1. The Option of Trading Options Course How to gain supplemental income on your own time from your own home

2. What Is An Option? Investopedia gives a definition: An option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). What does this actually mean in plain English? Let’s start with the only two products you will use: Calls and Puts There is nothing else to options; it is that simple you can either trade a put or a call either by itself (outright) or in combinations (spreads) CONCEPTS

3. Call options are securities that give the buyer the right, but not the obligation, to buy something (i.e., to “call” it away from its owner) at a specified price during a specified period of time. Typically, you buy calls when you’re bullish about the direction of the market and/or about a particular stock’s prospects. Calls Put options give you the right, but not the obligation, to sell stock (or “put” it to someone else) at a specified price during a specified period of time. Put buyers more often are bearish on the markets and/or a stock’s potential, so they purchase puts to profit from a downside move. Puts All stock options have expiration dates.. A stock option receives an expiration date upon its introduction to the market. Only during the time period from introduction through expiration may the stock option be bought, held, sold, or exercised. Expiration date The strike price is the price at which the underlying stock will be bought or sold if you choose to exercise the stock option. Every option contract has a fixed strike price. Strike Price For example, if you purchase an ABC Corp. May 35 call, the strike price is 35. If the price of ABC Corp. – your option's underlying security – reaches 35 on or before the third Friday in May, you may choose to exercise your option and buy 100 shares of ABC Corp. for $35 per share. Or, if you choose not to exercise, you may sell your option as long as you do so on or prior to its date of expiration. ORDER TERMSORDER TERMS

4. Options Contracts When you purchase options, it’s called an options contract. One options contract controls 100 shares of the underlying stock. For example, if Ford (F) is selling for $16 per share, it would cost you $1,600 to own 100 shares. But by purchasing the call option, you can control those 100 shares for a fraction of the cost — $0.69 x 100 = $69. Each options contract controls 100 shares of stock, so when you hear people talk about one contract, they’re talking about 100 shares. Two contracts would be 200 shares, and five contracts would be 500 shares. Number of Contracts x Price per Contract (also known as the premium) x 100 = Total Cost of Trade 5 Contracts at $0.50 = 5 x $0.50 x 100 = $250 CONTRACTSCONTRACTS

5. 3 Factors That Affect the Options Price 1.Stock Price - The stock price greatly — and perhaps predominantly — affects the price of the options available. 2.Time - Options are a wasting asset (i.e., they expire), so time erodes the value of all options. The further away the option is from expiration, the more value it likely could have. As the option approaches expiration, the time decay accelerates because there’s less time for the option to move in your favor and result in profits. It’s useful to factor this into your options trading decisions because you may want to buy options with more time (longer until expiration) than you think you may need to give them a chance to make a positive change. 3.Volatility - After the market price of the stock, volatility is the second- most important factor in the determination of an option’s price. Options on stocks that have been stable for years will be more predictably priced and, accordingly, priced lower than options on stocks whose charts are all over the place — up and down like a yo-yo. PRICEPRICE

6. Prices (Premium) Every option (whether it’s a call or a put, expiring in a month or a year) always will have a “bid” and an “ask” price. Said simply, you buy at the ask price and sell on the bid. For example, if you’re looking at Nov 75 Calls and you see prices of $47.20 X $51.10, then you’d be buying at the ask price (the higher price) and selling at the bid price (the lower number). The difference between the bid and ask prices is the “spread.” The narrower the spread, usually the better the liquidity (liquidity is the ability to move in and out of a position easily.) BID/ASK PRICESBID/ASK PRICES

