TycoonU Options Made Simple

8/12/2019 TycoonU Options Made Simple

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Options Made Simple

by Chris Rowe, Costas Bocelli and Ed Pawelec

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A Note from the Authors

Before reading this guide it is important that you understand something, andwere speaking to options traders of all levels, from novice to advanced.

Some of this guide, especially the first half, covers the bare bones basics ofoptions trading. We strongly urge you, no matter how much of it you alreadyknow, to read the entire guide. Worst case scenario, you refresh your beginnerlevel knowledge, which will strengthen your foundation of wisdom. When itcomes to options, you absolutely must have a solid foundation. Without that, thehouse will collapse.

We speak with options traders of all levels, and you would be very surprised athow many people who are way past this beginners level eventually encounterconfusion, or make a mistake that they never should have made had theirfoundation been concrete.

So if you find yourself saying yeah, yeah, blah, blah, blah, I already know this orduh at any point during this lesson/guide, just give it a chance and read throughit anyway. It wont hurt, and it will ensure that you will grasp everything that isdiscussed.

Before we go any further, let us first just say that our #1 suggestion to you is tostart 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 justlike 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 optionswork in general, get out there and trade one option at a time. If you make a profiton your first three tries, dont go crazy and put a huge amount in the next fewtrades. Have discipline.

If you lose on trade number one or two, be absolutely sure to stop what you are

doing, take some time, and understand exactly what happened on the trade. Thisis crucial. But dont let it get to you! Keep pushing ahead with your education.

What if Warren Buffett lost money on his first stock investment and decided tostop investing in stocks? He wouldnt be #2 on the Forbes 400 list.


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You may take some minimal losses and gains (dollar wise), but whether you areup a little or down a little, you will have learned several very valuable lessons, aslong as you carefully review each trade after executing them.

We hope that what we have written will help you, and if it doesnt, please let us

know so that we may improve this guide for you and others.

Without further ado, enjoy this guide that weve put together for you on the basicsof trading options.

Best,

Chris Rowe Costas Bocelli Ed Pawelec


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Put Options

Again at a very basic level, a put option is a way to bet that a stock will godown in valuewithin a certain timeframe, andgenerally offers the buyer moreleverage than simply shortingshares 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 astipulated 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 you !d have tobe a sophisticated Wall Street trader to understand how they work. This reallyisn!t the case at all. Once you break through a few simple barriers of

understanding, it becomes very easy.

It took me my whole career totruly master options. When I

first started working on WallStreet, I only knew what a

stock was. The optionstraders were always these

fifty-something-plus WallStreet veterans who had beentrading every day for decades.I mean, even the experienced

younger guys at the firmstayed away from optionscontracts for the most part.

The impression I got was that


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they would only play options when they wanted to gamble, but didn!t have time intheir schedule to take a trip out to Atlantic City or Las Vegas (it was always hardto 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 mycomfort zone.

But after I established myself on The Street with a solid track record and a strongmoney 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 forgetwhich 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 didn!t 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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I also knew that I!d have to learn through experience and make a few mistakesalong 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 otherimportant basic concepts.

To spare you the pain of learning any hard lessons for yourself, I !ll 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 takeadvantage of it).

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

Hurdle #4: Understand how to sell covered calls.


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The (option) contract owner has noobligationto do anything. The ownerdoesn!t have to buy IBM at $50. But ifhe wanted to, he could.

That is where the word option comesfrom. The owner of the option contracthas the option to exercise the contract,or to notexercise the contract.

Remember: The owner of an optioncontract has spent money to buy theoption contract. So it!s the owner!schoice, or right, to exercise the optioncontract.

The obligationis on the seller of theoption contract.

The sellerof the option contract hasreceived a payment.

The person who has soldthe optioncontract to the buyer/owner has theobligationto fulfill the terms of theoption contract if the owner decides to

exercise 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 longan

option, it means that we ownanoption. We have paid money, we nowown a contract we now own the rightto do something.

When we say that we are shortanoption it means that we have soldanoption for our opening (initial) trade.We have received money. In return forthe payment that we received, wemade a promise to either buy or sell astock at a fixed price.

I hate to sound repetitive but we haveto be sure that you get this

- When you are longan optioncontract, you own the right to exerciseit.- When you are shortan optioncontract, you have an obligation if thebuyer wants to exercise it.


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Option contracts aren!t always exercised. In fact, the majority of the time, anoption 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 thecontract, or not exercise the contract, but it is also your option to sell thecontract itself at whatever dollar value that the market is giving it at the time.

First I!ll give you a real life example, and then I!ll 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,Suncor!s stock was trading at $52/share, and the options I recommended weretrading for $15.20.

