Option Profits Mike Parnos - Never Compound Option Trading Profits

Nov. 21, 2010 - PRLog -- Option Profits Mike Parnos

Compounding is one of the most common mistakes made by an options trader when they are making long-term investments. It consists of putting profits back in to the investment, so that the profits can earn profit too. This is great strategy if you are a stock trader; many people have made their fortunes through re-investing profits, but for an options trader, it is extremely risky. If you compound your profits you will also be compounding your losses, and you may end up with nothing as you are dealing in leveraged stock options.

If you are looking for a long-term stock options strategy, you should be considering LEAPs call options. These options expire between six and twelve months in the future. They offer a simple way of making a long-term investment in stock options, without the need to compound monthly. LEAPs allow investors to make money in a leveraged style from the same movements in underlying stock that stock traders benefit from, but without having to use as much money. When you are making such a long-term investment is can be seriously detrimental to compound your profits.

Here is a sample scenario of what could happen:

Imagine you have decided to invest one thousand dollars into the January 2008 options of a particular company. It is trading at ten dollars on January 1st 2007, and the ten dollar strike price LEAPs call option (JAn10call) expiring in January 2008 can be bought for two dollars. You invest your thousand dollars and buy five contracts. When January 2008 comes around, you find that the company stock is doing well and it is trading at twenty dollars when the Jan10call expires, giving the LEAPS call options a value of eighteen dollars. You sell the LEAPs call options and get an 800% profit, because you make five hundred times eighteen dollars, or nine thousand dollars. A stock trader also buying at ten dollars would only have made 100% profit. Get Internet #1 - Option Profits Mike Parnos @ http://tradingcure01.webs.com  and be Successful forever!

You believe that the company will continue to do well, and decide to compound your interest. You put your entire nine thousand dollars back into the company; into the twenty dollar strike price LEAPs call options (Jan20call) which will expire in January 2009. These are again two dollars each.

Unfortunately things don't go as well this time, as at some point, almost every company will go through a rough patch and take you by surprise. In this case, lets assume the stock fell to nineteen dollars as the Jan20calls expired. As an options trader you have just lost all your money - including all the profits you made the year before. A stock trader would only have lost the dollar difference. You are left with zero.

This is why compounding your earnings can be so dangerous when trading in stock options. You can literally lose it all. Get Internet #1 - Option Profits Mike Parnos @ http://tradingcure01.webs.com  and be Successful forever!

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