options made simple

8/8/2019 Options Made Simple

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Options Made Simple by Chris Rowe

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Table of Contents

I. Table of Contents ....................................................................1

!II. A Note from Chris Rowe .........................................................2!

III. Some Very Important Definitions...........................................7!IV. Understand the Basics (Options 101).................................. 12!

More Basics: Types of Options ..................................................................... 14The Beauty of Leverage ................................................................................. 18

V. Time Value How I Learned About Time Value (Or I ShouldSay, Time Decay)................................................................23!

VI. Understanding Risk...............................................................33!So Lets Talk a Bit About Put Options ............................................................ 34

VII. COVERED CALLS..................................................................41!VIII. Important Tips and Terms.....................................................53

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A Note from Chris Rowe

A tragic accident at age 15 left Chris unable to walk, but turned him into one of

the most motivated and successful traders that Wall Street's ever seen.

Then, 5 years ago, Chris Rowe turned his back on a Wall Street career worth

tens of millions of dollars and said;

I Quit!

Dear Investor:

I quit.

Five letters ... two simple words.

But as soon as I said them, I knew my life had changed forever.

The year was 1998. I was making so much money in the markets I had become a

millionaire while still in my 20's.

And yet, I still quit. I'll never forget the look on my boss's face. He was shocked.He didn't understand (and still doesn't to this day) how I could so easily turn my

back on tens of millions of dollars in future income.

But I was leaving for a reason. I was sick and tired of watching the Wall Street

"establishment" lie, cheat and steal just to make a buck off the backs of hard

working Americans.

That may sound like a clich, but it's the honest-to-goodness truth. It was the

nature of the "game" on Wall Street, and I had decided that I wanted no part of it.

So I took what I had learned about options directly from the richest and most

successful investors on earth -- the secrets of how money is REALLY made inthe markets -- and put it to work to help my people like you profit along with the

big players.

Lately, I've started to think about slowing down, taking it easy, and enjoying my

money.


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Options Made Simpleby Chris Rowe

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Yes, I'm only 30. So you may think it's absurd for me to even consider something

like "retirement" at such a young age.

But when you have tragedy early in life, you see things differently.

When I was 15 years old, a doctor walked into my hospital room and told me Iwould never walk again.

My father, seeing that his son was never going to be able to play varsity sports,

dance at the prom, let alone walk again, wanted to give me a happy and active

life.

He told me that the stock market was the best gig in town for people with the time

and patience to really study it. And as a disabled teenager, time was something I

had plenty of.

While others were dating and hanging out at the school-yard, I was poring over

price charts, reading every book on trading I could lay my hands on, and making

successful paper trades.

A business associate of my father's saw my raw ability, and offered me a job at a

Wall Street brokerage on the spot.

Soon after, the richest and most successful trader at the firm, Wall Street legend

Mark Rosenberg, took me under his wing as his first and only apprentice.

The next 5 years under his tutelage were grueling and painful. Many good days

and bad days.

But I persisted, and my persistence paid off: I learned to master the markets ...and make vast sums of money for me, my firm, and our clients ... at an age

where most of my contemporaries and co-workers were getting drunk onweekends or going to Pearl Jam concerts.

Of course, I also lost many years of "normal" living that most young people enjoy.

And now that I am financially independent, I'm thinking of making up for lost time.

Yet I don't ever want to leave you ... and so many other individual investors ... at

the mercy of boiler-room operators, high-pressure stock brokers, hype-filled stock

sales brochures (er, I mean "analyst reports"), and the other sharks on Wall

Street.


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Options Made Simpleby Chris Rowe

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It's because I know from hard-earned experience that ...

1. THE ONLY WAY TO GET RICH ON WALL STREET IS TO HAVE

INFORMATION NOBODY ELSE HAS.

Truer words have never been spoken.

Knowledge handed down to me by one of the richest men on the planet and hastaken me almost fifteen years of my life to master and perfect.

2. IT'S AS EASY TO MASTER AS WATCHING A MOVIE:

My goal is to make it as learning options as easy as watching a movie. That's the

only way I could ensure that what I teach you can be put to use right away to

make outsized profits.

Trading options is not at all complicated. It scares a lot of people. But it shouldn't.

How Much is Your Financial Independence Worth to You?

My last 7 closed trades were:

Avid Technology Inc. (AVID) +65.46% in 4 months.BE Aerospace (BEAV) +54% in 7 days!Morgan Stanley (MS) +24.82% in 3 months.

Merrill Lynch & Co. (MER) +69.82% in 2 months.ImClone Systems (IMCL) -26.55%Terex Corp (TEX) -30.24%Gafisa SA (GFA) +64.87% in 72 Hours!

I can't "fake it" when discussing my track record. It's public knowledge, easily

available to any of my members with a PC and an Internet connection.

Fortunately, I have nothing to hide. Most mutual fund managers under-perform

the broad markets, and most financial advisors cherry-pick their track records.They show you only the handful of winners, conveniently "forgetting" to mention

that most of their stocks lose money.

The more investors like you I train to be completely self-sufficient ... and to gainreal mastery and understanding of the markets ... the sooner I can sit back, relax,

and ease into semi-retirement.


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You know the old expression: give a man a fish, feed him for a day; teach a man

to fish, feed him for life.

Of course, I don't think I'll stop cold and do nothing. I'll continue to trade my ownaccounts ... and write my articles, reports, courses, and maybe a book or two.

Freedom has a lot of meaning and appeal for a man stuck in a wheelchair.

Before reading this guide it is important that you understand something,

and Im speaking to options traders of all levels, from novice to advanced.

Some of this guide, especially the first half, covers the bare bones basicsof options trading. I strongly urge you, no matter how much of it you

already know, to read the entire guide. Worst case scenario, you refreshyour beginner level knowledge, which will strengthen your foundation of

wisdom. When it comes to options, you absolutely must have a solidfoundation. Without that, the house will collapse.

I speak with options traders of all levels, and you would be very surprised

at how many people who are way past this beginners level eventually

encounter confusion, or make a mistake that they never should have made

had their foundation been concrete.

So if you find yourself saying yeah, yeah, blah, blah, blah, I already know

this or duh at any point during this lesson/guide, just give it a chance

and read through it anyway. It wont hurt, and it will ensure that you will

grasp everything that is discussed.

Before I go any further, let me first just say that my #1 suggestion to you is to

start by playing very small.

You cant learn to ride a bike by reading a manual or having someone explainhow to do it. You need to get up and try, but at the same time, you dont want to

start learning how to ride a bike by entering the Tour de France. The best way tolearn about options is to actually be in the game, just like riding a bike. And just

like riding a bike, you ought to start on a very small level (with training wheels, soto speak).

So after you get these basic concepts down, and you understand how options

work in general, get out there and trade one option at a time. If you make a profit

on your first three tries, dont go crazy and put a huge amount in the next few

trades. Have discipline.


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Options Trading SimplifiedA Guide to Huge Profits Using Options

Some Very Important Definitions

Take a minute to read the definitions below of the two different types of options,which are call options and put options. Dont spend too much time with it, but

read it over once or twice. If you dont completely understand it, just continueforward and as you read on it will all sink in. We will cover this part again as

we get further into this guide.

Call Options

At a very basic level, a call option is a way to bet that a stock will go up in

value within a certain timeframe, and generally offers the buyer more leverage

than simply owning shares in that stock.

Call Option (Buyer/Owner)

This is a contract that gives the buyer the right to call (buy) 100 shares of the

underlying stock covered by the contract, at a stipulated price (exercise price)sometime before the option contract expires (expiration date), in return for paying

a premium to the seller of that call. Numerous exercise prices (strike prices) areattached to each stock. They generally go in 2 ! point intervals up to 22 !, and

in 5 point intervals above that level.

Call (Seller/Writer)

The seller (writer) of a call option contracts to sell 100 shares of the underlying

stock covered by the contract, at a stipulated price (exercise price) sometime

before the option contract expires (expiration date). The seller receives thepremium (cost of the options) from the buyer.


