easy money by scott wheelis
DESCRIPTION
A guide to successful futures tradingTRANSCRIPT
j
POOR RICHARDS
GUIDE
TO
THE HARDEST
EASY MONEY
YOU WILL EVER MAKE
Scott Wheelis PO Box 532725 Grand Prairie TX 75053
Email CSWheelismsncom
This tutorial is dedicated to Richard D Pate my father in law Like many of us he worked hard all his life and in approaching retirement realized more cash assets would be required He made an entry into the exciting world of stock investing and found that the experts really werent there to help him
This is the 2nd eddition
Thanks must go to my son my best friend Eidorb and additional friends for asking me to clarify many areas As always I am striving for excellence Perhaps after several more editions we may have a tutorial worth publishing
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Table of Contents
Preface 3
Rules of Speculation Investing 3
Dont Buy Stocks 3
Buy Options 4
Call Options 4
Put Options 6
Option Pricing 7
Tools Required 8
The Magic 9
How Do I Make Money 10
Basic Analysis 11
Trend Line Analysis 12
Measure Your Probability of Success before You Invest 13
How to Use the Call Option Price Evaluation Form 15
How to Use the Put Option Price Evaluation Form 17
Philosophy 18
Recommended Reading 21
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Preface
This tutorial is designed for those who have little or no experience in the stock market and who may be willing to risk $2500 to $5000 speculating on high growth and return on investment (ROI)
Rules of Speculation Investing
Only invest that which you can afford to lose There are no guaranties or warranties in the stock market
Knowledge is the most valuable tool in your arsenal Before you invest in an equity look at the chart know which way it has moved in the past and where you believe it is going in the future I will go into some detail on charting and trend line analysis later
Know your exit before you enter into an investment Determine what is an acceptable return on investment (ROI) and commit to it
Diversify Do not put all of your money into a single investment Instead of one large investment make smaller investments into 4 or 5 equities If one investment proves poor the others have a chance of making up for it
Dont Buy Stocks
When you buy a stock you are purchasing a part ownership in the underlying company Your investment has an unlimited upward potential The investment is limited only by the growth of the company Your risk is the full value of the stock purchased Although proper research will limit the liability of the stock going to $0 few companies grow at 20 per year and this tutorial is designed to help you achieve 20 per month growth on your speculative capital
Example
$500000 invested will buy 100 shares of a $5000 stock Your upside opportunity is limited only by the growth of the company If the company and the stock value increase 20 per year your investment will be worth $60 per share or $6000 at the end of 12 months However if the day after you buy the stock the company declares bankruptcy your shares are worth $0 Your loss is the entire $5000
3
Buy Options
An option on a stock is much like a $2 bet at the horse races You dont own the horse but you can share in its winnings and losses Options allow you to control hundreds of dollars of stock with a small investment for a limited time Options expire on the third Friday of the month for which the option was purchased Options are based on specific stock prices called strike prices Strike prices are the optional stock prices at which you can buy or sell a stock Strike pricing begins at $5 and increases in $25 increments to $20 they usually increase in $5 increments to $100 and then increase in $10 increments Options are bought in contracts One contract represents 100 shares of the underlying stock The market maker the actual trader on the floor prices the options
Call Options
The Call option gives you the right but not the obligation to buy the underlying stock at the strike price of the option
Call options are bought when you believe the underlying security is going to increase in value
Example ABC companys stock is currently selling at $4800 per share Through your research stock charts trend analysis fundamental analysis etc you believe that this stock will be in the $55 to $60 range in 90 days You price the $5000 strike price option 90 days out through your broker and he tells you it is 1 by 2 This means the bid what the market maker will pay for the option is $175 and the ask what the market maker will sell the option for is $200 Therefore 1 contract of ABC at a $50 strike price with 90 days of time will cost you $20000 plus commissions Assume you determine this to be a good investment and you buy 1 contract of the $5000 call 90 days out Where is your break even You bought the $5000 call and paid $200 for it Therefore the stock must reach $5200 on or before the option expiration date for you to realize your $200 back But were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $55 to $60 ranges by expiration Lets assume the stock reaches a price of $5825 two weeks before expiration You own the $5000 call which means that you have the right to buy the stock at $5000 But the stock is selling for $5825 You call your broker and he now quotes your option at 8 by 8 lA you can now sell your option for $800 On the risk side if by the option expiration date the stock has not performed as you anticipated and is still selling at $5000 or less your option becomes worthless and you have lost your $20ption Now lets really look at the numbers
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ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
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Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
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PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
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Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
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The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
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HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
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$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
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On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
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On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
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CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
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Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
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Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
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0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
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Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
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Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
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I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
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Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
