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Covered Call WritingCovered Call WritingInvesting with Stock OptionsInvesting with Stock Options

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Alan Ellman and Peak Performance LifestylesAlan Ellman and Peak Performance Lifestyleswww.thebluecollarinvestor.comwww.thebluecollarinvestor.comalan@thebluecollarinvestor.comalan@thebluecollarinvestor.com

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Important Consumer Disclosure The Blue Collar Investor is not a registered investment adviser. The publication of this website and the information contained therein should not be construed as the rendering of personalized investment advice for compensation over the Internet, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. There is no guarantee that the views and opinions expressed herein will be profitable or come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. We recommend that you seek the advice of a professional investment adviser before making any investment decisions. The information we provide is based on our opinions plus our statistical and financial data and independent research. They do not reflect the views or opinions of any registered corporate affiliate. Due to the nature of covered call options, stock prices are capped at strike prices and underlying stock could be purchased at any time. Options carry a level of risk and are not suitable for all investors. We do not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to our website or incorporated herein, and take no responsibility therefore. All such information is provided for convenience purposes only and all users thereof should be guided accordingly

DisclaimerDisclaimer

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Preview: Real Estate ExamplePreview: Real Estate Example Buy property for 100kBuy property for 100k

Sell option to purchase @ $120k in 6 Sell option to purchase @ $120k in 6 months for $10kmonths for $10k

2 possible outcomes2 possible outcomes

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RE- Scenario #1RE- Scenario #1 Option is NOT exercisedOption is NOT exercised

Keep the propertyKeep the property

Profit = 10k/100k =10% =20% Profit = 10k/100k =10% =20% annualizedannualized

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RE- Scenario #2RE- Scenario #2 Option IS exercisedOption IS exercised

Keep the 10k option premiumKeep the 10k option premium

Additional 20k profit on saleAdditional 20k profit on sale

Profit = 10k + 20k = 30k =30% = Profit = 10k + 20k = 30k =30% = 60% annualized60% annualized

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PREVIEW: Stock ExamplePREVIEW: Stock Example Purchase 100 shares of Company Purchase 100 shares of Company

XYX @ $48 per share = $4800.XYX @ $48 per share = $4800. Sell an option: sell someone the right Sell an option: sell someone the right

to buy these shares for $50 per share to buy these shares for $50 per share during the next month.during the next month.

You are paid a premium of $1.50 per You are paid a premium of $1.50 per share = $150.share = $150.

This is a 3.1% 1-month return = 37% This is a 3.1% 1-month return = 37% annualized.annualized.

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Stock-PREVIEW SCENARIO IStock-PREVIEW SCENARIO I At the end of the month, the stock At the end of the month, the stock

price is less than $50; your shares price is less than $50; your shares are NOT purchased.are NOT purchased.

You keep your 3.1% 1-month profit You keep your 3.1% 1-month profit and are free to sell another option.and are free to sell another option.

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Stock- PREVIEW SCENARIO IIStock- PREVIEW SCENARIO II At the end of the month, the stock At the end of the month, the stock

price is above $50 per share and price is above $50 per share and your shares ARE purchased.your shares ARE purchased.

You now make an ADDITIONAL $200 You now make an ADDITIONAL $200 on the sale of the stock.on the sale of the stock.

Total 1-month profit is $350 = 7.3% Total 1-month profit is $350 = 7.3% 1-month return = 87% annualized!1-month return = 87% annualized!

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WHY SELL OPTIONSWHY SELL OPTIONS 1- High rate of return/low risk.1- High rate of return/low risk. 2- Great strategy for moderately bullish, 2- Great strategy for moderately bullish, bearish and neutral markets.bearish and neutral markets. 3- Teach your children; help your parents3- Teach your children; help your parents 4- Control results through exit strategies.4- Control results through exit strategies. 5- Downside protection5- Downside protection 6- Compound your $ in minutes!6- Compound your $ in minutes! 7-Capture all corporate dividends7-Capture all corporate dividends 8-Cash-generating business in home-office8-Cash-generating business in home-office

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GOLDEN RULESGOLDEN RULES 1- MUST TOLERATE SOME RISK.1- MUST TOLERATE SOME RISK.

