Compounding

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 achievable with option trading. In fact, just about every trade I have placed has, at some point, yielded a 20% profit! The key is actually taking that 20% because, as option traders, we often get caught up in aiming for hundreds or even thousands of percent ROI. While that is possible, it's best pursued with my Lotto or White Whale strategies. For consistent gains, we apply compounding to Swing or Monthly trading 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 almost everyone overlooks because they focus on the dollars they will make rather than the percentage ROI on their invested dollars. It's true that you can achieve significant dollar gains with options, which is why so many investors tend to hold their trades until expiration day, hoping they will be right or relying on luck to turn things around. However, more often that not, this approach leads to a complete loss of capital—in fact, a study conducted at the CME revealed that 76.5% of all options contracts expired worthless.

What is lacking in most of the available education is the acknowledgement of the "dark side" of options trading. Why? Because the investing education "guru's" of the world are eager to 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 trades ideas—although I am skilled at selecting them—remember that these winners represent only a portion of the options landscape. Once you grasp the power of compounding, your perspective on the type of option strategies you choose to invest in may change.

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 hook onto some of those White Whale and Lotto Trade home run plays without the fear of loss. Why? Because you will have grown your money tree on the solid foundation of consistent profits vs. a false belief of winning at the expense of gambling on potentially huge percentage plays.

Let me explain a typical options trader.

Most traders, including myself, often start by funding their account with less than the actual amount they're willing to risk and dive into trading. After suffering a few losses, some of us may decided to take couple of trading courses more seriously. Once we believe we have it all figured out (based on all the supposed sage advice from the "guru" types) we continue to hit the buy button with enthusiasm, often disregarding the risks associated with our money. After all, didn't the course instructor show us numerous examples of massive winners? Well, the realty is quite different!

I have discovered that many aspiring investors are nothing more than gambling speculators who will never achieve consistent profits with options. In fact, most novice investors fail miserably because they are unwilling to acquire proper education first, practice sound money management second, and apply rock solid discipline to trade with a purpose. More often than not, they do not use a well-defined trading plan, meticulously implementing it, instead they simply buy and hope for the best outcome.

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!"

To embark on this venture, you must approach it as a diligent investigator, equipped with proper knowledge and education, coupled with discipline. Only then should you fund an account and commence your journey of trading for profits.

The most significant mistake many investors make when trading stocks and options is undercapitalization of their trading account. We often open accounts with the expectation of leveraging our money into substantial profits through 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 trading options properly, you will reap immense benefits! However, if you continue to gamble, you are guaranteed to lose all of your trading capital!—been there done that with several small trading accounts.

Why do so many of us approach trading with a gambling instinct? It's because we are drawn to it by the allure of quick riches promised by self-proclaimed gurus. Once we embark on this path, we quickly realize how challenging it is to navigate. As losses accumulate, fear takes hold, leading us to either neglect taking consistent profits or freeze up with analysis paralysis.

I want you to learn from my costly and hard-earned experience and avoid trading from a position of fear...or better said, fear of loss. There is a well known saying : "Scared money never wins!"

This statement holds 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 25 years now; and I have had some great success as well as some dismal failures; and I have blown up several small trading accounts along the way. 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!

Throughout my trading journey, I have executed well over 5,000 options trades using real money trading accounts. It is in the trenches of this challenging and costly experience that I have learned invaluable lessons about trading options—lessons that no course can ever fully teach you. I firmly believe that actual experience in the trading chair is where true learning begins.

Among all of my successful trades (and even my losing trades) I noticed a consistent pattern: nearly every option trade I have ever placed reached a minimum of 20% profit at some point during the trade. The challenge I faced was that I did not consider a 30% profit to be significant enough, mainly because I was trading with only a small portion of my capital. Consequently, I did not take those modest profits, and as a result, many times, those profits eventually turned into stop-losses, leading to a total loss, including my initial capital.

