Complete Options Trading Program

Transcription

1 TradeWithOptions.com Replace Your Income with TRADING PROFITS Complete Options Trading Program

2 Table of Contents Option Basics 6 1. Approach to Profitable Options Trading 7 2. Options Introduction Options Valuation Your First Strategy Deep In-The-Money Covered Calls Summary Appendix 40 Hedging Your Risk Identifying Risk Risk Reduction Techniques Strategy- Collar Trades 50 a. Example 1 USG Corp 51 b. Example 2 USG Corp - Modified 55 c. Example 3 AAPL Apple Computer Summary 63 Stock Analysis Overview Where to find stocks Analysis Techniques 68 a. Fundamental Analysis 68 b. Technical Analysis 69 c. Sentimental Analysis Summary 80

3 Table of Contents Debit Spreads Debit Spreads Overview Bull Call Spreads 83 a. Example 1 SHLD 84 b. Example 2 USG Bear Put Spreads 94 a. Example 3 RIMM Summary 100 Credit Spreads Credit Spreads Overview Bull Put Spreads 104 a. Example 1 HDI 106 b. Example 2 SUN Bear Call Spreads 117 a. Example 3 HAR Summary 124 Business Plan Essentials Overview Various Security Taxation Trader Tax Status vs. Individual Investor Entity Benefits Example Tax Savings Summary 133

4 Table of Contents Calendar Spreads Calendar Spreads Overview Trade Examples 137 a. Example 1 PAYX 137 b. Example 2 MON 141 c. Example 3 PEP Summary 149 Advanced Neutral Strategies Advanced Neutral Strategies Overview Long Straddle 152 a. Example 1 AAPL Long Strangle 160 a. Example 2 AAPL Short Straddle 169 a. Example 3 RIMM Summary 174 Advanced Combination Strategies Advanced Combination Strategies Overview Butterfly 177 a. Example 1 RIMM Dual Credit Spreads 183 a. Example 2 RIMM Summary 189

5 Table of Contents Systematic Writing Systematic Writing Overview In Theory In Practice SHLD Summary 204 Options to Repair Losing Stocks Options to Repair Losing Stocks Overview Small losses over short term Larger losses over long term Any size loss over any time frame Summary 216 Advanced Ratio Spreads Advanced Ratio Spreads Overview Example Modified Ratio Spread Example 2 NKE Summary 233 Dividend Income Strategy Dividend Income Strategy Overview Ex-Dividend Dates Stock Splits Dividend Income Strategy Summary 242

6 Replace Your Income with TRADING PROFITS

7 Sections 1. Trading Approach 2. Options Introduction 3. Option Valuation 4. Your First Strategy (Deep ITM Covered Calls) 5. Summary 6. Next Course Outline 7. Appendix 1 Approach to Profitable Options Trading Trading is not a get rich quick scheme. Trading is a business, like many other businesses, where you need to be able to generate consistent cash flow in order to plan for growth and make more money These courses will teach you to trade as a business. This incorporates statistically sound trading strategies, financial analysis, and tax planning! A trading business is similar to other businesses in that you need to generate consistent cash flow in order to predict and plan for growth; however, it is unique in that it offers a wonderful business model including limited overhead costs, zero product liability, zero inventory, and no sales or customer service. It also offers the most favorable tax structure of any other business since there are no self-employment taxes, only capital gains. You can start your trading business with as little as $10,000 to start generating $500 - $2,500 per month of trading profits safely. These courses emphasize and illustrate only high-probability trading techniques that achieve high win rates, typically around 60-80%. Trading techniques and examples will be illustrated using free tools available to everyone on the internet. Develop a Trading Plan The first step in successful option trading is to develop a long-term trading plan. You want to have a healthy time horizon and think of your trading as an activity you will carry forward for several years. Trading is not a get rich quick scheme. Trading is a business, like many other businesses, where you need to be able to generate consistent cash flow in order to plan for growth and make more money. Trading options with the strategies shown in com courses will provide a complete business plan based on conservative strategies proven to generate regular monthly cash flow. Trading options allows you to simply react to stock moves instead of trying to predict them. No one knows where the market is going or when it will move. Successful traders do not rely on predicting stock moves. They profit from sound cash management and risk control. Trading options provide the benefits of both risk control and cash flow management.