7. A person buying Call Options is BULLISH. They believe that the price of the stock will go higher. You decide that you are going to make an investment in Apple Inc = AAPL, which is currently at $100 a share. You think that Apple is undervalued and that the stock price should rise to $120 within the next year. You could choose to buy the stock at $100 per share, ($10,000 for a “round lot of 100 shares) but you would technically be risking every penny of that $10,000. Let’s say instead of buying the stock outright, someone agrees to pay all of the return above $100 (the strike price) over the next year, for a “premium” against their risk (selling a call). They think that by charging you $10 ($1000) for the “right but not the obligation” (buying the call) to selling 100 shares of stock that their risk is justified. This means that if Apple rises above $100, this person will pay you the entire amount above that level. If apple stays stagnant at its current price, this person will not pay you anything, and you lose the $1,000 premium. However, if you are correct and that AAPL goes to $120: Buying the stock - If it goes to $120 and you buy 100 shares of the stock we make 20 points x 100 shares and you make $2,000 on our $10,000 investment. A gain of 20% $2,000/$10,000=.20% Buying the option - If it goes to $120 and you buy 1 call on the stock you make 20 points x 100 shares and you net $2,000. Your investment was $1000 so you make $1000 a gain of $1000/$1000= 100% on the same price movement! Yahoo Calls With Stock Price at $40.00 Strike PriceStatus $35.00 In the money $37.00 In the money $40.00 At the money $42.50 Out of the money $45.00 Out of the money BUYINGCALLSBUYINGCALLS Strategy

8. A person buying Put Options is BEARISH. They believe that the price of the stock will go lower. You decide that you are going to make an investment in Apple Inc = AAPL, which is currently quoted at $100 a share. You think that Apple as a company is overvalued and that the stock price should drop to $90 within the next year. Let’s say instead of buying the stock outright, someone agrees to pay all of the return above $100 (the strike price) over the next year, for a “premium” against their risk (selling a put). They think that by charging you $5 ($500) for the “right but not the obligation” (buying the put) to selling 100 shares of stock that their risk is justified. This means that if Apple falls below $100, this person will pay you the entire amount above that level. If apple stays stagnant at its current price, this person will not pay you anything, and you lose the $500 premium. However, if you are correct and AAPL goes to $90 and you buy 1 call on the stock you make 10 points x 100 shares and you net $1,000. Your investment was $500 so you make $500 a gain of $500/$500= 100% Yahoo Puts With Stock Price at $40.00 Strike PriceStatus $35.00Out of the money $37.00Out of the money $40.00At the money $42.50In the money $45.00In the money BUYINGPUTSBUYINGPUTS Strategy

9. Limit Order - With limit orders, you will specify the price you wish to transact. The advantage of using limit orders is that you are in full control of the price at which you buy or sell your options. The disadvantage is that filling the order will take some time, or the entire order may not get filled at all because the underlying stock price has moved way beyond your desired price. Stop Loss Order - Stop loss orders are orders that only gets executed when the market price of the underlying stock reaches a specified price. They are used to reduce losses when the underlying asset price moves sharply against the investor. Stop Market Order - A stop market order, or simply stop order, is a market order that only executes when the underlying stock price trades at or through a designated price. Stop Limit Order - A stop limit order is a limit order that gets activated only when the underlying stock price trades at or through a specified price. While a stop limit order provides complete control over the transaction price, it may not get executed if the underlying price moves too quickly. T Y P E S Of O R D E R S For all options, there are always two parties involved — someone buying and someone selling. There are benefits to using each strategy. It’s all about knowing which choice is right for you at which time. Strategy

10. UNDERSTANDINGRISKUNDERSTANDINGRISK Remember taking losses is the start of your next winning trade. Discipline is the key to successful trading. Understanding Risk As an option trader what you really have at risk in a specific trade is often a function of whether you are long or short trader, and how quickly you think you can get out of a bad trade. For example, a long option has a fixed risk of the premium or purchase price. That means that your maximum loss may be just the option premium. Once you know what your maximum risk is, you can determine your position’s size. You can determine the size of a position by dividing that maximum risk amount into the total amount of your portfolio you have set aside for a trade. For example, if you assume that you are willing to use $10,000 of your portfolio for options trades and you are willing to risk 5% of that amount on any single trade, you are willing to lose $500 in a bad trade. Therefore, if you are evaluating a long call or put position with a max loss of $250 per contract, you could buy two contracts. Strategy

