VIDEO: Velocity Trading, Explained
Welcome to my video presentation for Friday, September 10.
In this video, I interview Jim Fink, chief investment strategist of our premium trading service, Velocity Trader. The article below is a brief excerpt of our discussion.
Jim, I’ve often heard you advise investors: Don’t trade stocks, trade velocity. What does that mean?
Velocity refers to the speed of generating profits. Stocks can double or triple over time, but it usually takes years. There is a way to generate 100% and 200% returns much more quickly…in days rather than years…and that involves the use of options as a substitute for stock.
In chemistry terms, call and put options are the “atoms” that make up a stock “molecule.” When you buy a stock, you are buying exposure to the full range of a stock’s price movement, up and down, for an unlimited period of time. Stock is a very blunt, and expensive, investment instrument that’s sort of like being forced to buy a 300-channel cable TV package when all you want to do is watch Nickelodeon and the Food Network.
Options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want…and for only the period of time you think necessary. This provides the trader with the ability to benefit from a stock’s price movement but at a much lower cost than buying stock.
But there is yet another step you can take with options to reduce your risk even further. It is a secret that option professionals have been using for decades but which has only recently entered the mainstream. This extremely powerful tool is known as spreading.
Remember, since an option is a derivative contract, it can be sold without owning it first. By selling an option at the same time that you buy an option, you can actually help finance the cost of the purchased option and lower your cost basis further. Remember, a lower cost basis while maintaining the same profit potential increases rate of return.
Because the outperformance of spreads is limited to cases where the stock rises only modestly, option traders often characterize spreads as possessing “regional leverage.” Within the region of modest price appreciation, the spread can’t be beat, but individual calls will outperform in cases where the stock makes a huge price move. But isn’t it better to bet on modest price moves than huge price moves? You betcha.
Another advantage of selling a call to reduce cost is that you can often totally eliminate the “time value” surcharge on the long-term call option that you are long. You get all of the upside of stock ownership (up to the strike price of the sold call) at a fraction of the cost of stock and without suffering any time decay…the best of both worlds!
In other words, options provide tremendous leverage that speeds up profit generation. Faster profits equal velocity.
I like case studies; they’re very persuasive. Could you provide one?
Sure. Imagine that you looked at Broadcom (NSDQ: AVGO) stock on November 19, 2020. Now, you might have noticed the semiconductor giant had excellent third-quarter financials, beating analyst estimates in both revenue and earnings. So, you figure you might as well go ahead and buy the stock.
By the end of the year, you would have earned a solid 15% gain. That’s nearly twice the average annual return for most investors… in a little over a month and a half.
Now, on the surface that sounds pretty impressive. But when you think about it…
If you’d invested just $5,000, you would have only made about a $750 profit.
If you’d traded Broadcom’s velocity…BOOM!
You could have doubled your money in ONLY 8 days.
And that means…
Instead of sitting on $5,750…
You’d be sitting on $10,000…in just over a week!
That option leverage has the power to generate huge profits in a short amount of time, which is what I mean by velocity.
Editor’s Note: As Jim Fink makes clear in the full-length video interview, he has developed four proprietary stock filters that provide advanced knowledge of when a stock price is about to rapidly accelerate. Based on this “secret” knowledge, Jim constructs trades that have consistently reaped windfalls for his followers.
Want to learn the details about Jim Fink’s next trades? Click here now.