For instance, let's say you allocate $500 from a $10,000 trading account to purchase option contracts. A 20% gain on this trade would amount to $100. After deducting the trade costs, your net profit would be less than $80. When you consider the time and effort invested in finding a good trade, earning less than $80 may not seem rewarding enough in you eyes. This is why many traders attempt to leverage with out-of-the-money (OTM) options or hold onto winning trades longer than they should, in the hopes of achieving those enticing 100-500%+ home runs.

While it is true that such gains are possible, 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 employ my Lotto Trade strategy if you want to hit the home runs AFTER you have compounded your account large enough to take those hits until the winners come.

The primary reason why it doesn't work to chase massive short-term profits with a small trading account is the limited capital available to absorb multiple losses before achieving a winning trade. This approach often leads to a series of consecutive losses, which can create a sense of fear and ultimately result in trading with scared money.

Instead, consider a more strategic approach. If you have $10,000 to risk, allocate a portion, such as $2,000, for a well-thought-out option play. Set a target to take profits at 20%, and stick to that for the initial trades. Once you have successfully achieved this 20% profit three times, you can start to expand your trading position by adding more contracts on subsequent trades. Additionally, you can implement a "layered" exit strategy, which involves gradually exiting your position to capitalize on bigger price moves. This gradual progression allows you to build confidence and experience consistent with profits before scaling up your trading size. It also helps to mitigate the risk of significant losses and provides a structured approach to managing your trades. By following this strategic approach and gradually increasing your trading position, you can enhance your potential for success in the options market.

It's a common pitfall for traders to become lured by the promise of huge short-term profits when trading options. They may enter a trade and witness it rapidly grow into substantial gains, only to have those profits wiped out or stopped out by unexpected news events or market fluctuations. Unfortunately , many traders struggle to take profits at the appropriate time, and they often find themselves frozen, like a deer in the headlights, watching their investments dwindle when things take a turn for the worse.

I understand the pain, humiliation, and mental devastation that can result from such experiences. As an educator, my mission is to help you avoid these pitfalls and guide you towards a more successful trading approach. By emphasizing the importance of discipline, risk management, and the power of compounding, I aim to provide you with the tools and knowledge to navigate the markets more effectively.

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Session 2 – Top Trading 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 any 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 CALL 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 200 / 40 / 21 / 8 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 made a few profitable Compounder Trades and STICK to the 20% rule!

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 3-5% or higher within 1–2 weeks. Also, 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: AMZN, AAPL, TSLA, CMG, GOOGL, WYNN, LVS, META, NFLX, SPY, QQQ, NVDA 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 the high beta stocks. If you are too impulsive, then stick to less volatile stocks like MSFT, QCOM, ORCL, GE, MCD, ADBE etc. 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 only want that type of action, then stick with my Lotto Trade 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 20% 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—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, so the proverbial adage is: "Buy the rumor and sell (before) the news."

The goal with this strategy is to compound your earnings at 20% and NOT try to hit a home run; therefore, 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 50-100 contracts on lower prices stocks without brining a lot of attention to market makers—who can manipulate the options spread and prices when you try to buy—typically they will fill you on 10-20 contracts and then move the ASK price higher giving you a partial fill.

Once you get to a larger contract load, then I recommend you switch to higher priced stocks like: NFLX, GOOGL, CMG, AMZN, TSLA, NVDA, AAPL, MSFT etc. where the cost of a contract is higher; therefore, you will be able to leverage your larger size with a lower number of contracts; however, if your smaller priced stock is really hot, just split up your contract load into multiple strike prices to spread out the money invested and bring less attention to the Market Makers.

The beauty of compounding is it only takes 20 successful trades at a 20% ROI to turn a small $1,000 account into a solid $38,000 day trading 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% when you are investing in volatile stocks is to buy one or two strikes ITM. 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 OTM 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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Entry is Key...Exit is Everything! TM

Entry is Key...Exit is Everything! ^TM