When Suncor Energy!s 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 $36.00apiece.

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 beenup 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% higherwithin that time-frame if you were willing to take that huge risk, but the call that Irecommended was muchmore conservative.)

Here!s 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 Energy45 call option, we owned a contractthat gave usthe rightto buy 100 shares of Suncor Energy at $45/share.

It doesn!t 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 Energy45 call option, then you own a contract that gives you the rightto buy SuncorEnergy at $45.00, even though the stock might be trading at a completelydifferent price.

Here!s a closer look at the trade in question:

When Suncor Energy was trading at $52.00 per share, I send out a trade alertrecommending the purchase of a year 2007 January 45 call option.


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This particular call option gave my Trend Rider members the rightto buy thestock at $45.00 per share. The purchase price of the option contract that Irecommended was $15.20.

Here!s 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

Here!s 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, that!s a $60,000.00 profit.

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

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

If I were considering purchasing a house, I would agree on the purchase price

before actually purchasing the house.

Let!s say in this example that I would put down a deposit of $5,000.00, and Iwould draw up a contract, guaranteeing that I could purchase the house at theagreed 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 let!s 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.

If the house went down in value by $100,000.00 I wouldn !t worry too much aboutbacking out and losing a $5,000.00 deposit. (Good thing I didn!t actually own thehouse, or I would be down $100,000.00!)


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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. (I!d sure hate to misplace thatpiece of paper!)

How Are Options Like Pizza???

Here!s 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?

It!s a coupon!

When buying a call option, think of theagreement that is made when a business

issues coupons.

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

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

Of course you don!t have to use the coupon,but it is your option or your right, 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 obligationtosell 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 couponcan!t just decide not to honor the coupon. The coupon is a contract! The issuer still has tohonor 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 youpaya premium for. The insurance company isn!t giving you anything you canhold in your hand just a promise to fulfill a specific obligation in the future.

If you!ve paid for an auto insurance policy, and then you crash the family car, theinsurance company is obligatedto take whatever action necessary to return thecar to its prior condition.

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

For instance, let!s say you own 100 shares of stock in H&R Block, which wastrading 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, andyou 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 timebuy a put option with a strike price of $22.50. That would give you the right tosell 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, it !s okay

because you bought insurance on your stock (in the form of a put option) thatsays that you can sell the stock at $22.50.

That!s a very simple example of how you can use options to protect yourselfagainst 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).

Although an options chain may seem like a foreign language to an optionsnovice, as long as you keep looking at it, and keep trying to understand it, it willcertainly become crystal clear to you.


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(You can find an optionschain by clicking here)

Let!s go over a couple ofkey terms

Strike (or Exercise) Priceis the price at which a stockcan be bought or sold asspecified in the optioncontract.

For example, with the IBMApril 80 Call, the strikeprice of 80 would give theholder the right to buythestock for $80 per share.

Where with the Exxon April70 Put, the strike price of70 would allow the holderthe right to sellthe stock at$70 per share.

The Expiration Dateis theday on which the option is

no longer valid and ceasesto exist. The expiration datefor all listed stock options inthe U.S. is the third Fridayof the month (except whenit falls on a holiday, in whichcase it is on Thursday).

For example, the IBM 80 Call option will expire on the third Friday ofApril, 2006.

The next part of options trading that we!ll discuss should to be the easiest tounderstand:

When opening a new options trade, you must specify that you are doing soby using the term to open.


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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 withina 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 itselfat over $20.)

Here's the problem: As time passes, time value deteriorates. (This is also knownas time decay.) This is one of the most important parts of options trading thatyou 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 contract!s lifecompared to the 3 months before that. In the 30 days prior to the option !sexpiration date, the time value deteriorates rapidly!


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(Intrinsic value is not affected at all by time decay.)

Although the stock ended up trading 50 cents higher (to $101.50), I lost 62% ofmy option trade in a couple of weeks.

Let!s 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.


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Let!s review:

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

-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 themercy of the most inevitable event that

we know of: Time Passing.

So, since 3 out of 4 points that I paid forwere 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 calloption had no more time left on it, thetime value ($3.00) would no longer exist.

Terms to Remember

The term premium just refers to thepriceat 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 calloption is in the money if the stock price is above the strike price at the time ofpurchase. A put option is in the money if the stock price is below the strike priceat the time of purchase.

Don!t Make the Same Mistake!

Not understanding the effect of diminishing timevalue is probably the number one mistake that Ihave seen beginners make.

If you understand how it works, you are ahead ofthe game and on the path to a much lessexpensive education.