8 The probability of winning has an INVERSE relationship with the Reward/Risk ratio. Before you trade, you should have a solid trading plan and focus on generating consistent profits. Don t trade for sport. You should think of your trading like you are the House of a casino. You stack all the odds in your favor and let the statistics play out. You do not want to be the individual walking into a casino and placing individual bets. You will lose as most gamblers lose in a casino while the House wins. Any one of our strategies shown can be used to build a solid trading plan on their own. The more strategies you learn, the more trading situations you will be prepared for to make more money. Once you are comfortable with various trading strategies, you want to evaluate your overall strategy performance instead of individual trade performance. Be sure to focus on measuring the correct metrics for evaluating strategy performance, such as Win/loss ratios, average dollars won, average dollars lost, drawdown, and time in the market. Your goal is to identify a strategy you are comfortable and successful with and apply that strategy to various securities/markets to get into more trades and make more money. Do not focus on structuring trades with extremely high Reward/Risk ratios as shown in other option education courses. The probability of winning has an INVERSE relationship with the Reward/Risk ratio. For example, Trades with 100%+ Reward/Risk Ratio s have low probabilities of winning typically around 50%, similar to stocks. Trades with 5% Reward/Risk Ratio s have HIGH probabilities of winning, typically around 90%! Trading based on conservative probabilities of winning will result in very consistent and profitable trades. Smaller consistent profits will compound exponentially with time. Profitable traders will focus on generating high probabilities of winning instead of a high Reward/Risk ratio on individual trades. Profitable traders will focus on generating high probabilities of winning instead of a high Reward/Risk ratio on individual trades Review the following data model comparing a conservative trader (Strategy A) with a more aggressive trader (Strategy B). The conservative trader has a much lower monthly return target and a higher probability of winning than the more aggressive trader. In year one, the conservative trader generates a very respectable 26% annual return, while the more aggressive trader had a great first year annual return of 116%. In the second year, the conservative trader has increased his portfolio by 46% by allowing his small winnings to compound every month. The more aggressive trader has given back much of his first year profits and is only up 39% in his portfolio. The conservative trader s performance has already surpassed the aggressive trader s performance. As time continues and statistics play out, you can see that the conservative trader ends up making much more money than the more aggressive trader. Note This data model is available for you with our products. You can modify the gray cells and view the results of many different combinations. The perfect portfolio performance assumes 100% probability.

9 Strategy A (Data 1) Strategy B (Data 2) Perfect Portfolio Initial Portolio value $ 100,000 $ 100,000 Initial Portfolio Value $ 100,000 Monthly Return 4% 15% Monthly Return 3.4% Probability 75% 55% Annual Return 49.4% Recalculate Year 1 Ending Portfolio Value Return on Equity $ 125,926 26% $ 216, % $ 149,364 49% Year 2 Ending Portfolio Value Return on Equity $ 146,374 46% $ 139,303 39% $ 223, % Year 5 Ending Portfolio Value Return on Equity $ 292, % $ 169,285 69% $ 743, % Year 10 Ending Portfolio Value Return on Equity $ 1,274, % $ 524, % $ 5,526, % $ 1,400,000 $ 1,200,000 $ 1,000,000 $ 800,000 $ 600,000 $ 400,000 $ 200,000 $- Equity Curve Strategy A Strategy B Your trading plan should be built on conservative options trading and allow your smaller wins to generate exponential returns over time. Your portfolio value will grow consistently and provide the financial rewards you need to grow your trading business and make big money.

10 2 Options Introduction An equity option is a contract which conveys to its holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day). After this given date, the option ceases to exist. Equity option contracts usually represent 100 shares of the underlying stock. The Expiration day for equity options is the Saturday following the third Friday of the month. Therefore, the third Friday of the month is the last trading day for all expiring equity options. Strike prices (or exercise prices) are the stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. The strike price, a fixed specification of an option contract, should not be confused with the premium, the price at which the contract trades, which fluctuates daily. The two types of equity options are Calls and Puts. A CALL option gives its holder the right to buy 100 shares of the underlying security at the strike price, Understand Contract Terms Long (Buyer) Short (Writer/Seller) Calls Right to buy stock at strike price before expiration Legal obligation to sell stock at strike price before expiration Puts Right to sell stock at strike price before expiration Legal obligation to buy stock at strike price before expiration anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to sell the shares. The opposite of a call option is a PUT option, which gives its holder the right to sell 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to buy the shares. How are they used? Options are tools that allow individuals to either hedge their risk of loss in their portfolio and/or provide leveraged returns for those individuals speculating on market activity. By combining multiple contracts into one trade, individuals can stack probability of winning in their favor and create a reward/risk ratio that matches their risk tolerance level. Are they Safe? These contracts are very liquid and traded in a system of exchanges similar to the stock market. In terms of dollar values, more money is traded in options markets than all stock markets combined. This liquidity provides ample opportunity to get in and out of contracts timely. These courses only teach strategies that incorporate multiple sided positions to create unique risk/reward ratios with high probabilities of winning 10