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Put Options

Again at a very basic level, a put option is a way to bet that a stock will go

down in value within a certain timeframe, and generally offers the buyer moreleverage than simply shorting shares in that stock.

Put Options (Buyer/Owner)

The buyer of a put has the right to put (sell) stock to the writer of that put, at a

stipulated price (exercise price), sometime before the option contract expires

(expiration date), and for that right must pay a premium to the seller of that put.

Put Options (Seller/Writer)

The seller (writer) of the put stands ready to buy stock at a stipulated price

(exercise price) sometime before the option contract expires (expiration date),

and receives the premium from the buyer.

Leaving Las Vegas

Some people think that trading options is a big mystery, and that youd have tobe a sophisticated Wall Street trader to understand how they work. This really

isnt the case at all. Once you break through a few simple barriers of

understanding, it becomes very easy.

It took me my whole career to

truly master options. When I

first started working on Wall

Street, I only knew what a

stock was. The options

traders were always these

fifty-something-plus Wall

Street veterans who had been

trading every day for decades.I mean, even the experienced

younger guys at the firm

stayed away from options

contracts for the most part.


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The impression I got was that they would only play options when they wanted to

gamble, but didnt have time in their schedule to take a trip out to Atlantic City orLas Vegas (it was always hard to pull these guys away from the action).

Stocks were much easier for me to understand. I mean, the concept was clear-

cut, and I was spending all of my time starting business relationships withinvestors and building up my client base and career. I decided to stay in my

comfort zone.

But after I established myself on The Street with a solid track record and a strong

money managing business, I decided to try buying my first option. I remember

spending a little over $400.00 on a Schering-Plough $45 call option (I forget

which month it expired).

Danny T., an older trader who sat next to me (well, he was in his 40s, which at

the time, I considered to make him one of the older guys), convinced me to doit. I didnt know how or why it worked, but it worked well.

The stock only traded up about 4 points (a 9% gain) for no reason other than

the entire market moving up and I turned my $400.00 into about $750.00,

because the option I had bought increased in value by almost 90%! Cha-CHING!!


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Wow! Well thatwas a pretty cool test! What did I just do again? Although this

was a small trade, I remember being nervous (and excited).

Next, I remember buying options on Capital One Financial (the credit cardcompany). I bought the COF 40 calls (again, I forget the expiration month, but

Im sure that the option contract expired within a couple of months).

I bought the option contract for $1.25. The stock traded 11% higher, from $40.00to $44.50.

That caused the option contract to trade 300% higher from $1.25 to $5.00. I

was starting to grasp the true power of leverage.

But I also knew that I ran the risk of losing the entire amount that I put into the

trade, so I continued to play very small.

After picking about 9 winners in a row (it was the 90s), I decided to do some

investigating, and a lotof reading. I was lucky that the older and wiser traders in

the firm really took a liking to me and wanted to help me. I think it was because

guys like that always tend to root for the hard-working underdog. Ill admit: I

usually got some special treatment.

I had only read about options when I was studying for my series 7 license, which

is the license that you need to be a stockbroker.

At first I thought to myself I wouldnt dare put my clients money at such a largerisk, and theres no way that Im going to shoot craps with a business that I spent

years building.

In the 90s, every money manager was making their clients money. The clientsrarely had any reason to leave their money manager and transfer the account for

me to manage.

But I was intrigued with the idea of finding an angle. I wanted to find anuntraditional way of making money for my clients that would separate me from

the average money manager.

Options required me to think outside the normal zone of comfort, and I had

learned that options werent always a craps-shoot. I knew that there were ways

to reduce risk and protect profit, as well as to use them to speculate on stocks.


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I also knew that Id have to learn through experience and make a few mistakes

along the way. The mistakes I proceeded to learn from were common for rookieoptions traders. Once I got out of the rookie phase, I learned a few other

important basic concepts.

To spare you the pain of learning any hard lessons for yourself, Ill list the hurdlesthat I had to get past and explain the 4 most important lessons that I learned:

Hurdle #1: Understand the basics (options 101).

Hurdle #2: Understand time value (and how to overcome it, and take

advantage of it).

Hurdle #3: Understand how to use options to reduce risk.

Hurdle #4: Understand how to sell covered calls.


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Understand the Basics (Options 101)

Most investors know that buying stockentitles them to partial ownership in the

company who issued those shares. In other words, youre purchasing an "equity"

participation in the company. Most stocks listed and traded on U.S. stock

exchanges are termed equity securities.

So what is an option? In a word, an option is actually a

contract. (When talking about an option contract,

sometimes people drop the word contract and simply refer

to it as an option.)

Unlike stock, however, an option does not convey to the

purchaser any ownership in anything. Instead, an option

contract conveys the right of its owner to buy or sell theunderlying stock on which it is based.

For example, you can have an option contract on IBM,

which gives you the right to buy or sell IBM stock at a fixed

price.

An option contract is publicly traded, just like a stock. Andjust like a stock, option contracts are constantly fluctuating in price.

As IBM stock fluctuates up and down, there are many different option contractson IBM that are also fluctuating up and down daily.

It is crucial that you get these essentials down before we go any further, so Illexplain it again.

The owner of an option contract has the right to exercise the contract.

What do I mean by exercise the contract?

If you have a piece of paper that says that you have the right to buy IBM at $50(even though the stock is trading at $70), and you decide to exercise that right to

buy IBM at $50, you have exercised the contract.


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The (option) contract owner has no

obligation to do anything. The ownerdoesnt have to buy IBM at $50. But if

he wanted to, he could.

That is where the word option comesfrom. The owner of the option contract

has the option to exercise the contract,or to notexercise the contract.

Remember: The owner of an option

contract has spent money to buy the

option contract. So its the owners

choice, orright, to exercise the option

contract.

The obligation is on the seller of the

option contract.

The sellerof the option contract has

received a payment.

The person who has sold the option

contract to the buyer/owner has the

obligation to fulfill the terms of the

option contract if the owner decides toexercise the option.

CALL PUT

LONG (owner) Right to Buy Right to Sell

SHORT (seller) Obligation to Sell Obligation to Buy

Wall Street Lingo

Remember:

When we say that we are long an

option, it means that we own anoption. We have paid money, we

now own a contract we now own

the right to do something.

When we say that we are shortan

option it means that we have sold anoption for our opening (initial) trade.

We have received money. In return

for the payment that we received, wemade a promise to either buy or sell

a stock at a fixed price.

I hate to sound repetitive but we

have to be sure that you get this

- When you are long an option

contract, you own the right toexercise it.

- When you are shortan optioncontract, you have an obligation if

the buyer wants to exercise it.


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More Basics: Types of Options

There are two types of stock options:

1. The call option

2. The put option

A calloption is an option contract that gives the ownerof the contract the right (not the obligation) to buy a stock

at a fixed price over a given period of time.

It gets its name from the fact that, as the owner of the

option contract, we are able to call the stock away from

the person who sold us the call option contract, whichmeans that we can buy the stock from that person (at a

predetermined price).

In other words, a call option contract gives its owner the

ability to say hey, remember the agreement that I paid

you money for? Well, I want to buy this stock from you at

the price that we had previously agreed on.

A putoption is an option contract that gives the owner

of the contract the right (not the obligation) to sell a stockat a fixed price over a given period of time.

It gets its name from the idea that the owner can put the stock to someone, or

to sell the stock to someone at a fixed price.

A put option contract gives its owner the ability to say hey, I want to sell thisstock to you at the price that we agreed on.

So remember: in regards to either a put or a call option contract, if you bought

it you have a right, and if you soldit you have an obligation.

Now, do you remember where the word option comes from?

Remember, when you own an option contract, you have the option of exercising

the contract if you want to.

Calls vs. Puts An Easy

Way to Remember

When you own a call option, yowant the underlying stock to

move up. This is because when

a stock moves up, the calloption moves up in price.

When you own a put option, yo

want the underlying stock to

move down. This is because asa stock moves down, a put

moves up in price.

An easy way to remember this:

You call up

You put down.


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Option contracts arent always exercised. In fact, the majority of the time, an

option contract is purchased for one dollar amount, and sold for another dollaramount.

