Welcome to my video interview for Friday, November 12. My guest is Jim Fink, chief investment strategist of our options trading service, Velocity Trader. Below is a condensed excerpt of our discussion. My questions are in bold. For the full question-and-answer session, watch the video.

Most investors are accustomed to investing through common stock, but you take a different approach. Please explain.

Stocks can double or triple over time, but it usually takes years. There is a way to generate such 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.

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.

Briefly run through for us a recent trade you’ve executed for Velocity Trader that handed your followers a huge gain.

Before recommending an option trade, I screen the stock market using my three velocity filters. Without going into too much detail on my trading system’s “secret sauce,” the three filters are:

1) Price momentum measured by means of two separate technical indicators, moving-average convergence-divergence (MACD), and stochastic oscillator;

2) Seasonality, which measures the number of times over the past 10 years that a stock has risen or fallen in price during a specific time period of the calendar year; and

3) Max pain option open interest analysis, which searches for extreme imbalances between the option bets that regular investors have made on a stock’s calls and puts and pinpoints the stock price which will collectively cause regular investors to lose the most money possible on their bullish and bearish option bets.

Earlier this year on May 25, Las Vegas Sands (NYSE: LVS), the casino operator, was trading at $57.75. I recommended a bearish $57/58 put spread on the stock. This trade had an 11-day duration and required the stock price to drop below $57.00 by June 4^th options expiration, so it was very short term and the timing had to be just right.

All three parts of my velocity formula were aligned in favor LVS dropping in price over the short term and these indicators gave me the confidence to recommend the trade:

• MACD was below zero and the MACD histogram was red (the short-term moving average was below the long-term moving average);

• Stochastic oscillator was in a severe downtrend below the 30% line (in other words, we had a double-barrel momentum sell signal since both MACD and stochastic oscillator were negative);
  
  
• Seasonality was bearish, meaning that the stock price had declined between May 24^th and the first Friday option expiration date in June more often than advanced over the past 10 years;
  
  
• Stock price chart was weak and meandering, with no real direction (that means relative weakness compared to the S&P 500);
  
  
• Massive open interest at the June (1st week) $57 call strike of 21,498 contracts, which should act as a downward magnet on the stock price; and
  
  
• Max pain for June 4th options expiration was at $56.00, which was great for our put debit spread because it would make maximum profit at a stock price of $57.00 or lower.

At June 4^th options expiration, LVS had dropped to $56.52 and the $57/58 put spread expired for its maximum $1.00 per share value ($100 per options contract). Since the initial cost to place the trade was only a $0.45 per share debit, the trade returned a whopping 122.2%. That’s more than a double in 11 days!

Editor’s Note: Jim Fink will soon take part in a special event that will show ordinary investors how to make massive investment gains within the next 12 months. Reserve your spot by clicking here.

John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.