11. Implied Volatility History isn’t the only determining factor. Implied volatility also affects an option’s price because it’s based on the amount of volatility the market maker believes the stock is likely to experience in the future. A stock on the move will go up in price as more and more people want to get in on the action As the stock starts to move, the options market maker usually adjusts the implied volatility upward, which means the options premium will rise, all else being equal. The options will be worth more to investors who want to lock in a certain price at which they’d be willing to buy the stock. Let’s take Apple again. Suppose it’s trading at $105. Then the company introduces a product that’s even hotter than its iPad or iPods, and the shares take off into the $150 range. Investors will want to secure their right to buy shares at $105 or any other strike price below the current stock price. Key Point: A higher option price implies greater volatility for the possible outcomes of the stock. VOLATILITYVOLATILITY Strategy

12. Implied Volatility As A Trading Tool Implied volatility shows the market’s opinion of the underlying security’s (either a stock, futures contract, or index) potential to move, but what you have to understand is that it does not anticipate direction. If implied volatility is “high”, that means the market thinks the underlying has the potential for big moves in either direction. “Low” IV, tells us that the option is not expected to move as much by expiration. Using IV, traders can better determine the probability of the outcomes of their option. While implied volatility doesn’t help forecast the market’s direction, IV can show the chances of an underlying security reaching a certain price by a certain time. That can be very helpful when making trading decisions. IV is a great tool to help you measure your risk vs. reward before purchasing an option. Even if the market acts irrationally you must stay rational and not get emotional if you wish to succeed. Strategy

13. Even if the market acts irrationally you must stay rational and not get emotional if you wish to succeed. Market Expectation and the Effect on Option Prices We know by now the idea those options are used to invest in the expectations of possible future outcomes of the stock. The price of each option is derived upon the implied volatility, or the expectation of the width of this range of expectations. This being the case, what happened when there is a surge of new information regarding the company? Would this have an effect on the IV and thus the price of the option? If you answered yes, you are absolutely correct. Any time we see important news on the horizon, whether it be the monthly employment report, earnings reports for the specific company, or news conferences, etc. there is the element of great ncertainty and the expectation that once the market gets a clearer picture then there will be a corresponding move in the stock price. Thus, it is this added uncertainty and expectation for a wider range of possible outcomes that will increase the IV of the option and ultimately cause it to increase in value. Strategy

14. TRADESTRATEGY1TRADESTRATEGY1 Strategy of Long Call - Outlook: Bullish When you buy to open a call option, you are making a bet that the underlying stock will rise in value. If you buy one call contract, you are essentially long 100 shares of that stock. As such, a purchased call is a bullish option-trading strategy. To understand how a long call trade might play out, let’s look at an example.  You are bullish on Stock XYZ, which is currently trading at $50 per share. In an attempt to capitalize on higher prices during the near term, you decide to buy (to open) one call contract on XYZ  You select a 45-strike call with two months of shelf life, which is asked at 7.45 (5 points intrinsic value + 2.45 points time value).  To purchase one contract giving you theoretical control of 100 shares, then, your  initial net debit will be $745 (ask price of 7.45 x 100 shares).  By comparison, it would have cost you $5,000 to buy 100 shares of XYZ outright, based on a share price of $50. 1.Entering the Trade Strategy