11 Options vs. Stock Options are similar to stocks in that they are Securities traded on SEC regulated exchanges Options differ from stocks in that they have Expiration dates No certificates Unlimited number of contracts vs. fixed amount of shares outstanding No voting rights or dividends Leveraged asset VALUATION METHODOLOGY DEFINED! The primary advantage of trading options is that they allow you to simply REACT to stock price movements instead of trying to PREDICT stock price moves! The primary advantage of trading options is that they allow you to simply REACT to stock price movements instead of trying to PREDICT stock price moves! This is a significant distinction from the stock trader who is constantly trying to predict stock price movement and buy low sell high. For example, if you buy a stock and the stock price moves down, the stock trader would be in a loss position while the options trader would simply REACT to the downward movement by adjusting the trade and maintaining profit potential. courses will teach you to REACT to stock movements and stop playing the guessing game of trading stocks. What does it mean to simply REACT to stock movements? Once you accept that you can not predict the direction a stock will move, you will learn to structure your initial trade as a neutral position where you will win if the stock goes up or down. The stock will eventually move in a direction and that s when you simply REACT to that direction by hedging your trade on that side. Review the following chart of RIMM. By combining multiple sided option positions with a dynamic hedge on both sides of your trade, you significantly reduce your risk of loss and establish a trade that will win whether the stock goes up, down, or stays flat. This is an example of an advanced trade setup that will be introduced in the Level 2 courses. You no longer have to try and predict stock movement. You can simply initiate this trade setup and REACT to where the stock moves. You win on both sides of this trade if the stock price stays between the two red lines. If the stock goes up or down and reaches one of the red lines, you will REACT and neutralize that side of the trade and collect your profit on the opposite side. A strategy like this virtually guarantees a profit. The only question is, will you win on both sides of the trade, or just one side? 11

12 Hedge Hedge Options allow you to REACT to stock moves 12

13 Long Call Example A call option gives the owner the right, but not the obligation, to buy stock at a specific price (Strike Price) on or before the contract expiration date. Let s look at an example comparing the stock trader with an options trader using Microsoft, which is currently trading around $25 per share. Assume both our stock trader and options trader want to control 1000 shares of Microsoft and are expecting it to go up. The stock trader will spend $25,000 to buy 1000 shares of stock. The options trader can buy 10 call contracts representing 1000 shares expiring in 120 days with a strike price of $25 for only $750. This gives the call option owner the right to buy Microsoft for $25 at anytime over the next 120 days. If Microsoft is trading at $30 after 120 days, the stock trader has a gain of $5000, while the Option trader has a gain of $4250 because he will exercise his option to buy Microsoft at $25 and then sell it in the open market at $30 for a $5000 gain. He paid $750 for the call so that leaves a profit of $4250 or a whopping 567% on his original investment of $750. If Microsoft is trading down at $20 after 120 days, the stock trader has a loss of $5000, while the Option trader simply lets his option expire and loses the original investment of $750.You can see the options trader has the benefit of limited risk while also generating large returns on investment. This information is presented in the table below. Stock Trader Cost to control 1000 shares of $25 $25,000 Options Trader $ CALL contracts expiring in 120 days with strike price of $25. Maximum Risk $25,000 $750 Results: MSFT trading at $30 at the end of 120 days +$5,000 +$4,250 Return on Investment +20% +567% MSFT trading at $20 at the end of 120 days -$5,000 -$750 Below are Profit and Loss Diagrams for a stock trader and a Long CALL Option Trader. You can see the Profit and Loss Diagram for the stock trader is a straight line and crosses the x-axis right at his purchase price. At any price below his purchase price, he is in a significant loss position. The Profit and Loss Diagram for the Call Option has similar upside profit potential, but the maximum loss is capped at $750, the amount paid for the option. If the stock is trading down at $10, the Call Option trader can only lose $

14 $15,000 $10,000 profit / loss $5,000 $- $(5,000) $(10,000) $(15,000) stock price STOCK $14,000 $12,000 $10,000 profit / loss $8,000 $6,000 $4,000 $2,000 $- $(2,000) CALL stock price By utilizing options, you can maintain unlimited upside potential while simultaneously limiting your risk. Options are risk management tools with benefits that far exceed those of traditional stocks. 14

15 Married Put Example If you own stocks and do not own Puts protecting your portfolio, you are at risk. A Put contract gives the owner the right, but not the obligation, to sell stock at a specific price (Strike Price) on before the expiration date. Think of Puts as an insurance contract similar to insurance on your home or car. You pay a premium to buy an insurance policy that will pay you if your home burns down or if you wreck your car. Puts are insurance contracts for your portfolio. Let s look at an example comparing a stock trader with an options trader using puts. Assume a stock trader owns 1000 shares of Enron back in 2000 when it was trading at its split-adjusted high of about $87 per share. Our option trader also owned 1000 shares of Enron, but also owned 10 Put contracts giving him the right to sell his 1000 shares of Enron stock anytime in the next 120 days for a guaranteed price of $87.50 per share. The put contracts cost $3,000 so his cost basis in his trade is $90,000. As you know, Enron disclosed significant accounting irregularities and the stock plummeted straight down. Our stock trader realized substantial losses, while the options trader was protected from downside moves and exercised his option to sell his stock at $ If you own stocks and do not own Puts protecting your portfolio, you are at risk. This information is presented in the table below. Stock Trader Options Trader Cost of 1000 shares of $87. $87,000 $87,000 Cost of 10 PUT contracts expiring in 120 days at a strike price of $87.50 $3,000 Cost Basis of Trade $87,000 $90,000 Maximum Risk $87,000 $2,500 Results Enron traded for less than $60 in 2001 assume stock sold at $60 ($20,000) ($2,500) Enron traded for less than $1 in 2002 assume stock trader held stock hoping for a bounce back. ($87,000) ($2,500) 15

