Options Trading Simplified 2008

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. seen . Chris is a 12-year Wall Street veteran and an internationally respected authority on options with nearly 80% of his trades being profitable since launching his advisory service, The Trend Rider, in 2005. Today he offers his options tutorial to you for free!

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Table of Contents I. Table of Contents ................ ................................... ................................... ................................. .................1 1 II. A Note from Chris Rowe .............. .............................. ................................... ........................... ........ 2

............................... ............................ ............ 7 III. Some Very Important Definitions ............... 101).............. .............................. .................... .... 12 IV. Understand the Basics (Options 101) More Basics: Basics: Types of Options Options ........................ .................................... ......................... ......................... .................... ........ 14 The Beauty of Leverage ......................... ...................................... ......................... ......................... .......................... .................. ..... 18

V. Time Value – How I Learned About Time Value (Or I Should

Say, “Time Decay”)................. Decay”).................................... ................................... ............................ ............ 23 VI. Understanding Risk................ Risk ................................... ................................... ............................ ............ 33 So Let’s Talk a Bit About Put Options ......................... ...................................... ......................... ...................... .......... 34

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















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 cliché, 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 in the markets -- and put it to work to help my people like you profit along with the big players.















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 I would 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 on weekends 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















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 has taken 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 gain















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 own accounts ... 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 I’m speaking to options traders of all levels, from novice to advanced. Some of this guide, especially the first half, covers the bare bones basics of options trading. I strongly urge you, no matter how much of it you already know, to read the entire guide. Worst case scenario, you refresh your beginner level knowledge, which will strengthen your foundation of wisdom. When it comes to options, you absolutely must have a solid foundation. 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 “beginner’s 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 won’t 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 can’t learn to ride a bike by reading a manual or having someone explain how to do it. You need to get up and try, but at the same time, you don’t want to start learning how to ride a bike by entering the Tour de France. The best way to learn about options is to to actually be in the 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, so to 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, don’t go crazy and put a huge amount in the next few

















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. This is crucial. But don’t let it get to you! Keep pushing ahead with your education. What if Warren Buffett lost money on his first stock investment and decided to stop investing in stocks? He wouldn’t be #2 on the Forbes 400 list. You may take some minimal losses and gains (dollar wise), but whether you are up a little or down a little, you will have learned several very valuable lessons, as long as you carefully review each trade after executing them. I hope that what I have written will help you, and if it doesn’t, please let me know so that I may improve this guide for you and others. Without further ado, enjoy this guide that I’ve put together for you on the basics of trading options. Best,

Chris Rowe October6th, 2008 Delray Beach, Florida

















Options Trading Simplified 2008 A 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. options . Don’t spend too much time with it, but read it over once or twice. twice. If you don’t completely understand it, just continue forward 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) are attached to each stock. They generally go in in 2 ½ point intervals up to 22 ½, and in 5 point intervals above that level.

















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 more leverage 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 you’d have to be a sophisticated Wall Street trader to understand how they they work. This really isn’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 to truly master options. When I first started working on Wall

















The impression I got was that they would only play options when they wanted to gamble, but didn’t have time in their schedule to take a trip out to Atlantic City or Las 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 clearcut, and I was spending all of my time starting business relationships with investors 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 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 do it. 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!!

















Wow! Well that was a pretty cool test! 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 card company). I bought “the COF 40 calls” (again, I forget the expiration month, but I’m 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 $40.00 to $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 lot of 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. I’ll 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 wouldn’t dare put my clients’ money at such a large risk, and there’s no way that I’m going to shoot craps with a business that I spent years building. In the 90s, every money manager was making their clients money. The clients



















I also knew that I’d have to learn through experience and make a few mistakes along the way. The mistakes I proceeded to learn learn from were common for rookie options 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, I’ll list the hurdles that 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.



















Understand the Basics (Options 101) Most investors know that buying stock entitles them to partial ownership in the company who issued those shares. In other words, you’re 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. 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 the underlying 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.



















Wall Street Lingo Remember: When we say that we are long an option, it means that we own an option. We have paid money, money, we now own a contract – we now own the right to do something. When we say that we are short short an an option it means that we have sold an option for our opening (initial) trade. We have received money. money. In return return for the payment that we received, we made 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 to exercise it.