Option contracts fluctuate in price just like stocks do. Therefore, they can be

bought and sold like a stock.

When you own an option contract, not only is it your option to exercise the

contract, or not exercise the contract, but it is also your option to sell the

contract itself at whatever dollar value that the market is giving it at the time.

First Ill give you a real life example, and then Ill explain themechanics behind the concept.

I recommended to members of my trading service The Trend Riderthat they

purchase call options on a company called Suncor Energy. At that time,

Suncors stock was trading at $52/share, and the options I recommended were

trading for $15.20.

When Suncor Energys stock hit a high of $80.00 per share on January 31, 2006,

the call option that I recommended had traded all the way up to over $36.00

apiece.

Now, if you had simply bought the stock at $52 on October 12, 2006 you wouldhave been up 53%. Great.

But if you had bought the call option that I recommended, you would have been

up 136% on the same exact movement in the underlying stock.


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(Of course there were some much riskier call options that traded 900% higher

within that time-frame if you were willing to take that huge risk, but the call that I

recommended was much more conservative.)

Heres the difference between buying the stock vs. buying the call option:

- If we had bought 100 shares of Suncor Energy stock, we would literally own a(very small) percentage of a business called Suncor Energy.

- By owning a Suncor Energy 45 call option, we owned a contractthat gave us

the right to buy 100 shares of Suncor Energy at $45/share.

It doesnt matter what price Suncor Energy is trading at in the stock market.

Suncor Energy could be trading at 38-56 or at 104. If you own a Suncor Energy

45 call option, then you own a contract that gives you the right to buy Suncor

Energy at $45.00, even though the stock might be trading at a completely

different price.

Heres a closer look at the trade in question:

When Suncor Energy was trading at $52.00 per share, I send out a trade alert

recommending the purchase of a year 2007 January 45 call option.


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This particular call option gave my Trend Rider members the right to buy the

stock at $45.00 per share. The purchase price of the option contract that Irecommended was $15.20.

Heres what the option quote looked like: 2007 Jan 45 call - $15.20

Always remember: One option contract represents 100 shares.

That means that each one of those 2007 January 45 call options trading at

$15.20, would have cost $1,520.00 to buy at that time.


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The Beauty of Leverage

Heres another way of looking at it: When I buy an option, I am using leverage.

Use this analogy:

If I buy a house for $300,000.00, and I put down 10%, and mortgaged 90%, thenI have only invested $30,000.00.

If the house goes up in value by 20%, then the house would be valued at

$360,000.00 right? So if I sell the house, thats a $60,000.00 profit.

Although the house went up in value by 20% (from $300k to $360k,) since I only

put up $30k, I actually made 200% on my money ($60k profit on my $30k.)

How Buying a Call Option is Like Buying a House

Some people are confused by options, but the reality is that people have beenusing options for ages in the form of contracts such as real estate and auto

insurance.

One way of looking at a call option is drawing a comparison to a contract to buya house.

If I were considering purchasing a house, I would agree on the purchase pricebefore actually purchasing the house.

Lets say in this example that I would put down a deposit of $5,000.00, and I

would draw up a contract, guaranteeing that I could purchase the house at the

agreed upon price.

(When I put money down to buy a call option, I also receive a contract,

guaranteeing that I can buy a stock at a fixed price.)

But lets say that a catastrophic event sent real estate prices down. I could find away to back out of the deal and choose not to buy the house at that price, but I

would lose my $5,000.00 deposit.


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If the house went down in value by $100,000.00 I wouldnt worry too much about

backing out and losing a $5,000.00 deposit. (Good thing I didnt actually own thehouse, or I would be down $100,000.00!)

But if the value of the house suddenly went up by $100,000.00, then the contract,

which guarantees me that purchase price that we agreed on, suddenly becomesmuch more valuable. (Id sure hate to misplace thatpiece of paper!)

How Are Options Like Pizza???

Heres one way that you may have used an option contract long before you even gotinterested in the stock market

Does this look familiar to you?

Its a coupon!

When buying a call option, think of theagreement that is made when a businessissues coupons.

Owning a coupon gives you the rightto buyan underlying asset at a fixed price.

Owning a call option gives you the righttobuyan underlying asset at a fixed price.

Of course you dont have to use the coupon,but it is your option or yourright, to use it.

The issuerof the coupon has the obligationto sell you (in this case) the pizza at a fixedprice ($10.99.)

Similarly, the sellerof the call option (or the person who is shortthe option) has the obligation tosell you a stock at a fixed price.

If the price of pizza goes through the roof and now sells for $30.00 each, the issuer of the couponcant just decide not to honor the coupon. The coupon is a contract! The issuer still has to

honor the coupon and sell you the pizza at $10.99.


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How Buying a Put Option Is Like Buying Insurance

When you purchase an insurance policy, you have purchased a contract that you

pay a premium for. The insurance company isnt giving you anything you canhold in your hand just a promise to fulfill a specific obligation in the future.

If youve paid for an auto insurance policy, and then you crash the family car, the

insurance company is obligated to take whatever action necessary to return the

car to its prior condition.

As a matter of fact, a put option is commonly used as an insurance policy on a

stock position.

For instance, lets say you own 100 shares of stock in H&R Block, which was

trading at $23.00, and you absolutely loved the stock.

I mean, you believed with every fiber of your being that the stock was going totrade to $40 this year. But they were going to announce earnings in a week, and

you heard a silly rumor that the earnings would be terrible, which would send thestock crashing down!

A smart choice would be to simply hold on to your stock, but at the same time

buy a put option with a strike price of $22.50. That would give you the right to

sell your stock at $22.50 if you chose to do so.

This way, even if the H&R Block stock traded down to $7.00 per share, its okay

because you bought insurance on your stock (in the form of a put option) that

says that you can sell the stock at $22.50.

Thats a very simple example of how you can use options to protect yourself

against losses.

Other Terms You Should Know

Below is an example of an options chain, which basically lists the options thatare available on a particular stock (in this case, IBM).


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The next part of options trading that well discuss should to be the easiest to

understand:

When opening a new options trade, you must specify that you are doing so

by using the term to open.

When you are closing out an existing options trade, you must specify that

you are doing so by using the term to close.

That sounds simple enough right?

For example:

If you think the XYZ June 15 call will trade higher and you want to open a trade

by purchasing it at $3.00/contract, then you would enter your trade like this:

I would like to Buy one June 15 call to open.

Then, when the June 15 call option is at $5.00, you would close the trade by

selling it at $5.00/contract like this:

I would like to Sell one June 15 call option to close.

Remember this similarity between stocks and options:

You have the ability to either buy a stock first and then sell it second OR youcan sell (or short) a stock first and then buy it second.

When you short a stock, the idea is to profit by selling it, and then buying it at a

lower price. You can do the same thing with options. The only difference is thatyou must always specify, when entering the trade, whether the trade is an

opening or closing transaction.

I will use this terminology in this guide going forward.


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Time Value How I Learned About TimeValue (Or I Should Say, Time Decay)

When I was a rookie, I lost an obscene amount of hard-earned cash on a singletrade for two reasons: Time Decay and Greed ...

I bought a call option at $4.00 to open. This particular option gave me the rightto buy a stock at $100.00. At the time, the stock was actually trading at $101.00

per share (so the call option was one point in-the-money.)

The price that I paid ($4.00) was based on two factors:

1. Intrinsic Value (which accounted for 1 point out of 4)

2. Time Value (which accounted for 3 points out of 4)

Let me explain what that means.

1. Intrinsic Value

The gain that I would automatically have if I were to exercise the option contract

at that time is called "intrinsic-value."

In other words, I had a "call option" that gave me the right to buy IBM stock at$100 per share. Meanwhile, the stock was trading at $101 in the open market.

If I had decided to use the option to buy IBM at $100 ($1.00 below the price thatit was actually trading at), then I would automatically have a 1 dollar gain on

the stock.

Said differently, the option that I owned only had $1.00 of "Intrinsic Value."

So if I only would have had a $1.00 profit on the stock, then why did I buy thecall option at $4.00?