15. TRADESTRATEGY1TRADESTRATEGY1 Strategy of Long Call - Outlook: Bullish  The potential profit on a long call is theoretically unlimited, as there’s technically no concrete limit to how high the underlying stock can rise. However, it’s probably fair to say you’d be happy with your bullish trade if XYZ rallied up to a reasonable $60 per share by the time options expiration rolls around.  With XYZ at $60, your 45-strike call would be worth $15 at expiration (15 points intrinsic value; no time value remaining). In order to collect your paper profit, you could sell to close your call contract for $1,500 (15 points intrinsic value x 100 shares).  Alternately, rather than selling to close the option, you could exercise your option to buy 100 shares of XYZ at $45 each. After accounting for the fact that your contract cost $7.45 per share, you would be buying the stock at an effective price of $52.45 (strike price of 45 + premium of 7.45) — a modest discount to the current market price. Plus, as a bona fide shareholder, you would be able to participate in any continued uptrend by the stock. 2. Potential Gains Strategy

16. TRADESTRATEGY1TRADESTRATEGY1 Strategy of Long Call - Outlook: Bullish  To avoid taking a loss on the trade, you need XYZ to finish above the breakeven price of $52.45 by the time expiration rolls around (strike price of 45 + premium of 7.45). In other words, if XYZ closes anywhere at or below $52.44 upon expiration, you’ll be swallowing a loss on your long call option.  However, losses are inherently capped when you’re an option buyer. Even if XYZ tanks to zero before your contract expires, the most you stand to lose is your initial investment of $7.45 per share, or $745. This entire loss will be realized if XYZ closes at or below the strike price of $45 upon expiration. 3. Potential Losses Strategy

17. TRADESTRATEGY2TRADESTRATEGY2 Strategy of Long Put - Outlook: Bearish If you’re bearish on a particular stock, you could buy (to open) a put option in order to profit from the predicted decline.  XYZ, which is currently trading at $35 per share. Over the next two months, you predict the stock will decline significantly. You buy to open one 37.50-strike put option with two months until expiration, which is asked at 3.85 (2.5 points intrinsic value + 1.35 points time value).  As such, you’ll pay $385 to purchase one put option controlling 100 shares of XYZ (3.85 premium x 100 shares). 1.Entering the Trade Strategy

18. TRADESTRATEGY2TRADESTRATEGY2 Strategy of Long Put - Outlook: Bearish  In the best case scenario, XYZ would go down to zero by the time your option expired. This would reap the maximum potential profit on your option — which would be $33.65 (strike price of 37.50 minus net debit of 3.85).  In fact, $33.65 (strike price less net debit) also happens to be the breakeven point on your purchased put option. This means you’ll collect a profit as long as XYZ finishes anywhere below $33.65 upon expiration.  You can sell to close your option, and pocket any gain in the contract’s value as your profit on the play. For example, let’s say XYZ is trading at $30 per share on expiration Friday. Your 37.50-strike put would be worth 7.50 (7.5 points intrinsic value; no time value remaining). By selling to close the option for $750, your profit would be $365 — representing a 95% return on your original investment of $385. 2. Potential Gains Strategy

19. TRADESTRATEGY2TRADESTRATEGY2 Strategy of Long Put - Outlook: Bearish  The most you can possibly lose in this put-buying strategy is your initial cash outlay of $385, plus any brokerage fees. This maximum loss will be realized if XYZ finishes at or above $37.50 upon expiration.  By comparison, should XYZ unexpectedly rally, a short seller’s risk is theoretically unlimited. 3. Potential Losses Strategy

20. TRADESTRATEGY3TRADESTRATEGY3 Pairs Trading - Outlook: Mixed A pairs trade involves two separate, yet related, option plays — one bullish, and one bearish — on two different underlying securities. While it can certainly be classified as a “hedged” strategy, a pairs trade is not a direct hedge in the way that a protective put shields against losses in a stock position. Instead, the concept is to play a directional trading idea while simultaneously guarding against unexpected headwinds in the given sector, or within the market as a whole. There are several different ways to build a pairs trade, but let’s consider the following example: Strategy