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This tutorial is dedicated to Richard D Pate my father in law Like many of us he worked hard all his life and in approaching retirement realized more cash assets would be required He made an entry into the exciting world of stock investing and found that the experts really werent there to help him
This is the 2nd eddition
Thanks must go to my son my best friend Eidorb and additional friends for asking me to clarify many areas As always I am striving for excellence Perhaps after several more editions we may have a tutorial worth publishing
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Table of Contents
Preface 3
Rules of Speculation Investing 3
Dont Buy Stocks 3
Buy Options 4
Call Options 4
Put Options 6
Option Pricing 7
Tools Required 8
The Magic 9
How Do I Make Money 10
Basic Analysis 11
Trend Line Analysis 12
Measure Your Probability of Success before You Invest 13
How to Use the Call Option Price Evaluation Form 15
How to Use the Put Option Price Evaluation Form 17
Philosophy 18
Recommended Reading 21
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Preface
This tutorial is designed for those who have little or no experience in the stock market and who may be willing to risk $2500 to $5000 speculating on high growth and return on investment (ROI)
Rules of Speculation Investing
Only invest that which you can afford to lose There are no guaranties or warranties in the stock market
Knowledge is the most valuable tool in your arsenal Before you invest in an equity look at the chart know which way it has moved in the past and where you believe it is going in the future I will go into some detail on charting and trend line analysis later
Know your exit before you enter into an investment Determine what is an acceptable return on investment (ROI) and commit to it
Diversify Do not put all of your money into a single investment Instead of one large investment make smaller investments into 4 or 5 equities If one investment proves poor the others have a chance of making up for it
Dont Buy Stocks
When you buy a stock you are purchasing a part ownership in the underlying company Your investment has an unlimited upward potential The investment is limited only by the growth of the company Your risk is the full value of the stock purchased Although proper research will limit the liability of the stock going to $0 few companies grow at 20 per year and this tutorial is designed to help you achieve 20 per month growth on your speculative capital
Example
$500000 invested will buy 100 shares of a $5000 stock Your upside opportunity is limited only by the growth of the company If the company and the stock value increase 20 per year your investment will be worth $60 per share or $6000 at the end of 12 months However if the day after you buy the stock the company declares bankruptcy your shares are worth $0 Your loss is the entire $5000
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Buy Options
An option on a stock is much like a $2 bet at the horse races You dont own the horse but you can share in its winnings and losses Options allow you to control hundreds of dollars of stock with a small investment for a limited time Options expire on the third Friday of the month for which the option was purchased Options are based on specific stock prices called strike prices Strike prices are the optional stock prices at which you can buy or sell a stock Strike pricing begins at $5 and increases in $25 increments to $20 they usually increase in $5 increments to $100 and then increase in $10 increments Options are bought in contracts One contract represents 100 shares of the underlying stock The market maker the actual trader on the floor prices the options
Call Options
The Call option gives you the right but not the obligation to buy the underlying stock at the strike price of the option
Call options are bought when you believe the underlying security is going to increase in value
Example ABC companys stock is currently selling at $4800 per share Through your research stock charts trend analysis fundamental analysis etc you believe that this stock will be in the $55 to $60 range in 90 days You price the $5000 strike price option 90 days out through your broker and he tells you it is 1 by 2 This means the bid what the market maker will pay for the option is $175 and the ask what the market maker will sell the option for is $200 Therefore 1 contract of ABC at a $50 strike price with 90 days of time will cost you $20000 plus commissions Assume you determine this to be a good investment and you buy 1 contract of the $5000 call 90 days out Where is your break even You bought the $5000 call and paid $200 for it Therefore the stock must reach $5200 on or before the option expiration date for you to realize your $200 back But were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $55 to $60 ranges by expiration Lets assume the stock reaches a price of $5825 two weeks before expiration You own the $5000 call which means that you have the right to buy the stock at $5000 But the stock is selling for $5825 You call your broker and he now quotes your option at 8 by 8 lA you can now sell your option for $800 On the risk side if by the option expiration date the stock has not performed as you anticipated and is still selling at $5000 or less your option becomes worthless and you have lost your $20ption Now lets really look at the numbers
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ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
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Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
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PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
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Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
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The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
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HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
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$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
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On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
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On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
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CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
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Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
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Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
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PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
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How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
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Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
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Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
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contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
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Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