2- ONLY SELL OPTIONS ON STOCK 2- ONLY SELL OPTIONS ON STOCK YOU WOULD OTHERWISE LIKE TO YOU WOULD OTHERWISE LIKE TO OWN.OWN.

3- SET UP A PLAN THAT INCLUDES 3- SET UP A PLAN THAT INCLUDES MULTIPLE EXIT STRATEGIESMULTIPLE EXIT STRATEGIES

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S&P 500 – 1 YearS&P 500 – 1 Year

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S&P 500 – Long TermS&P 500 – Long Term

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DEFINITIONSDEFINITIONS

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WHAT IS AN OPTION?WHAT IS AN OPTION? 1- OPTION- the 1- OPTION- the rightright to buy or sell 100 to buy or sell 100

shares of stock at a fixed price (shares of stock at a fixed price (strikestrike) ) and by a specified date (and by a specified date (expiration expiration datedate).).

2- CALL OPTION- an option to 2- CALL OPTION- an option to buybuy 100 100 shares of stock at a specified price.shares of stock at a specified price.

3- PUT OPTION- an option to 3- PUT OPTION- an option to sellsell 100 100 shares of stock at a specified price.shares of stock at a specified price.

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OPTION OPTION STRIKE PRICESTRIKE PRICE AS IT AS IT RELATES TO STOCK PRICERELATES TO STOCK PRICE

1- AT THE MONEY- the strike price of the call 1- AT THE MONEY- the strike price of the call option is option is identicalidentical to the market value of the to the market value of the stockstock

2- IN THE MONEY- the strike price of the call 2- IN THE MONEY- the strike price of the call option is option is lowerlower than the market value of the than the market value of the stockstock

3- OUT OF THE MONEY- the strike price of the 3- OUT OF THE MONEY- the strike price of the call option is call option is higherhigher than the market value of the than the market value of the stockstock

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OPTION VALUEOPTION VALUE AS IT RELATES AS IT RELATES TO STOCK PRICETO STOCK PRICE

1- INTRINSIC VALUE- the amount the option 1- INTRINSIC VALUE- the amount the option is in the money ( at the money or out of is in the money ( at the money or out of the money options have no intrinsic value)the money options have no intrinsic value)

2- TIME VALUE- the options premium above 2- TIME VALUE- the options premium above any intrinsic valueany intrinsic value

3- Example: 50 call option @ 8 3- Example: 50 call option @ 8 If stock price is 56, intrinsic value is 6 If stock price is 56, intrinsic value is 6 and time value is 2and time value is 2

PREMIUM = Intrinsic value + Time ValuePREMIUM = Intrinsic value + Time Value

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COMPONENTS OF THE COMPONENTS OF THE OPTION CONTRACTOPTION CONTRACT

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THE THE RISKRISK IS IN THE STOCK IS IN THE STOCK 1- If stock price declines below breakeven there is 1- If stock price declines below breakeven there is

a loss. a loss.

2- Profit potential is limited to the strike price of 2- Profit potential is limited to the strike price of the option- DON’T GET GREEDY!the option- DON’T GET GREEDY!

3- Assignment- if option is exercised, you must 3- Assignment- if option is exercised, you must sell your stock. Early assignment is rare but sell your stock. Early assignment is rare but possible. You can buy back option thereby possible. You can buy back option thereby avoiding assignment.avoiding assignment.

