Hughes Optioneering Team Presents . . .
How to Trade
Options and
Win!
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HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED
BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
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IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING
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PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL
TRADING RESULTS
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How to Trade Options and Win!
Welcome to the exciting world of Option Trading! In this Report the Optioneering® Team
will explore one of the most important rules we use daily when trading options. We call
this ‘The 1% Rule’. Using the 1% Rule has been a big part of our trading success over
the past 30 years.
The Team has been trading options successfully for many years in every type of market
condition including the severe 2001 and 2008 bear markets when we profited from
bearish option trades.
$1.2 Million in Actual Profits with No Losing Trades
Copies of our brokerage account Profit/Loss Reports for two of our retirement accounts
at the end of this Report show we have $1,262,443.76 in open trade profits for our stock
and option trades. There are 23 winning trades and no losing trades resulting in 100%
accuracy. The average return for the two trading account portfolios is 120.5%.
No Experience Needed
The Optioneering® Team has taught thousands of people from all walks of life and
backgrounds with no investing experience to trade the Optioneering® strategies. The
Team has found that just about anybody can learn the Optioneering® trading strategies
as long as they understand the basics of options trading. And if you don’t understand
options, then no problem . . . We have the resources to teach you what you need to
know.
In this Report we will first look at option basics . . . teaching you only what you need to
know about options and none of the complicated theories you don’t need. To trade
options, you don’t need to know complicated math or formulas like you have probably
been led to believe.
Starting Small
One of the big advantages of trading options is that you can start out small. Options
control 100 shares of stock and can be purchased for as little as $300 to $500. A
portfolio of options can be traded in a $3,000 - $5,000 account.
I started trading options with a $4,600 trading account but within two years I had over
$460,000 in profits which is more than I earned the previous six years as an airline pilot!
Copies of my tax returns for that first two year period are included at the end of this
Report.
Let’s next look at option basics.
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Option Basics
There are two types of options:
Puts give you the right to sell stock at a specified price
And calls give you the right to buy stock at a specified price
Just think “Put It Down” in a down market
And “Call it Up” in an up market
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Option Basics
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Options Share the Following General Characteristics:
• Options give you the right to buy or sell an underlying security or index
• If you buy an option, you are not obligated to buy the underlying security. You
simply have the right to exercise the option
• Options are good for a specified period of time after which they expire and you
lose the right to buy or sell the underlying security
• When options are purchased the buyer incurs a debit
• Options are available in various strike prices representing the price of the
underlying security
• The cost of an option is referred to as the option premium. The premium is
comprised of time value and intrinsic value
• There are two kinds of options: calls and puts. Calls give you the right to buy
the underlying security and puts give you the right to sell the underlying
security
• Most options are never exercised and are closed out before option expiration
• And one more thing… trading options is similar to trading stocks but it
takes a lot less money to do! Below are examples of online orders to buy
stocks and buy options.
Stock Order
Option Order
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Once You Really Understand
How Options Are Priced
You Have a Winning Edge!
(Unfortunately, very few traders do)
Option premiums consist of two essential elements INTRINSIC value + TIME
value
The intrinsic value of an option is determined solely by the difference between the
current stock price and the strike price and can be calculated exactly.
Time value is the extra money you pay for the privilege of owning that option and will
vary depending on several factors.
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Intrinsic Value
Intrinsic value is the difference between the current price and the strike price.
Call options with a strike price at or above the current trading price of the underlying
stock are ‘At the Money’ or ‘Out of the Money’ and have no intrinsic value. Their option
premiums consist of Time Value only.
Put options with a strike price at or below the current trading price of the underlying
stock are ‘At the Money’ or ‘Out of the Money’ and have no intrinsic value. Their option
premiums consist of Time Value only.
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Leverage
Each Option controls 100 shares of the underlying stock.
Therefore, the Intrinsic value of your option increases $100 for every $1 the stock
exceeds the strike price.
100 shares of Apple stock costs $21,240 at current prices.
