Options

April 19th, 2009

What the Option Writers report is offering here will literally make you thousands of dollars over your lifetime. Therefore, I cannot strongly advise everyone enough to take the time to completely read over this page as just one or two ideas here will change your outlook on options trading. There are no fancy words or phrases, just straight facts about what professional and institutional trading companies do every single month to make consistent returns. The facts and examples presented below are real and without flaw – based on historical data and current market regulations.

 

 

 

I feel so strongly about this option strategy as a way to create long-term wealth for you and your family that I am willing everyone an opportunity to see first hand how the Option Writers Report will help you create stable income each month. I’m sure that after just the first week’s report you will see how powerful and successful this strategy will be for your portfolio.

 

The Option Writers Report WILL Make You Money!

 

This report is designed so that the individual investors/traders can substantially benefit from the time decay aspect of option premiums. As a Member you will get very detailed reports each week about the most profitable option trades in the current market. All of the reports will completely break-down the profit potential, trade risk, time horizon, and execution strategy. These reports are framed around the exact same trading strategies used at the big firms on Wall Street. Thousands of other professional option traders have used this strategy to cash in on option time decay for decades. The Option Writers strategy has consistently made me annual returns of 20-30% year after year after year after…

 

 

Most Beginning Options Traders Are Using A Losing Strategy

 

History suggests that long-term success in the options market is an uncommon achievement for the average retail traders – i.e. the uneducated traders. There are a variety of reasons for this disparity; however the most obvious cause is poor strategy selection.

 

 

The majority of popular option techniques are based on forecasting the future price of an issue. Still, determining market direction requires expertise in a number of skills – charting with technical trend and momentum indicators, the use of contrarian systems including sentiment indexes and put/call ratios, and valuation systems such as fundamental analysis.

 

The truth is that most people do not have the time or knowledge necessary to find success in the options market and are knocked out by hopefully gambling rather than simple strategies. But, what if I told you there was a strategy with lower risk than trading covered-calls and with far better profit potential? What if I told you that nearly 75% on my family’s wealth is created from this one strategy month after month? Here’s how it works.

 

Learn The 90% Win Strategy Using Safe Options Trading

 

Most options decay to the point of no value at expiration. If these options lose value at expiration, it stands to reason that those who sold them made money – similar to taking a short position in a stock that goes all the way to zero. Make no mistake, this is absolutely correct! Option sellers, or Option Writers as they are more commonly called in the industry, make money when the options they sold are not exercised by the option buyer on or before the expiration date.

 

 

 

 

The option writer makes money by patiently waiting for the option to lose its value due to time decay. As an trader employing the technique of selling options you will place yourself in the shoes of the option writer and take advantage of this statistical fact. Based on this you may therefore conclude that most of the options you sell will decay and be winners at expiration – allowing the premiums you collected to accrue into profits.

 

85% Of All S&P Options Expire Out Of The Money & Worthless

 

According to a breakdown by the Chicago Mercantile Exchange Clearing House, more than 85% of all S&P options sold during the last six years expired out of the money and worthless. *Source: Chicago Mercantile Exchange Clearing House; Analysis of S&P options sold during the period 2002 through 2008. With this fact in mind, it is easy to understand why, in the long run, the seller of options should have a higher return than the buyer of options every time. Now isn’t that a beautiful statistic working in your favor?

 

 

Option Writers provides the opportunity to receive the premium that the option buyer pays. Option writers benefit when the option expires worthless allowing the option writer to retain the entire amount of premium that was received for writing the option, minus any fees or commissions from their broker.

 

 

The primary advantage of selling options is that the investor has the ability to profit from the decay of the option’s time value. Selling out of the money options allows the investor to potentially profit from sideways markets, trending markets, and occasionally markets which move against the seller’s position.

 

It’s Like Selling Insurance On Stocks For Consistent Income

 

Owning publicly-traded stock is by far the most popular method of investing into today’s market. Frankly this is because it is the easiest way the “Average Joe” can invest. But, as we all know the stock market is very difficult to forecast month after month for the non-professional traders.

 

At the same time, years of statistical analysis suggest that stock prices generally move in a predictable manner or typically remain in a specific range for a given period of time. With this knowledge in mind, would-be stock owners can establish a conservative option-based portfolio with the sale of out-of-the-money options.

 

 

New traders often wonder who is buying these puts on the other end. The simple answer of course is other options traders! Some are bought by speculators – or as I call them “lottery gamblers” – who are hoping for future rapid declines in the stock, but most out-of-the-money options are purchased by hedge fund managers and institutional investors who own the stock and want to protect their portfolios from extremely abnormal market moves.

 

Remember, when you sell an option you are essentially acting as an insurance company. You agree to protect the option buyer a predetermined price for a specific period of time. For this protection that you are offering the other party, the option buyer must pay you a premium in cash up front.

 

The main reason this strategy is so successful is because it’s a mutually beneficial relationship; the owner of the stock is willing to compensate you for providing insurance against extremely abnormal market moves while you get to collect premiums like an insurance company month after month. And we all know that some of the most profitable companies and longest lasting companies around are insurance companies.

 

So What’s The Option Writers’ Targeted Monthly Returns?

 

Our profit goal with this strategy is to generate $250 to $300 of passive income each month using an average balance of $10,000. Clearly, if you have an average balance of $50,000 then your goal would be to generate $1,250 to $1,500 of passive income each month.