21. TRADESTRATEGY3TRADESTRATEGY3 Pairs Trading - Outlook: Mixed 1.Entering the Trade Widget producer XYZ is a technical standout, and you believe the near-term outlook remains bullish. However, the broader widget sector has been going through a choppy phase, with many sector components struggling in the face of weaker demand. While you think XYZ has the chops to rise higher, you’re concerned the shares may fall victim to “guilty by association” selling pressure.  To hedge your bets, you decide to play a call option on XYZ while simultaneously initiating a long put on underperforming sector peer ABC. With XYZ at $35, you buy to open one 32.50-strike call at the ask price of 3.60.  Meanwhile, with ABC hovering around $21, you buy to open one 23-strike put for 2.24. You’ve shelled out a net debit of 5.84 for both options, bringing your total cash outlay to $584 for the trade.  Your ultimate goal is to turn a profit one way or the other — whether it be a gain on the put, the call, or both. However, both legs of the trade should be managed as one single position. Strategy

22. TRADESTRATEGY3TRADESTRATEGY3 Pairs Trading - Outlook: Mixed The good news is, your win rate with a pairs trade can be greater than directional plays involving only a call or only a put. However, the trade-off is that your average win will typically be smaller, due to the built-in hedge used in this strategy.  In the best-case scenario, both legs of the trade will move in your favor. XYZ rallies up to $40 by expiration, and your call is now worth 7.50. ABC drops down to $16, leaving your put option with an intrinsic value of 7.00. Both options can be sold to close for 14.50, or $1,450 — netting you a healthy profit of 148%.  But what if only one leg of the trade pans out? Perhaps XYZ does, in fact, fall victim to sector-wide selling, and your call winds up worthless at expiration. On the other hand, ABC once again drops down to $16 by expiration, allowing you to cash in your put option at 7.00, or $700. In this outcome, you still net a profit — albeit a much smaller one of about 20%.  Because you’re dealing with two options on two underlying assets, and they’re being managed as a single entity, there’s no hard-and-fast breakeven point on a pairs trade. In order to win, you simply need your two options combined to gain more money than you spent to open the trade. In this example, as long as your options gain a combined total of more than 5.84 by expiration, you’ll be able to walk away with a profit. 2. Potential Gains Strategy

23. TRADESTRATEGY3TRADESTRATEGY3 Pairs Trading - Outlook: Mixed Your maximum potential loss is limited to your initial upfront cost of 5.84, or $584. In the hypothetical above, both stocks would have to move significantly against you for this to occur, since in-the-money options were used.  Volatility Impact -As with other option-buying strategies, rising implied volatility is a positive once the pairs trade has been entered, while declining implied volatility will negatively impact your position. Since a 100% loss on a pairs trade is frequently going to be steeper than a 100% loss on a solo options play, it makes sense to focus on in-the-money options. This reduces your exposure to the ill effects of time decay, and minimizes the chances of taking a 100% loss on the position.  Other Considerations - Managing the trade as a single position shouldn’t deter you from taking profits when appropriate. If one leg is at a 100% gain, for example, you can comfortably take some cash off the table and let the remainder of the position continue to run its course. 3. Potential Losses Strategy

24. Straddle Trade - Outlook: Directionally neutral, bullish volatility Sometimes, you’re not sure whether a stock is going to move higher or lower — but you expect dramatic price action nonetheless. Maybe there’s an earnings report or product launch scheduled, or perhaps a biotech company is due to receive a key regulatory ruling. Or, after a long period of quiet consolidation, perhaps you think a particular stock is due to break out of its trading range. In order to bet on a big move in the shares — even if you’re not sure what direction the move will take — you can play a two- legged spread known as a straddle. TRADESTRATEGY4TRADESTRATEGY4 Strategy