An ‘At the Money’ call option that controls 100 shares of Apple stock costs $680 at
current prices giving the call option 31 to 1 leverage.
You have less money at risk when trading options. In this example you have $680 at risk
with the option versus $21,240 for the stock if Apple declines in price.
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Time Value
Time value is the extra money you pay for the privilege of owning an option. Although
Volatility plays a role depending on market conditions…
The two critical factors employed by every Optioneering® strategy are…
 The amount of Time before Option Expiration
 The Strike Price relative to the current price
The less time there is before option expiration, the cheaper the option.
The further the strike price is from the stock price, the cheaper the option… and this is
true whether you’re going deeper into the money or further out of the money, (which
most people don’t realize).
As we just discussed, OTM options have no Intrinsic value… the entire premium is
comprised of Time value. And since the premium gets less and less the further Out of
the Money you go, the relationship between strike price and option cost is obvious.
But, as you go deeper In-The-Money, the increased Intrinsic value pushes the option
premium higher. So most people don’t realize the Time value is actually getting cheaper
and cheaper the deeper In-The- Money you go.
And, as you’ll soon see… therein lays the Optioneering® secret to winning!
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Time Decay
Each day before option expiration, the Time Value portion of an option decays . . .
And the greatest amount of decay occurs in the last 30 days
At option expiration call options lose all time value and consist of only intrinsic value if
the underlying stock closes above the strike price of the call option
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Choosing Your Option
Once you select a stock for a call option purchase you must then select an option strike
price. Depending on the stock, there could be hundreds or even thousands of strike
prices available. With so many strike prices to choose from how do you determine which
strike price to use?
As noted previously, option premiums consist of time value and intrinsic value.
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Options lose all time value at expiration and consist of only intrinsic
value
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So when you buy an option you are buying a decaying asset
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Due to the time decay characteristics of options, when we buy an
option we want to minimize time value and maximize intrinsic value
Minimizing Time Value and
Maximizing Intrinsic Value
The best way to minimize Time Value and Maximize Intrinsic Value is to purchase in-themoney options.
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In-the-money options have more Intrinsic Value and less Time
Value than at-the-money or out-of-the-money options
On the following page is an option price chain for the NASDAQ 100 ETF symbol QQQ. The
option chain contains the current bid and ask prices for the QQQ ETF Jan options. The
QQQ ETF is trading at 171.52 (circled).
In- the-money options have strike prices below the current price of the stock/ETF. In this
example the 171-Strike call and lower strike prices are in-the-money (circled).
At-the-money options have a strike price that is closest to the current price of the
stock/ETF. With the QQQ ETF trading at 171.52 the closest strike price would be the
172-Strike (circled).
Out-of-the-money options have a strike price that is higher than the current price of the
stock/ETF. In this example the 173-Strike call and higher strike prices are out-of-themoney (circled).
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Minimizing Time Value
In-The-Money
At-The-Money
Out-of-The-Money
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Calculating Time Value and Intrinsic Value
The table below focuses on the QQQ in-the-money January call options presented in the
previous QQQ option chain. As noted previously, In-the-money options have more
Intrinsic Value and less Time Value than at-the-money or out-of-the-money options. The
first column in the table below lists the intrinsic value of the call option. The intrinsic
value is calculated by subtracting the strike price from the current price of the stock/ETF.
In the top row of the table we can see the 148-Strike call has an intrinsic value of 23.52
and was calculated by subtracting the strike price of 148 from the current stock/ETF
price of 171.52.
The second column in the table below lists the time value of the call option. The time
value is calculated by subtracting the intrinsic value from the option premium. In the top
row of the table we can see the 148-Strike call has a time value of 1.40 and was
calculated by subtracting the intrinsic value of 23.52 from the 24.92 option premium
which is the ask price for the 148-Strike call.
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Minimizing Time Value and Maximizing Intrinsic Value
The table below again lists the QQQ in-the-money January call options presented
previously.
