FAQ. (Continued on page 2) An Investment Advisory Firm

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1 FAQ An Investment Advisory Firm What is QASH Flow Advantage? It is a time-tested model that includes three strategic components: A portfolio of carefully selected Exchange-Traded Funds (ETFs) for diversification and growth, A short position to provide partial downside market protection, and Covered Call and/or Asset-Secured (i.e. Cash) Put option income to provide monthly cash flow. 2. What is an ETF? An Exchange-Traded Fund (ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Several ETFs track an index, such as the S&P 500 or the Russell ETFs may be attractive as investments because of their low costs (lower expense ratios), tax efficiency, and stock-like features. 3. What is a Covered Call? A Covered Call is a type of revenue-generating option for owners of individual stock or an Exchange-Traded Fund (ETF). This legal transaction gives the holder or buyer of the Call the right to purchase an individual stock or ETF (representing stock in several companies) at a fixed price for a limited period of time. To buy that right, the Call buyer pays a premium. A seller must own at least 100 shares of a stock or an ETF to participate in a Covered Call. The seller of that Call is obligated to sell the stock or ETF at the agreed ( strike ) price during a specified time period. Under this obligation, the seller of that Call receives a cash payment (i.e., the premium), which we often compare to receiving rent. When the seller of the Call owns the stock or ETF that he has agreed to sell, then the call is considered Covered. In the Qash Flow Advantage, the seller of that Covered Call is a QFA client. 4. What is a Put? A Put option is an option in which the buyer has the right but is not required to sell a security to the writer of the contract at the strike price during a certain time period. If the buyer exercises the option, the seller/or writer of the contract is required to purchase the underlying security at the agreed upon strike price. The buyer of a Put either believes the price of the underlying equity will fall below the strike price before the exercise date and hopes to profit, or the buyer is simply protecting a long position on an EFT/Stock. The seller/writer of the Put believes the underlying security will trade flat to higher over the lifetime of the contract and has the goal of simply collecting the premium, and/or prefers to take advantage of buying the underlying ETF/Stock at a lower price (i.e. strike price) if the market price drops below the strike price. In the Qash Flow Advantage, the seller of that Put is a QFA client. 5. What does expiration mean? All options have an expiration date. Stock Options, including Covered Calls and Puts, are standardized contracts that trade on an exchange. Each stock option contract represents 100 shares of stock and they are offered in many maturities of one, two, three, six months, and one year, but they always mature or expire on the third Friday of each month. As a Covered Call seller, if the stock price is at or above the strike price at expiration, you are obligated to sell the stock to the Covered Call buyer at the strike price. Conversely, when selling Puts, if the stock price is at or below the strike price at expiration, you are obligated to buy the stock from the Put buyer at the strike price. 6. What can I expect with a new account? When we open a new account, starting the Qash Flow Advantage will depend on the time of the month and market conditions. We always want the best yield to be produced from selling monthly options. The week of the 3rd (Continued on page 2) 1

2 Friday of every month and the week after the 3rd Friday of every month is when you will see the bulk of the trading done in your account. If a new account comes in after we have done the majority of our bulk trades, we will most likely wait for opportune market conditions before we trade your account. If your new account comes in around the Monday before expiration week, it is safe to say that we will wait to include it with everyone elses trades that Friday (expiration) or the following Monday after expiration (depending on whether or not their ETF/stocks got called away). 7. Will I only see activity in my account on the third Friday of the month (option expiration)? No. When we feel it is advantageous, we will act before expiration and roll options. At any time before the option expires, we can buy back the option for our client. The cost to buy it back is directly related to the number of days left until expiration and the current value of the stock or ETF. In the case of selling Covered Calls, the money to pay for buying back the option can come from prior profits or, more frequently, from selling a new Covered Call on the same stock or ETF at a strike price sufficiently higher than the current value to cover the purchase. At QFA, we call this rolling an option, and it applies to both Covered Calls and Puts. 8. Can you explain how I check my account balance with the Asset Secured Option program? Typically, when a client s account has cash, stocks, Exchange-Traded Funds (ETFs), mutual funds and bonds, it s very straight forward to get the up-to-date account balance. The balance is simply the sum of the current value of each of these financial instruments in the account. However, it is not as simple a process