25. Straddle Trade - Outlook: Directionally neutral, bullish volatility To initiate a straddle, you will simultaneously buy to open a call option and a put option on the same underlying stock. Both options will have the same strike price and the same expiration date. Most often, the focus strike price will be very close to the price of the underlying stock (or “at the money”).  Essentially, you are now long 100 shares of the stock (via the call) and short 100 shares of the same stock (via the put). In other words, you have a path to profit whether the shares rally or plunge during the time frame of the trade.  To illustrate how this directionally indecisive trade works, let’s say that you anticipate a big move from XYZ within the next two weeks, as the company is due to report quarterly earnings for the first time since a major restructuring.  With the stock trading just below $60, you buy to open one 60-strike call and one 60-strike put, using front-month options. The call is asked at 0.51, while the put is asked at 0.85, for a net debit of 1.36. Your total cash outlay, then, is $136 [(0.85 x 100 shares) + (0.51 x 100 shares) = 136)]. TRADESTRATEGY4TRADESTRATEGY4 1.Entering the Trade Strategy

26. Straddle Trade - Outlook: Directionally neutral, bullish volatility Since you’ve purchased both a put and a call, there are two breakeven points on the straddle:  If the stock rises, profits will begin to accrue on a move above $61.36 (call strike + net debit). On a move lower, profits will add up after a dip below $58.64 (put strike minus net debit).  If XYZ rallies, potential profits are theoretically unlimited. If the shares fall to zero by expiration, the maximum potential profit is $58.64 (put strike minus net debit). TRADESTRATEGY4TRADESTRATEGY4 2. Potential Gains Strategy

27. Straddle Trade - Outlook: Directionally neutral, bullish volatility The worst-case scenario for a straddle buyer is for the stock to remain completely stagnant through expiration. If this should occur, the trader will realize the maximum potential loss — which is equal to the initial investment of $136.  Volatility Impact - A straddle requires the purchase of two options, rather than one. This is known as buying “double premium,” and it means you’ll have to keep a close eye on volatility — particularly since implied volatility tends to rise ahead of scheduled events, as the market prices in the stock’s post-event price swing. To avoid overpaying for options, compare implied volatility against historical volatility for a comparable time frame. For option buyers, it’s a red flag if implied volatility is significantly higher than historical.  Other Considerations - Since you’re buying two options, instead of one, you need a sizable move in the share price to offset your cost of entry and turn a profit. To avoid overpaying for time premium, it makes sense to target options with as little time value as possible. In other words, select the nearest expiration date after the scheduled event or expected price swing. TRADESTRATEGY4TRADESTRATEGY4 3. Potential Losses Strategy

28. Strangle Trade - Outlook: Directionally neutral, bullish volatility A strangle is similar to a straddle, with one minor adjustment: the put and call are purchased at two different strikes, rather than converging on the same strike. Generally, the call strike is located above the stock's current price, while the put strike is located below. This effectively widens the breakeven rails on the trade, which means a strangle requires an even greater directional move than a straddle in order to become profitable. However, since the strikes selected are out-of-the- money, rather than at-the-money, a strangle is typically less expensive to initiate. As with a straddle, you're targeting a big rally or plunge, sufficient in magnitude to offset the cost of buying two options (call strike plus net debit on the upside, or put strike less net debit on the downside). Your maximum loss occurs between the two purchased strikes, and is equal to the net debit paid to enter the spread. TRADESTRATEGY5TRADESTRATEGY5 Strategy

29. Strangle Trade - Outlook: Directionally neutral, bullish volatility  To initiate a straddle, you will simultaneously buy to open a call option and a put option on the same underlying stock. Both options will have the same strike price and the same expiration date. Most often, the focus strike price will be very close to the price of the underlying stock (or “at the money”).  Essentially, you are now long 100 shares of the stock (via the call) and short 100 shares of the same stock (via the put). In other words, you have a path to profit whether the shares rally or plunge during the time frame of the trade.  To illustrate how this directionally indecisive trade works, let’s say that you anticipate a big move from XYZ within the next two weeks, as the company is due to report quarterly earnings for the first time since a major restructuring.  With the stock trading just below $60, you buy to open one 60-strike call and one 60-strike put, using front-month options. The call is asked at 0.51, while the put is asked at 0.85, for a net debit of 1.36. Your total cash outlay, then, is $136 [(0.85 x 100 shares) + (0.51 x 100 shares) = 136)]. TRADESTRATEGY5TRADESTRATEGY5 The Trade Strategy