Notice the Intrinsic Value increases and the Time value decreases as the strike price gets
deeper in-the-money.
The 160-Strike call has an Intrinsic Value of 11.52 which is less than the 21.52 Intrinsic
Value of the deeper in-the-money 150-Strike call. And The 160-Strike call has a Time
Value of 3.03 which is greater than the 1.60 Time Value of the deeper in-the-money
150-Strike call.
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Use the ‘1% Rule’ for Selecting an Option Strike Price
We developed a simple technique called the ‘1% Rule’ for selecting an in-the-money
strike call option when purchasing options. The 1% Rule utilizes a Strike price that limits
the Time Value portion of a call option premium to less than 1% of the stock price in
order to minimize time value and maximize intrinsic value.
Using our current example, with the QQQ ETF trading at 171.52, we would limit the time
value portion of the call option to less than 1.71 points which is 1% of the current ETF
price. We can see from our table below that the 150-Strike and lower strike prices have
less than a 1.71 Time Value and would qualify using the 1% Rule.
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A 1% Stock Move = Option Profit
If you limit the Time Value portion of an option to less than 1% of the
stock/ETF price, the stock/ETF price only needs to increase 1% in order for the
option trade to profit!
A 1% price increase to profit has a much higher probability of being profitable than an
at-the-money or out-of-the-money strike price that can require up to a 5% to 10% or
higher increase in price of the underlying stock/ETF at option expiration to profit. Many
times the expected stock price move will not occur before option expiration.
When you use the 1% Rule, the option value will increase $100 for each 1 point increase
in the stock/ETF price.
Remember, if you purchase an at-the-money or out-of-the-money strike call option and
the stock is flat or down at option expiration, it will result a 100% loss for your option
trade.
Using the 1% Rule to select an option strike price will increase your percentage
of winning trades compared to trading at-the-money or out-of-the-money strike
calls and this higher accuracy will make you a more successful trader.
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Let’s now look at an actual option trade example to demonstrate the profit/loss
characteristics of an option purchase and illustrate the 1% Rule for selecting an option
strike price.
Our brokerage account transaction report below shows that on June 3rd we purchased
the CIGNA 50-Strike call option for 17.00 points. CIGNA stock was trading at 66.71 at
the time of the option purchase.
Buy to Open CI 50-Strike Call @17.00
Determine the Profit/Loss Potential for Your
Option Trade Before You Take the Trade
The Optioneering® Team designed a series of calculators to calculate the profit potential
for six different types of option strategies. These calculators allow us to know the
profit/loss potential of an option trade before we take the trade. The calculators calculate
the profit potential for an option trade based on the price change in the underlying
stock/ETF at option expiration.
The price movement of the underlying stock determines the profit for an option trade not
using complicated mathematical formulas you may have been led to believe.
The calculators allow us to know in advance the profit/loss potential for an option trade
before you take the trade. The six option calculators are available to members of our
Trading Service.
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Let’s now take a look at the profit/loss potential for our CI 50-Strike call option purchase
using the call option purchase calculator. The Call Option Purchase analysis below
displays the profit/loss potential for purchasing the CI 50-Strike call at 17.00 points with
CI stock trading at 66.71 at the time of purchase. The calculator displays the profit/loss
potential for this trade assuming various price changes for CI stock at option expiration
and does not include commissions.
The first row of the table is labeled ‘% Change’ and assumes various percent changes in
CI stock at option expiration from a 30% increase to a 5% decrease in price in this
example. The second row is labeled ‘Stock Price’ and is the CI stock price that
corresponds to the percentage change listed on the row above.
The ‘Option Value’ row lists the value of the call option which corresponds to the price of
CI stock. The rows labeled ‘Profit/Loss’ and ‘% Profit/Loss’ lists the point profit or loss
and the % profit or loss for the option. There is no limit on the profit potential of a call
option purchase.