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Table of Contents
Preface 3
Rules of Speculation Investing 3
Dont Buy Stocks 3
Buy Options 4
Call Options 4
Put Options 6
Option Pricing 7
Tools Required 8
The Magic 9
How Do I Make Money 10
Basic Analysis 11
Trend Line Analysis 12
Measure Your Probability of Success before You Invest 13
How to Use the Call Option Price Evaluation Form 15
How to Use the Put Option Price Evaluation Form 17
Philosophy 18
Recommended Reading 21
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Preface
This tutorial is designed for those who have little or no experience in the stock market and who may be willing to risk $2500 to $5000 speculating on high growth and return on investment (ROI)
Rules of Speculation Investing
Only invest that which you can afford to lose There are no guaranties or warranties in the stock market
Knowledge is the most valuable tool in your arsenal Before you invest in an equity look at the chart know which way it has moved in the past and where you believe it is going in the future I will go into some detail on charting and trend line analysis later
Know your exit before you enter into an investment Determine what is an acceptable return on investment (ROI) and commit to it
Diversify Do not put all of your money into a single investment Instead of one large investment make smaller investments into 4 or 5 equities If one investment proves poor the others have a chance of making up for it
Dont Buy Stocks
When you buy a stock you are purchasing a part ownership in the underlying company Your investment has an unlimited upward potential The investment is limited only by the growth of the company Your risk is the full value of the stock purchased Although proper research will limit the liability of the stock going to $0 few companies grow at 20 per year and this tutorial is designed to help you achieve 20 per month growth on your speculative capital
Example
$500000 invested will buy 100 shares of a $5000 stock Your upside opportunity is limited only by the growth of the company If the company and the stock value increase 20 per year your investment will be worth $60 per share or $6000 at the end of 12 months However if the day after you buy the stock the company declares bankruptcy your shares are worth $0 Your loss is the entire $5000
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Buy Options
An option on a stock is much like a $2 bet at the horse races You dont own the horse but you can share in its winnings and losses Options allow you to control hundreds of dollars of stock with a small investment for a limited time Options expire on the third Friday of the month for which the option was purchased Options are based on specific stock prices called strike prices Strike prices are the optional stock prices at which you can buy or sell a stock Strike pricing begins at $5 and increases in $25 increments to $20 they usually increase in $5 increments to $100 and then increase in $10 increments Options are bought in contracts One contract represents 100 shares of the underlying stock The market maker the actual trader on the floor prices the options
Call Options
The Call option gives you the right but not the obligation to buy the underlying stock at the strike price of the option
Call options are bought when you believe the underlying security is going to increase in value
Example ABC companys stock is currently selling at $4800 per share Through your research stock charts trend analysis fundamental analysis etc you believe that this stock will be in the $55 to $60 range in 90 days You price the $5000 strike price option 90 days out through your broker and he tells you it is 1 by 2 This means the bid what the market maker will pay for the option is $175 and the ask what the market maker will sell the option for is $200 Therefore 1 contract of ABC at a $50 strike price with 90 days of time will cost you $20000 plus commissions Assume you determine this to be a good investment and you buy 1 contract of the $5000 call 90 days out Where is your break even You bought the $5000 call and paid $200 for it Therefore the stock must reach $5200 on or before the option expiration date for you to realize your $200 back But were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $55 to $60 ranges by expiration Lets assume the stock reaches a price of $5825 two weeks before expiration You own the $5000 call which means that you have the right to buy the stock at $5000 But the stock is selling for $5825 You call your broker and he now quotes your option at 8 by 8 lA you can now sell your option for $800 On the risk side if by the option expiration date the stock has not performed as you anticipated and is still selling at $5000 or less your option becomes worthless and you have lost your $20ption Now lets really look at the numbers
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ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
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Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
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PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
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Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
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The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
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HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
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$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
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On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
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CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
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Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
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0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
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Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
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Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
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Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
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Preface
This tutorial is designed for those who have little or no experience in the stock market and who may be willing to risk $2500 to $5000 speculating on high growth and return on investment (ROI)
Rules of Speculation Investing
Only invest that which you can afford to lose There are no guaranties or warranties in the stock market
Knowledge is the most valuable tool in your arsenal Before you invest in an equity look at the chart know which way it has moved in the past and where you believe it is going in the future I will go into some detail on charting and trend line analysis later
Know your exit before you enter into an investment Determine what is an acceptable return on investment (ROI) and commit to it
Diversify Do not put all of your money into a single investment Instead of one large investment make smaller investments into 4 or 5 equities If one investment proves poor the others have a chance of making up for it
Dont Buy Stocks
