Cashflow secrets how we generate 6% per month with minimum risk! Document Transcript
Lesson 1 - Getting Wealthy By Selling OptionsWhat the heck is an option and why do we want to sell these things?I like to think of an option as a coupon. Lets say you are thinking ofbuying a watermelon in the not too distant future. And you think that theprice of watermelons is going to increase. So you want to lock in todaysprice.In this case, I agree to sell you a coupon (option) to buy a watermelonfrom me for $1.00 which is todays price. But I will charge you 10 cents forthis coupon and it expires in 90 days.Lets say 89 days go by. Your coupon expires tomorrow. If the price ofwatermelons is more than $1.00 and you still want your watermelon youshould use the coupon. If the price of watermelons is below $1, youshould forget the coupon and just buy a watermelon at the market price.This will allow the coupon to expire worthless and I would make a niceprofit of 10 cents.But what if you didnt want the watermelon but the price went up to $2.You could either buy the watermelon yourself using the coupon and sell itto someone else for $2, making you a nice 90 cents profit. (Remember youpaid 10 cents for the coupon.) Or you can sell the coupon to someoneelse, for $1, also making you 90 cents. Either way you win, and I lose.Its the same with stocks. Thousands of stocks, indexes, and futures haveoptions available to trade. Options are gaining in popularity because of theimmense leverage. In our example, all you have to invest was 10 cents to
control $1 worth of watermelon.Lets look at our example above again. You buy an option for 10 cents,and you later can sell that option for $1 making you 90 cents. Thats a900% return on your money. If instead you had bought a watermelon at$1 and sold it later at $2, you would have made $1, or 100% return.100% is great, but not compared to 900%. What about me, the option seller?In this scenario I would have to sell you a watermelon at $1. If I had one,you could have it. But if I did not have one, I would have to buy one in themarket at $2 and sell it to you for $1.Lets look at the other side. What if prices went down? Imagine priceswent down to 50 cents. Your option that you bought for 10 cents would beworthless and you would have a loss of 10 cents. But what if instead, youhad bought the watermelon at $1? You would have a 50 cent loss!As the option seller, I keep the entire 10 cents you paid me.As you can see, options are cheaper to invest in, they limit your loss, andthey also provide leverage for higher percentage of profits.Sounds like the perfect investment right? Lets go out and buy a bunch ofthese suckers. Wait!In our example prices went way up to $2 and way down to 50 cents. Butwhat if prices didnt move much at all? What if the price stayed at $1?Then your option would expire and you would lose your 10 cents.That would be the perfect scenario for the option seller. And guess what?This is what happens most of the time. In the news, you hear about thewild fluctuations of the markets. You hear about the stock that went from$10 to $100 or the ones that went the other way from $100 to $0. But
these are the few exceptions amongst the thousands of stocks that tradeeveryday. The majority of stocks move very little at all. Sure they moveup, but then they also move down. Overall the move is measured in smallpercentages. If a stock moves 10% in a year its a big deal.Options need big moves to make money. Thats why according to industrysources, 80% of all options expire worthless!In the following lessons, we will coverLesson 2 - How options are a decaying asset. As an option gets closer toexpiration, it losses value. So by selling options, everyday that goes by,makes you money. I call it Selling Time.Lesson 3 - Making money if the stock goes up, down or sideways. If wesell a call option (Ill explain what a call option is in this lesson), we makemoney if the stock goes down or sideways, but we can also position ourtrade to make money if the stock goes up only a little. Making moneythree ways is much better than buying a stock and praying it goes up.Lesson 4- Your Own Casino. Casinos have the odds stacked in their favor.Some people get lucky and win more than they lose, but casinos knowthat over the long term they will make money. Thats their edge. Our edgeis the same. As option sellers we can stack the odds in our favor. Howdoes 80% probability of success sound to you? Ill show you how.Lesson 5 - Not being glued to the screen all day. Option selling allows youto have a life, to get out during the day and not have to watch my monitorall day. You can put on my trades and spend about 15 minutes monitoringthem a day. If you have a job or would like to have a life, my system ofoption selling is perfect for you.Lesson 6 - No guesswork. You dont need to guess which way a stock willmove, or use fancy technical or fundamental analysis. Dont need to knowhow to read the MACD or Stochastic or other indicators. I use simplestatistics to figure my probabilities and can manage my positions using
concrete math, not voodoo or guesswork.Lesson 7 - Limiting your risk. In this lesson I will show you how to limit therisk on every option trade you do. I hate losing money. So every trade Iout on has limited risk. I know what my maximum loss can be on everytrade, and if the trade goes against me, I make adjustments to myposition to protect my profit or myself from the maximum loss. Even withan 80% probability of success, you will still have 2 out of 10 trades goagainst you. I do not believe in putting on a trade and not protecting it.Lesson 8- Sure, steady, reliable income. In this lesson I will give youexamples of trades that make 10% in a month. Its possible and there arepeople, like me, doing it each and every month. You can either leave yourprofit in the account and let it grow or withdraw it to live on.Lesson 9 - We couldnt do this a couple years ago. Up until recently onlymarket makers and very large traders could do these trades. The reason:commissions. As soon as three to four years ago you would have to pay$30-$40 to buy or sell a single option. Now you can to the same trade forless than $1. Online trading and lower commissions have allowed regularpeople like you and me the opportunity to trade for a living. Lesson 2 - Options Are A Decaying Asset.
