Question:
How do I find a good options broker?
Answer: If
you currently have a broker who is familiar with options and who will
also give you a discount, use them. Any broker should be able to
enter your options order. But unfortunately not all brokers are
created equal. Any broker you use should be a discount broker --
never use a full commission broker unless they are willing to discount commissions -- after all, you are supplying the investment information
when you use our services.
Using a discount broker
is also important because the price of most of our recommended options
is very low -- when you pay a high commission too much of your money is
used to execute the order and too little for the actual option purchase.
You will dramatically increase your profits by using a discount broker.
But not all discount brokers are the same. Some charge less but in
turn expect more from you. Some charge more and give you more
help. You are the deciding factor in choosing a broker.
While we do not recommend
the services of any specific broker, the following brokers have worked
successfully with option traders for years. They are:
Benjamin & Jerold.
Call 800-446-5112, international investors call 312-554-0202. This
brokerage is an options specialist that also allows options trading in
IRAs -- very rare. They also will hold your stop losses -- a very
valuable service. Ask for Jerry Kopf.
E. D. F. and Man
Securities. Call 800-837-6212, international investors call
312-663-7790. Commission costs are
discounted and you will get some help in making your trades from this
brokerage.
If you prefer online
trading consider www.optionsXpress.Com or www.terranovaonline.com
And of there's the old
workhorse Charles Schwab,
800-435-4000, international traders call 510-465-8800. This is one
of the biggest discount firms in the U.S. Schwab does not have the
lowest rates but the company is easy to work with and has little or no
minimum account requirements.
Call one or more of the
above brokers. Feel free to ask questions, ask about account
minimums, costs and the like.
Question: How do I
find reliable options quotes?
Answer: You
do not need to follow options recommended in our newsletters by the hour
-- every day or so is plenty.
You may get options prices from the
following sources -- First, your broker will be able to give you quotes
as you request them.
For a complete listing of all option prices,
go to www.cboe.com. It is the web site for the Chicago Board of
Options. Also, www.msn.com has option prices for stocks.
Question: How many
positions should I take?
Answer: This
answer depends on your own financial situation.
Obviously, the
more funds you have available, the more you can devote to buying
options. As a rule of thumb no more than 10% of your total funds
should be used for buying options. Take that 10% and divide it
over a one year period, and that`s how much you can invest monthly.
Question: I don’t
know how to place a trade, what do I do?
Answer: Our
report package boils down our profitable trading
strategies into simple
language. Use it. You`ll discover what the options market is all
about.
Question: Where
can I get more information?
Answer: The
most important and basic questions are answered in our posted
reports.
We also offer several video
tapes, computer programs and other published information to help you.
Look for additional services at our Bookstore.
Question: I’m not
certain how to get started.
Answer: Proceed
in this order...
1) Read and study our reports.
2)
Review our recommendations. You should be certain you know how to
implement our recommendations.
3) If you do not already have an
options account you must open one. You may do that with your
existing broker or open a new account. Use a discount broker such
as the ones we`ve listed above. Every broker has different
requirements for opening an account.
4) If you are a new
options trader you will need to build up some experience.
Depending on your personality you may want to use this training time to
"paper trade" where you only follow the recommendations and do
not actually invest any money. Or you may prefer to invest a small
amount of money to get started. Use this "training" time
to build up experience before you actually invest money.
Our recommendations give
you all the information you need to place your order. All you have
to do is decide how many option contracts you want to trade and then
read the information to your broker. Unless you’re an
experienced options trader start trading slowly. As you gain
experience expand your trading. Options are easy to trade. Just
review these reports and you’re on your way!
When you buy an option
you are renting the profit right to a stock for a limited amount of
time. The easiest way to explain what an option is and what it
does is this: You are paying a rental fee for the stock.
During that time you get all of the stock`s potential profits except
dividends. The technical definition is... "An option is a
contract that gives one person the right, but not the obligation, to
purchase or sell a set amount of a stock at a set price for a set amount
of time." Our explanation is simpler. They both mean
the same thing.
Options are perhaps the
most versatile tool in all of the investment world. You can use
options to make very simple but profitable trades, or they can be part
of complex trades for a variety of investment goals. To achieve
success you need to understand a few terms. The terms are not hard
to understand. In the end buying and selling options is no more complex
than buying and selling stocks.
There are two types of
options. A call
option gives its
owner the right to buy the underlying stock. Call option buyers
want the stock price to rise, as you would if you bought the stock.