When you buy a stock you are purchasing a part ownership in the underlying company Your investment has an unlimited upward potential The investment is limited only by the growth of the company Your risk is the full value of the stock purchased Although proper research will limit the liability of the stock going to $0 few companies grow at 20 per year and this tutorial is designed to help you achieve 20 per month growth on your speculative capital
Example
$500000 invested will buy 100 shares of a $5000 stock Your upside opportunity is limited only by the growth of the company If the company and the stock value increase 20 per year your investment will be worth $60 per share or $6000 at the end of 12 months However if the day after you buy the stock the company declares bankruptcy your shares are worth $0 Your loss is the entire $5000
3
Buy Options
An option on a stock is much like a $2 bet at the horse races You dont own the horse but you can share in its winnings and losses Options allow you to control hundreds of dollars of stock with a small investment for a limited time Options expire on the third Friday of the month for which the option was purchased Options are based on specific stock prices called strike prices Strike prices are the optional stock prices at which you can buy or sell a stock Strike pricing begins at $5 and increases in $25 increments to $20 they usually increase in $5 increments to $100 and then increase in $10 increments Options are bought in contracts One contract represents 100 shares of the underlying stock The market maker the actual trader on the floor prices the options
Call Options
The Call option gives you the right but not the obligation to buy the underlying stock at the strike price of the option
Call options are bought when you believe the underlying security is going to increase in value
Example ABC companys stock is currently selling at $4800 per share Through your research stock charts trend analysis fundamental analysis etc you believe that this stock will be in the $55 to $60 range in 90 days You price the $5000 strike price option 90 days out through your broker and he tells you it is 1 by 2 This means the bid what the market maker will pay for the option is $175 and the ask what the market maker will sell the option for is $200 Therefore 1 contract of ABC at a $50 strike price with 90 days of time will cost you $20000 plus commissions Assume you determine this to be a good investment and you buy 1 contract of the $5000 call 90 days out Where is your break even You bought the $5000 call and paid $200 for it Therefore the stock must reach $5200 on or before the option expiration date for you to realize your $200 back But were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $55 to $60 ranges by expiration Lets assume the stock reaches a price of $5825 two weeks before expiration You own the $5000 call which means that you have the right to buy the stock at $5000 But the stock is selling for $5825 You call your broker and he now quotes your option at 8 by 8 lA you can now sell your option for $800 On the risk side if by the option expiration date the stock has not performed as you anticipated and is still selling at $5000 or less your option becomes worthless and you have lost your $20ption Now lets really look at the numbers
4
ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
5
Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
6
PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
7
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
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$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
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-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
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Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Buy Options
An option on a stock is much like a $2 bet at the horse races You dont own the horse but you can share in its winnings and losses Options allow you to control hundreds of dollars of stock with a small investment for a limited time Options expire on the third Friday of the month for which the option was purchased Options are based on specific stock prices called strike prices Strike prices are the optional stock prices at which you can buy or sell a stock Strike pricing begins at $5 and increases in $25 increments to $20 they usually increase in $5 increments to $100 and then increase in $10 increments Options are bought in contracts One contract represents 100 shares of the underlying stock The market maker the actual trader on the floor prices the options
Call Options
The Call option gives you the right but not the obligation to buy the underlying stock at the strike price of the option
Call options are bought when you believe the underlying security is going to increase in value
Example ABC companys stock is currently selling at $4800 per share Through your research stock charts trend analysis fundamental analysis etc you believe that this stock will be in the $55 to $60 range in 90 days You price the $5000 strike price option 90 days out through your broker and he tells you it is 1 by 2 This means the bid what the market maker will pay for the option is $175 and the ask what the market maker will sell the option for is $200 Therefore 1 contract of ABC at a $50 strike price with 90 days of time will cost you $20000 plus commissions Assume you determine this to be a good investment and you buy 1 contract of the $5000 call 90 days out Where is your break even You bought the $5000 call and paid $200 for it Therefore the stock must reach $5200 on or before the option expiration date for you to realize your $200 back But were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $55 to $60 ranges by expiration Lets assume the stock reaches a price of $5825 two weeks before expiration You own the $5000 call which means that you have the right to buy the stock at $5000 But the stock is selling for $5825 You call your broker and he now quotes your option at 8 by 8 lA you can now sell your option for $800 On the risk side if by the option expiration date the stock has not performed as you anticipated and is still selling at $5000 or less your option becomes worthless and you have lost your $20ption Now lets really look at the numbers
4
ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
5
Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
6
PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
7
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
ABC STOCK CURRENTLY AT $48 MOVING TO $5825 PURCHASE amp SELL STOCK PURCHASE amp SELL CALL OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Call Contract $50 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $5825 $582500 1 Contract $50 Strike $800 $80000
Commission ($3500) Commission ($3000)
Income $579000 Income $77000
Less Investment ($483500) Less Investment ($23000)
Profit $95500 Profit $54000
ROI (Profitffotal Cost) 197518 ROI (Profitffotal Cost) 2347826
Please Note If the market experienced a severe downturn during your investment period your total liability on the stock purchase would be the total fall in the stock price while your liability with the call option would be $230 your total investment