As an option gets closer to expiration, it losses value. So by selling options,everyday that goes by, makes you money. I call it Selling Time.Have you ever heard the song, Time is On My Side by The Rolling Stones?If yes, then you know what it feels like to be an option seller. Everydaythat goes by, the options I sell lose value. And that means I am makingmoney.Lets use an example:IBM stock is at $80. I sell you an option that expires in 30 days that allowsyou to buy IBM at $100 ($100 is the strike price of the option.). I chargeyou $1 for this option.Now each option controls 100 shares, so this option worth $1 actuallycosts you $100. The only way you will make money is if IBM goes above$101 ($100 plus the $1 cost of the option) within 30 days. If IBM staysbelow $101, I make money.The clock is ticking. Tick tock. Time is on my side. By the way, eventhough the markets are closed Saturdays, Sundays, and Holidays, optionsstill lose value on those days. So the 30 days until expiration is 30 calendardays, not 30 trading days. Cool huh?The seller of an option attempts to benefit from the decay of the optionstime value. Time value captures the possibility, however remote, that theoption may increase in value due to the changing value of the underlyingstock. This value depends on the time until the expiration date and thevolatility of the underlying stocks price.If the underlying stocks price has not been reached by the strike price ofthe option, the option is considered to be out of the money. As timepasses, if the option remains out of the money, the option gradually losesits time value.
The time value of an option is always positive and declines exponentiallywith time, reaching zero at the expiration date. Upon expiration, if theoption is still out of the money, the option will have no value left, and itwill expire worthless. Its holder will simply abandon the option leaving theoption seller with the premium. (Premium is jargon for amount paid for theoption.)The entire premium for which I sold the option will be in your account, lesscommissions and fees. At that time, your position closes outautomatically.The graph above illustrates the accelerated decline of time value asexpiration draws near. The graph allows you to see why an option isconsidered a "wasting asset". Time value erodes as each day passes. Therate at which the time value is eroding increases as the options expirationnears. Notice that the time value decays the fastest during the last days ofthe options life.
Notice how the option loses value fastest in the last 30 days. Because ofthis, we sell options no longer than 50 days left to expiration. We want ouroptions to expire 50 days from now or sooner. The amount depends onthe strategy used. Sometimes we can make 20% in a couple weeks, othertimes we make 10% in 40 days. It depends on the market and strategyused. But it is best to sell options 60 days or less to expiration to get ashigh a theta as possible. Theta is jargon for the amount an option losesvalue each day. So if an option has a theta of 10, that means that optionwill decline in value $10 each day.In many cases, we dont even need to wait until the option expires to getout of the trade. Lets say we sell an option for $1, and 21 days later theoption is worth 10 cents. We just made 90 cents. We should just buy backthe option we sold for 10 cents and move on to the next trade. Eventhough we can make another 10 cents, it might not be worth it. We mightfind another trade that we can better use our money for. Getting out alsolocks in our profit.So lets say we do a trade that has a maximum return of 12% in 50 days.If after 30 days we are up 9% it might be best to take the money and run.Instead of making another 3% in 20 days, we can probably find anothertrade that can generate a better return in the same amount of time.In our next lesson we are going to learn how to make money on a stockwhether it goes up, down, or sideways.Lesson 3 - Making Money if the Stock Goes Up, Down or Sideways.