30. Fill in the blanks 1.A put is out-of-the-money when the strike price is ______ the market price of the underlying stock. 2.If you bought 3 contracts of the Netflix (NFLX) June 95 Calls for $9.70 you would pay _____for the trade. 3.You believe XYZ stock will continue to go up, so you buy the _______ option. 4.A _____ option gives the buyer a right but not the obligation to buy a stock at a specified price during a specified time period. 5.An option contract controls ________ shares. 6.A ______ option gives you the right but not the obligation to sell a stock at a specified price during a specified period of time. 7.The _________ _________ is the price at which the underlying stock may be purchased or sold by the option holder. 8.A Call option is in-the-money when the strike price is ______the market price of the underlying stock. 9.You buy an option at the ________ price. 10. An option is at-the-money when the strike price is _____ to the market price of the underlying security. Evaluate

31. Fill in the blanks ANSWERS 1.Below 2.$525. Number of Contracts x Price per Contract x 100 5 x $1.05 x 100 = $525 3.Call 4.Call 5.100 6.Put 7.Strike Price 8.Below 9.Ask. When you look at the options chain you will see two prices for each option: ask and bid. You buy at the slightly higher ask price and sell the option at the bid price. 10.Equal Evaluate

32. True and False 1.You would need 7 options contracts to control 700 shares of stock in the underlying security? ____ 2.The options symbol WFM141122C00065000 is a put option? ____ 3.All option symbols are uniform with 21 characters. ____ 4.When you sell an option, it’s sold at the ask price? ____ 5.With options, you can profit in any market condition at a fraction of the cost of buying stocks. ____ 6.An option has more time value the further away it is from expiration. ____ 7.Option strike prices are based on the underlying stocks current price. ____ 8.If XYZ stock is selling for $60 per share, then an XYZ July 60 Call is in the money? ___ 9.You would be in-the-money if your stock is trading for $21 per share and you have the $25 call option. ____ 10. An option expires on the last day of the month. ____ Evaluate

33. True and False ANSWERS 1.True 2.False. This options (WFM141122C00065000) is a call option. 3.True. On February 12, 2010, all option tickers were converted to a 21-character format. Each symbol contains the options root, year, month and date it expires, type of options (call or put) and the strike price. 4.False. It will be sold at the bid price, which is lower than the ask price. 5.True. 6.True. 7.True. 8.False. The July 60 call is at the money when the stock is at $60. It would be in the money when the strike price is below the stock price — for example when it is at $55. 9.False. If the stock is trading for $21 per share, your call option gives you the right to buy the stock at $25 per share. Since the stock is trading at a lower price, you are out-of-the money. 10. False. For trading purposes, an option contract expires on the third Friday of the month. Evaluate

34. Multiple Choice 1. After this date your options will cease to exist and no longer be valid. For trading purposes it is the third Friday of each month. ____ A. Expiration Date 2. This strategy is used to protect yourself from a downturn in the market or to profit from a stock you believe is going down in the future. Your loss is limited to the amount you pay for the trade. ____ B. Buying Puts 3. What contains all the information on each option including: stock name, type of option month and date it expires along with many other details? C. Options Symbol 4. An option is also known as this because as time passes it erodes the value. ____D. Options Trading 5. The benefits of doing these trades are many including: minimal capital outlay, leveraging your money, earning profits in a sideways, nontrending market, and the versatility. ____ E. Wasting Asset 6. This strategy can be used when you want to “control” a stock but don’t want to own the stock outright and you expect the stock to rise. You have unlimited upside potential, but your loss is limited to the amount you spent on the trade. ___ F. Options contract 7. The price you can sell or buy an underlying security when you hold an option. ____G. In the money 8. When a put option’s strike price is above the market price of the underlying security and a call option’s strike price is below the market price of the underlying stock. ____ H. Buying Calls 9. Buy this type of option when you have a bullish outlook and believe the stock price will increase. I. Call Options 10. Controls 100 shares of stock for each one purchased.J. Strike Price Evaluate