A put option
gives its owner the right to
sell the underlying stock. Put buyers want the price of the stock
to fall.
Generally, when you buy a
call option you will make money if the stock price goes up, and if you
buy a put option you`ll make money if the stock price declines.
New option traders are surprised that you can make money if a stock goes
down -- but you can! It`s just one of the great things about
options.
Underlying Stock:
This is the stock the option contract
gives you the right to buy or sell. If you buy an option on IBM
the underlying stock is IBM.
Strike Price: This
is like the finishing line in a horse race. When the price of the
stock goes past the strike price (the finishing line) your option begins
to make almost dollar for dollar profit, just like the higher priced
stock. This is where you want the stock to go -- up in price if it
is a call option, down in price if it is a put option. Once you
reach the strike price the big profits begin to kick in.
Expiration Month:
This is the month in which the option
expires. Remember, options are similar to rental agreements --
they don`t last forever. Stock options expire on the Saturday
following the third Friday of each month. An XYZ October 30 call
gives the option buyer profit rights through the third Friday in
October.
Premium: This
is the price paid by you, the option buyer. One stock option
controls 100 shares of the underlying stock, and option premiums must be
multiplied by 100 to determine their cash value. A premium of 1
means $100 per contract.
Limit Order:
The
cornerstone of all of our recommendations is an option’s price.
Don’t pay more for an option than the price we recommend. If you
pay too much for an option you ruin the strategy. The best and
easiest way to get the correct price that we list is to tell your broker
to use a "limit order." Limit orders are usually good
for one day. If the option price moves higher before you can
purchase it, wait a few days and try again if the stock price is still
the same and the option has a few months until expiration.
Using
a limit price will keep you from chasing the option and busting the
strategy. Don`t worry if you don`t get the order immediately.
The market is open 5 days a week, 52 weeks a year. You can always
go back and try again the next day. Just be certain that the stock
and option prices are still in line with our recommended prices.
Price is the key to
success in the options market. When you pay too much to buy an
option the odds are stacked against you. Finding underpriced
options is simple in theory but in the real world it takes an enormous
amount of work. We have developed a computer pricing model that
does this better than anyone else. Take advantage of it.
That is why you subscribed in the first place!
Option Contract:
When you buy an option you
are buying a "contract." One contract controls 100
shares of stock. So the true cost of an option is its quoted price
multipled by 100. For example, if you buy an option quoted at 1,
it will cost you $100. An option quoted at 1/2 costs $50.
Also, there are brokerage
commissions involved when you buy options. Most brokerages charge
a minimum commission where buying five option contracts will cost you
the same in commissions as buying one contract. For that reason,
we recommend that you buy at least four contracts when you take a
position.
For example, let’s say
you want to buy an option priced at 1/2 ($50), and your brokerage’s
minimum commission is $30. If you buy one contract you will pay
$30 in commissions for a $50 option purchase. But if you buy four
contracts you will pay $30 for a $200 option purchase. So by
buying four contracts, average commission per purchase is $7.50 versus
$30 if you just buy one contract.
Intrinsic Value:
This is the "real value" of
the option. Once the stock has risen above the strike price with a
call option or fallen below the strike price with a put option the
option has real or "intrinsic" value. You have won your
bet. Options with intrinsic value are called
"in-the-money;" options without intrinsic value are said to be
"out-of-the-money."
Time Value: This is the amount of premium or
money you have to pay to buy the option in excess of intrinsic value.
It`s your basic rental fee.
Exercise: An
option buyer has the choice to enforce the terms of the option contract.
Most of the time you will simply sell your option to make your profits.
But sometimes, especially when your option has taken on a lot of
intrinsic value, you may have to exercise your option to reap your
gains.
The easiest, safest and
potentially most lucrative way to profit with an option is to buy one.
You simply pay your money (the premium) and wait to see if the stock
does what you think it will: rise if you buy a call option, fall if you
buy a put option.
If the stock price rises
above the strike price specified in your call option, you win your bet.
If the stock falls below the price specified in your put option, you win
your bet.
If the stock does not behave the way you thought it
would you lose your bet, as well as the premium you paid for your
option. Don’t be dismayed by this. Even the pros only win
their bets about 20% to 30% of the time when they buy cheap options.
Fortunately, we know how to increase your odds of winning.
So you
have a better chance to profit if you follow our strategies.
Our Number 1 Rule for
buying options is: only buy underpriced options, like the ones we
recommend.