The (option) contract owner has no obligation to do anything. The owner doesn’t have to buy IBM at $50. But if he wanted to, he could. That is where the word “option” comes from. The owner of the option contract has the “option” to exercise the contract, or to not exercise the contract. Remember: The owner of an option contract has spent money to buy the option contract. So it’s the owner’s choice, or right or right,, to exercise the option contract. The obligation is on the seller of the option contract. The seller of seller of the option contract has received a payment.



















More Basics: Types of Options There are two types of stock options: 1. The “call” option 2. The “put” option A “call” option is an option contract that gives the owner of 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, which means 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

Calls vs. Puts – An Easy Way to Remember When you own a call option, you want the underlying stock to move up. This is because because when a stock moves up, the call option moves up in price. When you own a put option, you want the underlying stock to move down. This is because as a stock moves down, a put moves up in price.



















Option contracts aren’t always exercised. In fact, the majority of the time, time, an option contract is purchased for one dollar amount, and sold for another dollar amount. 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 I’ll give you a real life example, and then I’ll explain the mechanics behind the concept. I recommended to members of my trading service The Trend Rider that 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 were trading for $15.20.









































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 I recommended was $15.20. Here’s what the option quote looked like: 2007 Jan 45 call - $15.20





















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%, then I 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.





















If the house went down in value by $100,000.00 I wouldn’t worry too much about backing out and losing a $5,000.00 deposit. (Good thing I didn’t actually own the house, 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 becomes much more valuable. (I’d sure hate to misplace that piece of paper!)

How Are Options Like Pizza???





















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 isn’t giving you anything you can hold 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, 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























Although an options chain may seem like a foreign language to an options novice, as long as you keep























The next part of options trading that we’ll discuss should to be the easiest to understand: When opening a new options trade, you must specify that you are doing so























Time Value – How I Learned About Time Value (Or I Should Say, “Time Decay”)























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 IBM traded to $112? That would mean that I could









































































































































































































































































































































































































































































































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Tycoon Publishing, Publishing, LLC, publisher publisher of, of, TheTrendRider.com, TheTrendRider.com, and PointandProfit.c PointandProfit.com, om, is strictly strictly a research publishing firm and falls within the publisher’s exemption of the definition of an “investment advisor” advisor” and is of general and regular circulation. circulation. None of the Trading or Investing newsletters, services or educational programs provides individual customized investment advice. The information we provide and publish 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. We are a financial financial publisher publisher and do not provide provide personalized personalized trading trading or investment investment advice. advice. Again, we are a financial publisher. We publish information regarding companies in which we believe our subscribers subscribers may be interested and our reports reflect our sincere opinions. However, the information information in our publications is not intended to be personalized recommendations to buy, hold, or sell securities. As a financial publisher, we are not legally permitted to offer personalized trading or investment advice to our subscribers. If a subscriber chooses to engage in trading or investing that he or she does not fully understand, we may not advise the subscriber on what to do to salvage a position gone wrong. We also may not address winning positions or personal trading or investing ideas with subscribers. Therefore, subscribers subscribers will need to depend on their own mastery of the details of trading and investing in order to handle problematic situations situations that may arise, including the consultation of their own brokers and advisors as they deem appropriate. 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Your actual results may differ from results reported for the model portfolio for many reasons, including, without limitation: limitation: (I) performance results for the model portfolio do not reflect actual trading commissions that you may incur; (ii) performance results 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 model portfolio may be volatile, and although the "purchase" or "sale" of a security in the model portfolio will 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 substantially from the price at the time the alert was sent; and (iv) the prices of stocks and options in the model portfolio at the point in time you begin subscribing to TheTrendRider.com may be higher than such prices at the time such stocks or options were chosen for inclusion in the model portfolio. Past results are not indicative of future performance/results. The Trend Rider, and any educational material created by Christopher Rowe including, but not limited to “Options Trading Simplified” contains Mr. Rowe’s own opinions, and none of the information information contained therein constitutes a recommendation by Mr. Rowe or TheTrendRider.com TheTrendRider.com that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. person. You further understand that Mr. Rowe will not advise advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment investment strategy or other matter. To the extent any of the information information contained in TheTrendRider.com may be deemed to be investment advice, such information information is impersonal and not tailored to the investment needs of any specific person. 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and/or recommendations in the Newsletter prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Neither the Editor, Editor, the publisher, publisher, nor any of their respective respective affiliates affiliates is responsible responsible for any errors or omissions in any Newsletter. The Newsletter's or Trading Service’s commentary, analysis, opinions, advice and recommendations recommendations represent the personal and subjective subjective views of the Editor, and are subject to change at any time without notice. The information provided in our Newsletter s and Trading Services contain material which is obtained from sources which the Editor believes to be reliable. However, the Editor has not independently verified or otherwise investigated all such information. information. Neither the Editor, the publisher, nor any of their respective affiliates affiliates guarantees the accuracy or completeness of any such information. Our Newsletters, Trading Trading Services and Educational Educational material are not a solicitation solicitation or offer to buy or sell any securities. Subscribers Subscribers may submit questions to the Editor by accessing accessing the “Help” section section of The Trend Rider website. However, since the Newsletter/Trading Service Service is impersonal and does not provide individualized advice for specific subscribers, the Editor can only answer questions of a general nature about the markets or specific securities. The Editor will make every effort to answer subscriber questions on our website (www.thetrendrider.com) (www.thetrendrider.com) or in the “member communications” e-mails that are sent to members occasionally. Any subscriber who would like like a copy of these “Disclaimers “Disclaimers and Disclosures” Disclosures” may request a copy by calling 877-4-TYCOON or writing to Tycoon Publishing, LLC, 110 East Atlantic Avenue, Suite 230, Delray Beach, FL. 33444, Attention: Disclosure (whereupon a copy will be mailed or faxed to such subscriber.)