If you purchase call options on a stock and the stock goes up you can sell your option at a profit any time prior to the option expiration date If you fail to sell your call option prior to the option expiration date and the stock value is $75 above your strike price at the option expiration date you will be assigned the stock the following Monday This means that on the Monday following the third Friday of the option expiration month you will purchase the shares of the underlying stock covered by your options at the strike price of your option If you do not have the purchasing power in your brokerage account to pay for the shares you can sell them at the market value the value that the security is trading at the moment of buy or sale that Monday This may sound good However consider this You own 10 contracts of the $50 call on ABC Company On Thursday prior to expiration Friday the stock is trading at $51 You dont want to accept $075 per share for the options so you wait On Friday the stock stays flat and you dont do anything Now on Monday the stock opens at $5150 and your broker tells you that you have been assigned 1000 shares of ABC stock at $50share You can keep it if you have $5000000 in your account or you can sell it at the market price so you say SELL IT But from the time of the market open and you place your sell order the stock fell to $49 per share You sell but you sold it at $49 and bought at $50 so you now need a $100000 in your account to cover the loss Only let a call option expire if it is out ofthe money or well into the money so you arent taking any risk
5
Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
6
PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
7
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
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Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Put Options
The Put option gives you the right but not the obligation to sell the underlying stock at the strike price of the option
Put options are bought when you believe the underlying security is going to decrease in value
Example ABC companys stock is currently selling at $4800 per share You believe that this stock will be in the $35 to $40 range in 90 days You price the $4500 strike price option 90 days out through your broker and he tells you it is 1 by 2 Assume you determine this to be a good investment and you buy 1 contract of the $4500 put 90 days out Where is your break even You bought the $4500 put and paid $200 for it Therefore the stock must fall below $4500 by $200 on or before the option expiration date for you to realize your $200 back But again were not investing to get our $200 back so how do we make money Remember through your research you believed that this stock would be in the $35 to $40 range by expiration Lets assume the stock reaches a price of $3875 two weeks before expiration You own the $4500 put which means that you have the right to sell the stock at $4500 But the stock is selling for $3875 You call your broker and he now quotes your option at 6 by 6 lA you can sell your option for $600 On the risk side if by expiration the stock has not performed as you anticipated and is still selling at $4500 or more your option becomes worthless and you have lost your $21option Again lets really look at the numbers
ABC STOCK CURRENTLY AT $48 MOVING TO $3875 PURCHASE amp SELL STOCK PURCHASE amp SELL PUT OPTION
PURCHASE PURCHASE
100 Shares $48 $480000 1 Put Contract $45 Strike $200 $20000
Commission $3500 Commission $3000
Total Cost $483500 Total Cost $23000
SELL SELL
100 Shares $3875 $387500 1 Contract $50 Strike $600 $60000
Commission ($3500) Commission ($3000)
Income $384000 Income $57000
Less Investment ($483500) Less Investment ($23000)
Loss ($99500) Profit $34000
ROI (Profitlfotal Cost) -205791 ROI (profitlfotal Cost) 1478261
6
PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
7
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
PUT OPTIONS (Continued)
Please Note If the stock value remained relatively flat on the option expiration date the $45 put would be worth its intrinsic value however if the stock value increased above $4500 during your investment period your total liability with the put option would be $230 your total investment
As with the call option if your put option has an intrinsic value of $75 or greater on the option expiration date and you fail to sell it your brokerage will automatically exercise it for you on the following Monday This means that they will automatically put the stock to one that sold the put option at the current market price and the difference between the value of your put and the current market price of the security will be put into your account less commissions
Option Pricing
The key ingredients that go into the pricing of the option are as follows
Strike Price This is the price at which you can buy or sell the underlying stock
Intrinsic value The value a stock is currently trading over a call option strike price or under a put option strike price This is also called the amount in the money Example If you buy a $45 calIon a stock currently trading at $48 $300 of the option price is intrinsic value On the other hand if you buy a $45 put on a stock currently trading at $42 $300 of the option price is intrinsic value
Time Value Time value is that value of the option price charged for the right to hold the option until expiration Time value degrades rapidly in the last 8 weeks of the option period As in the previous example if you paid $5 for the $45 call expiring 90 days out on a stock which was currently trading at $48 $3 is intrinsic value and $2 is the time value Note the time value depreciates as you approach the option expiration date and it will virtually disappear if the stock price moves to a point where you are deep in the money Example If you hold the $45 call on a stock which is trading at $65 your option may only be worth $20 even if you have 2 or 3 months of time left
Volatility The amount the underlying stock price moves up and down over time A highly volatile stock will have a higher probability of moving through the strike price and consequentially the option price will reflect this
Volume Typical supply and demand If there is a lot of interest in a specific equity the price will reflect it
7
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
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Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Tools Required
Investment Capital
For most brokers you need $250000 minimum to open a margin account with option capabilities
A Discount Broker
You will do all of your own research and investment decisions so you dont need the advice of a full service broker Also your individual investments may be as small as $6250 for 10 contracts (1000 shares) of a stock Why pay more in commissions than you put in the investment
A Computer
You can actually do this without a computer but getting timely data and doing timely analysis will be difficult The large investors banks holding companies and brokers are all on line and in a sense you are competing with them I have included Option Price Evaluation Forms in this tutorial and you can work them longhand but putting them into a spreadsheet program will reduce your evaluation time immensely As with any job the better the tools you have the easier the job is If you can access the Internet you can use on line brokers get quotes and even get stock charts However if you are on a limited budget you do not need any more than a computer capable of running windows 31 and a 96-KB modem
A Charting Service
