Basic Option Strategies for Income

Enhancing Profits for Building Wealth

Walnut Creek – December 16, 2009

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Topics Covered so far

This is the fourth and final discussion in this series of discussions on basic option strategies

Session 1: Option Basics• What options are and how they work (calls and puts)

• The option Greeks and what they mean

• Time Decay and its implications

• Basic Long strategies – Their potential rewards and risks

• The advantages of being a seller of options

Topics Covered so far

Session Two: Basic Selling Strategies• Naked Put Selling – Get paid to buy stock at a

discount

• Covered Calls – Better than Dividends

Session Three: Vertical Credit Spreads• Bull Put Spreads

• Bear Call Spreads

Tonight’s Topic

Adjustment Strategies for Vertical Spreads gone bad

The goal of the game is to make money Select high probability trades that can

make money even if the trade doesn’t do what you think it will – Make money whether the underlying goes up, down or sidways

Credit Spreads – Basic things to remember Keep time on our side Don’t panic if the trade doesn’t behave like you

want it to from the beginning Select volatile stocks

• Higher premiums – more potential for profit• Easier to repair.

Plan exit / repair strategies before entering the trade

Don’t be greedy – Get out when profit target has been met

Critical Point about the Market

I have a crystal ball so I know with certainty what the market will do tomorrow!!!!

It will go up It will go down or It will go sideways

Critical Point about the Market

The truth is, no one knows with certainty what the market will do tomorrow

We use Technical Analysis to make a prediction about what the market or a stock is likely to do

It’s a little like forcasting weather - far from perfect

It gives you an edge, but there will be times when you’ll be wrong – We need to plan for those times!

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade Management

FSLR Trade History

Exec Time Spread Side Qty Exp Strike Type PriceNet

PriceNet

CR/DB10/21/2009 12:57 VERTICAL SELL -1 9-Nov 145 PUT 6.18 1.55 1.55 CR

BUY 1 9-Nov 140 PUT 4.63 CREDIT11/12/2009 7:11 VERT ROLL SELL -1 9-Dec 130 PUT 17.46 -1.55 0.00 ---

BUY 1 9-Dec 125 PUT 13.92 DEBITBUY 1 9-Nov 145 PUT 29.19SELL -1 9-Nov 140 PUT 24.10

11/24/2009 7:04 VERTICAL SELL -1 9-Dec 125 CALL 3.96 1.40 1.40 CRBUY 1 9-Dec 130 CALL 2.56 CREDIT

12/2/2009 6:36 SINGLE BUY 1 9-Dec 125 CALL 4.70 4.70 3.30 DB12/4/2009 6:32 SINGLE SELL -1 9-Dec 130 CALL 7.20 7.20 3.90 CR12/10/2009 7:30 VERTICAL SELL -1 9-Dec 140 CALL 2.46 1.18 5.08 CR

BUY 1 9-Dec 145 CALL 1.28 CREDIT12/14/2009 7:00 VERTICAL BUY 1 9-Dec 140 CALL 2.87 1.44 3.64 CR

SELL -1 9-Dec 145 CALL 1.43 DEBIT

General Rules

Identify Levels of support and resistance Look for a strong level of support (or

resistance) above or below the short strike Check for next level of support or resistance

(want the underlying to have a long way to move if it breaks with conviction (a break with much larger volume than normal)

Don’t adjust a trade until the trend is broken – Wait for Confirmation

Example of support break

Actions you can take

Buy back the short strike and let the long run Help offset the cost of buying back the short

strike by selling vertical spreads (can be OTM or ITM) as the situation dictates

Buy a put or call option (will gain value to offset the decrease in value of the short vertical spread

Roll spread out and up or down Use your imagination – But Don’t Panic!!!!

Actions you can take

Practice with paper money until you master the art

Don’t expect to be perfect – You don’t have to be to make money

Get a trading buddy - It helps to discuss ideas with someone else

Be persistent – Don’t give up – You can do this!!!!

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Notable Quotes

“You know you’re a trader when you’re wrong and still make money”

Tom Sosnoff – Founder, Thinkorswim

“It is not necessary to try to get rid of fear in order to succeed”

T. Harv Eker – Secrets of the Millionaire Mind