The Hot Money Trader Handbook

August 1, 2019

Hi, I’m Joshua Belanger.

I got my start as a runner on the floor of the Chicago Mercantile Exchange (CME) and eventually made my way to the trading desk — learning the inner workings of trading and the markets.

I knew there was more to “options success” than what I learned studying for my Series 7.

I knew that to be successful, I had to follow those that were successful.

This was something I picked up from watching certain traders on the CME floor. The most successful traders only traded when the large orders would come into the pit from the big players like Goldman Sachs & Merrill Lynch.

I mimicked a pro trader’s moves. Sure, I fumbled along the way but I knew I was on to something.

By 2008 I left Wall Street completely to focus on helping readers like you master the options market.

Today I am proud to say I have figured out how to track the “Hot Money” — and harness its power to deliver you options profits.

In this report, I am going to share what “Hot Money” is and how you can profit from it — and give you everything you need to start trading options.

So, What Is “Hot Money”?

Hot Money is a way to predict explosive moves in the market days before they occur.

We’re talking about trades that capture gains as high as 900% in eight days… 1,103% in 15 days… even 1,797% in 14 days.

You see, Hot Money trades are nothing like the typical trades from everyday folks….

They’re huge investments made by people on the inside placing all-or-nothing bets on a single stock.

If the insiders making those trades are wrong, they lose all the money they’ve wagered…

Who’s willing to take such a big risk? Someone who’s dead certain they’re going to be right!

Wall Street insiders spend billions on research. They have thousands of highly paid analysts on staff, and they have connections you can only dream of.

They know things that you and I don’t.

But following the Hot Money can tip you off to major market moves BEFORE they happen.

Here’s an example of Hot Money in action:

Back during the financial crises on March 10, 2008, Bear Sterns lit up my system as a massive short. My proprietary system indicated millions of dollars worth of put option contracts were being purchased.

The CEO of Bear Sterns, Alan Schwartz, was just on CNBC telling the world his company wasn’t at risk of going under.

So why were insiders betting against that?

Buyers of these put contracts were risking millions of dollars betting for a potential bad news.

Fast forward eight days later, Bear Sterns declares bankruptcy. Shares of the company sank. And those insiders betting it all were able to lock in a 3,900% gain!

This is what I call Hot Money.

Bear Sterns is just the tip of the iceberg. I used my same Hot Money system to instruct my clients into Lehman Brothers put option contracts around the same time frame. They closed out for 2200% gains.

Savvy investors with market-moving information don’t just buy stock. They leverage the options market.

They are able to make directional bets with massive payoffs using limited capital.

These bets are placed without tipping off stock investors that a massive move is about to occur.

Using my prior floor trading experience from the Chicago Mercantile Exchange, I’ve developed a proprietary approach that scans millions of options orders on all 16 option market exchanges to find “Hot Money” trades like those and be able to profit from them in real-time.

When my Hot Money Tracker fires the signal, I will shoot you an email alert letting you know everything you need to know to place the trade.

But even with my step-by-step instructions, I understand many have never touched an option. Entering into a new realm of investing can be overwhelming…

Not to worry. We’ve put together this brief how-to guide on the ins and outs of getting started in the options market.

Options 101

Options. The mere mention of the word is enough to send a shiver down many investors’ spines.

But, fact is, you don’t have to understand any complex options strategies to make money using them.

Now I want to show you how you can use options to supercharge your gains, all while keeping your risks limited.

First, let’s take a look at how options work — and how they’re able to boost your trading profits…

A type of derivative, an option is a contract that grants the right, but not the obligation, to buy or sell an underlying asset at a set price on (or sometimes before) a specific date.

A “call option” gives you the right to buy a stock, and a “put option” gives you the right to sell it.

There’s a good chance you already have a contract very similar to an option. I’m talking about car insurance. You can think of buying options a little bit like buying an insurance policy for your car.

Think about it: Car insurance pays out when your car gets damaged during your policy cycle.

Likewise, options pay out when a stock moves through a set price during the option’s lifespan.

Just like with car insurance, you pay a premium to purchase an option. If the option is likely to have to pay out, then the premium you pay is higher — just like trying to insure your teenage son to drive your Ferrari.

As traders, we’re trying to buy options that act like insurance policies with cheap premiums but are still likely to pay out. Following the Hot Money will allow us to do that for massive profits.

All options contracts have standard pieces:

  • The “underlying” is the stock that the option gives you right to buy or sell.
  • The “strike price” is the price that the option lets you buy or sell at.
  • The “expiration date” is the date when the option’s “life” ends.

As a basic example, let’s look at Microsoft (NASDAQ:MSFT), which was trading for $30.77 in April 2013 — even though that was a little while ago, it shows you how options work, which is the important thing.