Because the option contract is worth more than just the $1.00 in profit that I

would make on the stock on THAT DAY.


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What about the future profits that the option could potentially bring me tomorrow,

or in a week or two?

What if, on the following day, IBM traded to $112? That would mean that I coulduse the call option to buy IBM at $100, and I would then be up 12 points on the

stock!

That would be at least a 200% gain if I bought that call option for $4.00 (since Iwould have $8.00 in profit on the $4.00 investment).

As a matter of fact, I remember that the reason that I bought that call option (to

open) was because I thought that the stock would trade from $101 to $120 within

a month (remember: it was the 90s), which would have given me a 400% profit

on my options.

(If the stock traded to $120, it would have caused the call option to trade from$4.00 over $20.00/contract. At that point, it would have been my OPTION to

either use the call option to buy IBM at $100, OR to simply sell the contract itself

at over $20.)

Here's the problem: As time passes, time value deteriorates. (This is also known

as time decay.) This is one of the most important parts of options trading that

you absolutely must understand.

Look very closely at the time decay curve below. Notice how the deterioration

accelerates much faster in the last 3 months of the option contracts lifecompared to the 3 months before that. In the 30 days prior to the options

expiration date, the time value deteriorates rapidly!


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(Intrinsic

value is

notaffe

ctedat

allby

time

dec

ay.)

Although the stock ended up trading 50 cents higher (to $101.50), I lost 62% of

my option trade in a couple of weeks.

Lets get back to my story of how I learned about time decay (the hard way).

When the option had 1 day left before expiration, all of the time value had

deteriorated.

The contract was worth $1.50 because I could still use it to buy IBM at $100,

and sell it at the market price of $101.50.

I was left with a contract that was worth $1.50. Notice that the intrinsic

value portion of the option was not affected whatsoever by time passing.

Only the time value portion of the options price can be affected by timedecay.

I sold the call option at $1.50 (to close) and I had lost $2.50 on my $4.00!

AAARRGH!


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How?

2. Time Value! Or, I should say, Time Decay.

As time passed, my call option lost over half of its value. The call option expired,

and after that, to add insult to injury, the stock hit $145 in a month and a half (ofcourse).

All I got from it was a huge tax write off, and a very expensive lesson. So

expensive that, to this day, I'm too embarrassed to tell you the dollar amount that

I lost.

Even though the stock traded slightly higher, I lost 62% on the trade! This is

because the time value portion of the option price deteriorated.

If this has ever happened to you, then you can certainly relate to the

overwhelming feeling of frustration that I felt that day. Oh! I just had another

grey hair pop out from thinking about it!

So what went wrong?

Lets review:

- I bought the call option at $4.00 (to open.)


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- Since the call option gave me the right to buy IBM at $100 when the stock was

at $101, the call option was only one point "in the money."

In other words, when I paid $4.00, only $1.00 (out of the $4) was real, "intrinsicvalue."

The remaining $3 (out of the $4) was "time value," and was therefore at the

mercy of the most inevitable event that we know of: Time Passing.

So, since 3 out of 4 points that I paid for

were time value, that meant that if the

stock traded flat at $101.00, over time,

my call option would have gone from

$4.00 to $1.00, because once the call

option had no more time left on it, the

time value ($3.00) would no longer exist.

Terms to Remember

The term premium just refers to the

price at which an option is trading. So, inthis case above, the premium was

$4.00.

Premium = Intrinsic value + Time value.

($4.00= 1.00+$3.00)

Intrinsic Value: The in-the-money

portion of an option's price.

In-the-money: An adjective used to describe an option with intrinsic value. A call

option is in the money if the stock price is above the strike price at the time of

purchase. A put option is in the money if the stock price is below the strike price

at the time of purchase.

Time Value: The part of an option's total price that exceeds its intrinsic value. The

price of an out-of-the-money option consists entirely of time value.

Time Decay: A term used to describe how the theoretical value of an option

erodes or reduces with the passage of time.

Dont Make the Same

Mistake!

Not understanding the effect of diminishing

time value is probably the number one mistake

that I have seen beginners make.

If you understand how it works, you are ahead

of the game and on the path to a much less

expensive education.

In my story, 75% of the option that I bought (3

out of 4 points) was time value. This wasextremely risky.

But there are always options available out therethat have very little time value.

Those less risky options are the only options

that I recommend to my Trend Rider members.


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Here, Ill show you how each one works with real life examples:

Here is an old alert that I sent out on December 6, 2005 to BUY: Citrix Systems

2006 June 20 call options.

This particular call option, which was set to expire in June 2006, gave me theright to buy Citrix Systems at $20.00 per share. The recommended purchase

price for the option was at $840 per contract.

The stock was actually trading at about $27.00 at the time.

See if you can answer these questions:

1. What is the premium?2. What is the strike price?

3. What is the intrinsic value?4. What is the time value?5. How much time did the option have before the expiration date?

Answers:

1. The premium is the price of the call option, which was $8.40.2. (In the case of a call option) The strike price is the price that the owner

has the right to buy the stock at, which was $20.00.3. The intrinsic value was $7.00 because the stock was at $27.00, which is

$7.00 above the strike price of $20.00, or $7.00 in-the-money. If this

were a put option on the other hand, it would be in the money if the stockwere trading below the strike price.

4. Time value is the premium (price of the option) minus the intrinsicvalue/in-the-money value ($8.40 - $7.00). So the time value is $1.40.

5. The option had a little over6 months before expiration. I recommendedthe call option on December 6, 2005 and the expiration month was June.


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Remember: options always expire on the third Friday of each month(except if it falls on a holiday in which case options expiration is onThursday).

You should notice a couple of key points here:

1. In the trade recommendation, you will notice that my timeframe for thestock to do what I anticipated was 2-3 months so I recommended calloptions that expired in 6 months. Time value deteriorates faster in thelast 3 months of the life of the contract, so you should always give yourself

plentyof extra time for your trade to work out.

2. Notice that the stock was actually trading at about $27.00 at the time. Theoption was $7.00 in-the-money. That means that if Citrix Systems were totrade flat for 6 months, the lowest that the call option would trade would be

to $7.00.

Since the option was $7.00 in-the-money and had $7.00 of intrinsic value,only $1.40 was at the mercy of time decay. In other words, only $1.40 ofthe $8.40 that we paid would actually be affected by time passing.

The deeper in-the-money that an option is, the less time value there willbe. For instance, if I bought the June 15 calls, instead of the June 20calls, they probably would only have had about $1.00 in time value(instead of $1.40.) But they were probably at $13.00 (compared to thecalls that I recommended at $8.40).

Now take a quick look for a minute at the actual trade alert that I sent to our

members, along with the two charts that follow:


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Understanding Risk

So you see, when you buy options, you dont necessarily have to try to make

400% - 3,000% profits while betting the house.

Instead, you can choose to trade a more conservative option that puts you at less

risk, but still gives you above average return!

The reason I focus on this part is that I want to dispel a myth. Many people think

that buying options is a game where you invest a very small amount of money,

and either you make hundreds or thousands of percentage points, OR, you lose

everything.

Lets change the numbers around a little bit here.

Here is an example of a super risky craps-shoot type of options strategy:

Citrix Systems is at $27.00

Joe thinks that it trades to $35.00

Joe buys the June 30 calls to open (which are out-of-the-money since

the stock is not trading over the strike price of $30.00)

The calls cost $2.00 (which is 100% time value.)

Now if Joe is right and the stock hits $35.00, then his options will go from $2.00

to over $5.00, netting him more than a 150% gain. Heck, if the stock rips to

$40.00, its a grand slam home run because hell make 500%. Nice to think

about, huh?

But if Joe is wrong and the stock trades flat, his call option will lose value each

week especially in the three months before the option expires and very

rapidly in the last 30 days, until the option is worthless.

In this case, the stock could trade a few points higher, but if it takes a few months

to do so, the option could actually end up at the same price, or even lower!

Joe is putting his entire investment at great risk. The option that he bought at$2.00 was all time value. Even if Citrix Systems traded to $31.00, if it


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happened close to the expiration date, the option could end up somewhere

around $1.00!