when a client s account is comprised of options; specifically, Covered Calls and/or Asset-Secured Puts. When our investment analysis and strategy favors selling asset-secured Puts, you will find your account comprised of the following: Cash used to secure the sale of a Put Long Position represents the value of the hedge or short position (to reduce some downside market risk) Short Position reported as a Liability on your Account Statement and represents the cost of buying back the Puts that were previously sold. Each month, QFA will sell Puts on various ETFs, creating option income. When these option trades are completed, the following will occur: 1. Option income will increase the Asset Balance ( Cash ) in your account, and 2. A Liability ( Short Position ) will be created which reflects the present value of buying back the Put(s). Based on the market value of the underlying ETF, the value of the Short Position will increase, decrease or stay the same on any given day. As we approach the Option expiration date (3rd Friday of each month), the value of the Short Position will continue to decline due to the reduction in time value of the specific Put that we sold, given that the price of the ETF stays the same or goes higher from when the Put was sold. Scenario 1: If the underlying ETFs market value was above the Put strike price at expiration, the value of the Short Position in your account would be 0 and the Put would expire. As an example, this scenario would apply if we sold a SPY 127 Put in April, and the 5/20/11 market closing price was $ Scenario 2: If the underlying ETFs market value was below the Put strike price at expiration, the value of the Short Position in your account would be its intrinsic value and the ETF would be put to you meaning that some portion of the cash in your account would be used to purchase the ETF at the strike price of the Put that was sold. As an example, this scenario would apply if we sold a SPY 127 Put in April, and the 5/20/11 market closing price was $126.10, creating a Short Position balance of $ If this occurs and we elected not to roll the Put to the following month, QFA will begin selling Covered Calls on the ETF that was purchased. During the time between when we sold the Put and its expiration date, the market might be constantly changing. The closer the underlying ETF market price gets to the strike price of the PUT (or below the strike price), the larger the Short Position balance will become. The Short Position is in essence considered a liability, and simply reflects what we would have to pay to buy back the Put that was initially sold. Remember, regardless of what the Short Position balance is during the option cycle, the realized gain or loss is determined during option expiration week when we will either: 1. Let the Put expire worthless, and begin the process all over again for the next month, 2. Roll the Put to the next month (buy back the existing Put, and sell a new Put for the following expiration period), or (Continued on page 3) 2

3 3. Let the ETF be put to us and begin selling Covered Calls. The most accurate reflection of our Put selling results (and your account value) will be found on the 3rd Friday of each month as option expiration occurs. 9. Is Covered Call selling more risky or less risky that buying and holding stocks or stock funds? Most informed professionals will tell you that option selling is far less risky than a buy and hold stock strategy. The revenue produced by selling Covered Calls lowers the cost basis of owning the stock or fund thereby providing a cushion against moderate loss. The risks typical to owning the underlying investment are not eliminated by writing Covered Call contracts. The underlying investment s price can decline. In such a case, some of the potential loss is offset by the amount of income received for having written the contract. Covered Call contracts also limit an investor s potential for profit. The Call writer forgoes appreciation above the strike price at which they agreed to sell or deliver their investment. Remember, the underlying ETF is not sold or delivered to the Call buyer if it is worth less than the agreed upon strike price at the option contract s expiration. Over 80% of the time, options expire worthless. Thus, the option buyer loses 100% of their option premium most of the time. This is risky, but option buyers are willing to assume that risk. The opposite is true for the option seller (QFA s client), especially if the seller owns the stock or ETF upon which the option is based. This Covered Call is considered to be a conservative strategy. In fact, in many respects, selling Covered Calls is safer than simply owning the stock. If the seller of the option does not own the stock, it is not covered and, thus, is referred to as a naked option. Selling a naked Call is also risky because if the price of the stock exceeds the strike price at the end of the option term the naked seller must purchase the stock at the current market value and sell it for the lower strike price, potentially losing a significant amount of money. QFA does not buy naked Calls for its clients. Referring to the example in Question 11 of the Frequently Asked Questions, if the price of XME was to rise significantly over the Call strike price in that one month, let s say to $50 a share, the seller must give up his ETF at $ Our client owns the ETF, as he purchased it beforehand at $46.425, so he earns a profit (gain) and keeps his premium. His only loss is the opportunity cost of making a larger profit by selling XME for $50. On the other hand, the naked Call seller does not own the ETF and must purchase it at $50.00 a share in order to sell it at $ He would incur a loss of $1, minus the premium received, for a net loss of $ {[(500 x $50) ($500 x $47)] $1,144.08}. If you firmly believe that the markets will outperform the cash flow goals that we target, then a buy and hold strategy might be suitable for you. QFA s clients simply would rather take the cash returns and not blindly trust the markets to deliver their profits. 