Let’s say you thought Microsoft was a good buy at that time that’s set to move higher. More specifically, you think it will climb in price several dollars by the middle of the summer.

So you buy the Microsoft July 2013 $31 call, which was trading for $1. Since one options contract controls 100 shares of a stock, you’re out $100 for your trade ($1 option cost times 100 shares).

First, let’s break down what that specific call means: It gives you the right to buy shares of Microsoft at $31 per share anytime between now and the end of July (stock options always expire on the third Saturday of the month, unless it’s a holiday).

But why would you want to buy options in the first place? Well, take a look at what happens if you’re right…

If Microsoft climbs to $34 by the middle of the summer, its stock went up just over 10% (remember, it started at $30.77). Not too shabby.

But since you bought the option, you would have seen your investment climb by 200% in those same three months. How? The option gave you the right to buy Microsoft at $31 when it was already trading at $34 — that’s a gain of $3 for each of the 100 shares your option controls. In total, your proceeds are $300. When you take out your initial $100 cost, you’re left with $200 — or $2 in profit for every dollar you invested!

That’s what makes options so powerful.

As a real-world trader, you’re not going to be right every time. So what happens if you’re wrong on the Microsoft trade?

Let’s say that Microsoft doesn’t rally for the next few months — instead, let’s say it falls by 10% or so. Instead of ending July at $34, it ends the month at $27.70. In that case, you’re not still stuck buying shares of Microsoft for $31. Instead, you’re out only that $1 per contract that you paid for the option itself. If you’d actually owned 100 shares of Microsoft, you would have lost $307. But since you owned the option, you’re out only a third of that!

Your risk is always limited to your initial investment when you buy an option.

Better still, you don’t have to hold onto an option until it’s worthless. If you figure out that your original Microsoft analysis was wrong sometime before expiration, you could sell your contract on the open market while the “clock is still ticking” and potentially recoup most of your initial investment.

Let’s take a closer look…

Clearing up Options Pricing Confusion

A lot of investors don’t understand how option prices (also called “premiums”) work. In many ways, though, it’s much simpler and more transparent than stock pricing!

Just as with stocks, supply and demand determines option prices. That means that an option is worth whatever someone in the market is willing to pay and someone else in the market is willing to sell it for.

Let’s go back to our real-world Microsoft example:

Going back to our previous example, the MSFT July 2013 $31 Call was trading for $1, while the underlying stock was trading for $30.77. Since MSFT was trading for less than $31, it didn’t have any “real” or “intrinsic” value — its only value comes from the potential that shares will climb above $31 sometime between when you bought it and July. Options traders call that “time value.”

Since our option has zero intrinsic value, it’s considered “out of the money.”

On the other hand, a $30 July 2013 MSFT call traded for $1.54. Since Microsoft was trading at $30.77, that option had $0.77 worth of intrinsic value — and it also had $0.77 worth of time value. This option was considered “in the money” since it could be exercised right now for that intrinsic $0.77 per share…

The market determines extrinsic value, also known as time value, but intrinsic value is always the difference between the option’s current price and its strike price.

Option Premium = Intrinsic Value* + Time Value*

(* times 100 shares per option contract)

I said that option prices are simpler than stock prices. That’s because you always know precisely how much intrinsic value is built into an option’s price at any given time.

For a company’s stock, it’s effectively impossible to truly understand all the variables that contribute to its intrinsic value; after all, how much do the 90,000 desk chairs or computer desks at Microsoft’s offices contribute to its share price? Options skip that step.

Lots of tiny hard-to-value components make up a stock price, but an option’s price is made up of only two pieces: its intrinsic value and the premium market is putting on the chance that it will move higher before expiration (the time value).

How Strike Prices Impact Options

The basic rule is that the further away an option’s strike price is from the stock’s current price, the less the option will be impacted by price moves.

Let me show you what that means in plain English:

In-the-money (ITM) means the strike price of a call is below the market price of the underlying security — or that the strike price of a put is above the market price of the underlying security. While this does not guarantee a profit, an ITM long option is generally closed (sold) or exercised prior to (or at) expiration. ITM short options will generally be assigned prior to (or at) expiration.

On the other hand, if you pick a strike price that’s far above XYZ’s current price (a deep out-of-the-money call), the option’s price won’t be as sensitive, because all of its value is “time value.” A 5- or 10-cent change in XYZ isn’t going to make much of a real impact on the value of, say, a $50 call option, because it barely makes a dent at getting XYZ’s price closer to the share price. It’ll still probably expire worthless, and that’s priced into the premium you pay for the option.