(No lucky seven for Joe. Actually, I think his odds are betterat the craps table.)

At this point I must apologize. I realize that in most of my examples, Ive usedcall options to explain each concept.

Its just that in all my years of having thousands of conversations about options, I

found that people have an easier time grasping the concept with call options first,

and put options second.

So Lets Talk a Bit About Put Options

Put options are basically the opposite of call options.

Remember: Put options give you the right to SELL a stock at a fixed price.

A person buys a put option (to open) for one of two reasons:

1. As a Bearish Strategy:The person is betting that the underlying stock is going to trade lower.Generally, when a stock trades down, a put trades up.

2. As Insurance:

If a person owns XYZ stock and is concerned that the stock might trademuch lower, but doesnt want to sell that stock. If the stock trades down,the person can still sell XYZ stock at the fixed/agreed on price.

Lets look at a real life example:


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CAI 2006 March 70.00 Put options

This particular put option, which expired in March 2006, gave me the right to

SELL Caci International Inc at $70.00 per share. Our recommended purchase

price of the put option was at $12.25.

The stock was actually trading at about $58.75 at the time.

See if you can answer these questions:

1. What is the premium?2. What is the strike price?3. What is the intrinsic value?4. What is the time value?5. How much time did the option have before the expiration date?

Answers:

1. The premium is the price of the put option which was $12.25.2. (In the case of a put option) The strike price is the price that owner of

the put option, has the right to sellthe stock at, which was $70.00.

3. The intrinsic value was $11.25 because the stock was at $58.75, which is$11.25 belowthe strike price of $70.00. This means that this put option is$11.25 in-the-money.Remember: a put option is in the money by the amount that the stock istrading BELOW the strike price. A call option is in the money by theamount that the stock is trading ABOVE the strike price.


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4. Time value is the premium (price of the option) minus the intrinsic value($12.25 - $11.25.) So the time value is $1.00.

5. The option had about 5 months before expiration. I recommended theput option on October 21, 2005 and the expiration month was March.Remember: options always expire on the third Friday of each month

(except if it falls on a holiday in which case options expiration is onThursday.)

-My recommended purchase price for this option was $12.25.-The stock was actually trading at about $58.75 at the time.

-Remember: we will profit if the stock trades lower.

You should notice a couple of key points here:

1. On this trade I had a very short-term time frame. Youll notice that in theTrade Alert (see below), I spoke about the negative technical picture of the

stock and the negative trend that the computer sector as a whole was in.

But you will also see that I mentioned that the company was scheduled toreport earnings in a week.

It is important to notice that, although I had a short-term time frame on thistrade, I still recommended that The Trend Ridermembers buy the putoptions that expire in 5 months. This way, I would have a nice pillow oftime for the stock to do what I wanted, in case my timing was off.

2. 2) Once again, I recommended put options that were deep in-the-money,

so that the time value would be minimal. I hate to see time decay ruin agood trade. In this example, the put option only had 1 point of time value.That means the most that I could lose due to time passing was $1.00.

Now take a quick look for a minute at the actual trade alert that I sent to my

members:


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Watch what happened here

Heres what the stocks chart looked like when I made the recommendation:


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And heres what ended up happening:


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VERY IMPORTANT NOTE:

When you think that a stock will trade lower, these are two ways that you can tryto make a profit.

1. You can short the stock: Here you are putting up at least ! of the entiredollar amount of the transaction. In other words, if you wanted to short1,000 shares of CAI at $58.75, you would have to put up $29,375.00minimum, or the full $58,750.00.

That isnt even the bad part. When you BUY a stock, you know that theworst thing that can happen is it goes to zero. Your risk is limited to thedollar amount that you have invested.

But the reason that most people shy away from shortinga stock, is that

you have an unlimitedrisk!

Thats right. For every dollar that the stock trades higher (when you areshort 1,000 shares) you are losing $1,000.00. What if the stock is Wall-Mart in 1997, or Microsoft in 1990? You could end up with a disaster onyour hands.

When you short a stock, if you are wrong and the stock trades muchhigher, you could end up owing your firm money, and your broker couldsell out your other positions to cover the debt in the account!

Okay, maybe thats a little extreme. Even if you didnt happen to shorttodays 1990 Microsoft what if you shorted CAI at $58.75 and they gotacquired by another company at $85 the next day? You would lose$26.25 per share, or $26,250.00.

2. The alternative is buying a put option (to open): In our case, CAI workedthe way we wanted it to. It traded lower. We made about 32.2%, over 3times the percentage returns that we would have made by shorting thestock.

What if the stock went the wrong way? At least we know that our risk is

limited to the dollar amount that we had invested (in this case $12.25.)

There is one more major benefit to trading options that Ill show you, and then I

have to get back to researching more trades for our members.


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COVERED CALLS

The seller (aka the writer) of covered calls is generally interested in capturing the

premium income of the call option, and is willing to give up the stock at the

exercise price if the buyer of the call chooses to exercise the contract and takethe stock.

First, think about what the average stock trader does in this example:

Say you are the average stockholder who doesnt sell covered calls. You buy

1,000 shares of Bobs car wash (BOBC) at $50.00 per share.

The stock trades eight points higher, to $58.00 per share.

You say to yourself if this stock gets to $60.00 per share, Im going to sell it!

So far you are up $8,000.00. There are four possibilities:

1. BOBC trades to $60.00+, and you net a profit of $10,000.00 HORRAY!2. BOBC trades down and you watch your $8,000.00 profit shrink

FOOWEY!3. BOBC doesnt trade up or down, but sideways ZZZZZZZZZZZZZZZZ.4. BOBC trades somewhere between $58 and $59.99 and you sit there biting

your nails wondering what your fate will be. Will you be rewarded forstanding your ground, or will you be swimming in regret, after seeing your

profit dwindle away?

Guess what! Either way you slice it, you have just left money on the table!!!

When you sell covered calls, you are grabbingthat extra money off the table and

putting it in your pocket. You are increasing your potential profit, and you are

reducing your risk.

So why doesnt everyone sell covered calls?

No, Im asking you, because I really dont know the answer.

Lets look at the example again. You bought BOBC at $50. The stock hastraded up to $58.


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You can either decide not to sell covered calls and say if it gets to $60 Ill sell it

and make 10 points, OR you can sell someone the rightto buy your stock at$60.00 and receive a few extra bucks by selling a call option contract on BOBC.

If you dont sell covered calls, then you are basically going to do what most

people do: If the stock hits your target, youre going to sell the stock at $60.00(free of charge).

What you could have done is have someone pay you money, if you promise that

they can be the one to buy your stock at $60.00 and yes, this is legal!

For instance: Imagine that after buying BOBC at $50, it traded up to $58.

Since you can see that the stock is approaching your intended sell price of

$60.00/share, you sell the June 60 call for $2.00/share (to open.) - Notice that

when you sell (or write) covered calls, you will sell the call to open. Someanonymous investor basically pays you money for the right to buy BOBC from

you at $60.00/share.

If the stock keeps trading higher, and continues past $60.00, then chances are

that your stock will be called away or sold at $60.00 at some point (when the

stock is trading at a price higher than $60.00).

Note: Keep in mind that the person who bought the call option from you has the

right, and not the obligation, to buy your stock at $60.00. The only time that your

stock is guaranteed to be called away from you is on expiration day, as long asthe stock is in-the-money by 25 cents or more.

Comparison

Regular Stock Trade: Stock trades from $50-$60

$60.00 on sale of BOBC-$50.00 on purchase price$10.00 total profit

Covered Call Stock Trade: Stock trades from $50-$60

$60.00 on sale of BOBC-$50.00 on purchase price$10.00 profit


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+ $2.00 profit on sale of June 60 call option$12.00 total profit

If you do sell someone the RIGHT to buy your stock at $60 (which is what

happens when you sell covered calls), then you are being paid extra money!

Why on earth would someone PAY you for the right to buy your stock at $60, ifthe stock is only at $58.00?

Why would someone give you extra money, so that they have the ability to buy

your stock at a higher price? Sound crazy?

