A Powerful Way to Profit in a Volatile Market: Options Trading 101

Today's comment is by Mike Burnick, our Senior Editor, Global Markets Analyst and editor of the NEW signature service Market Shock Trader.

Dear A-Letter Reader,

I was invited to appear as a guest on CNBC last week for a segment on options trading strategies. The very first question the host asked was, "What are some of the options strategies you are focused on right now?"

I've personally used options trading strategies often in my nearly 20-year career in the investment industry. At times, I've used options to hedge my risk in existing positions, but I have mostly purchased both put and call options outright - making directional bets on individual stocks or market indexes.

In addition to the many options available on popular indexes today, there are also hundreds of exchange traded funds (ETFs) that now offer listed options. These new ETF options give traders more flexibility than ever before. While trading options is more speculative than purchasing mutual funds, ETFs or stocks - it's really not complicated at all - as long as you stick with a simple directional strategy of trading put and call options.

Options are Great for Playing
Sudden Market Shocks

Perhaps the biggest advantage options have to offer is leverage, which can potentially boost your returns many times over. For instance, it's not uncommon to find attractive options trades where you have 10-to-1...50-to-1...or even 100-to-1 leverage on the underlying security. This means that even SMALL moves in the underlying index or ETF can mean BIG potential gains from your options.

That said - options aren't for everyone. They're more speculative than many investments, like mutual funds, but they're less risky than futures.

Here's a good rule of thumb when trading options: Only use money you can afford to lose because unfortunately, you won't always play the right option.

Discipline is the Key to Realizing Big
Potential Gains in Options

However, if you follow a disciplined options trading strategy, you'll often be able to position yourself for double- and even triple-digit gains. These profit opportunities far exceed anything you're likely to earn from investing in blue-chip stocks or mutual funds.

Let me give you a very recent example of the profit potential in options that simply can't be matched by other investments.

Global currency markets have been on fire lately, thanks to increased volatility from the ongoing credit crunch. As a result, we've seen a bit of a "carry-trade unwind" that's boosting the Japanese yen's value against most other major currencies.

Just to give you an idea about the leverage-advantage of options that I discussed above, the value of the yen itself moved up less than 4% or so during this time, while the call option surged 139%! Jack also scored gains over 100% on euro put options in recent weeks too.

Go Yen, Go!

This gives you an idea of the big profits that are possible using a relatively simple, straightforward call and put buying strategy.

Tune in to my wealth comment in tomorrow's edition of the Offshore A-Letter when I'll show you where I'm finding options with the best upside profit potential right now.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. At The Sovereign Society, one of our existing signature investment research services focuses on currency options, compiling an impressive track record of gains in recent weeks, thanks to stepped-up volatility in financial markets. Now, I'm launching an all-new service this week called Market Shock Trader.

I developed this new options service to give Sovereign Society members an easy to follow, no-nonsense way to focus on the big upside profit opportunities in index options and options on exchange traded funds. In Market Shock Trader, I recommend simple, directional plays that involve going long both puts and calls - nothing more complicated than that.

If you're already a new subscriber to Market Shock Trader, look for your first issue to arrive in your email inbox tomorrow. And of course, if you're a Trader's Ring member, you'll also receive the first issue tomorrow.

Are Investors Finally Becoming Skeptical
of the "Gimme Trade?"

P.S. This currency comment is an excerpt from our FREE E-Letter, My Two Cents. Click here to receive all our currency insights twice a week - from where the yen is headed to what those dollars are worth - FREE.

Privacy & Rights

If it Sounds Too Good to be True,
Better Hang on to Your Wallet

It couldn't have happened to a more deserving group.

Last week, a U.S. District Court in Oregon sentenced four officers of the now-defunct First International Bank of Grenada to prison terms of up to eight years.

While the First International Bank of Grenada was in business from 1997-2000, FIBG promised "guaranteed" annual returns up to 300% for funds invested with it. To assure depositors that their investments were safe, FIBG claimed that an independent deposit insurance company insured them fully.

However, when FIBG went belly-up in 2001, the company supposedly insuring these deposits never made good on them. Depositors lost nearly US$500 million in all.

The FIBG scam began when one Gilbert Allen Ziegler came to Grenada from Oregon, after declaring bankruptcy in 1994. With no banking experience, no identifiable assets, and a passport issued by a nonexistent country (the so-called "Dominion of Melchizedek"), Ziegler obtained a banking license in Grenada with the aid of corrupt local officials.

Grenadian banking regulators permitted Ziegler to capitalize the bank on the strength of a jeweler's supposed US$17 million appraisal of a single ruby. Ziegler possessed only a photograph of the ruby and wasn't able to prove that he owned it.

Unfortunately, Ziegler wasn't around to receive his just desserts in the Oregon courtroom earlier this week. He died in 2005 of a heart attack. But four of his associates will now be serving time after their convictions on multiple counts of mail fraud, wire fraud, conspiracy and money laundering.

The lesson of FIBG is simple: If something sounds too good to be true, it probably isn't true. Unfortunately, this lesson has yet to be learned by many investors.

No matter where you invest or do business, onshore or offshore, appearances can be deceiving. There is no substitute for due diligence. And while in FIBG's case due diligence was difficult because of the connivance of corrupt government officials with Ziegler and his coconspirators, anyone promising of a 300% "guaranteed" return can't be taken seriously.

Further, even a cursory review of Ziegler's background would have demonstrated that he had zero experience in the banking industry. How realistic is it to expect that someone with no background in banking could somehow stumble upon a miraculous investment that provides a 300% guaranteed annual return?

When investing offshore, the first rule is "Hang on to your wallet." Because there are many offshore scam artists ready, willing and able to separate you from your hard-earned money.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

P.S. My Sovereign Society colleagues perform the necessary due diligence on all our recommended offshore contacts, so you can go offshore and still "hang on to your wallet." You can meet many of these professionals at our upcoming Offshore Advantage Academy in The Bahamas November 7 - 11. Seats are already starting to fill up at this annual event, so click here for more details right now.

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