16 Below are Profit and Loss Diagrams for a stock trader and a Long PUT Option Trader. You can see the Profit and Loss Diagram for the stock trader is a straight line and crosses the x-axis right at his purchase price. At any price below his purchase price, he is in a significant loss position. The Profit and Loss Diagram for the Put Option has the opposite profit potential. When the stock price declines, the Long Put increases in value. When the stock price increases, the Long Put loses value, but the loss is capped at $3,000, the cost of the insurance premium. $15,000 $10,000 $5,000 profit / loss $- $(5,000) $(10,000) $(15,000) $(20,000) Stock stock price $14,000 $12,000 $10,000 $8,000 profit / loss $6,000 $4,000 $2,000 $- $(2,000) $(4,000) stock price 16 Put

17 Below is the Profit and Loss Diagram for the combined position of long stock and a Long PUT Option. You can see the Profit and Loss Diagram for the combined stock and Put position takes the best of both securities individual charts with unlimited upside potential and the maximum risk capped at the price paid for the insurance of $3,000. $8,000 $6,000 profit / loss $4,000 $2,000 $- $(2,000) $(4,000) stock price Combined stock and put 17

18 3 Options Valuation Options are valued very differently from stocks and understanding the components of option valuation will enable you to isolate individual components of option valuation and win on more trades. The variables of the Black-Scholes formula are: Strike price vs. underlying security price (Intrinsic Value) Volatility of underlying security Time remaining until expiration Risk-Free Interest Rates Dividends As you can see in the above variables, the underlying security price only affects 1 of the variables, or only 20% of the options value. Therefore, you can structure trades to capture the other 4 components, or 80% of the options value and it doesn t matter what happens with the stock price. By capturing the other components of option value, you will win whether stocks go up, down, or stay flat. Our trading strategies will try to capture all 5 components, but our profitability is not dependent on predicting the correct stock move direction. Intrinsic Value Intrinsic value can be defined as the amount by which the strike price of an option is in-the-money. It is actually the portion of an option s price that is not lost due to the passage of time, or decrease in volatility. It is calculated by subtracting the strike price from the current stock price for a Call. The intrinsic value of a Put is calculated by subtracting the current stock price from the strike price. For example, WMT stock is trading at $58. A call contract with $55 strike price has $3 of intrinsic value ($58-$55). A call option holder can elect to exercise his call and buy WMT at $55 and immediately sell it in the open market at $58 for a $3 difference. That $3 of real option value is called Intrinsic Value. A Put contract with a $55 strike price has $0 intrinsic value because a Put option holder has the right to sell his stock at $55, but will not exercise his Put because he can sell his stock in the open market at $58. Therefore, the $55 Put has $0 intrinsic Value. A Put contract with $60 strike price has $2 intrinsic value ($60-$58). 18

19 Extrinsic Value Represents all other amounts figured into the option price above intrinsic value and includes: Volatility premiums Time Value premiums Risk-free Interest Rate Dividends Volatility Volatility is one of the most important factors in an option's price. It measures the amount by which an underlying asset is expected to fluctuate in a given period of time. It significantly impacts the price of an option's premium. Volatility is simply a measure of risk (uncertainty), or variability of price of an option's underlying security. Higher volatility estimates reflect greater expected fluctuations (in either direction) in underlying price levels. This expectation generally results in higher option premiums for puts and calls alike, and is most noticeable with at-the-money options. The official mathematical value of volatility is denoted as "the annualized standard deviation of a stocks daily price changes." There are two types of Volatility: Statistical Volatility and Implied Volatility Statistical Volatility - a measure of actual asset price changes over a specific period of time. Implied Volatility - a measure of how much the market place expects asset price to move, for an option price. That is, the volatility that the market itself is implying. There is a general rule of thumb: Buy options in low volatility; sell options during periods of high volatility. Markets with lots of volatility trigger an inflation of option prices. A market that moves a lot increases the probability that an option on that stock will end up in-the-money. Volatility is a very important piece of the puzzle, not only for analyzing an option s value, but for assessing a market s inclination for dramatic price movement. Examining the difference between a stock s historical volatility and implied volatility can also help traders to recognize when a stock option is underpriced or overpriced. If the option s implied volatility is higher than the historical volatility, the option is theoretically overpriced. Option sellers look for these kinds of opportunities to sell high and buy low. In contrast, option buyers look for underpriced options by searching for market situations in which the implied volatility of an option is lower than the historical volatility (buy low and sell high). 19

20 Time Value Time until expiration affects the time value component of an option s premium. The longer the amount of time for market conditions to work to an investor s benefit, the greater the time value. Generally, as expiration approaches, the levels of an option s time value, for both puts and calls, decreases or erodes. This effect is most noticeable with at-the-money options. The erosion of time value is not linear. Time value decays most rapidly as the days near expiration tick away. You will see more time value decay in the final 30 days of an options life. The time value of an option erodes with everyday that brings the expiration closer. See the chart below Time Decay Risk-Free Interest Rates and Dividends The final two components of option valuation including the risk free interest rate and corporate dividends do not play a significant role in the option valuation. These components are considered fixed values and do not fluctuate because their values are defined. The effect of an underlying security s dividends and the current risk-free interest rate have a small but measurable effect on option premiums. This effect reflects the cost of carry of shares in an underlying security -- the interest that might be paid for margin or received from alternative investments (such as a Treasury bill), and the dividends that would be received by owning shares outright. 20