10. What are the risks of Asset-Secured Put selling? We have previously established the Put sellers goal of creating option premium and/or locking in a lower than market price in which the Put seller can acquire the ETF/Stock. On the downside, the break-even point for this strategy is an underlying stock price equal to the Put s strike price, less the option income initially received for selling it. If the stock declines significantly below the strike price by expiration, on assignment, the Put seller may be obligated to purchase shares well above their current price level. ETFs/stocks bought under this circumstance may therefore reflect an unrealized loss compared to its market price at the time. QFA s strategy would be to either roll the option contract before expiration to the following month, or to gladly accept the ETF/stock at a price lower than when the option contract was initially established. If we choose to have the ETF/stock Put to us, we will then begin selling Covered Calls on that equity. 11. Can you provide an example of a Covered Call with a current client? This example is based on prices as of September 16, Our client purchases 500 shares of XME (the ETF for METALS & MINING). The price per share is $ Total cost, including TD Ameritrade s commission, is $23, ([500 x $46.425/share] + TD Ameritrade s commission). Just after purchasing the 500 shares, our client utilizes the Qash Flow Advantage and sells 5 Covered Call contracts (each contract represents 100 shares). Our client agrees to sell his XME at a price ( strike price) of $47.00 a share until 10/16/09 (option expiration). The premium offered is $ per share, or $1,152.85, for the 500 shares. Our client will receive a net of $1, after TD Ameritrade s commission for executing the option transaction. This is real cash received immediately and represents additional income generated by the portfolio. Time passes and on 10/16/09, the option expiration date, the price of XME is either a) at or below $47.00, or b) over $ In case a) if the price of XME is at or below $47.00, the holder of the call will not exercise the option; that is, he will not buy the ETF. The option expires worthless because the holder of the call can buy the same ETF cheaper in the open market. Our client retains his XME and is now free to continue participating (Continued on page 4) 3

4 in the Qash Flow Advantage and have QFA sell another Covered Call on the same ETF and earn another premium. Our client realized cash flow of $1, on his ETF and will now receive another premium for the next month. On the other hand, in case b) if the price of XME is above $47.00, the holder of the call will purchase the ETF at $ Our client will receive $23,480.00, net after TD Ameritrade s commission ([500 x $47/share] $20). Now we start the process all over again. Since his XME was sold, our client has the sale proceeds. We buy another ETF and sell another covered call generating income on the new ETF purchased. This process can be repeated over and over with different stocks or ETFs, earning premiums each time, thus generating income on a regular basis. In both cases, our client retains the $1, premium earned on the call sold. This is the true value of the QASH Flow Advantage. Our clients portfolios generate substantially more cash flow than would have been earned from relying on dividends alone. 12. Why did you choose 10/16/09 as the Covered Call expiration date in the above example? Stock Options, including Covered Calls and Puts, are standardized contracts that trade on an exchange. Each stock option contract represents 100 shares of stock and they are offered in many maturities of one, two, three, six months, and one year, but they always mature or expire on the third Friday of each month. 10/16/09 is the third Friday in October 2009 and the QASH Flow Advantage model is based on writing/selling Covered Call and Put options on a monthly basis. 13. Can you explain how to best understand my TD Ameritrade statements? Generally speaking, brokerage statements are rather boring and most investors glance at the net value number compared to the month before and ignore the rest of the information. Our client s monthly statements contain transactions from the sale of options that reveal the actual sale proceeds which equate to profits. This means, you can finally see your actual monthly profits on the Transactions Detail page. No calculations are necessary to determine how much you made (or lost); these transactions are permanent, real, and are available for you to withdraw if you choose to do so. You will always be able to identify the option sales from the words To Open in the Transaction Detail section. It means that an option was sold to open an option