4- Learning curve and time commitment4- Learning curve and time commitment

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HOW TO MAKE LOTS OF $$$$$$HOW TO MAKE LOTS OF $$$$$$$$$$

1- Use a discount broker1- Use a discount broker

2- Tax sheltered account if possible2- Tax sheltered account if possible

3- Fundamental & Technical Analysis3- Fundamental & Technical Analysis

4- Exit Strategies4- Exit Strategies

5- Common Sense5- Common Sense

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CCashing in on ashing in on CCovered overed CCalls alls System- The Three CsSystem- The Three Cs

1- 1- CCreate a watch list of 40-60 reate a watch list of 40-60 stocksstocks

2- 2- CCalculate option returnsalculate option returns

3- 3- CCarry out necessary exit arry out necessary exit strategiesstrategies

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INVESTOR’S BUSINESS INVESTOR’S BUSINESS DAILYDAILY

1- Monday Edition-can buy on 1- Monday Edition-can buy on SaturdaySaturday

2- Section B- page 12- Section B- page 1 3- Fundamental Analysis3- Fundamental Analysis 4- Reduce 7500 stocks down to 50!4- Reduce 7500 stocks down to 50! 5- 5- www.investors.comwww.investors.com for 3 week for 3 week

free trialfree trial

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IBD 100 as of 1-14-2010IBD 100 as of 1-14-2010

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IBD WEBSITEIBD WEBSITE

www.investors.comwww.investors.com

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MSN-MONEY CENTRALMSN-MONEY CENTRALSCOUTER Risk/Reward RatingSCOUTER Risk/Reward Rating

1- h1- http://moneycentral.msn.com/home.aspttp://moneycentral.msn.com/home.asp

2- 10 years of historical data2- 10 years of historical data

3- Volatility factored in3- Volatility factored in

4- Type in ticker symbol to get rating4- Type in ticker symbol to get rating

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TECHNICAL ANALYSISTECHNICAL ANALYSIS 1- 1- http://stockcharts.com/index.htmlhttp://stockcharts.com/index.html

2- Set up chart as per figure # 28,Page 85 of 2- Set up chart as per figure # 28,Page 85 of “Cashing in on Covered Calls”“Cashing in on Covered Calls”

3- Check to see if stock is up trending and trading 3- Check to see if stock is up trending and trading above it’s 20 day moving averageabove it’s 20 day moving average

4- Short term MA above longer-term MA4- Short term MA above longer-term MA

5- Price @ or above short-term MA5- Price @ or above short-term MA

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ACCESSING THE OPTION ACCESSING THE OPTION CHAINCHAIN

List of Option Prices for a List of Option Prices for a Particular StockParticular Stock

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WWW.FINANCE.YAHOO.COMWWW.FINANCE.YAHOO.COM

1- Type in ticker symbol and ENTER1- Type in ticker symbol and ENTER

2- Hit “OPTIONS” link on left2- Hit “OPTIONS” link on left

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The Ellman CalculatorThe Ellman Calculator

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Selling Options on the QsSelling Options on the Qs

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Managing Our Covered Call Managing Our Covered Call PositionsPositions

Stock selection processStock selection process Earnings ReportsEarnings Reports Industry or sector diversificationIndustry or sector diversification Strike price selectionStrike price selection Trading volumeTrading volume EXIT STRATEGIES- BUY BACK THE EXIT STRATEGIES- BUY BACK THE

OPTIONOPTION

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Our Goal: 2-4% monthly returnsOur Goal: 2-4% monthly returns

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COMPOUNDINGCOMPOUNDINGGeometric Progression and the Geometric Progression and the

Rule of 72Rule of 72 A 6% CD will double in value in 12 years: 100k A 6% CD will double in value in 12 years: 100k

becomes 200kbecomes 200k

CC returns of 2%/month = 24%/yearCC returns of 2%/month = 24%/year

In 12 years 100k becomes 1.6 millionIn 12 years 100k becomes 1.6 million

At 3%, 100k becomes 6.4 million in 12 yearsAt 3%, 100k becomes 6.4 million in 12 years

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SummarySummary Select the GREATEST performing Select the GREATEST performing

stocks in the GREATEST performing stocks in the GREATEST performing industriesindustries

Manage with exit strategies and Manage with exit strategies and common sense guidelinescommon sense guidelines

Compound your money to great Compound your money to great wealthwealth