If we sell a call option (Ill explain what a call option is in this lesson), wemake money if the stock goes down or sideways, but we can also positionour trade to make money if the stock goes up only a little. Making moneythree ways is much better than buying a stock and praying it goes up.When you buy a stock you make money when it goes up. If it goes downyou lose money. And if it just sits there like a lazy dog, your money is justtied up, unless you get dividends. Normally if a stock you own movessideways, it is called "dead money" because not only are you not makingmoney, but you are not making the interest you could be making if themoney was invested somewhere else. You lose twice. But what if you could make money no matter which way the stock went? Interested?Lets use Google for our example. Lets say Google is at $300. If you thinkGoogle is going up you can buy it for $300 a share. Or you can buy a"Call" option for $30. A "Call" option is the option you buy when you thinka stock will go up in value. The other type of option is the "Put" option,which goes up in value if the stock goes down.By buying a Call, we need GOOG to move up. Instead of that lets sellsome options.We can sell a "Put" option. This means we will sell an option to someonewho thinks GOOG is going down. Lets sell the put at the $250 strike pricefor $2. This mean we get $200 for the option and the option will expireworthless if GOOG stays above $250. We think GOOG is going up so weare fine with that. The option will expire in 30 days.Now if GOOG goes up, or sideways, and even down to $250 we still makemoney. This type of strategy works great when stocks are trending,meaning they continue to go in the same direction.
But sometimes we dont know which way a stock is going to go. What dowe do then? We can sell Calls and Puts at the same time.Ok so GOOG is at $300. In 30 days we think GOOG is going to move upand down but we dont know where it will stop exactly. But are pretty sureit is going to be in a $100 range, so either up to $350 or down to $250.We can figure this out by technical analysis or using statistics andprobabilities. (Ill show you more in a future lesson.)So what we do in this case is we sell the $240 Put for $1.50 and we sellthe $360 Call for $1.25. So we get a total of $2.75 or $275. Now as longas GOOG stays in between $240 and $360 we profit on both sides. Whereit gets tricky is when GOOG breaks out of the range. That is the only wayyou can get hurt and if that happens I have advanced strategies that cansave our money. I share these strategies only with members of mynewsletter.Considering the fact that stocks move in a sideways direction about 75%of the time, this strategy can make you some nice dough on a stock that isjust bouncing up and down in its range. I personally wouldnt do thisstrategy on GOOG because it moves up and down too much, but it iseasily done on indexes and ETFs.In fact, this is one of the strategies we use every month. Its called theIron Condor. We do basically what I described above but add in some riskand loss management. This one strategy brings in on average 10% every30-45 days. So if you take just one trade a month, remember I try tocome up with 3-5, but if you just trade this one strategy every month, youcan bring home at least 50% for the year. We dont win every month, butwe limit our losses in the months we do lose. In a future lesson I will walkyou through an actual Iron Condor trade that I have done.The best part is that you can start with as little at $2-3,000 in youraccount. If you do a Condor with one option, it will cost you, depending on
the stock or ETF, for example, $1,000 in margin, and you can makearound $100 per month. With an 80% probability of success, this is one ofmy members favorite strategies.In our next lesson I will show you can have your own casino where peoplepay you to play. Lesson 4- Own Your Own CasinoCasinos have the odds stacked in their favor. Some people get lucky andwin more than they lose, but casinos know that over the long term theywill make money. Thats their edge. Our edge is the same. As optionsellers we can stack the odds in our favor. How does 80% probability ofsuccess sound to you? Ill show you how.I view myself as a casino owner. Well, maybe not the owner because Idont own the stock exchange. But I do play the role of the "house". Withclose to 80% of all options expiring worthless, option buyers are basicallygamblers looking to buy a lottery ticket. And I dont mind selling it tothem.Now keep in mind, that sophisticated traders also use options to protecttheir other investments but we can sell options to these guys too. Thatswhy I say you can own a casino.What I like to do is sell out of the money options. There are three typesof options when it comes to price. In the Money, At the Money, and Out of
the Money. An example will help clarify things.IBM is at $50. An At the Money Call option would be the one with the $50strike price because that is where IBM is right now. If IBM expires today,this option would be the closest to making money.All of the Call options with strike prices above $50 are Out of the Money.So the 55, 60, 65, 75, and 100 are all out of the money. These have novalue except for time value (because they have time before they expire).All of the Call options below $50 are said to be In the Money. Such as the45, 40, 35, etc. If IBM expired today, the people owning these optionswould exercise them to buy IBM stock at lower than market price.In the last lesson, I mention the Iron Condor trade. With the Iron Condorwe sell options that are way out of the money. I use my statistics andprobability calculations to decide exactly which options I want to sell.Because the options we sell are Out of the Money we receive less premium(money) for selling these options because the risk is less. You can also sellAt the Money and In the Money options for a lot more money, but youwould also lose a lot more often. Selling Out of the Money is the way to goin most cases.The people who buy the options I write are gambling that IBM will get tothe strike price I sold. If it does, good for them, I will just adjust my tradeto protect my profit. It if doesnt I keep the entire amount I was paid forthe option.Choosing the right option to sell is the tricky part of option selling.Sell the wrong one and you could lose a bundle. Anyone can understandhow options work and start selling them, but knowing which ones to selland then how to adjust the trade when it goes against you is what I helpyou with. Since I have my own money doing the same trades I advise youto do, I stay on top of things and let you know as soon as any trade is introuble and what to do about it. Thats one of the reasons my memberspay me: to watch over their trades so they dont have to.