Many brokers will offer stock charts and if you are on line there are many web sites which will offer free charts The true value of a good charting service is that they will give you much more information than just a price chart They tell you if a stock is overbought therefore perhaps coming down or undersold therefore poised to go up I use Wordens Telechart 2000 All of the chart examples in this tutorial are scanned charts from Telechart 2000 version 30 with my crude annotation added Version 30 is a DOS based software package and it provides you with end of the day data from an 800 bulletin board service for about $looday I dont know the cost of V30 but its less than $4000 Version 42 is a true Windows 95 version and will give you close to real-time data via the Internet at a cost of about $250day More than offering you an excellent charting service Don Worden his son and staff are professional technical annalists offering usually daily comments on what they see through their well educated and experienced eyes Just following their advice has brought profits which are many times the costs of using their products Wordens phone is 1 800 776 4940
8
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
The Magic
OK you have $500000 of discretionary funds in a brokerage account a computer and a charting service Now What
What Stocks Do You Buy Options On
You can buy a $1750 call on a $1600 stock with 60 to 90 days of time value for $400 Your break even will be the $1750 strike plus the $400 investment or $2150 $2150 minus the current value of $1600 is $550 $550 divided by $1600 is 34 This means you need a 34 movement in the stock price just to break even You could also buy a $70 call on a $6800 stock with 60 to 90 days of time value for the same $400 Your break even will be the $70 strike price plus the $4 invested or $7400 $7400 minus the current value of $6800 is $600 $600 divided by $6800 is 088 This means you need an 88 movement in this stock price to break even It is far easier for a stock to move 10 or less than 30 or more so without additional data I am uncomfortable with an inexpensive stock
Analyze
Study the underlying stock which you plan to purchase the options on Is it at an all time high overbought and perhaps corning down or at an all time low underbought and perhaps moving up Use trend line analysis to determine what the future support a value the stock will stay above or resistance a value the stock seems to not go above points are Most importantly once you find a stock you are interested in look at all the options available Options deep in the money are often a better value than those that are close to the money
Know Your Exit before You Enter an Investment
You wouldnt buy a CD if the bank told you we think youll make 4 in 90 days would you Predetermine the rate of return you want before you risk your money Is it 20 50 or 100 return set your own goal and commit to it
Do Paper Trades
Practice before you play for money Just because you know how to hold a golf club or a pool cue and you know the rules of the game you dont risk your money on the first game you play or do you Find a few stocks that you feel are moving in a certain direction and price the calls or puts on them Watch them for a while and reprice the options to see if you would have achieved your investment goal This will give you experience and confidence after time Dont worry Ifyour paper trade would have made you $100000 profit the market will always be there and there is another trade corning to you There is not an investor out there who cant tell you about the hundreds of thousands of dollars left on the table Ask anyone you know
9
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
HOW DO I MAKE MONEY
By Not Losing It
Understand your Goal and Commit to it (Know your Exit Before you Enter)
What are you trying to accomplish Do you just want growth in your investment or perhaps a new car boat or other improvement in your life style Sit down before you begin to invest and establish your ultimate goal Then establish a plan with milestones along the way to measure your effectiveness Getting where you are today to where you want to be Perhaps you are starting with $250000 and your goal is a $2000000 boat within a year Then you need to be looking for 20 per month return on your investments All of your research should be based on the probability of you achieving that goal This also tells you your exit before you get into an investment Set your sell prices as soon as you buy into an investment at a profit of 20 + the cost of commissions going in and out It is far easier to achieve 20 growth than 50 growth and you will see much quicker turns on your investment dollars If you get into a particular stock that is on a long run in one direction you can always play it again and again Each time taking your 20 profit Below are two spreadsheets that will give you an idea of where you should be in relation to the time and money invested during a years period
$2500 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $250000 $250000 $250000 $250000 $250000 December $275000 $300000 $350000 $375000 $400000 January $302500 $360000 $490000 $562500 $640000 February $332750 $432000 $686000 $843750 $1024000 March $366025 $518400 $960400 $1265625 $1638400 April $402628 $622080 $1344560 $1898438 $2621440 May $442890 $746496 $1882384 $2847656 $4194304 June $487179 $895795 $2635338 $4271484 $6710886 July $535897 $1074954 $3689473 $6407227 $10737418 August $589487 $1289945 $5165262 $9610840 $17179869 September $648436 $1547934 $7231366 $14416260 $27487791 October $713279 $1857521 $10123913 $21624390 $43980465 November $784607 $2229025 $14173478 $32436584 $70368744 December $863068 $2674830 $19842869 $48654877 $112589991
10
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
$5000 GROWTH V ARIOUS COMPOUND INTEREST
ROI per Month 10 20 40 50 60 Original Investment $500000 $500000 $500000 $500000 $500000 December $550000 $600000 $700000 $750000 $800000 January $605000 $720000 $980000 $1125000 $1280000 February $665500 $864000 $1372000 $1687500 $2048000 March $732050 $1036800 $1920800 $2531250 $3276800 April $805255 $1244160 $2689120 $3796875 $5242880 May $885781 $1492992 $3764768 $5695313 $8388608
June $974359 $1791590 $5270675 $8542969 $13421773
July $1071794 $2149908 $7378945 $12814453 $21474836 August $1178974 $2579890 $10330523 $19221680 $34359738 September $1296871 $3095868 $14462733 $28832520 $54975581 October $1426558 $3715042 $20247826 $43248779 $87960930 November $1569214 $4458050 $28346956 $64873169 $140737488 December $1726136 $5349660 $39685739 $97309753 $225179981
Basic Analysis
Learn to read the charts A picture is worth a thousand words Below is a typical chart
6298 6112 5938 5755 5584 5418 5258 5182 4958 4084 4661 4523 4399 4259 4132 4818
3lt
On the bottom from left to right you have The Date of the chart the Open price of the stock the High price of the stock the Low price of the stock the Close price of the stock the trading Volume and the time definition of the chart daily 2 day 3 day or more In the case of this graph we are looking at a nine day period which means that each horizontal line represents the high and the low over a nine day period and the vertical bar represents the closing price for the nine day period
11
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
