Hey trader,
A couple I coached years ago called me with great news. They were right on 90% of their trades.
Their system was simple. They bought out-of-the-money calls at the open and sold them at the close.
Those are cheap options that only pay off if the stock climbs past a price it hasn’t reached yet.
I asked what they did when a trade lost money. They told me they held it overnight because it always came back.
A month later, they’d given back every dollar of profit.
Being right 90% of the time couldn’t save them. Every loser they carried overnight had the whole night to get worse.
This morning the Console showed someone buying those same kinds of cheap calls in Realty Income. I’m going to show you how I’d trade them without falling into the habit that sank that couple.
It starts with the phone call.
The Call That Worried Me
I spoke with thousands of traders on the phone back in the day. A lot of them walked the same path.
Someone buys a trading program and takes a couple of losses. Then they start reinventing the wheel and decide to day trade.
Their first version almost always looks the same. They buy at the open, sell at the close, and lean bullish every time.
That couple was running that exact play with calls. Same-day options didn’t exist back then unless it was expiration day.
They called me excited. They were right 90% of the time and making money.
I told them that was a big problem.
Why 90% Was The Warning
Out-of-the-money calls are low-probability trades. Being right on 90% of them told me something else was going on.
Their answer explained it. When a trade lost, they just held it overnight.
They told me it always comes back.
It does, right up until it doesn’t.
I told them the risk was holding overnight. Nobody can keep a 90% win rate forever when the probabilities behind it are that small.
The overnight move is simply bigger. It does the most damage when nothing caps the risk on the position.
They’d been up around 50%. When I talked to them a month later, they’d lost all of those profits.
How I Handle The Same Calls Today
Realty Income showed up on the Console this morning with call buyers stepping in. They bought the October 57.50 calls, the first strike out of the money.
Those calls sit at a 17 delta. Essentially, the market sees a fairly small chance of them paying off.
That’s the same kind of cheap call the couple was buying. I just treat it differently from the first click.
If I buy the 57.50 for 25 cents, I call it a low-probability trade before I ever own it. I’ve got 21 days to see a squeeze, and I’m willing to lose all 25 cents.
I’m paying for the size of the payoff. I’d risk a couple of bucks for a shot at 7, 8, 10 or more.
The couple’s math ran the other way. They collected small wins almost every day and let the rare loser run.
Size For The Loss Before You Look At The Win Rate
The leverage in options is significant. The odds of losing everything you put into a trade are much higher than with stock.
A spread that costs 35 cents is $35 a contract. I have to be willing to take all of it.
Put 10% of your account into that trade and you can lose 10% of your account that day. I size differently because of that.
You also need plenty of cash behind these positions.
That couple planned for the comeback instead of the loss. When it didn’t come, a month of profits went with it.
A win rate tells me how often a trade works. Before I look at it, I want to know what the trade costs me when it doesn’t.
That couple needed a loss they’d accepted before the trade and a hard rule against holding overnight. THE SWITCH 90-Day Challenge is built around both.
Before the open, I find the wall on THE SWITCHBOARD. Late morning, I send you the trade with the strikes, the price to pay and the exit already written out.
You place one resting order and walk away. Nothing is held overnight, and if nothing has filled by 2 PM, one tap cancels the order.
The record runs 71 trades since May 5, with a 63.4% win rate. That’s well short of the couple’s 90%.
All 25 losses added together came to $870. The 45 wins came to $1,773, and every $1,000 traded became $1,903.
Only 100 beta seats are open. Enrollment closes when they’re gone, or October 8 at the latest.
Brandon Chapman, CMT
Creator of Ghost Prints