Its great to have someone on your team that knows what he is doing ingood and bad markets. When I first started this, I didnt know what I wasdoing. I lost over $5,000 on just one trade selling options. If I hadsomeone with me whose shoulder I could watch over or bounce tradingideas off of, I would not have lost so much money.At first I thought I just got unlucky, so I sold more options, but then lostanother $6,000. I lost on other trades too, until I figured out what I wasdoing wrong. It was a very expensive education. Putting on the trades isthe easy part. Adjusting the trade when it is in trouble is where theprofessional traders separate themselves from the amateurs. I have seen an amateur trader and a professional trade put on thesame exact trade on the same day, but in the end, the amateur trader lost money on the trade while the professional made money.In our next lesson I will show you how you can do the trades I do in just15 minutes a day and I go through I real life trade that we made. Lesson 5 - Not Being Glued to the Screen All Day.Option selling allows me to have a life, to get out during the day and nothave to watch my monitor all day. I can put on my trades and spend about15 minutes monitoring them a day. If you have a job or would like to have
a life, my system of option selling is perfect for you.Ive tried day trading. Ive tried jumping in and out of the market trying tomake $1 on this stock, and 50 cents on that one, only to have my headhanded to me on a silver platter. The most I made on a day trade was$800. I bought 100 shares of a stock and was waiting for it to move up.What I didnt know what the market was only open for half the daybecause it was the day before a holiday and the market closed while I stillowned the stock. When the market reopened, the stock opened up $8 andI got out. It could just as easily gone down $8. Pure luck. I dont day tradeanymore.My trading style does not require you to be at the computer all day. Youdont jump in and out. You dont have to pay thousands in commissions.You dont even have to be home all day. Nowadays you can take yourlaptop with you. I will email you when it is time to adjust a trade. You canthen adjust the trade on your laptop or when you get home. My brokereven allows customers to place trades using cell phones. Dont even needthe laptop anymore.Here is a real life trade we did so you can see how much time it will takeyou to implement my system.On February 20, we did an Iron Condor trade using the RUT (index). Hereis the trade: Sell 1 MAR 660 Call at $1.98 Buy 1 MAR 670 Call at $1.58 Sell 1 MAR 380 Put at $4.05 Buy 1 MAR 370 Put at $3.50The total credit we received was 95 cents per option. Our maximum losswas $9.05 per option. So our max return would be 10.5%.For 7 days we didnt have to do anything. But the RUT was trendingdown. On the 28th we made an adjustment. The RUT was too close to ourPuts.