Don't enter any trade without fully understanding the worst-case scenarios of that trade. Trading securities like stock options can be extremely complicated, complicated, so make sure you understand these trades before entering into them. For example, aggressive positions in options have a greater probability of losing, while less aggressive positions are less likely to yield substantial profits. Similarly, far out-of-the-money options are unlikely to finish in the money, and options purchased close to their expiration dates are very high risk and, thus, likely to win big or lose big very quickly. Don't enter any trade without fully understanding the worst-case scenarios of that trade. RISKS WHICH ARE SPECIFIC TO STOCK OPTIONS TRADING When you open a stock option account, you should receive a booklet entitled "Characteristics "Characteristics and Risks of Standardized Options," Options," which is also available on the Chicago Board Options Exchange website at http://www.cboe.com/resources/intro.asp. This booklet contains an in-depth discussion of the characteristics and risks associated with stock options trading. We strongly encourage you to carefully read and understand this information. 4.

Assignment of exercise exercise to writers. writers. As a writer writer of a stock stock option, you you may be assigned assigned an exercise exercise at any time from the date of sale through approximately two days after the date of expiration. expiration. The consequences of being assigned an exercise depend upon whether the writer of a call is covered or uncovered, as discussed below. Since an option writer may not be informed of the assignment of exercise until up to two days after expiration, special risks risks can come into play. For example, an option writer who sells out their underlying position position upon expiration may find out the next day that they have to surrender stock they do not now own.

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Risk of unlimited losses for uncovered writers of call options. A "naked" or uncovered writer of a call option is at substantial risk should the value of the underlying stock move unfavorably against the position. For a naked call writer, the risk of loss is theoretically unlimited. The obligation of a naked writer that is not secured by cash to meet applicable margin requirements creates additional risks. A harsh adverse move in stock prices can create steep margin call scenarios in which a brokerage firm may liquidate other holdings in the writer's account(s) to cover the option. Since pricing of















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Deep out-of-the-money out-of-the-money options carry high risk of loss. Although Although purchasing purchasing stock options options at strike strike prices significantly significantly above or below the current market price can be very inexpensive, you are at high risk of losing your money. There are two versions of deep out-of-the-money out-of-the-money options: A deep out-of-the-money out-of-the-money call is an option to purchase 100 shares of stock at a price far above the current market price. A deep out-of-the-money put is an option to sell 100 shares of stock at a price far below the current market price. Although these options seem inexpensive, the chances of making a profit on such transactions are extremely low. Therefore, novice traders should avoid buying deep out-of-the-money out-of-the-money options.

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Out-of-the-money Out-of-the-money options near their expiration expiration date carry carry a high risk risk of loss. loss. The closer closer you buy an out-of-the-money option to its expiration date, the less likely it is to end up profitable. Although these options are cheap, in order to win in such situations, you will need precise timing and the occurrence of a major event that significantly significantly moves the underlying future in your favor. Therefore, the risk associated with these options is high and you are likely to lose your entire investment in these positions.















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Options Trading Simplified 2008

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