This type of option is cheap (it has zero intrinsic value) and has a lower probability of success, but it’s also provides the highest returns.

How Expiration Dates Impact Options

Here’s the secret behind expiration dates: As an option gets closer and closer to expiration, its time value disappears.

Remember, time value comes from the chance the option will move higher before it expires. So as the option’s life gets shorter, the chances drop for a big move higher before expiration — and so does its price.

That means that an option with lots of time until expiration will be very expensive to buy because it has lots of time value left. But an option with very little time until expiration may not have the chance to play out before it expires.

Buying Put Options

Until now, we’ve been focusing on call options. Calls are popular because buying them is a lot like buying a stock — only with a ramped-up reward-to-risk ratio, as you’ve seen here. But put options have a lot to offer as well.

As a refresher, buying a put option gives you the right (but not the obligation) to sell a specific stock at a specific strike price and by a predetermined expiration date. What does that accomplish exactly?

Basically, buying a put lets you bet against a stock.

Let’s say that our old imaginary friend XYZ Corp. has shares of its stock currently trading for $5. But this time, you think that the stock is overpriced and headed lower in the next couple of months — so you buy an XYZ Corp. $5 June put option. Your put option gives you the right to “sell shares” of XYZ for $5 anytime between now and June’s options expiration date (the date isn’t important in this example).

So if you’re right and XYZ falls down to $2, your puts give you the ability to sell that two-buck asset for the full $5. You can see why that’s a good thing…

In every other way, buying puts works just like buying calls: Your risk is limited to the cost of the options (because if XYZ’s price rose above $5, you wouldn’t bother with it), and the cost of the options is determined by intrinsic value and time value.

With puts, intrinsic value is found by subtracting the option’s strike price from the stock’s current price.

In a big way, put options are a lot like insurance.

When you buy a $200,000 homeowners insurance policy for your house, you’re saying that you want to be able to get $200,000 for your home — even if a spaceship smashes into it while you’re out of town.

With our XYZ put example, you’re saying that you want to be able to get $5 for shares of XYZ — even if some catastrophe destroys shares’ value.

Trading Considerations of Options

In general, the same risk management procedures you use with stocks can carry over to options trades.

At the end of the day, options trades are just a way of ramping up our reward-to-risk trade-off.

Position sizing is a key part of the risk management process — it ensures that you can withstand a loss in your portfolio and still survive to trade another day. Generally speaking, you should avoid taking options positions that are more than 2% of your trading capital.

In some cases, high options costs will make it difficult to stick to that 2% benchmark. In those cases, you can lower your costs by sliding down to an option with a lower strike price – just keep in mind that you’re increasing your risk level by doing so.

Up until now, we’ve talked about the profit or loss opportunities of holding until expiration because it’s easier — there’s no time value to factor in. Since the market determines time value, it’s impossible to predict exactly how much it’ll add to an option’s price at a certain point in time. But that doesn’t mean that you have to hold onto options until they expire. Just like a stock, you can sell your options into the market and collect whatever new buyers are willing to pay.

(Hint: When you sell before expiration, it will always be for at least intrinsic value plus some time value, depending on the chances of a move higher by expiration.)

Most options traders “trade out” of their positions long before they expire. Trading out avoids the added costs and complications of actually executing an option and then selling the resulting stock on the market to collect your gain.

Barring extremely rare situations, we always trade out of any options positions in Hot Money Trader.

When traders do hold until expiration, there are two possible outcomes: If an option is “out of the money,” it just expires worthless and nothing happens. Around 75% of all options end up doing nothing.

If an option is “in the money” when it expires, it’ll be automatically exercised by your broker — for a call option, that means you’ll end up buying 100 shares of the stock at the strike price for each option contract you own. It’s one of the few times that your broker will act without instructions from you — so it’s important to keep in mind.

Most of the time, exercising an option incurs an additional fee from your broker, and then selling the resulting stock racks up even more commissions, so unless you actually want to own shares, it’s usually a much better bet to sell the option before it expires.

Because options tend to be more thinly traded than stocks, I recommend always using a limit order to buy them. A limit order lets you set a maximum that you’re willing to pay to get your order filled — and it ensures that you’re not setting yourself up for an instant loss if there’s a big bid-ask spread in the option’s price.

It’s also important to remember that your broker probably uses a different commission structure for options than for stocks — make sure that you understand the fees for trading options before you click the “buy” button…

What to Expect Next?

I’m busy tracking the Hot Money. As soon as my system signals the next trade, I’ll shoot it out to you via email.

And, don’t worry. I’ll tell you everything you need to act on our next trade.

Until then, if you have any questions, feel free to drop me a line at [email protected].

For Hot Money Trader,

Joshua Belanger

Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%