Buy 1 MAR 380 Put at 14.43 Sell 1 MAR 370 Put at 12.33Total debit of $2.10 Sell 2 MAR 310 Put at 4.53 Buy 2 MAR 290 Put at 3.18Credit of $2.70Also, our Calls had gone done a lot in value so I decided to buy them backto protect our profit. We could have bought these back and sold calls witha lower strike for more credit but we did not. Buy 1 MAR 660 Call at .18 Sell 1 MAR 670 Call at .10Total debit of .08Again, several days go by without us having to do anything. In fact, wecould have left the trade alone and our Puts would have expired worthless.But on March 5, We exited the trade. Buy 2 MAR 310 Put at .22 Sell 2 MAR 290 Put at .12Total debit of .20We were in the trade from February 20 until March 5. Thats 14 daysincluding weekends. We made a profit of $127. That is more than weoriginally were going to make. Because of the adjustment, we had toincrease our risk. If we had not adjusted, we would have lost around$200. Our adjustment not only saved us from losing money but madeus more than we expected.Members of our program that did this trade, actually had to do threetrades: 1. Put on the trade Total time: 10 minutes (until you know whatyou are doing) 2. Make adjustment on 28/2 Total time: 10 minutes 3. Exittrade on 05/03 Total time: 10 minutesHeres how it would work. On 20/02, you would get an email that a new
trade is on. You log into the members area to see the trade and any noteswe have made about how to get in. You go to your brokers website (or ifon auto trading this is done for you) and enter the trade either during theday for immediate fill or after hours to be filled the next morning.On 28/02, you get an email saying we need to adjust and the exactadjustments to make. You log into your brokers website and enter theadjustment trade.On 05/03, you get an email to get out of the trade. If you choose to do soyou log into your brokers website and enter the trade to exit.During this trade, RUT went from 546 all the way down to 448. Thats an18% move. For an index, that is HUGE. But members did not worry. Wehad our protection in place. We knew when we were going to makeadjustments. And we were watching the situation for them.So even though I say on the website that my trades will take you 15minutes a day, its more like 15 minutes a week.In our next lesson I will show you how you can do the trades I do usingconcrete mathematics and statistics so you dont have to guess which waya stock will move or which options to sell. Lesson 6 - No Guesswork.
We dont need to guess which way a stock will move, or use fancytechnical or fundamental analysis. Dont need to know how to read theMACD or Stochastic or other indicators. We use simple statistics to figureour probabilities and can manage my positions using concrete math, notvoodoo or guessworkDo you understand support and resistance? If yes, good. If not, noproblem. We dont use support and resistance much to choose whichoptions to sell. Instead we use statistics.In statistics there is a term called standard deviation. I am not going to gettoo technical here. If you need more info on standard deviation you canlook it up.Basically you do a mathematical calculation to find the standard deviationof a stock or index based on how much its price has moved up and downin the past.So lets say IBM is trading at 50, and it has a standard deviation of 5.Using what I know about statistics I call tell you that for the next 30 daysthere is a 68.27% probability that IBM will stay between 45 and 55. I canalso tell you that there is a 95.45% probability IBM will stay between 40and 60. And that 99.73% of the time IBM will stay between 35 and 65.Once I know the standard deviation I can determine a range of optionsthat I would like to sell. I then look at the delta of the various optionsalong with the credit I would receive from each one. I like to have a veryhigh probability of success on my trades. So I will choose options about1.5 standard deviations away from the current price. This puts myprobability of success at 75-85% in most trades.Pretty cool huh? Do you think you could make more money, if you were right 75% of the time?
When I first learned that you could have such a high probability ofsuccess, I thought I had found the Holy Grail. But there is a catch. Withless risk, there is also less reward. So on an Iron Condor trade you canonly make about 10%. On a butterfly trade we aim for 20%. If you justbuy options, you can double, triple, or more your money in a few days.But that is a very rare occurrence and the odds are against you. Id ratherbe the casino letting people gamble and making money consistently monthafter month. Plus, 10% a month is not too shabby. Warren Buffetaverages only 2% a month.In our next lesson I will show you how we limit our risk. You might haveheard that selling options is very risky. Not the way we do it. Lesson 7 - Limiting Your Risk.In this lesson I will show you how to limit the risk on every option tradeyou do. I hate losing money. So every trade I out on has limited risk. Iknow what my maximum loss can be on every trade, and if the trade goesagainst me, I make adjustments to my position to protect my profit ormyself from the maximum loss. Even with a 80% probability of success,you will still have 2 out of 10 trades go against you. I do not believe inputting on a trade and not protecting it.Before I make a trade, I want to know what is the most I can lose, themost I can make, and when I need to adjust my trade to protect myself.