21 4 Your First Strategy Deep In-The-Money Covered Calls Strategy Objectives Provide reward potential > 100% annually, while providing an active hedge as insurance for your stock positions GOAL = Buy Intrinsic value in stock and Sell Extrinsic value in options Strategy Benefits Simple structure Very High Success Rate ( > 80%) Includes Margin of Error High Annual Return Rates Steps 1. Find a stock you would like to own or already own. 2. Perform analysis (including Technical, Fundamental, and Sentimental) to determine anticipated price movement. You don t want to enter a trade just before any event that could drive stock price in any direction, e.g. earnings, FDA releases, etc. Note - If you are unfamiliar with standard analysis, I have a basic course available to bring you up to speed. 3. This strategy should be applied to stocks that you anticipate going up (Bullish). 4. Evaluate Option chain focusing on intrinsic/extrinsic value of In-The-Money (ITM) Call Contracts Trade Structure Combines Stock and Options. Buy 1000 shares of stock and simultaneously sell 10 CALL Contracts representing 1000 shares of stock. Review Short Call Obligations from Matrix By selling a CALL contract, you are giving someone else the right to buy your stock at a fixed price. 21

22 Example 1 USG Corp For our first trade, we ll use USG as our stock we would like to own. We can pull up a chart on to see the past year price chart that confirms USG is in a bullish trend up. Therefore, we will continue to anticipate the stock going up from here. Earnings have recently been released so we do not expect any short term news to come out that would impact the stock price. See the chart below. Next, we will review an option chain for USG available at com. The standard option chain will list Call contracts on the left and Put contracts on the right with a column of strike prices down the center. The In- The-Money Calls and Puts are shaded in light yellow. For this trading strategy, we want to look at Call contracts that are at least two strike prices In-The-Money to capture Intrinsic Value and build in our margin of error. Review the Option Chain for USG Corp below. 22

23 The objective of this strategy is to buy intrinsic value in the stock and sell extrinsic value in the options while building in a margin of error into your trades. You can see that the $37.50 Strike Call contract is the second contract listed that is In-The-Money (starting from the Out-Of-The-Money Call Contracts shown in white). The intrinsic value of the $37.50 strike Call contract can be calculated by subtracting the strike price from the current market price ($41.51-$37.50 = $4.01). Since the Intrinsic value is $4.01 and the market price for the contract is $6.20, there is $2.19 ($ $4.01) of Extrinsic value in this option. The objective of this strategy is to buy intrinsic value in the stock and sell extrinsic value in the options while building in a margin of error into your trades. That is very important to understand. Your trades will build in a buffer in case the stock moves against your initial expectation. Remember we selected this stock in anticipation that it would go up from here. The option will provide our margin of error in case the stock moves down. To establish the Deep In-The-Money Covered Call, you will buy the stock and simultaneously sell the Call contract. In our example, we will use a standard 1000 shares of stock and 10 Call contracts representing 1000 shares of stock. 23

24 Gives you a 15% margin of error. By building in a margin of error, you are increasing your probability of winning! Cost of Trade Buy 1000 shares of USG at $41.51 This will consume $41,510 or if you have a margin account, only half of the stock position will be required, which is $20,755. Sell 10 June $37.50 Calls at ($6.20) Net Cost/Share = $35.31 (calculated as $ $6.20) By selling the Call contracts, we are giving someone else the right to buy the stock from us at $ That s okay though since our cost is $ Review Trade Metrics/Calculations Max Gain = Short Strike Price less net cost of trade $ $35.31 = $2.19 per share, or $2,190 total Break even = Stock price less credit from selling Call 6.2% in 30 days equates to an Annual Rate of Return of 106%!!! $41.51 $6.20 = $ Stock must be at or above this amount to breakeven or make a profit. Current stock price = $41.51 Your profitability does not depend on your prediction that the stock will go up. The stock can also decrease and you will still win. Max Risk = Net cost of trade $35.31 x 1000 shares = $35,310 Note Even when trades move against you, you can adjust the trade to offset any risk and maintain profit potential. I will show you how to always Hedge your downside risk in your first course, Hedging Your Risk. Reward/Risk Ratio Equals max gain divided by max risk $2.19 / $35.31 = 6.2% 24

25 Below is the Profit and Loss Diagram for the combined position of long stock and a Short Call Option. You can see on the Profit and Loss Diagram the current stock price is already well above our Maximum gain point. By using the Option contract, we have built in a Margin of Error on this trade. We can be completely wrong on our analysis of expected stock movement up and still win our maximum profit! As long as the stock is trading above $37.50 by the expiration date in 30 days, we will win our $2,190! $(4,000) $2,000 Margin of Error = 15% Current Stock Price $- We can be completely wrong on our analysis of expected stock movement up and still win our maximum profit! profit / loss $2,000 $4,000 $6,000 $8,000 $10,000 $12, stock price Break Even 25