The Analysis below reveals that if CI stock increases 30% to 86.72 at option expiration
then a $1,972 profit and a 116.0% return would be realized (circled). A 10% increase in
CI price to 73.38 would result in a $638 profit and a 37.5% return.
If CI stock increases 1% to 67.38 at option expiration then a 2.2% return would be
realized verifying a profitable trade using the 1% Rule (circled).
If CI stock price remains flat at 66.71 a 1.7% loss will be realized (circled) and a 5%
decrease in CI to 63.37 would result in a 21.3% option loss (circled). CI stock is
currently trading at 85.64 and we have an $1,864 open trade profit in this trade.
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This CI In-the-Money Call Option Purchase analysis reveals:
● A 20% increase in stock price results in a 76% option profit
● A 30% increase in stock price results in a 116% option profit
● A 1% increase in stock price results in a profit
● A flat stock price results in a small 1.7% option loss
● Each 1 point increase in stock price results in a $100 increase in option value
● Risk is limited to cost of option
● Profit Potential is unlimited
Calculating the Breakeven Price
The breakeven price for a call option purchase can be manually calculated by adding the
strike price to the option premium.
Buy CI 50-Strike Call @17.00
Using this Cigna option trade example we would add the strike price of 50 to the option
premium of 17.00 to calculate the breakeven price of 67.00. With a breakeven price of
67.00 and CI stock trading at 66.71 the stock only has to increase .29 points or 0.4 of
1% to breakeven. Any increase above .29 points becomes profit.
Strike Price
+ Premium
= Breakeven
50.00
17.00
67.00 stock price
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1% Rule
The Call Option Purchase Calculator will also calculate the time value and intrinsic value
of an option. The Call Option Analysis for our CI 50-Strike call purchase below shows
that the time value portion of this option is .29 and the intrinsic value is 16.71 (circled).
The .29 points of time value is 0.4 of 1% of the Cigna stock price (.29/66.71 = .4%) and
meets the criteria of limiting the time value portion of an option to less than 1% of the
stock price. This allowed us to minimize time value and maximze intrinsic value.
Cigna stock only has to increase .29 points in order for this trade to breakeven and start
profiting.
Time Value and Intrinsic Value of CI 50-Strike Call Option Purchase
Let’s compare this CI in-the-money option purchase to an out-of-the-money option
purchase. We do not own any out-of-the-money options so let’s take a look at an option
quote table on the following page which has a partial list of Feb option quotes for
Priceline.com symbol PCLN.
Let’s focus on the PCLN Feb options which have about the same amount of time to option
expiration as our CI 50-Strike in-the-money call purchase example.
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Pricline.com Feb Out-of-the-Money Option Quotes
Let’s analyze the PCLN Feb 1270-Strike call which is trading at an ask price of 12.60
(circled). With PCLN stock trading at 1162.40 the 1270-Strike call would be an out-ofthe-money call. Let’s now take a look at the profit/loss potential for the purchase of the
PCLN 1270-Strike call using the call option purchase calculator.
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The Call Option Purchase analysis on the previous page displays the profit/loss potential
for purchasing the PCLN 1270-Strike call at 12.60 points with PCLN stock trading at
1162.40 at the time of purchase.
The calculator displays the profit/loss potential for this trade assuming various price
changes for PCLN stock at option expiration from a 10% increase to a 10% decrease in
price and does not include commissions. The calculator also reveals that this option
consists of only time value of 12.60 and has no intrinsic value.
Adding the strike price of 1270 to the premium of 12.60 results in a breakeven price of
1282.60 for this call option purchase. This requires PCLN stock to increase 120.20 points
or 10.3% in order for this trade to breakeven.
Strike Price
+ Premium
= Breakeven
1270.00
12.60
1282.60 stock price
The maximum risk on this trade is $1,260 which is the cost of the option. The Analysis
reveals that if there is any decline in PCLN stock price or if PCLN stock remains flat at
1162.40 (circled) a 100% option loss will be realized. A 5% increase in PCLN stock
would also result in a 100% loss. A 10% increase in PCLN stock would result in a 31.4%
option loss (circled).