position. Numerous clients have learned to isolate these trades and frequently call and comment on how wonderful it is to add up the dollars and how consistent it usually is to see the profit gratification occur every month. If you see any language that uses the words To Close, we have repurchased an open option position to make way for a new To Open position. Simply net the two numbers together to calculate the profit from these two transactions, which is commonly called a Roll. One more detail to discuss is the pricing of options on your statement and the positions page of the online internet positions page. Whenever an opening option position is created (selling a Call or a Put), brokers are required to price the position on your statement and the online internet page. Since a client might wish to exit the open position, the broker must calculate the price to close the position. This is always stated in a negative number. You as the account holder do not owe this money to close the position, unless you wish to end this transaction early. If the option is not closed and held for the full period, it will either expire worthless, shares of the underlying will be transferred out (Call) or in (Put), or it will be rolled. This number does not represent a loss, and there is no margin interest or any obligation whatsoever other than to sell the security at a set price. Some clients become concerned about this section of the statement, but it has no effect on the profit obtained from the sale of the options, and the pricing number represents no risk to you. It is a pricing tool only used if for some odd reason you wanted to liquidate the transaction. 14. If I sell a Covered Call on my stock, what happens to the dividends? Ordinary dividends are payable to the owner (QFA client) of the stock or ETF on the date the dividend is declared. They do not accrue to the Call holder. Dividends and distributions of principal accrue to the Call holder only if he exercises the Call and buys the stock or ETF on or before the Call expiration date and before the dividend is declared. 15. What are the tax consequences of this strategy? When addressing tax issues, it is important to know whether the Covered Call or Put sold is in an IRA or any other tax advantaged account as compared to a regular taxable brokerage account. Option revenues on taxable accounts are short-term capital gains and are taxed at the ordinary income rates that apply to your adjusted gross income. Our Call and Put option strategy is designed to make cash profits. When profits are made from any source, they create the requirement to pay taxes. However, if you have accrued investment losses, they may be used to offset option income depending on your individual tax situation. IRA option revenue is not subject to taxes; only withdrawals from the IRA (Continued on page 5) 4

5 are taxable. In regard to taxation of the underlying security (ETF) in which the Covered Call is sold, if the ETF is held less than 12 months, it would be short-term capital gain and in excess of 12 months it would be long-term capital gain. You may want to consult your tax advisor before investing in a strategy that produces cash flow profits. 16. Who is buying all these options that we sell? The following is a summary of the numerous and different scenarios in which private investors and institutions buy options : 1. There are several newsletters and services that recommend buys on certain Calls that they screen through a software program. They usually produce one big winner and multiple losers, 2. Any investor who sells a stock for a profit and believes the stock could continue to rise might buy a Call, 3. Short sellers need to protect themselves from losses by buying Calls, 4. Many investors invest in option spreads which require the purchase and sale of two Calls. The purchase side of the spread becomes an option buy, 5. An option seller who sold a long dated Call (3 months or more) might repurchase it to take his profits. This becomes a Call buy, and 6. When fund managers sell stocks for profits or for redemptions, they can stay in a particular stock or sector by buying Calls. The important message to understand is that the liquidity of the buy side of the options market is extremely large. There is always a supply of investors who have their own purpose in mind. These investors make up the opposite side of our SELL strategy. 17. Why don t brokerage firms offer option strategies? Brokerage firms discourage their clients from utilizing options for two primary reasons: Money and Time, in that order. Brokerage firms will not offer discounted commissions on options, therefore, they charge excessive amounts four or five times the normal discounted rates. This would harm the performance of any option strategy. The brokerage firm wants its brokers to earn large commissions on products such as annuities, mutual funds, and wrap fees. A few years ago, Jim Neher was offered a position as a broker at a major firm whose manager actually sold options on his personal account, but not for clients. He told Jim that he admired his rationale for option selling, but he would learn to abandon the strategy for clients when he realized that he could earn a much larger income selling other services and products. Respectfully, he turned down this offer. Brokerage firms also need to perpetuate the illusion that their research and market savvy makes you money, not the rather logical approach to creating cash flow through options. In their eyes, this diminishes their value. The other reason is time. Brokers are consumed with conference calls, strategy meetings and, of course, constant searches for new clients. There is little time for them to manage individual stock, fund, and option portfolios. At QFA, we have the time and ability to manage these accounts because we are not distracted by other investment activities or strategies. 