26 Trade Results: At expiration, the stock was trading even higher at $ We allowed our short call to be assigned which means we were obligated to sell our stock at $ Our cost basis in the trade was only $35.31 so we achieved our maximum profit of $2,190 in only 30 days. We are on our way to achieving our annual rate of return of over 100%! See the chart below to see where USG finished at expiration. Stock stayed above $37.50 so we realized our entire $2,190 profit!! Let s review another example of this strategy. In this example, we were completely wrong on our expectation of stock movement, but simply REACTED to the stock move and made more money than we originally planned. That s the power of options! 26

27 Example 2 AAPL Apple Computer For this trade, we ll use AAPL as our stock we would like to own. We can pull up a chart on to see the past year price chart that confirms AAPL is in a bullish trend up. Therefore, we will continue to anticipate the stock going up from here. Earnings have recently been released so we do not expect any short term news to come out that would impact the stock price. See the chart below. Next, we will review an option chain for AAPL available at com. The standard option chain will list Call contracts on the left and Put contracts on the right with a column of strike prices down the center. The In- The-Money Calls and Puts are shaded in light yellow. For this trading strategy, we want to look at Call contracts that are at least two strike prices In-The-Money to capture Intrinsic Value and build in our margin of error. Review the Option Chain for AAPL below. 27

28 You can see that the $37.50 Strike Call contract is the second contract listed that is In-The-Money (starting from the Out-Of-The-Money Call Contracts shown in white). The intrinsic value of the $37.50 strike Call contract can be calculated by subtracting the strike price from the current market price ($41.19-$37.50 = $3.69). Since the Intrinsic value is $3.69 and the market price for the contract is $4.90, there is $1.21 ($ $3.69) of Extrinsic value in this option. The objective of this strategy is to buy intrinsic value in the stock and sell extrinsic value in the options while building in a margin of error into your trades. That is very important to understand. Your trades will build in a buffer in case the stock moves against your initial expectation. Remember we selected this stock in anticipation that it would go up from here. The option will provide our margin of error in case the stock moves down. To establish the Deep In-The-Money Covered Call, you will buy the stock and simultaneously sell the Call contract. In our example, we will use a standard 1000 shares of stock and 10 Call contracts representing 1000 shares of stock. 28

29 Gives you a 12% margin of error. By building in a margin of error, you are increasing your probability of winning! Cost of Trade Buy 1000 shares of AAPL at $41.19 Sell 10 April $37.50 Calls at ($4.90) Net Cost/Share $36.29 calculated as ($ $4.90) By selling the Call contracts, we are giving someone else the right to buy the stock from us at $ That s okay though since our cost is $ Note The long stock position will consume $41,190 or if you have a margin account, only half of the stock position will be required, which is $20,595. A single stock futures (SSF) account would only require $8,240! You should substitute SSF s for stock wherever possible. In the remaining courses, we will discuss the use of Single Stock Futures in lieu of traditional stock wherever possible. Review Trade Metrics/Calculations Max Gain = Short Strike Price less net cost of trade $ $36.29 = $1.21 per share, or $1,210 total 3.4% in 30 days equates to an Annual Rate of Return of 49.4%!!! Break even = Stock price less credit from selling Call $41.19 $4.9 = $ Stock must be at or above this amount to breakeven or make a profit. Current stock price = Your profitability does not depend on your prediction that the stock will go up. The stock can also decrease and you will still win. Max Risk = Net cost of trade $36.29 x 1000 shares = $36,290 Note Even when trades move against you, you can adjust the trade to offset any risk and maintain profit potential. I will show you how to always Hedge your downside risk. Reward/Risk Ratio Equals max gain divided by max risk $1.21 / $36.29 = 3.4% 15% in 30 days equates to an Annual Rate of Return of 535%!!! Reward/Risk Ratio Equals max gain divided by Capital consumed in trade (assumes Single Stock Futures used instead of stock) $1.21 / $8.24 = 15% 29

30 Below is the Profit and Loss Diagram for the combined position of long stock and a Short Call Option. You can see on the Profit and Loss Diagram the current stock price is already well above our Maximum gain point. By using the Option contract, we have built in a Margin of Error on this trade. We can be completely wrong on our analysis of expected stock movement up and still win our maximum profit! As long as the stock is trading above $37.50 by the expiration date in 30 days, we will win our $1,210, or 535% on capital! $2,000 Margin of Error = 15% profit / loss $- $2,000 $4,000 $6,000 $8, Break-Even Current Stock Price $10,000 $12,000 stock price Trade Results: April 15th AAPL closed at $35.39, down $5.80 or 14% from where we entered the trade. Our cost basis in the trade was $36.29 so we can either make an adjustment or take a loss. The loss would only be $900 vs. a loss of $5,800 had we only bought the stock for our initial trade. The short option expired worthless so we kept the entire $4,900 collected from selling the Call contracts. This gave us our cost basis in the remaining stock we owned of $ At this point we owned the stock and the option expired. We could decide to enter another Covered Call by selling a $30 Call against our stock and collect $8/share. That would lower our cost basis in the stock to $28.29 ($ $8) and obligate us to sell the stock at $30 if AAPL trades above $30 at expiration of the next month. That would leave us with profit potential of $1.71/share, or $1,710, on a stock that went from $41 down to $35. We were completely wrong and could simply REACT to the downward movement by adjusting our trade and maintaining profit potential. 30