Sticking with undervalued options gives you two
advantages: First, you are risking less money when you buy a cheap
option. It is much easier on the pocketbook to lose $50 than $500
if the option expires worthless.
Second, if the stock crosses the
strike price (putting it "in the money") before your option
expires, you not only win your bet but your percentage gains will be
more than had you bought a more expensive option.
Price is the key to
success in the options market. When you pay too much for an option
the odds are stacked against you. Finding underpriced options is simple
in theory but in the real world it takes an enormous amount of work.
We have developed a computer pricing model that does this better than
anyone else.
How to Maximize
Profits
As important as selecting
the right option to buy and paying the right price is knowing when and
how to take profits. Most option buyers lose not because they take
the wrong positions, but because they fail to take profits properly.
To make the biggest potential profit your first objective is to protect
profits, and your second objective is to hit home runs. Most important, when your
option begins to profit you must be ready to act.
First, be alert
to sell your position if the stock pulls
back (if you bought a call option), or rises (if you bought a put
option) 5%.
And if the stock makes a sudden big move in your
direction, don`t get greedy. Sell your position and
pocket the money.
One other consideration: If your option is in
the money (goes past the strike price) and enters its last week before
expiration, take profits. Don`t wait for it to expire.
As important as taking
profits is cutting losses. Losses are part of the game, and if you
don`t take them and move on you will soon be out of the game.
Cutting losses is easy -- if an option falls in value by 50% after you
buy it, sell it and close your position. The harder part is
convincing yourself to do it.
We can`t stress this enough -- if
you do not cut your losses quickly, you will not last as an options
player.
That, in a nutshell, is
our fundamental trading strategy -- follow it and you`ll have your best
shot at real success. It is your road map to making colossal profits
with low-priced options.
To achieve the highest
possible success always follow these ten commandments of option buying:
1) Be patient.
This is the most important commandment. Decide how much you`re willing
to risk in options during the next twelve months, and don`t invest it
all right away. Spread your trades over an entire year.
2) Diversify.
Don`t put all your eggs in one basket. Take at least two or three
positions, and buy at least four contracts per position to reduce
commission costs.
Spread your purchases over one year. Try to invest the
same dollar amount in each position, to eliminate the risk of having
small investments in the winners and big investments in the losers.
Also, buy puts and calls on several stocks. Market variability is a
major risk of option buying.
If you buy calls and the market declines,
you could be wiped out. You should always have some bets for both
bullish and bearish scenarios.
3) Minimize your risk.
Pay as little as possible for each option. And always be ready to cut
your losses should the need arise.
Generally you should sell a losing
option only if you pay 1 point ($100) or more, and it drops by 50%. If
this happens you should take your loss and move on.
If you paid less
than 1 point make sure it is worth it from a commissions standpoint to
cut your losses.
4) Plan before you play.
If you do not have a game plan it will be more difficult to profit. Know
before the fact the price at which you will buy an option, take profits
or exit the position.
5) Don`t be greedy.
The downfall of 90% of all options investors is greed. To avoid this
natural tendency make sure you follow your game plan. Force yourself to
wait for the right price by using limit orders to buy options.
6) Maximize your
leverage.
One option contract controls 100 shares of the underlying stock. Try to
find options that will increase in value by at least 200%. Buying cheap,
undervalued options is the first step in this strategy.
7) Buy options on high
volatility stocks.
You have a limited amount of time to work with, so your best plays are
on volatile stocks that move within wide ranges of their base values. An
option’s price factors in this volatility.
When we recommend an
option, often times it is undervalued because the market has mispriced
it based on the stock’s historical volatility. In other words, the
stock has the potential for bigger price swings than the market is
giving it credit for, so your chances of profit are higher. These types
of options are the best plays.
8) In general, buy
out-of-the-money options.
These options
normally have lower prices, and as a result less risk. If it is
underpriced because of volatility factors, it has a greater chance of
going in the money and increasing in value.
9) Buy undervalued
options whenever possible.
Successful option buyers are meticulous bargain hunters. Wait for your
price, pay no more than that price, and make sure the price is below the
option`s true value.
10) Be patient.
This is the most important commandment, and it bears repeating. You must
wait for options to become underpriced. Contrary to popular belief,
buying speculative options is not a game that requires action everyday.
Players looking for this kind of action usually are not around for very
long.
Successful options buying requires patience and selectivity. It is
the only way to win this game.