18. What is your relationship with TD Ameritrade? QFA s clients and most of the independent brokerage and Advisory firms that use our services for their clients employ TD Ameritrade as custodian of their accounts. TD Ameritrade has the most advanced technological platform for our clients. In addition, QFA has negotiated the lowest transaction fees in the industry specifically for our clients. Based on our trading volume, QFA was able to negotiate a significant transaction fee reduction with TD Ameritrade. As of May, 2011, TD Ameritrade will charge our clients account a flat percentage fee based on the monthly net asset value of the account and paid quarterly regardless of our trading volume. Of significant value to our clients is their cash and/or money market balances are not charged a TD Ameritrade fee. When our client accounts are holding Asset- Secured Puts that are backed by cash, the client s account will not incur a trading fee. QFA s clients are also clients of TD Ameritrade and TD Ameritrade is the custodian responsible for maintaining our clients accounts, issuing trade confirmations, monthly statements and the tax forms necessary for their tax returns at year end. QFA does not take possession of any client s assets and has only a limited power over our client s accounts at TD Ameritrade. Thus, any client can sever the relationship with QFA at any time simply by advising TD Ameritrade. QFA will help you set up your TD Ameritrade account, establish a computer log-in ID and password, and help you obtain a check book and debit card (Continued on page 6) 5

6 for your account if you desire. After the account is established, you will be able to go on-line at any time and follow QFA s management of your account. QFA is not part of or associated with TD Ameritrade. However, TD Ameritrade does provide a special team to help our new clients open accounts, transfer assets and, when desired, provide research on investments. Further benefits worth noting about the QFA and TD Ameritrade relationship: All QFA client accounts are held at TD Ameritrade, providing full-transparency, with monthly statements sent via or mail. Investment checks from QFA clients are written to TD Ameritrade Institutional, not QFA QFA clients have access to their accounts through TD Ameritrade s website QFA cannot move your assets; we can only instruct TD Ameritrade to issue you a check or wire a bank (with the same brokerage account name) Clients with multiple TD Ameritrade accounts will see all of them under a single TD Ameritrade Login 19. What are the fees that TD Ameritrade will charge me? TD Ameritrade charges each of our clients a flat annual trading fee that is paid quarterly based on the value of each client s TD Ameritrade account as follows: 40 basis points, for accounts under $500, basis points, for account between $500,000 and $999, basis points, for accounts greater than $1,000,000 The fee is calculated as follows: TD Ameritrade will record the end-of-month balances of eligible assets for each Account. At the end of each quarter, TD Ameritrade will multiply each of the previous three months balances by the Annual Fee percentage rate, then divide each of those numbers by 12 to arrive at the monthly fee. The monthly fee for each month of the quarter will be added together to arrive at the quarterly fee. QFA will then charge this quarterly fee to your account at the same time that our Management Fee is charged to your account. TD Ameritrade does not include the clients Cash balance (or equivalents) when calculating their quarterly fee. Of further note, when QFA has sold Asset-secured Puts using Cash as the collateral on behalf of our clients, TD Ameritrade will not charge any trading fees on those positions. TD Ameritrade only charges quarterly trading fees on stock, ETFs, bond and other securities, in addition to any client requested services fees (i.e. wires). 20. Why choose QFA, LLC over traditional advisors? Our main focus is solely on the performance of our QASH Flow Advantage model which is based on a combination of ETFs, Covered Calls and Asset-Secured Puts. We are not distracted by the marketing of bond, annuity or insurance products we focus solely on creating cash flow. Moreover, our belief is so strong that we manage our own personal investments in the same fashion as our clients. 21. Who regulates QFA,LLC? The SEC regulates our firm. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the regulation of about 4,200 Registered Investment Advisors (RIAs) is being switched from the Securities and Exchange Commission (SEC) to state authorities. The changeover, which applies to RIAs with assets under management (AUM) of less than $100 million will be complete by July 21, Because QFA,LLC exceeds the new state maximum of $100 Million, we will still be monitored by the SEC. 950 Encore Way, Suite 102 Naples, FL phone fax 6

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