Figuring out the most I can make is easy. Its usually the amount of thecredit we receive from selling our options.Figuring out the most I can lose is easy too. I always limit my losses bybuying options at the same time I sell them. Huh?Lets say I want to sell a call option on IBM with a 50 strike price. For thisoption I will get 2.00 in credit. To limit my risk I buy an option further outof the money. In this case I can buy the 55 strike price option for a debitof 1.25.Heres how it works. I sell one option at 2. I buy one 5 points away for1.25. So my total credit is .75 (2-1.25). That is my max profit. To figuremy max loss, I subtract .75 from 5 to get 4.25. (We bought the option 5points away).So if IBM stays below 50 we make the max profit. But what if IBM shootsup and goes to 60?We would have to sell 100 shares of stock at $50. But we bought anoption at 55, so we can buy 100 shares at $55. Plus we got .75 for eachshare so we would only lose $4.25 per share. Even if IBM goes to 300, westill only lose $4.25 a share.In option terms, this is a called a spread. You sell one, and you buy one tolimit your risk. You make less money because you have to spend some ofyour credit but less money made is a lot better than a whole lot lost. But what about the adjustment?Lets look at the Iron Condor trade. A lot of people lose money on thesetrades because they do them incorrectly. I have even heard option"experts" and newsletter writers advise clients to put on a condor tradeand never touch it. If you lose, you lose.Here is the problem with that thinking.
Lets say we do 10 condor trades, 1 a month for 10 months. Each has a10% max profit and 80% probability of success. When we win, we make10%, but when we lose we can lose 90%.Lets look at the trade we discussed earlier on the RUT: Sell 1 MAR 660 Call at $1.98 Buy 1 MAR 670 Call at $1.58 Sell 1 MAR 380 Put at $4.05 Buy 1 MAR 370 Put at $3.50The total credit we received was 95 cents per option. Our maximum losswas $9.05 per option. So our max return would be 10.5%.The total margin we have to put up for this trade is $1,000. If we win wewill make $95. If we lose the max, we will lose $905.So lets begin. We trade the RUT in this way for one month, and we win.We also win in the 2nd, 3rd, 4th, 5th, 6th, 7th, and 8th months. Wow, weare hot! 8 months of profit for about $100 each month gives us a profit of $800.But then in month 9, we lose. And we dont adjust so we lose the max. -$900. Now we are in the hole $100. After nine months of work we arenegative. That sucks. But wait, we are not done yet. In month 10, we loseagain. We lose another $900. Ouch! Now we are down $1,000.What happened? Even with an 80% probability of success we still lost aboatload of money. In this case 100% of our margin. Lets stay away fromthese Iron Condors, right?If you dont know how to adjust, you should stay away from them.Because you will lose your shirt. And if you come across a newsletteror teacher that tells you not to adjust your condors, RUN away fromthem. Trust me, in the long run you will lose, unless you adjust.
Remember the RUT trade we revisited above. We made a profit on thattrade. But only because we adjusted. If we had not adjusted we wouldhave lost the max amount.We need to treat our trading as a business. If you were running your ownbusiness would it be ok if you could lose your whole years profits in onemonth? Hell no! You want profit every month. And if thats not possiblethen you want to keep your monthly loss to be about the same as the gainof an average month. So if you make 10% in a good month, you dontwant to lose much more than 10% in a bad month.To recap, we limit our max loss by using spreads. And we limit our losseseven further by adjusting our trades. This works with all our tradestrategies, the condors, butterflies, calendars, credit spreads, coveredcalls, and all the rest.In our next lesson I will show you some of the trades we do and how wecan make 10% a month. Lesson 8- Sure, Steady, Reliable Monthly Income.In this lesson I will give you examples of trades that make 10% in amonth. Its possible and there are people, like me, doing it each and everymonth. You can either leave your profit in the account and let it grow, orwithdraw it to live on. I like reliable monthly income
In previous lessons I already walked you through a real life Iron Condortrade that we did. Lets look at some others.On November 11, 2008, SDS closed at 95.59. SDS has been trading in arange and is coming back from the bottom of the range. The closing pricefor the November 95 Call was $7.3. This option has ten days to expiration.A covered call would work like this: We feel this ETF will continue to go up.So we buy 100 shares at $95.59 and sell 1, 95 Call at $7.3. If SDS is above95 on expiration day, our option will be exercised and we will have to giveaway our 100 shares. But we will have a profit of $671.100 shares at 95.59 = debit of $9559 option sold = credit of $730 100shares sold at 95 = credit of $95009559-730-9500= profit of $671 in 10 days.671 divided by 9559 = 7% return in 10 days.We also do other types of trades such as butterflies, calendars, and creditspreads. Which strategy I choose depends on market conditions. Whenvolatility is very high, its great to do covered calls because you get moremoney for the calls. When volatility is medium we can do well withcondors and butterflies. When volatility is in the low range I look atcalendars for nice profits.The Iron Condor is a staple though. This is a strategy we put on everymonth. Thats the best way to make money with it. Every month, around acertain amount of days to expiration, we put on the trade and watch it. Itsone strategy for reliable monthly income. Most months we win without anyadjustments. Some months we have to make adjustments or else I justdecide to get out with a small lose.October 2008 was a wild time. Never before has volatility in the marketsbeen so high. It was a dangerous time for all traders and it was a monththat our strategies would not have worked very well because the marketwas moving too much. The DOW was up 500 points one day, down 900