31 AAPL dropped right at expiration We elected not to enter another Covered Call and just 3 days later, AAPL traded up to $37.74 giving us the opportunity to sell our stock at $ We sold our stock for $37.70 and our cost basis was $36.29 so we captured an additional profit of $1.41 or $1,410 for the trade. We made more money than we originally planned because we simply REACTED to the stocks downward movement and adjusted our trade. That s the power of options! We made more money when we were completely wrong about the stock! 31

32 5 Summary Options allow you to control stocks without owning them. By using multiple option positions, you can effectively reduce risk to your acceptable level or eliminate it entirely. You can achieve high rates of return while building in margins of error into your trades. The key to profiting with options is to focus on Probabilities of winning! Build in margins of error into your trades and that will increase your probability of winning. Mastering options will change your investment strategy to simply REACT to stock movements instead of trying to predict them. Due diligence will make you a better and more successful trader. Be sure to paper trade strategies before you start trading with real money. 32

33 Next Course Outline These courses are designed to educate you on conservative option strategies that will allow you to make money consistently every month. You will learn how to find trades, initiate trades, and make adjustments to your trades to come out a winner on 80% of your trades. You will also learn how to structure your trading business for tax purposes to allow you to keep more of the profits you earn by reducing the taxes on your gains. You will gain a complete business plan to allow you to replace your current income with Trading Profits and give you financial freedom! Our program is reserved for individuals that are serious about making a living by successfully trading options. The program starts with Home Study Training Materials including our training manual and presentation CD s that you can read through at your convenience. As you go through the training materials and develop questions or need clarification, you can ask the professionals that created the program directly in our live interactive online seminars. We host the seminars online so you do not have to travel to receive answers and guidance from our professional team. You can also see the strategies you learn in action through our trading newsletter. Our team will send you real trades they are making in their personal accounts. More importantly, they will send you the adjustments they make to their trades to show you how to maximize profits. You can follow along with the professionals, place the same trades they are, and make money in the markets while you learn. This program will take a novice investor and make them a professional trader living off of profits generated in the markets. You can sign up now for the Complete Option Trading Program including our Home Study Training Materials, Live Seminars, and continuing support with our Professional Trading Newsletter. In order to provide clients with the most beneficial learning experience and adequate levels of personal attention, session enrollment is limited. Your first trade will pay for the entire Program!! Click Here to Order Now 33

34 Below are details for the individual courses. You can also review more details of the courses online at Click on any course name for a more detailed description of content. 34 Level 1 Courses Hedging Your Risk Stock Analysis 101 Debit Spreads Credit Spreads Rule #1 is always protect your downside. This course goes past the basic protection of Puts and shows you how to hedge your risk for individual stocks or entire portfolios in both retirement and nonretirement accounts. You can even hedge your downside risk for stocks you will own in the future, such as when you exercise options granted by your employer. Learn how to get portfolio insurance for NO cost! Learn a new strategy to limit your risk in all situations! Review 3 real trades used to generate annual returns >86% See the strategy produce $2,140 Profit with only $2,860 of trading capital at risk. That s a 75% return in 30 days! This course explores the many disciplines involved in analyzing stocks. Learn to analyze a stock using a blend of Fundamental, Technical, and Sentimental analysis techniques. Increasing your stock analysis skills will provide increased trading profits. Learn where to find good trading opportunities quickly and easily Learn various analysis techniques including Fundamental, Technical, and Sentimental Review examples of indicators and valid Buy/Sell signals View websites where you can get all the trading information you need for Free! Learn two basic strategies that will provide high returns and are great trade setups. Although you can use these strategies to build a solid business plan, these essential strategies will become the adjustments to better trade setups in the advanced courses. Learn unique approaches to Bull Call spreads and Bear Put spreads that generate >80% win rates! Review 3 real trade examples that generated huge Profits! See one trade that won 19% in only 30 days. That equates to annual rate of return of over 700% Profit from stocks that move up or down These two essential strategies put cash in your pocket up front. Learn how to generate cash flow consistently. I play these strategies every month!