Lets use an example from the point of view of the buyer of the call option:

Forget about sellingcovered calls for a minute. Lets pretend that instead of

being the seller of the BOBC call option contract, youare the buyer.

You have boughtthe BOBC June 60 calls at $2.00 (to open.) (Youre a dice

rolling, risk taking, gun slinging cowboy/cowgirl!)

That means youhave purchased (at $2.00/share) the right to buy BOBC at

$60.00 per share at some point before the call option expires on the third Friday

of June (remember: options always expire on the third Friday of the month.)

As the buyer/owner of the call option, you are hoping that the stock continues to

trade higher, from its current price of $58, up to (lets say) $70.00 per share.

If that happens, then the call option that you bought at $2.00 will trade to over

$10.00, which will be over 400% in profit!

But if the stock stays around $58.00 per share, and never trades over $60.00, thecall option will expire worthless in June (on the third Friday).

You are basically risking the entire $2.00 for the chance to make an $8.00 profit.

Its a huge risk for a huge reward.

Now lets test your memory:

Do you remember the difference between intrinsic value and time value?


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Always Remember: When you buy options that are out of the money, you are

taking a big risk, because the entire amount that you are paying for the option is

time value. Time value is at the mercy of time decay.

The BOBC June 60 call gives you the right to buy BOBC at $60.

Since the stock is not trading over$60.00 per share (its at $58,) the BOBC June

60 call option contract that you bought for $2.00 (to open), has zero intrinsicvalue.

When an option is in-the-money, it has intrinsic value. When an option is out-

of-the-money, it has zero intrinsic value, and is 100% time value.

In this case, the entire $2.00 premium is time value.

Time value is prone to time decay. Intrinsic value is not affected by time decay.So as time passes, the time value of the call option in our example will

deteriorate. If you recall, the time decay actually accelerates in the last 3 months

and especially in the last 30 days.

(See time decay chart below)

A Side Note: One of the most common mistakes that I see options beginners

make (even options veterans for that matter) is buying out-of-the-money options,

without realizing the level of risk that they are taking.

Whats worse is that they buy out-of-the-money options that are going to expire

within the next 1-3 months! Talk about stacking the odds against you!

This is the difference between buying options that are cheap and buyingoptions that are inexpensive.

Heres a picture of the BOBC June $60 call. Its two points out of the money

(BOBC is at $58) so the entire premium (price of the option) is time value, andwill be affected by time-decay!

Watch what will happen to the premium if the stock simply trades flat (at $58.00):


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Why does a casino make so much money?

Because there are millions of people who are okay with taking bets, even when

they know that the odds are against them. Every now and again, the casinoloses and the gambler wins!

But does the casino ever really lose? I mean, is the casino really gambling at

all?

The guest, of the casino is doing all of the gambling. The casino is simply

running a business. The casino knows that every now and again they will haveto pay up. But the amount that they pay out once in a while is dwarfed by the

amount that they collect from most of the other guests. Everyone knows that!

But when you are the buyer of short-term, out of the money options, you might

notrealize that you are the same guy as the gambling casino guest.

When you are the person who is selling (aka writing) covered calls, YOU

are the casino!

You are the one who is accepting payment after payment after payment,

from the guy who wants to see his $2.00 BOBC call option trade up to

$10.00.


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Once you have sold a covered call and received your payment, either you will

keep the premium andyour stock position, or else you will keep your premium,and you will sell your stock. BIG DEAL! Just be sure to only sell covered calls if

you are willing to sell your stock at the strike price.

Ideally, you want to sell calls with a strike price thats slightly higher than thestocks current price. Its also okay to sell calls with a strike price thats at-the-

money (the same as the stocks current price) or slightly in-the-money (slightlylower than the stocks price. The idea is to profit from the decaying time value of

the option that you have sold.

Ideally, you also want to sell calls that will expire in 30-45 days because that is

when time value will decay most rapidly.

Now for the comparison:

Lets say you are NOT that average stockholder (who neversells covered calls).

Instead, you have taken the time to learn about covered calls, and you now have

the advantage of an easily acquired education on the benefits of covered call

writing

You buy 1,000 shares of Bobs car wash BOBC at $50.00 per share.

The stock now trades to $58.00 per share.

You say to yourself: I would be willing to sell my stock at $60.00. Lets see what

the BOBC June 60 call options are trading at, because you know that someoneis willing to pay somethingfor the right to buy your BOBC at $60.00.

You find out that you can sellthe BOBC June 60 calls for $2.00.

Again, the stock is at $58.00, and so far you are up $8,000.00 on your stock

position...

Remember these two keys:

1. Each option contract represents 100 shares. 10 option contractsrepresent 1,000 shares. So if you own 1,000 shares of BOBC, and youwant to sell someone the right to BUY your 1,000 shares of BOBC, thenyou would sell 10 call options (to open,) because 10 options represents1,000 shares.


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2. Some people get confused about selling first and buying second.Traditionally people are trained to only understand buying something first,and selling it second. But when you write an option contract (or sell anoption contract), then you are essentially short the option contract. Youcan firstsell an option contract at $10 (to open), and THENbuy the option

3 weeks later at $6 (to close) for a 4 point profit.

So again, BOBC has traded from $50.00 to $58.00 per share.

This time you sell 10 June 60 call options (to open), and you receive an extra

$2.00.

That part of the transaction is now done. You now have an extra $2,000.00 in

the bank, no matter what happens to the stock.

(Now take a look at the difference)

There are four possibilities:

1. BOBC trades to $60.00+. Your BOBC is called away (sold) at $60.00 pershare, and instead of $10,000.00, you net a profit of $12,000.00. ($10k onthe stock and $2k on the option that you sold.)

Special note: Your stock will not necessarily be sold at $60.00 justbecause it trades over $60.00. Your stock may or may not be called away

at any time before expiration. If, at 4:00 p.m. on expiration day, the stockis 25 cents in-the-money, or more (which means BOBC would be at$60.25 or higher), the call that you sold willautomatically be exercised,and your stock will automatically be called away (sold).


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Here is a quick picture of what this would look like

2. BOBC trades down. You dont feel so bad because you picked up thatextra $2,000.00. If you didnt sell that call option, BOBC would have stilltraded lower, but your account would be worth $2,000.00 less than it isworth right now! Whatever dollar amount the stock trades down by, thedecline in value is reduced by $2,000.00.

For instance: If, after you take in that $2.00 premium, your stock tradesfrom $58 down to $55, then instead of losing $3,000.00 in value, your1,000 shares of BOBC would lose $1,000.00 in value since you will havebeen paid $2,000.00 for the call option that you sold.

(If the stock trades down 3 points, you really only lose 1 point in value,because while the stock lost 3 points, you made 2 points by selling the calloption.)

At least you take in an extra $2,000.00, and you will be free of any future

obligation once the option contract expires. (Or else you can just closeout the call option position by buying the same call back (to close) at itscurrent lower price (see below).

Now heres a fun twist: You actually have two choices if your stocktrades lower.


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a) You can do nothing and maintain both the long stock position,as well as the short call option position until the option contractexpires.

b) You can simply buy the option contract (that you previously soldat $2.00) at a cheaper price. Imagine selling a gold watch for$2,000.00 and then buying it back from the person that you sold itto for $300.00. Not bad. Thats a $1,700.00 profit.

As the stock trades lower, the call option that you sold also trades lower.That means that if the stock trades lower, you can always buy the calloption (that youve sold), at a cheaper price than what you received for itwhen you sold it. This is a profit on the option trade that will reduce theloss incurred on your stock position.

For example: If BOBC trades from $58.00 down to $55.00, then the calloption that you sold at $2.00 (to open) may trade down to 30 cents. Youcan now buy the call option at 30 cents (to close). Thats a difference of$1.70. Since you originally sold(or shorted) that call option at $2.00, that$1.70 difference is a profit.

Said differently, if BOBC traded from $58.00 to $55.00 the stock positionlost $3.00 in value. But since the call option that you sold at $2.00 (toopen) is now at 30 cents, you have a profit of $1.70.