points the next day. And so in October, we were lucky enough to stay outof the market. The market did not act "normal" in September and Idecided to stay out in October.How did I know? Well I watch the markets everyday. I stay on top of mytrades. I talk to other professional traders and we share notes andthoughts on a regular basis. After you have been doing these trades for awhile, you get a "feel" for the market. You know when something is notright. Its like driving your car. When you hear a new noise or the steeringwheel doesnt respond they way it should, you know. So you stop the carto see whats wrong or you take it to the shop. In this game, we just stayout of the market until things gets better.The good part is, things usually settle down in a few days. But in Octoberthings never settled down. But I want to make something clear. Octoberwas very, very different. It was something option traders and all tradersfor that matter, had never seen before. October was not a normaloccurrence. Steady, Reliable, Monthly IncomeMy style of trading is not for people who want to hit a grand slam andmake a million dollars overnight. Its not for people who want to sit at thescreen all day. Its not for those of you who are addicted to action. Youwont have any stock picks to give away at parties. If you have to maketrades everyday, this is not for you. Its also not for someone with multi-millions to invest.The trades we do are designed to make a steady, consistent income. Wewant a few percentage points a month. At the end of the year our resultsare impressive, but look at any one month and they are not so flashy.Some people ask me, if my system is so great, why dont people likeWarren Buffet do these trades. Actually, he does. It is known that Warrenis a seller of puts. But he does it for a different reason, and in a differentway. He chooses a company that he wants to buy more stock in. Then he
decides on a price he would like to get in at. If there are Puts at that price,he will sell those Puts and get a credit.If the stock price stays above his strike price, his options expire and hekeeps the credit. Then sells more Puts. If the stock price drops to his strikeprice or lower, he buys the stock at that price - which is what he wantedto do anyway. Plus, he keeps the credit giving him a discount on the stock.We dont want to buy stock, so we dont use that strategy. We wantincome and regular returns. Even though we can earn 10% a month, Iwould be happy with 5% a month. Thats still 60% a year.The reason Warren and his billionaire friends do not use our strategies isbecause they have too much money. If they tried to do our trades using amillion dollars at once, they would mess up the trade. They would not getthe right price from the market to make it worthwhile. They could do thetrade with a couple hundred thousand. But 10% on 200,000 is only20,000. And to someone with billions to invest, that is just not worth thetime.This is also the reason I limit memberships to my site. I dont want toomany people doing the same trades or else it will mess it up for everyone,including me. Thats why I dont just offer one trade a month, I try to offer3 to 5. If a trade is too "crowded", you can wait a day or two to put it on,or you can just wait for the next trade.You dont have to do every trade I release.By limiting the number of subscribers and by choosing liquid trades I makesure that everyone who wants to put on the trade can.Very large traders do these trades as well. But why would they advertiseor teach others how to do it? If you could do what other people think isimpossible, would you teach others? Probably not. If too many people startdoing these trades, it can ruin it for everyone.
In our next lesson I will show you why what we do is relatively new andwhy many people dont know about it.Lesson 9 - We Couldnt Do This A Couple Years Ago.Up until recently only market makers and very large traders could do thesetrades. The reason: commissions. As soon as three to four years ago youwould have to pay $30-$40 to buy or sell a single option. Now you can tothe same trade for less than $1. Online trading and lower commissionshave allowed regular people like you and me the opportunity to trade for aliving.Market makers are the guys or companies that keep stocks liquid. Theirjob is to buy and sell the stock all day so everyone gets their orders filled.They are the ones that get to keep the spread between the ask and thebid prices.The current trend is moving more and more to electronic trading.Computers are the new market makers. And this has lowered the cost oftrading. Commissions that used to be $30 per option are now $1 or lessper option traded. Before, it only made sense for the big boys to do thesetrades. Now us little guys can do them too.Not only that, but brokers are now giving away trading tools that used tocost thousands of dollars to buy and use. For example, my broker gives