35 These are very high probability trades. Win more than 80% of your credit spreads by implementing our unique strategy play. Review 3 real trade examples that generated huge Profits! See one trade that won 15% in only 35 days. That equates to annual rate of return of over 320% Profit from stocks that move up or down Business Plan Essentials Before you trade with real money, you need this course. Learn how to maximize the tax system so you keep more of your gains. Learn the benefits of creating separate entities to trade within and the tax benefits of certain securities we will trade. Learn which options to trade to cut your taxes in half! See the tax impact of various trading instruments Understand the tax laws affecting stock, options, futures, and commodities Should you create your own Corporation or LLC to trade within? See how two traders compare when one knows the tax law and one does not. The tax wise trader saved over $19,000 in taxes! Why your CPA won't know the tax law affecting transactions involving options and futures 35 Level 2 Courses Calendar Spreads Learn advanced trade setups that are easily adjusted to allow you to REACT to stock price moves. These are very versatile trades that will incorporate several adjustments. Our unique approach to Calendar spreads makes it easy to make money Review 3 real trade examples that generated huge Profits! See one trade that won 79% in only 30 days. That equates to annual rate of return of over 2,000% Profit from stocks that trade within a range Easily adjust your trades to REACT to stock price moves These 2 strategies require the lowest amount of capital! You can trade using these strategies with only a few hundred dollars! Advanced Neutral Strategies When stocks are trading within a range, you can employ several strategies to take advantage of predictable support and resistance levels to profit from stagnant stocks. Learn 3 new strategies that will generate profits whether the stock moves up or down. Play both sides of the stock to win in either direction

36 Review 3 real trade examples that generated huge Profits! Profit from stocks that move up, down, or that even stay flat Learn invaluable trade adjustments so you know how to maximize profits when stocks move in any direction Advanced Combination Strategies Level 3 Courses Systematic Writing See one trade that won 54% in only 11 days. That equates to annual rate of return of over 4,000% Learn to combine multiple strategies on one stock that only consumes the margin of one trade and guarantees a winner. Play both sides of stocks so you can win if they go up and you win if they go down. Learn 2 new strategies that will generate profits whether the stock moves up or down. Play both sides of the stock to win in either direction These strategies require minimal trading capital since you are guaranteed a winner Review 3 real trade examples that generated huge Profits! See one trade that won 15% in only 11 days. That equates to annual rate of return of over 2,800% Profit from stocks that move up, down, or that even stay flat Learn invaluable trade adjustments so you know how to maximize profits when stocks move in any direction The Systematic Writing course is a complete trading system involving trade setups, initial adjustments and secondary adjustments to generate huge profits! Learn what to do when your initial trade setup goes against you so you can still come out a winner. Learn this complete Trading System that produces huge Profits! Learn how to make money even when you are 100% wrong on your analysis See one trade that won over $2,000 even when the stock dropped 16% against our expectation Profit from stocks that move up, down, or that even stay flat Learn invaluable trade adjustments so you know how to maximize profits when stocks move in any direction Use the strategy flowchart diagram as a road map to your trading 36

37 Options to Repair Losing Stocks If you currently own stock in a losing position, or if you will ever own stock in the future, learn these strategies to get out of a losing stock position at breakeven or even a small profit. These strategies are great at rescuing stocks. Learn 4 new strategies that will recover your losses in your stock position See how to get out of your losing stock at breakeven or maybe a slight profit Strategies are catorgorized based on the size and length of time in a loss Learn how to use the advantages of options to repair the value of your losing stock positions Advanced Ratio Spreads The Advanced Ratio Spread course combines your technical analysis skills with advanced options knowledge to show you how to leverage into huge profits. Learn the strategies the professionals use to make thousands of dollars on each trade. Learn 2 new strategies the professionals use that will either generate profits or breakeven You can even structure these trades to guarantee a profit Review 2 real trade examples that generated huge Profits! See one trade that won 1400% in only 37 days. We made $2,820 in Profit on a trade that only required $200 to initiate. Profit from stocks that move up, down, or that even stay flat Learn invaluable trade adjustments so you know how to maximize profits when stocks move in any direction Dividend Income Strategy The Dividend Income Strategy is virtually a risk-free trade setup that can be used anytime a dividend is declared. You can receive the dividend and profit in as little as one day. Learn this virtually risk free strategy that profits by the amount of the dividends issued Worst case scenario is a breakeven trade Understand the mechanics of dividends and key dates Learn how common stock splits affect stock prices and option valuation 37

38 You can also sign up for the individual components of our Complete Option Trading Program. For more information, click on: NEWSLETTER, SEMINARS, and COURSES. Courses Each option trading course includes unique strategies and includes real trade examples. You will also learn the adjustments made during the trade to maximize profits! To review a listing of courses and their content, click on COURSES. Newsletter Our Trading Newsletter allows you to peek over the shoulder of our trading professionals and see the trades they are making in their own accounts in real time. You can place the same trades they place and make money while you learn! You will see the strategies we teach in action. More importantly, you will see the adjustments made to these trades to come out a winner on virtually every trade. Stocks do not move in a straight line so you need to see what to do when the stock moves against you so you can make more money, even when you are wrong on a stock. To sign up for our Trading Newsletter, click on NEWSLETTER. Seminars Our Live Interactive Seminars provides the opportunity to review the Trading Program Materials directly with the professionals who designed it and make their living trading. These seminars are held online so you do not need to travel anywhere to have access to our team of professionals. They are here to guide you to success. You can have all your questions answered in these online Seminars. The Seminars are held daily so you can participate when you are ready. In addition, you can request a one-on-one session at a time convenient to you if our standard times do not work with your schedule. To see more information on our Seminars, click on SEMINARS. 38