So the net result is that, instead of your position losing $3.00 in value, itreally only lost $1.30 in value.

Stock lost $3.00Option gained $1.70Total loss is $1.30

OR as I said originally, you can let the option expire worthless andrealize the entire $2.00 gain on the call. In this case, if the stock tradedfrom $58-$55, then your entire position would have lost $1.00 in valueinstead of $3.00.

Stock lost $3.00Option gained $2.00Total loss is $1.00

After the option expires, you are free of you obligation. If you wishto do so, you can sell another call option and start the process overagain.


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If you were to repeat the process over again, here is a picture of what itmight look like

If BOBC fluctuates up and down between $55.00 and $60.00 all year long,you can sell new covered calls every month or two, and take in extrapremiums over and over again throughout the year!

3. BOBC doesnt trade up or down, but sideways. GREAT! As timepasses, the call option that you sold (to open) is losing its time value.Since you are short the call option, this is a good thing for you.Basically, as time goes by with the stock trading flat, you are makingmoney as the call option loses value due to time decay.

If the stock pretty much trades flat until the option expires, even thoughthe stock did absolutely nothing, you made an extra $2,000.00. This isawesome! Even though the stock never got to $60.00 per share, you still

made $10,000.00 as you had originally hoped for! (You made $8,000.00on the stock and $2,000.00 on the call option that you sold.)

Meanwhile, there is someone out there who was in the same position asyou, but since they didnt sell covered calls, they are sitting on a $58.00stock, wondering whether or not it will trade to their target price of $60, so


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that theycan make the $10,000.00 that youjust made with zeromovement in the stock.

The call option expires worthless, you now have two choices: You couldeither: sell BOBC at $58 and skip down the street thinking about how cool

you are for making $10,000.00 on a stock that only traded up 8 points, oryou could sell another call (to open) that expires the following month ortwo out. Maybe you can sell the July 60 call (to open), or the August 60call (to open) and take in yet another extra premium.

4. BOBC trades somewhere between $58 and $59.99. GREAT! I cantwait to brag!

Lets say, for example, the option expires worthless, and BOBC is at$59.00 at the time. That means that you made $2,000.00 by selling thecall option (you had sold that casino guest the right to buy your BOBC at

$60), and you are also up 9 points on the stock. If my calculations arecorrect, you are now up $11,000.00, and the stock never even hit yourprice target of $60.00!

So the moral of the story is this:

When you are long the option contract (said differently: when you are theowner/buyer of the option contract), Time Decay is your worst enemy, becauseas time passes, your option loses value.

When you are short the option contract (said differently: when you are thewriter/seller of the option contract), Time Decay is your best friend, because astime passes, the option that you sold (to open) to someone else, loses value.You can either buy the option back (to close) cheaper, which will result in aprofitable option trade (offsetting your stocks loss of value), or you can let theoption expire which will also result in a profitable trade.

If this covered call lesson has helped you learn something new, then you areprobably anxious to get out there and write some covered calls on stock that youown, and start grabbing all of that extra money that you have been leaving on thetable each month. But before you do, first consider this last possible outcome

What would happen, and how do you think you would feel, if you wrote a coveredcall on BOBC, which obligates you to sell BOBC at $60.00 per share, but 2weeks later BOBC traded up to $90.00 per share? Hmm.

Before you read any further, think about that for a minute. Do you know whatwould have to happen in that case?


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Well here it is: You would have to sell BOBC to someone at $60.00, even thoughit is selling at $90.00 in the stock market. Now, that might drive you crazy, eventhough your original plan was to sell at $60.00 anyway.

Ask yourself, how much of a loser would you feel like if you sold someone the

promise that they could buy your stock at $60, only to see it trade to $90, 2weeks later?

Answer: You should feel like as much of a loser as the casino feels like whensomeone puts $2.00 in a slot machine and wins $30.00.

The reason a casino is happy to give up a profit every once in a while is becausethey make so much more in the long run.

I hope that I have given you a clearer picture of why options can be used as away to gamble, but also as a conservative way to reduce risk.


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Important Tips and Terms

Tip 1:

Always look at the bid and the offer, not the last trade.

I have had many people ask me how an underlying stock had fluctuated up or

down by a few points, but the price of the options contracts that are related to

that stock didnt move at all.

Usually the problem was that when they looked at the option quote, they were

looking at the last trade instead of looking at the Bid and Asking price of the

option.

Think about this: You may look at an option quote that looks like the one circled

below, and make the mistake of thinking that you would only receive $5.60 by

selling this call option.

I circled in red a call option that has a bid of $6.00 (which is what you would get if

you were to sell the call at its currentmarket price), and an asking price of

$6.20 (which is what you would pay if you were to buy the call at its current

market price).

So why does the last trade say $5.60? Simple: Because the last trade was

executed at $5.60. That trade may have happened a week ago for all we know.

Maybe the trade happened during the same day, but the option has sincefluctuated in price.


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When looking to see what you would pay for an option, or what you could get for

the sale of an option, always refer to the bid and ask (not the last trade).

It seems simple enough, but I hear this question all the time!

Tip 2:

Buy deep in-the-money options.

You may notice that some of the options that I used as examples in this report

only traded 38% higher, or 120% higher. But what about those 900% and

2300% returns that you heard can be made on options? Isnt this a high risk,

high return strategy?

The answer is that options have a reputation of being high risk, high reward but

the truth is that it doesnt have to be that way at all. Its like the saying goes: Itisnt only black or white. There are all sorts of shades in between.

Check out the Knowledge Center at The Trend Riderwebsite

(http://www.thetrendrider.com/view_service_knowledgecenter.asp), specifically

the two articles titled In the Money Part 1 & Part 2.

At The Trend Rider, instead of trading the options that either get you a 920%

return, or a 100% loss, we buy and sell options in a way that is much more

conservative by trading options with lots of intrinsic value.

Buy purchasing deep in-the-money options, you reduce your risk greatly, but you

can still achieve profits that are much greater than a stock will show you.

Important Terms

At this point in our lesson, let me take you back a bit to make sure that nothinggot by you. In other words, dont try to trade options before you understand

these terms:


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Premium: Price of the option

Selling an Option: Writing an option contract.

Just remember: When you sell an option contract (put/call), you are selling a

promise. Imagine literally making a promise and accepting payment to write it

down on a piece of paper and signing the paper. You are writing a contract and

selling that contract.

In the world of options trading, when referring to options contracts, the words

Writing and Selling mean the same thing.

Opening Transaction & Closing Transaction

When opening a new options trade, you must specify that you are doing so

by using the term to open. When you are closing out an existing options

trade, you must specify that you are doing so by using the term to close.


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Remember: Just as you can Short a stock, by selling the stock first and

anticipating that you will buy it back in the future, you can also short an optionscontract.

You can either: buy an option today and sell it tomorrow, or you can sell an

option today, and buy it back tomorrow.

With that in mind, just remember that whichever transaction you do first, that willbe your opening transaction, and should be marked to open.

Naturally, whichever transaction you do second, that will be your closing

transaction, and should be marked to close.

The Bottom Line on Covered Calls

When selling covered calls, the idea is to sell short-term calls (that expire in nomore than 60 days), that have lots of time value. The reason is because you

want the call option that you sold to lose value quickly.

If you sell calls that have lots of time value, then time decay will work in your

favor. Even if your stock trades flat, the call option that you have sold (shorted)

will trade lower.

Remember, when you sell a call option, you have the choice of buying the call

option back for a profit.

So you can: Sell IBM January 50 calls to open at $10.00/contract, on June 17,

2006.

Then, you can buy the same IBM January 50 calls to close at $8.00/contract, onJune 25, 2006.That would net you a $2.00 profit. ($10.00 - $8.00 = $2.00 profit.)

I hope that this helps, that you have had fun, and that you are ready to start

making some more money!

Chris Rowe


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How to Get Started Trading OptionsAn Invitation From Chris Rowe

I hope you enjoyed this guide to trading options, and that it has given you the

confidence and motivation to get involved in trading options.

But you may be asking yourself, What next? How do I get started?