In my story, 75% of the option that I bought (3out 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 thatI recommend to my Trend Rider members.


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Time Value:The part of an option's total price that exceeds its intrinsic value. Theprice 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 optionerodes or reduces with the passage of time.

Here, I!ll 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 purchaseprice 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 $7.00because 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


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

It!s just that in all my years of having thousands of conversations about options, Ifound 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 doesn!t want to sell that stock. If the stock trades down,the person can still sell XYZ stock at the fixed/agreed on price.

Let!s look at a real life example:


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

report 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) Once again, I recommended put options that were deep in-the-money, sothat the time value would be minimal. I hate to see time decay ruin a goodtrade. In this example, the put option only had 1 point of time value. Thatmeans 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 mymembers:


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COVERED CALLS

The seller (aka the writer) of covered calls is generally interested in capturing thepremium income of the call option, and is willing to give up the stock at theexercise 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 doesn!t sell covered calls. You buy1,000 shares of Bob!s 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, I !m 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 doesn!t 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 yourprofit 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 andputting it in your pocket. You are increasing your potential profit, and you arereducing your risk.

So why doesn!t everyone sell covered calls?

No, I!m asking you, because I really don!t know the answer.

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

You can either decide not to sell covered calls and say if it gets to $60 I !ll sell itand 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.


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If you do sell someone the RIGHT to buy your stock at $60 (which is whathappens 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 buyyour stock at a higher price? Sound crazy?

Let!s use an example from the point of view of the buyer of the call option:

Forget about sellingcovered calls for a minute. Let!s pretend that instead ofbeing the seller of the BOBC call option contract, youare the buyer.

You have boughtthe BOBC June 60 calls at $2.00 (to open.) (You!re a dicerolling, 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 Fridayof 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 totrade higher, from its current price of $58, up to (let !s 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.It!s a huge risk for a huge reward.

Now let!s test your memory:

Do you remember the difference between intrinsic valueand time value?

Always Remember: When you buy options that are out of the money,you aretaking a big risk, because the entire amount that you are paying for the option istime value. Time value is at the mercy of time decay.

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


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Since the stock is not trading over$60.00 per share (it!s at $58,) the BOBC June60 call option contract that you bought for $2.00 (to open), has zero intrinsicvalue.

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

of-the-money, it has zerointrinsic 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 willdeteriorate. If you recall, the time decay actually accelerates in the last 3 monthsand especially in the last 30 days.

(See time decay chart below)

A Side Note: One of the most common mistakes that I see options beginnersmake (even options veterans for that matter) is buying out-of-the-money options,without realizing the level of risk that they are taking.

What!s worse is that they buy out-of-the-money options that are going to expirewithin the next 1-3 months! Talk about stacking the odds against you!

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

Here!s 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 whenthey 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 atall?

The guest, of the casino is doing all of the gambling. The casino is simplyrunning 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 theamount 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 mightnotrealize that you are the same guy as the gambling casino guest.

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

Once you have sold a covered call and received your payment, either you willkeep 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 ifyou are willing to sell your stock at the strike price.


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Ideally, you want to sell calls with a strike price that!s slightly higher than thestock!s current price. It!s also okay to sell calls with a strike price that!s at-the-money (the same as the stock!s current price) or slightly in-the-money (slightlylower than the stock!s 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 iswhen time value will decay most rapidly.

Now for the comparison:

Let!s 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 havethe advantage of an easily acquired education on the benefits of covered call

writing

You buy 1,000 shares of Bob!s 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. Let!s see whatthe 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 stockposition...

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.

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. You


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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 sold

at $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. That!s 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 you!ve 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). That!s 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, it

really only lost $1.30 in value.

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

OR asI 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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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 ordown by a few points, but the price of the options contracts that are related tothat stock didn!t move at all.

Usually the problem was that when they looked at the option quote, they werelooking at the last trade instead of looking at the Bid and Asking price of theoption.

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 byselling 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 currentmarket price).

So why does the last trade say $5.60? Simple: Because the last trade wasexecuted at $5.60. That trade may have happened a week ago for all we know.


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

When looking to see what you would pay for an option, or what you could get forthe 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 reportonly traded 38% higher, or 120% higher. But what about those 900% and 2300%

returns that you heard can be made on options? Isn!t this a high risk, high returnstrategy?

The answer is that options have a reputation of being high risk, high reward butthe truth is that it doesn!t have to be that way at all. It!s like the saying goes: Itisn!t 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 ), specificallythe 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 moreconservative by trading options with lots of intrinsic value.