35. Multiple Choice ANSWERS 1.A. 2.B. Buying Puts 3.C. Options Symbol. Every options symbol has a uniform format so it can be universally understood by everyone in the markets. It contains the options root, year, month, expiration date, type of option and the strike price. 4.E. Options are wasting assets because they expire and become worthless. As time gets closer to the expiration date, it erodes the value of the options. 5.D. Options Trading. 6.H. Buying Calls. This is also known as the “Long Call.” It gives you the right but not the obligation to buy the stock at a predetermined (strike) price in a set period (expiration date) of time. 7.J. Strike Price. The strike price will vary depending on the amount of the underlying stock. Usually, if the stock is traded between $5 and $25, the strike price will be increments of $2.50. If the stock is traded between $25 and $200, the increments will be in $5. If the stock is trading over $200 the increments will be in $10, and occasionally for stocks under $50 you can have increments of $1. 8.G. In the money. 9.I. Call option. A call option is a bullish trade when you think the stock price will increase. 10.F. Options Contract Evaluate

36. Getting Started in Options Trading  To start trading options, you will need to have a trading account with an options brokerage firm. Once you have setup your account, you can then place options trades electronically or with your broker who will execute it on your behalf.  Opening a Trading Account - When opening a trading account with a brokerage firm, you will be asked whether you wish to open a cash account or a margin account.  Cash Account vs. Margin Account - The difference between a cash account and a margin account is that a margin account allows you to use your existing holdings (stocks or other securities held in your account) as collaterals to borrow funds from the brokerage to finance additional purchases. With cash accounts, you can only use the available cash in your account to pay for all your stock and options trades.  As a beginner – NEVER OPEN A MARGIN ACCOUNT. This limits your risk and the potential to put yourself in debt. When choosing a broker make sure you check out their platform and the ease of operation for you. Many offer paper money accounts so you can practice and see which one fits your eye better. Look for the best charting software and ease of operation. BEGINTRADINGBEGINTRADING Practice

37. Getting Started in Options Trading Month 1 Become a member to the following websites for Research:  www.schaeffersresearch.com www.schaeffersresearch.com  www.investorplace.com www.investorplace.com  www.optionmonster.com www.optionmonster.com  www.optionshawk.com www.optionshawk.com  www.seekingalpha.com www.seekingalpha.com Month 2 Subscribe to the following websites for a fee:  www.zacks.com $1 the first month www.zacks.com  www.slingshot-trader.investorplace.com for $39 a month www.slingshot-trader.investorplace.com Step1- Explain Use the experts for your initial trades Makes options lists and research the stock BEGINTRADINGBEGINTRADING Practice

38. Getting Started in Options Trading Step 2 - Elaborate For 1 month trade only paper trades Start with an imaginary $10,000 BEGINTRADINGBEGINTRADING Sign-in or Register for myCBOE to start using Virtual Trade now! Practice

39. Getting Started in Options Trading Step 3 - Evaluate Analyze gains and losses and which were best sites for recommendations BEGINTRADINGBEGINTRADING Practice

40. Mantras for Options Trading Step 4 – Develop a trading plan…sell your options after x % gain and stop your losses at z %. BEGINTRADINGBEGINTRADING Conclusion  Trade your plan and the rules will help you accomplish your goals  Beware of the “can’t lose” strategy  There is no free ride. Trading success is built by learning and discipline.  No system works all of the time  Earn the right to trade bigger by having success