you have limited capital to absorb so many losses before you catch a winner. What it does do is set you up for loss after loss that in turn becomes fear and ultimately scared money! If you have $10,000 to risk, why not take $2,000 and use all of it in a strategic option play? Target your minimum profit at 20%, and once you achieve it, set a stop loss thereby fixing your minimum profit at 20% and then you can manage it from there. This way, if you get on a monster rally, you know you have made your 20% Options Compounder TM profit and your game plan is in tact.


Too many times, I see traders get side tracked by the illusion of massive short term profits when trading options. They put on a trade, then see it balloon to massive profits, only to see it get wiped out or stopped out by some unsuspecting news event. They do not take a profit when they should, and most of the time, they sit there like a deer in the headlights watching their investment dwindle when things go bad. I want you to avoid this pain, humiliation and mental devastation. If you learn the secret of compounding, then my job as an educator is complete and you will be on your way to financial bliss.


Trading (Start Here)


Controlling Losses



A month in the life



A month in the life


Day Trading Intro


Covered Calls



Naked Puts

Naked Calls


Pair Trading




Model Portfolio

Day Trades

Lotto Trades





Lotto Plays

Bull/Bear 180's

Day Trading

Risk Free Trading


Session 2 – Tactics


How you master the protection of your trading capital is far better than thinking your are a great trader when you pick a winner. Remember, when you make a profit on an option play you did absolutely nothing to get it. It's all about mastering the exit of a trade that will turn you into a winner vs. a gambling loser—Entry is key...Exit is Everything! TM


The key to making a living at options trading is consistent small gains built one upon another.


Let me explain:


Compounding is a very powerful concept, once understood, and then properly implemented. There are three criteria I use to place call option trades that allow me the opportunity for the highest degree of success:


1. Only trade options on stocks that have future compelling news to move higher. For example: buying options on a company who pre-announces they will have better earnings than projected by major analysts following them; or they pre-announce they are going to have a stock buy back in place; or they have historically beaten earnings estimates in the past couple of quarters back-to-back.


2. The overall market and sector are in rally mode and the moving averages of your stock are ALL heading up (see charting)


3. Buy deep in-the-money options to get the best delta (0.75). I recommend a minimum of three weeks to expiration and prefer to buy the next month out. (only buy 1 strike OTM once you have a profitable Compounder trade working for you.)


Once you have these criteria in place, then you can start your search for the best option opportunities. I recommend you choose stocks that have some volatility and a proven track record to move an average of 2-5% or higher within 1–2 weeks. The volume should be over 1 million shares per day with good option open interest and plenty of daily activity.


Currently, I like these stocks for this type of strategy: GOOGL, AAPL, TSLA, CMG,  WYNN, LVS, BABA, PCLN, GPRO, AMZN, FB to name a few. Of course, stocks like these can move against you just as easily as they can move in your favor, so it's critical that you are patient and wait for the best timing in order to exploit this strategy on high beta stocks. If you are too impulsive, then stick to less volatile stocks and buy deeper ITM options plus another month of time. The goal here is to make a minimum of 20% ROI over time and not home run returns in a few days. If you want that type of action, then stick with my Lotto Strategies..


When a stock has future compelling news, they tend to get bid up in anticipation of the coming news. This is the best opportunity for you to make the returns you are seeking for call option plays. The timing of your trade is critical, so I highly recommend you do these trades at least two weeks before an earnings release or right after the pre-announcement is released. Always buy the next month out for expiration even if you have three weeks—NEVER hold over earnings releases unless you have an iron stomach and can absorb a total loss.


Many times, stocks will rise to the occasion and then get crushed; even if the company reports excellent earnings and beats estimates. The proverbial adage is: "Buy the rumor and sell  (before) the news." The goal with this strategy is to compound your earnings and NOT try to make a home run. I recommend you start this strategy with call options since it's more predictable for stocks to move up on future compelling news.


As you play around with the numbers in the spreadsheet, you will notice the number of contracts you have to purchase can become quite large. It is unrealistic to purchase more than 100 contracts on small priced stocks without brining a lot of attention to market makers who can manipulate the prices on you. I recommend you switch to higher priced stocks like: GOOG, CMG, AAPL, PCLN, AMZN, ISRG etc. where the cost of a contract is higher; therefore, you will be able to leverage your larger contract size with a lower number of contracts; however, if your smaller priced stock is really hot, just split up your contract load with deeper ITM options.


The beauty of compounding is it only takes 20 successful trades at a 20% ROI to turn a small $1000 account into a $38,000 account. Yes, you will have potential losers if you try to make more than 20%...and you do not DO YOUR HOMEWORK or you trade stocks without future compelling news or earnings announcements coming up—the longer you stay in a trade the more risk you have to take.


The safest way to get the target ROI of 20% is to play volatile stocks and buy as deep ITM options that your capital invested will allow. Once you have built your account larger, then you can start over with another $2,000 of profits and play one to two strikes OTM because those options will give you a 20% ROI much faster, but they also carry a lot more risk of a total loss.


My best advice? Stick to the safe road until you have a hefty profit in your trading account that can absorb riskier trades. This will allow you to build upon success so that any failures you might endure will have less of a sting.


If you feel that I have taught you a valuable lesson, then consider Subscribing to my members only site for access to my live portfolio's, daily suggested plays, compounder trades and my massively profitable Lotto Trades!



Profits Up!

The donFranko 






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