# More and more people are now including options in their investments as a smart way to get ahead of the market.

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7 Buying Calls and Puts continued... Too many people will load up on cheap out-of-the-money options in hopes of seeing an extraordinary move and cashing in. The problem is the majority of the time, that won t happen. And when it doesn t they forfeit everything they put into it. By focusing on the right options we can tilt the odds of success in our favor. What s Your Time Worth? As I mentioned above, the more time you have the more time value there is. Many investors will skimp on time in hopes of saving a couple of hundred dollars on their purchase price. But in reality, this savings can be costly. Example: Let s look at three hypothetical options all at the same strike price: There s a 2 month option going for \$5.00 (or \$500) A 4 month option going for \$7.00 (or \$700) And a 6 month option going for \$9.30 (or \$930) Some simple math will quickly show you which options are the better bargain. For the 2 month option, divide the premium (\$500) by the amount of time remaining (2 months). That means each month of time costs the investor \$250. Now take the 4 month option; divide that premium (\$700) by the amount of time remaining (4 months) and you ll see that the investor would only be paying \$175 for each month of time he/she gets to hold onto that option. The 6 month option is even better (\$930 divided by 6 months) as you re only paying \$155 per month of time in this case. Using the examples above, the 6 month option is the better bargain in that you re paying less for each unit of time than the others. Of course, if you really don t think you want (or need) that much time, the 4 month option would still be the better bargain than the 2 month option. So while you don t need to buy excessive time, as a general rule, it s usually a good idea to get a little extra time. This is true for two major reasons. 1. If you run out of time, it s game over on that option. And sometimes the difference 6 Options Trader User Guide

19 Summary continued... This service takes all the guesswork out of options by doing all the research for you and presenting it in plain language analysis and easy to understand trade signals. Congratulations again on getting started with the Options Trader. Up, down or sideways, we plan on making success our only option. 18 Options Trader User Guide

21 Glossary of Terms continued... Out-of-the-Money: For a call option, it s a strike price above the current price of the stock. This option has no intrinsic value and is only comprised of time value or extrinsic value. If a stock was trading at \$50, a call option with a strike price of \$55 would be out of the money. For a put option, it s a strike price below the current price of the stock. If a stock was trading at \$50, a put option with a strike price of \$45 would be out-of-the money. In-the-money options have greater deltas and out-of-the-money options have smaller deltas. (The term out-of-the-money is often times abbreviated as OTM.) Delta: This is the percentage the option will increase or decrease in value in relation to the underlying price movement of the stock. A delta of.60 for example, means the option will move (or change in value) equal to 60% of the underlying stock s price change, meaning a \$1.00 rise in the stock should see a 60 cent rise in the option premium. The delta changes as the stock rises and falls. Intrinsic Value: The difference between an option s strike price (that s in-the-money ) and the current price of the stock. For example: if a stock was trading at \$50, and a \$45 call option with 30 days of time left on it was selling for \$6.50 (or \$650, which is \$6.50 x 100 shares), that option would have \$5 (or \$500) of intrinsic value. [\$50 (stock price) - \$45 (strike price) = \$5 (intrinsic value)] Time Value (aka extrinsic value): The amount of the premium that s not comprised of intrinsic value. This part of the premium is said to be your time value. Using the same example as above, that same option would have \$1.50 or \$150 of time value or extrinsic value. [\$6.50 (premium) \$5 (intrinsic value) = \$1.50 (extrinsic value or time value)] 20 Options Trader User Guide

22 Glossary of Terms continued... Expiration: This is the last day an option contract can be traded. At expiration, an option s only worth is its intrinsic value. Since there s no time left to hold your option to buy or sell, there s no more time value or extrinsic value left. And at-the-money and out-of-themoney options would expire worthless. Exercise: The time in an option s trade (usually at expiration) when the underlying stock is assigned to either the buyer or the writer based on the rights and obligations of the transaction. Exercise usually takes place for in-the-money options. Most brokerage companies will automatically exercise in-the-money options at expiration unless notified otherwise. The expiration date for most options is effectively the 3rd Friday, of the month of the option. 21 Options Trader User Guide

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