 

 

A portfolio of conservative cash-secured options, when prudently selected and diligently managed, can easily achieve this 2.5% – 3% monthly return. On an annualized basis that would be a return of over 30% per year. The selection process will focus on “out-of-the-money” positions with a very high probability of success – sometimes as high as 90%. To further reduce risk, the Option Writers will at times sell verticals and collect a smaller premium during extremely volatile market conditions.

 

 

Using professional research and technical indicators, Option Writers will determine the most likely market trading range in the short term. Research shows that over the last ten years the S&P 500 Index, in any 30 day period, generally trades within a certain range – usually within two standard deviations.

 

 

Based on this proven fact, our strategy seeks to advise the selling of “out-of-the-money” options on a monthly basis. That means that call and put options, most often in pairs, are sold at different strike prices above and below the anticipated market trading range. Within this range the market can go up or down, or trade flat and the options sold can still expire worthless, to Member’s advantage, at the time of expiration.

 

Trades are usually initiated between four and six weeks from expiration to maximize the time value decay of the options. Positions are often held until then, at which point they will expire worthless. This will again maximize the return for Option Writers’ Members by retaining all the premiums received into the account when the option was initially sold. However, there are times when positions may be bought back – or covered – before expiration to protect profits. The cycle is then repeated continuously – month after month, profit after profit.

 

Strategy Basics: Making The Profitable Trade

 

Let’s use a popular “premium-selling” stock as an example. Suppose General Electirc (NYSE:GE) is trading near $20. A front-month put option – 30 days of time value left until expiration – with a strike price of $15 would sell for about $40.00 per contract. Thus, a trade involving the sale of 5 put option contracts would generate approximately $200 cash before commission costs. The initial margin – or collateral – requirement is roughly $1,000 per contract. So the complete position would yield a 4% return in just 30 days. Again, here are the specifics of the trade:

 

Option Writers GE Trade

Stock: GE @ $20

Sell (5) Front Month – $15 puts for $0.40 each (X 100) = $200

Collateral Requirement or Margin Requirement = $5,000

Return On Investment = $200 / $5,000 = 4%

 

The maximum profit of 4% or $0.40 per contract is achieved as long as the stock price remains above $15. That means the share value of GE can decline 25%, to $15, before the position begins to lose money. For any stock, that is a major collapse in just 30 days!

 

Now, if GE stays anywhere above the strike price at $15, you will collect the entire premium – or $200 – at expiration. In addition, the insurance “premium” is paid in the initial trade, so the incoming funds can be put to work immediately in other positions, further improving the potential return on investment.

 

Some Notable Advantages/Benefits To Selling Options

 

Once again, the major benefit of selling options, as opposed to buying them, is the concept of time decay: the time value or excess premium in an option’s value declines every single day as expiration nears. Unlike stocks, where an investor can hold on to a stagnant issue indefinitely in the hope that it will rebound, the value of an option eventually falls – even dramatically within 30 days of expiration – if the underlying stock fails to move in the correct direction.

 

 

This premium erosion allows an option writer to profit without having to correctly predict the future movement of the underlying issue – all you have to do is predict where the stock WILL NOT. This takes 80% of the guess work out of predicting stock movement! As long as it remains above the strike price of the sold option, you make money plain and simple.

 

 

 

In contrast to most option-buying techniques, short term selling strategies that use out-of-the-money strikes have an extremely high probability of success because the option value, which decays at a predictable rate, falls very rapidly in the final month of the expiration period.

 

Another advantage of option writing strategy stems from the nature of option pricing. The methods used to value options are very complex, involving computerized models that evaluate historical data. But, the calculations are based upon the assumption that all stock price movement is “random.”

 

Clearly, there are always a number of stocks moving in well-defined price trends, as opposed to moving randomly, and if you can identify those issues whose price trends are likely to continue, you can achieve an edge against the option-pricing model. Much of our effort at Option Writers is devoted to finding stocks and ETFs that will remain in such trends, so our Members can profit from selling options with premiums that create consistent monthly income.

 

Here’s How You Can Limit Your Risk Substantially

 

Many investors avoid selling “naked” puts because of the large downside risk; a stock can always fall to zero they say. However, these same investors are usually willing to buy stock and hold it through a lengthy decline, far beyond a point at which it should have been sold in the name of prudent money management – need I say anymore to LEH and BSC shareholders. The key to success with any option writing trade is understanding the unique drawbacks and learning to implement the strategy correctly, in the appropriate market conditions – which is where professional advice comes into play.

 

 

From a risk/reward standpoint, writing deep-out-of-the-money options is based on a high probability – again over 90% – of achieving a limited profit. But, as with any “premium-selling” strategy, there will always be some risk. With that reality in mind, you choose to sell vertical spreads to prevent large losses (see charts). Selling a vertical spread – either put or call spread – will both reduce your risk but also reduce you profit potential to a certain extent (see P/L charts above and below).

 

 

Though the Option Writers strategy is very conservative and attempts to limit risk, some traders will be more comfortable with ultra-conservative risk strategies. Either way, Option Writers’ Members will be alerted to both trading techniques for you individual selection and situation. Of we will always spread risk through diversity, both in the number of contracts per position and in the market sectors/industry groups selected for each position.