On the right side from top to bottom you have The graphical portrayal of the stock price the change of price between each line of the graph the stock exchange it is traded on and whether or not it is optional
In the overlying graph A you have money stream balance of power and a representation of what the market is doing buying or selling The money stream (top graph) is a representation of the stock price There is a long-term trend line and a short-term trend line to assist you in your analysis The balance of power (center graph) shows you the accumulation of the stock This graph also has trend lines to assist you The lower graph is a representation of whether the stock is being bought or sold This really reflects the institutional buying small investors dont buy lOs of thousands of shares but it will give you an idea of what the institutional traders are doing
Area B is extremely valuable information You see two lines within the border of the graph These lines are at 25 and 75 levels When the moving solid and dotted line are below the 25 line a stock is undersold When the moving solid and dotted line are above the 75 line a stock is oversold When the solid line crosses from above to below the dotted line this is a sell signaL When the solid line crosses from below to above the dotted line this is a buy signal Study the chart If you bought at the buy signals and sold on or before the sell signals you would be profitable
Trend Line Analysis
Although the chart will give you a long and short term trend line it wont give you future support the price that a stock should stay above or resistance the price that a stock will have difficulty exceeding prices Below is another chart with highs and lows labeled A B C and D To determine a moving support point find three consecutive points a high followed by a low and then another high A B C meets this criteria Draw a line from B to C and find its center point Then draw a line from A through the center point of the line from B to C This line will be a moving support To find a moving resistance point find once again three consecutive points a low followed by a high and another low B C and D meet these criteria Draw a line from C to D and find its center point Then draw a line from B through the center point of the line between C and D This will represent a moving resistance line The more times you draw support or resistance lines the better If you draw two resistance lines then the point they intersect is a true resistance point and visa versa for the support lines Practice this on historical data on any stock and verify its accuracy
12
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
CPQ
8 Jun
BUSINESS DATA PROCESSINGmiddot Comgtu_
3279 3224 3171 3118 3867 3816 Z966 Z91 2869 2821 2714 2728 2683 2639 2595 2552 ~
NY9pound optionabl
31lt4
Measure Your Probability of Success before you Invest
There are many software packages which will calculate the probability of success of your investments for you However without additional investment you can use the following Call Option Price Evaluation Form or the Put Option Price Evaluation Form I have developed How do you use them First select several stocks which through your analysis are moving in a certain direction Secondly price several strike prices around the current stock value at varying months of expiration Third use the appropriate Option Price Evaluation Form to determine the change in the current stock value which will accomplish your investment goal Fourth act on your analysis Make sure you diversify invest in the 4 or 5 options which require the smallest change in current stock value required in accomplishing your investment goal
13
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
-
Date
I I
I I STOCK
Symbol IUnit Price
I I I I I I I CALL OPTION PRICE EVALUATION FORM
I I I l I J Days Remaining I OPTION BUY I OPTION SELL STOCK
Symbol I Exp Date I Strike IUnit Price ROI IUnit Pricel Stk Price Change I to Double
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
How to Use the Call Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are eValuating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROI The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROI Formula (1+ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price = the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROI you want Formula Option Buy Strike Price + Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goal Formula (Option Sell Stock Price - Stock Unit Price) divided by Stock Unit Price = change in current stock Unit Price required to give you the ROI you want
To Double change in current Stock Unit price required to double your investment Formula laquo(2 x Option Buy Unit Price) + Option Buy Strike Price) shyStock Unit Price) divided by Stock Unit Price = change in current Stock Unit Price required to double your money
15
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
0
PUT OPTION PRICE EVALUATION FORM
i ~ Days Remaining
STOCK OPTION BUY OPTION SELL STOCK Date Symbol Unit Price Symbol Exp Date Strike Unit Price ROI Unit Price Stk Price Change to Double
i I
shy
I
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
How to Use the Put Option Price Evaluation Form
Date The date of your evaluation
STOCK
Symbol The symbol of the underlying security that you are evaluating
Unit Price The current unit prices of the underlying security that you are evaluating
OPTION BUY
Symbol The option routing symbol you are evaluating
Exp Date The expiration date of the option you are evaluating
Strike The strike price of the option you are evaluating
Unit Price The unit prices of the option that you are evaluating
OPTION SELL
ROJ The returns on your investment that accomplishes your investment goal
Unit Price The value the option must reach to give you your ROJ Formula (l +ROI remember 20 is 20 in decimal format) times the Option Buy Unit Price equals the Option Sell Unit Price
Stk Price The stock price which will give you the option price and the ROJ you want Formula Option Buy Strike Price - Option Sell Unit Price = Option Sell Stock Price
DAYS REMAINING Formula Option Exp Date - Todays date
STOCK
Change change in current stock unit price to accomplish your investment goaL Formula (Current Stock Unit Price - Option Sell Stock Price) divided by Current Stock Unit Price = change in current stock Unit Price required to give you the ROJ you want
To Double change in current Stock Unit price required to double your investment Formula (Current Stock Price - ((Put Option Strike Price - (2 x Option Buy Unit Price)) divided by Current Stock Unit Price = change in current Stock Unit Price required to double your money
17
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Philosophy
There are as many different investment strategies as there are individuals Just watch CNBC for a couple of hours and this will be evident You will also see an endless line of market professionals that are far smarter better educated and have much more experience than I have I am not attempting to compete with them in any way I am just a small investor that has studied traded lost and profited From this experience I have developed an investment strategy that is working to accomplish my goals I do not think that my strategies will be comfortable for anyone else You must develop your own That being said the following is my philosophical approach to accomplishing my investment goals