I have the answer for you, and Ill share it with you below, but first I want to share

a few rules of thumb that you need to take to heart if youre just getting started

with trading options:

1. Don't Ever Be Afraid to Make MistakesThe only lessons that really stick, in my opinion, are lessons that hurt a

little bit. Just do your best to limit the pain. When you start trading

options, the best way to do that is to make sure you learn as much as you

can and "start small." Don't pour all your money into any single trade,

start with some "phantom" trades, and only play with money that you can

afford to lose.

2. Good Things Come to Those Who Work

There's a lot of hype out there ... a lot of noise about how "easy" it is to

make money. Tune all of that out and be wary of anyone offering you

easy money.

I got to where I am today through hard work and self-discipline. Sure, I try

to make it as easy as possible for my members to have success with their

investments, but at the same time I'm a strong proponent of education and

discipline.

3. It Never Hurts to Have a Mentor

I wouldn't be half the trader I am today if I hadn't been lucky enough to

have a man named Mark Rosenberg take me under his wing in my early

days on Wall Street.

When I was just getting started, he "held my hand" for months and months

until I hit my stride. I'll always be thankful to him for making the

complicated simple, for questioning my decisions at every turn, and for

sharing some of his tried and true strategies with me.


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In my trading service, TheTrendRider.com, I find myself patterning my advice

after how Mark taught me. I try to picture a little bit of me in all of the Trend Rider

members, and I try to "hold hands" with my members to make sure they

understand everything I recommend.

So, on one hand, I make sure that my members have a very easy time tradingthe service. I want it to be like they're trading right alongside me at my desk.

On the other hand, I always want to challenge Trend Rider members to improve

their own skills. Who knows ... maybe a few years from now one of them will be

writing to people talking about me like I was Mark Rosenberg.

I Chris Rowe, Hereby Volunteer to Be YOUR Mentor

No, I cant fly out to your house and sit in front of the computer with you while you

learn the ins and outs of trading options. But I can come close to doing just that.I do it for hundreds of people just like you every day as CIO of

TheTrendRider.com.

Good News and Bad News

The Bad News:

Membership to TheTrendRider.com is very hard to come by these days.

Recently, demand for the service became so great; I decided to close the service

to new members for all but one week out of each month. Even when it's open, I'mbeing very careful not to let more than 100 new people on board in any given

month.

The Good News:

You dont need a membership to my trading service to receive professional

options advice from me! Thats right; you can read my weekly articles on options

in TheTycoonReport.com forFREE!

However, if you are interested in a Trend Rider membership, I can sneak you to

the front of the line through this special offer. The 100 memberships usually govery quickly.


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Remember: You can read my weekly articles ontrading options FREE in TheTycoonReport.com

However, joining The Trend Riderhas these major advantages:

Unmatched Advice, Winning Recommendations: You'll get the benefit of the best investment

experience money can buy in 60 weekly issues ofThe Trend Rider. Once you get my emails, simply ca

your broker or place your trade online.

Urgent Flash Alerts: Sometimes the market moves too quickly for a regular trading schedule. Whesee an important event that changes the landscape of any of my recommendations, or when I see a

new trading opportunity in the middle of the week, I won't hesitate to send you a flash alert.

Winning Recommendations: An incredible near 80% of closed Trend Rider trades have been

profitable a mind boggling success rate for any trader, let alone an options trader!

A World-Class Education: You already know by now that youll never have to worry if Ill

conveniently forget trades I recommended that didnt work out as planned. I treat you like I want to

be treated, which is why you get an honest and in-depth analysis of all my trades regardless of the

result!

Special Reports: Free special reports such as Options Made Simple, which are packed with easy-tounderstand lessons on the dos and donts of option trading.

Profit Protection: Demand for The Trend Riderhas become so strong that I decided to close the

service to the general public and only accept a limited amount of new members each month just to

protect your trading profits from excess trading!

NEW Monthly Webinars: With the recent economic turmoil I wanted to make myself directly

accessible to my Trend Rider members so that I can personally answer their questions. In these Live

Webinars we will discuss our open positions as well as answer member questions. These Webinars w

also be available for members to download from The Trend Rider website.
http://trendrider.tycoonresearch.com/subscribe/


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DISCLAIMER

1. Tycoon Publishing, LLC, publisher of, TheTrendRider.com, and PointandProfit.com, is strictly aresearch publishing firm and falls within the publishers exemption of the definition of aninvestment advisor and is of general and regular circulation. None of the Trading or Investingnewsletters, services or educational programs provides individual customized investment advice.The information we provide and publish is based on our opinions plus our statistical and financialdata and independent research. They do not reflect the views or opinions of any registered

corporate affiliate.2. We are a financial publisher and do not provide personalized trading or investment advice. Again,

we are a financial publisher. We publish information regarding companies in which we believe oursubscribers may be interested and our reports reflect our sincere opinions. However, theinformation in our publications is not intended to be personalized recommendations to buy, hold, orsell securities. As a financial publisher, we are not legally permitted to offer personalized trading orinvestment advice to our subscribers. If a subscriber chooses to engage in trading or investing thathe or she does not fully understand, we may not advise the subscriber on what to do to salvage aposition gone wrong. We also may not address winning positions or personal trading or investing

ideas with subscribers. Therefore, subscribers will need to depend on their own mastery of thedetails of trading and investing in order to handle problematic situations that may arise, includingthe consultation of their own brokers and advisors as they deem appropriate.

3. Profits can be lost if they are not taken at the right time. Subscribers are advised to take profits at

whatever point they deem optimal, regardless of the profit target set in any given recommendation.Publications such as those we offer provide recommendations. Subscribers are free to follow therecommendation, follow it in part, or ignore it altogether. If a subscriber believes a given profit is atrisk, the subscriber should take the profit. Similarly, if a subscriber feels a position is likely to lose

value, or a losing position is likely to fall further, the subscriber can choose to exit at any time topreserve capital. The final decision as to when to take profits remains in the sole discretion of thesubscriber, keeping in mind that profits can be lost if they are not taken at the right time.

4. TheTrendRider.com publishes a model portfolio of stocks and options chosen by its author/s inaccordance with their investment strategy. Your actual results may differ from results reported forthe model portfolio for many reasons, including, without limitation: (I) performance results for themodel portfolio do not reflect actual trading commissions that you may incur; (ii) performanceresults for the model portfolio do not account for the impact, if any, of certain market factors, such

as lack of liquidity, that may affect your results; (iii) the stocks and options chosen for the modelportfolio may be volatile, and although the "purchase" or "sale" of a security in the model portfoliowill not be effected in the model portfolio until confirmation that the email alert has been sent to

subscribers, delivery delays and other factors may cause the price you obtain to differ substantiallyfrom the price at the time the alert was sent; and (iv) the prices of stocks and options in the modelportfolio at the point in time you begin subscribing to TheTrendRider.com may be higher than suchprices at the time such stocks or options were chosen for inclusion in the model portfolio. Pastresults are not indicative of future performance/results.

5. The Trend Rider, and any educational material created by Christopher Rowe including, but notlimited to Options Trading Simplifiedcontains Mr. Rowes own opinions, and none of theinformation contained therein constitutes a recommendation by Mr. Rowe or TheTrendRider.comthat any particular security, portfolio of securities, transaction, or investment strategy is suitable forany specific person. You further understand that Mr. Rowe will not advise you personallyconcerning the nature, potential, value or suitability of any particular security, portfolio of securities,transaction, investment strategy or other matter. To the extent any of the information contained inTheTrendRider.com may be deemed to be investment advice, such information is impersonal andnot tailored to the investment needs of any specific person. Mr. Rowes past results are not

necessarily indicative of future performance. PLEASE DO NOT EMAIL MR. ROWE SEEKING

PERSONALIZED INVESTMENT ADVICE. THIS IS NOT SOMETHING THAT HE CAN PROVIDE.6. All securities trading, whether in stocks, options, or other investment vehicles, is speculative in

nature and involves substantial risk of loss. You may lose money trading and investing. Tradingand investing in securities

options made simple

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