Buy purchasing deep in-the-money options, you reduce your risk greatly, but youcan 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, don!t try to trade options before you understandthese terms:

Premium: Price of the option


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You can either: buy an option today and sell it tomorrow, or you can sell anoption 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 closingtransaction, 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 youwant 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 yourfavor. 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 calloption back for a profit.

So you can: SellIBM January 50 calls to openat $10.00/contract, on June 17,2006.

Then, you can buythe same IBM January 50 calls to closeat $8.00/contract, on

June 25, 2006. That would net you a $2.00 profit. ($10.00 - $8.00 = $2.00profit.)

I hope that this helps, that you have had fun, and that you are ready to startmaking some more money!


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Meet the Authors

CHRIS ROWE

At fifteen, a tragic accident confined Chris to a wheelchair for life.

He realized two things:

First, his life would be forever changed. He had to learn how to be independent.Second, he could either waste his life away in resentment or he could dosomething about it.

He decided to fight, and worked his way on to Wall Street.

After 9 years there, Chris was sick and tired of watching the establishment lie,cheat and steal just to make a buck off the backs of hard working Americans.

He quit, turning his back on a career worth tens of millions of dollars, and co-founded Tycoon U, where he takes what he learned about options and technicalanalysis from the most successful investors in on earth and shares it with250,000 other people like you every market day.

Chris has a rare combination of battle-tested investing knowledge, and the abilityto teach what he knows to anybody -- regardless of their prior experience.

COSTAS BOCELLI

As the CIO for TycoonU!s new Profit Skimmertrading service, Costas has comeroaring out of the gate with a 75% win rate, including winners of 108% in lessthan a month, 96% in 11 days, and 123% in just 2 weeks.

Costas began his trading career in 1998, hired by Gateway Partners, an EquityOptions Trading Specialist Unit, on the Philadelphia Stock Exchange (PHLX).During his tenure there, Costas gained valuable experience navigating thefinancial meltdown that saw the downfall of hedge fund, Long Term Capital andthe Russian Currency Crisis, trading volatility levels that reached unprecedentedlevels.

Costas became a Senior Equity Options Market Maker for the firm, eventuallyleaving to join a proprietary trading desk, making markets for large customer andinstitutional orders.


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Costas has over 7 years of experience making options markets and has trainedand educated several junior traders on option theory, risk analysis, and strategy.

With TycoonU, he enjoys helping the self-directed investor become successful

through the utilization and understanding of how options can play an importantrole in achieving their financial objectives.

ED PAWELEC

Ed!s trading specialty is what we like to call Big Game Hunting. He!s an expertat playing major corporate events such as takeovers, earnings surprises, anddrug approvals -- events that he!s dubbed Price Shock events.

As the CIO for TycoonU!s Price Shock Traderservice, Ed has delivered profitabletrade after profitable trade, including one for 67% gains in just one week, and anastonishing 174% winner in less than 2 months.

Ed Pawelec has been active in the options markets for nearly 2 decades. Hisinterest in options began when he studied finance in college. At that time, optionswere a very new instrument among listed financial products.

His options trading career began on the PHLX in 1993 as an equity options clerk.He worked his way up and eventually become a successful market maker.

In addition to working as an options market maker on the PHLX for ten years, heacted as portfolio manager on the buy side, and as an options executionspecialist and strategist on the sell side.

Continuing his financial education has been key to his profitable career. Hereceived a CFA charter in 2008. The CFA stands for Chartered Financial Analyst.This is an elite designation held by fewer than 110,000 people worldwide.

At TycoonU he merges his passion for financial education and enthusiasm foroptions trading to pass along the tricks and secrets most individual investorsdon't have access to anywhere else.


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DISCLAIMER

1. Tycoon Publishing, LLC, publisher of TheTycoonReport.com, TheTrendRider.com, and

PointandProfit.com, is strictly a research publishing firm and falls within the publisher !s exemptionof the definition of an investment advisor and is of general and regular circulation. None of theTrading or Investing newsletters, services or educational programs provides individual customizedinvestment advice. The information we provide and publish is based on our opinions plus ourstatistical and financial data and independent research. They do not reflect the views or opinions ofany 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 atwhatever 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 losevalue, 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 the

model 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, suchas 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 tosubscribers, 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 Simplified contains Mr. Rowe!s 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 for

any 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. Rowe!s past results are notnecessarily indicative of future performance. PLEASE DO NOT EMAIL MR. ROWE SEEKINGPERSONALIZED INVESTMENT ADVICE. THIS IS NOT SOMETHING THAT HE CAN PROVIDE.

6. All securities trading, whether in stocks, options, or other investment vehicles, is speculative innature and involves substantial risk of loss. You may lose money trading and investing. Trading


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