I am an economic optimist I believe that the economy will continue to grow and that the markets will follow the upward trend that they have been on for quite some time Look at the historical chart on the DOW or the SampP500 Yes there will be corrections but over the long haul we have an upward moving economy Therefore my interest lies primarily in investing in Call Options High value companies whose charts have been on a steady increase over several years dominate the database of stocks that I watch
Analysis is the most important part of the investment selection process I initially go through my entire database of stocks looking specifically for optionable under-bought issues with buy signals on a daily chart Also look at the 2345 etc day charts to insure confidence in the buy signal I then further cull this list by eliminating any issue that is very close to an all-time high I want the issue to have room to move back up without running into any resistance Look at the balance of power Is buying beginning by the institutional traders If selling is still going on wait and watch until selling stops and buying begins This usually brings my list of potential issues of interest down to about 10 or 12 specific stocks
I then go to my broker and price options 3 to 6 months out on each of the stocks of interest Unless you are in a position to watch your stockoption price performance on a daily basis do not invest in an option with less than 60 days to expiration The last 60 days of an option period is when the time value degrades the most rapidly I price the options that are from $1000 in the money to $500 out of the money You will notice that often there is very little Time Value cost in a deep in the money option
The next step in the analysis process is using the Option Price Evaluation Form for the specific options you are considering Fill in all the data you have accumulated and do the math This provides extremely valuable data Options that may have looked inexpensive may often require a greater percent movement in the stock price to achieve your investment goals
Now that you have gotten a list of stocks that you are interested in and have priced several options on each and completed the Option Price Evaluation Form you may have 50 to 60 lines of data You are now ready to begin selecting potential investments
18
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Look down the STOCK Change column in your Option Price Evaluation Form and find the 4 or 5 lowest Change required to accomplish your investment goals Those are the options you should be thinking of investing in because the lower the Change required to accomplish your investment goals the higher the probability of success
Diversify your investment dollars as best you can Invest in not only several options but also across different industries Often when there is bad news about one company it will effect others in the same industry
After deciding on which options to invest in place your orders Place limit orders at the values you used in your evaluation analysis otherwise your analysis will be wrong Do not place market orders If the market maker sees a market order he may raise the price just prior to taking your order Monitor your buy orders to insure that they are filled
In terms of importance selling your options runs a very close second to analysis You have predetermined the ROJ that you want So as soon as your buy order is filled place your sell order at the price calculated in the Option Price Evaluation Form Option Sell Unit Price Column plus the cost of commissions going in and out If your analysis is correct and you have enough time in the option the odds are in your favor that you will accomplish your goals If your goal is accomplished quickly and you are in and out of a trade in a short time you can always get back in Do not hesitate to take profits Remember that the first rule in making money is not loosing it
I travel a great deal and personally can not monitor my chosen investments on a daily basis My personal overall investment goal is 20 ROJ Therefore because I am not able to watch the day to day movement of the individual investments when I use the Option Price Evaluation Form I use a 50 ROJ I am working under the assumption that if 4 out of 5 investments return 50 then I achieve my overall goal of 20 ROJ I do not invest in an option unless the Change in the stock price required to give me my 50 growth in my investment is less than 5 This requirement alone will keep you away from the inexpensive issues Using 50 ROJ demands a longer time investment than using a lesser ROJ value Look at the charts often a high value stock will move $4 to $8 a week If you are positioned right on an option a $2 to $3 movement in stock price will give you a 20 return within a few days Again do paper plays for a while and get some experience and confidence in your analysis
I said earlier dont buy stocks I need to modify that a bit When you begin to take good profits from your option trading take your profits away from risk You decide where to put the profits whether in a sock a CD gold or whatever As an example one of my more successful investments was with a companys stock that historically increased approximately $20 per year I priced a 6-month $55 call option very close to the then current stock price It was selling at $300 I believed from the chart analysis that the stock would move up at least $1000 during the 6-month period This would have provided a $7 per option profit In actuality the stock moved up $2300 I was fortunate to have 10 contracts or 1000 shares So when it was time to sell at $23 I sold 9
19
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
I
contracts putting $2370000 back into my account I also exercised my right to buy 100 shares the remaining contract at $55 per share This reduced the actual $23700 by $5500 meaning only $15200 went into my account but I also now hold 100 shares of a $7800 stock and still profited the $15200 - the original investment of $3000 =$12200 in cash In my mind the 100 shares were free If they fall to $0 I still have the $12200 profit which alone is a 407 ROJ However since the stock is in a very large and profitable company I am confident that it will continue to increase in value I follow this same scenario any time I can using profits to buy equity However the risk of a downturn in the market is always present So if you invest in equities buy inexpensive puts out of the money as insurance against severe downturns Example You own 100 shares of a $78 stock For a few dollars you can buy 1 contract of a $70 put with 3 months of time value If the stock does drop to $65 per share and you want out you can sell your stock at $65 Your put option will have an intrinsic value of $5 You sell the put for $500 and with the $6500 cash from the sale of the stock you have limited your loss to $800
In closing if at first you are successful it is pure luck Success can only be measured over time Education is not free but with it comes the knowledge that will make you successful Experience will add to the knowledge and continue to build confidence in every investment you make Good Luck
20
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21
Recommended Reading
Getting Started In Options by Michael C Thomsett
The Complete Option Player by Kenneth R Trestler
Trading 101 How to Trade Like a Pro by Sunny J Harris
Wall Street Money Machine by Wade Cook
21