Remember when you invest in options you must be correct not only about the future
price movement of the underlying stock but you must also be correct about the time
frame during which this movement must occur (before option expiration).
You must plan on the possibility that you are not correct about the price movement
and/or time frame. If you are wrong about the price direction or time frame you could
lose your whole investment with an out-of-the-money option. This is not an acceptable
risk if you want to ‘stay in the game’ after unanticipated price declines in the underlying
stock.
The CI and PCLN trade examples clearly demonstrate that investing in in-the-money call
options can reduce the overall risk of option investing. With a .4% breakeven price the
in-the-money CI option has a much higher probability of being profitable than the PCLN
out-of-the-money option with a 10.3% breakeven. The in-the-money call option
purchase strikes a good balance between reward and risk compared to a high risk outof-the-money call option purchase.
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100% Loss Versus 1.7% Loss
We saw with the CI option purchase, that a flat stock price at option expiration resulted
in a small 1.7% loss. A flat price at option expiration with the PCLN option purchase
results in a 100% loss.
If you purchase a 1 month out-of-the-money option that requires a 10% increase in the
underlying stock price price to breakeven, you could easily lose 100% of your premium
investment if the stock does not make the anticipated price move before expiration.
Regardless of the accuracy of your trade selection process, a 10% monthly price increase
does not occur that often.
Out-of-the-money call option purchases incur considerably more risk than purchasing
in-the-money options. Our CI in-the-money trade example does not require a large
upward price move in the underlying stock to profit.
Trading in-the-money options puts the odds of winning in your favor and greatly
increases the probability of a winning trade.
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The Secret to Becoming a More Successful Trader
We hope you were able to gain some valuable insights into our technique for selecting
option strike prices. We having been using this technique successfully for many years.
Let’s review the advantages of using the 1% Rule for selecting option strike prices:
-
Underlying stock/ETF only needs to increase 1% at option expiration for
option trade to profit
-
A 1% stock price increase to produce a profitable option trade has a much
higher probability of success than an at-the-money or out-of-the-money
strike price that can require up to a 5% to 10% or higher increase in the
price of the underlying stock/ETF at option expiration to profit
-
Using the 1% Rule to select an option strike price will increase your
percentage of winning trades compared to trading at-the-money or outof-the-money strike calls
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This higher accuracy will make you a more successful trader
Wishing you the best in investment success!
The Optioneering Team
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Real Time Profit Results
The Optioneering Team has been trading options successfully for many years in every
type of market condition.
Let’s take a look at recent actual profit results. Copies of our online brokerage account
Profit/Loss statements that follow contain a snap shot of open option trades. The
stock/ETF symbol, entry price, number of contracts, current price and the dollar profit
and percent return for each trade in the portfolio is listed. We can see from these profit
results that our option trading strategies are performing well across a variety of stock
and ETF options.
$1.2 Million in Actual Profits
With An Average Return of 120.5%
Copies of our brokerage account Profit/Loss Reports for our two retirement trading
accounts show that we have $1,262,443.76 in open trade profits for our stock and option
trades. There are 23 winning trades and no losing trades resulting in 100% accuracy.
The average return for the two trading account portfolios is 120.5%.
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Trading Account #1
$356,934.87
$356,934.87 Profit
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Profit
Trading Account #2
$905,508.89
$905,508.89 Profit
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Profit
Trading Account #2 Continued . . .
$905,508.89 Profit
29
$905,508.89
Profit
First Two Years of Trading
Chuck Hughes started investing in options more than 30 years ago. Chuck had a big
mortgage payment and a young family at the time. He started investing in options with
only a $4,600 trading account as that is all he could scrape together at the time. But
within the first two years he made $460,164 in profits which is more than he made at his
airline job over the previous six years. Copies of his tax returns that show the $460,164
profit follow.
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Copies of Tax Returns from
Chuck’s first two years of
trading showing $460,164 in
option profits
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