High Accuracy Option Trading Prime Trade

Transcription

Guaranteed
Real Optioneering
Winners!
Copyright 2015 by Legacy Publishing LLC. All Rights Reserved.
Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the
1976 United States Copyright Act without the permission of the copyright owner is unlawful.
Information within this publication contains "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any
statements that express or involve discussions with respect to predictions, goals, expectations, beliefs,
plans, projections, objectives, assumptions or future events or performance are not statements of
historical fact and may be "forward looking statements." Forward looking statements are based on
expectations, estimates and projections at the time the statements are made that involve a number of
risks and uncertainties which could cause actual results or events to differ materially from those presently
anticipated. Investing involves the risk of loss as well as the possibility of profit. All investments involve
risk, and all investment decisions of an individual remain the responsibility of that individual. Option and
stock investing involves risk and is not suitable for all investors. Past performance does not guarantee
future results. No statement in this book should be construed as a recommendation to buy or sell a
security. The author and publisher of this book cannot guarantee that the strategies outlined in this book
will be profitable and will not be held liable for any possible trading losses related to these strategies.
All information provided within this publication pertaining to investing, options, stocks and securities is
educational information and not investment advice. Legacy Publishing is not an investment advisor and
recommends all readers and subscribers to seek advice from a registered professional securities
representative before deciding to invest in stocks and options featured within this publication. None of the
material within this publication shall be construed as any kind of investment advice. Readers of this
publication are cautioned not to place undue reliance on forward-looking statements, which are based on
certain assumptions and expectations involving various risks and uncertainties that could cause results to
differ materially from those set forth in the forward looking statements. Please be advised that nothing
within this publication shall constitute a solicitation or an invitation to buy or sell any security mentioned
herein. The author of this publication is neither a registered investment advisor nor affiliated with any
broker or dealer.
Although every precaution has been taken in the preparation of this publication, the publisher and author
assume no liability for errors and omissions. This publication is published without warranty of any kind,
either expressed or implied. Furthermore, neither the author nor the publisher shall be liable for any
damages, either directly or indirectly arising from the use or misuse of the book. Users of this publication
agree to indemnify, release and hold harmless Legacy Publishing, its members, employees, agents,
representatives, affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and
against any and all claims, liabilities, losses, causes of actions, costs, lost profits, lost opportunities,
indirect, special, incident, consequential, punitive, or any other damages whatsoever and expenses
(including, without limitation, court costs and attorneys' fees) ("Losses") asserted against, resulting from,
imposed upon or incurred by any of The Companies as a result of, or arising out of this agreement and/or
your use of this publication. This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the author and publisher
are not engaged in rendering legal, accounting, or other professional services. If legal advice or other
expert assistance is required, the services of a competent professional person should be sought. Use of
the material within this publication constitutes your acceptance of these terms.
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 LOSSES SIMILAR
TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE
RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH
THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN
SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS.
THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY
SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL
PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS
2
High Accuracy Option Trading Strategy
Your Path to Success!
Welcome to the exciting world of High Accuracy Option Trading! In this Manual the
Hughes Optioneering™ Team will explore in detail our High Accuracy Option Trading
Strategy. This Strategy is one of the most highly profitable but lowest risk option
strategies the Team has encountered in their 60 years of combined trading
experience.
The Team has been trading the High Accuracy Strategy successfully for many years in
every type of market condition. This Strategy is particularly successful during choppy
or non-trending markets which occur over the vast majority of time. The High
Accuracy Strategy was also very profitable during the severe 2001 and 2008 bear
markets when the Strategy profited from bearish option trades.
$1.7 Million in Actual Profits with No Losing Trades
Copies of brokerage account statements presented in this Manual show that the
Hughes Optioneering™ Team currently has over $1.7 million in actual profits using
the High Accuracy Strategy with no losing trades!
The Hughes Optioneering™ Team utilizes a simple 3-Step trend following system
called Prime Trade Select to discover options with the best profit potential. In this
Manual you will learn this easy 3-Step Selection Process which utilizes indicators
readily available on financial websites. It only takes a few minutes to determine if a
stock or ETF qualifies as a Prime Trade Select ‘Buy’.
No Experience Needed
The Hughes 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.
The Team wrote a Report titled “A Practical Guide to Understanding Options” which is
designed as a “refresher” course for options veterans . . . and an essential guide if you
are new to options trading.
This guidebook is short and simple . . . teaching you only what you need to know
about options and none of the complicated theories you don’t need. It gives you the
practical, real-world knowledge required in order to successfully trade options.
You don’t need to know complicated math or formulas like you have probably been led
to believe. You just need to know the simple mechanics of buying and selling options.
And this guide breaks options trading down to the bare essentials you need. It even
includes quizzes to make sure you understand each topic.
3
Starting Small
Another advantage of the High Accuracy Option Strategy is that you can start small.
We will see later in this Manual that trading a portfolio of 12 options using the High
Accuracy Strategy requires less than a $2,000 trading account. Also, options can be
traded in most retirement accounts just as the Optioneering™ Team does in their
retirement accounts.
The recent trade examples presented in this Manual are bullish call option trades but
as mentioned previously Prime Trade Select works just as well in bear markets when
the system generates ‘Sell’ signals to take bearish put option trades.
$7.2 Million in Actual Ptofits
Prime Trade Select has a long history of profitability generating more than $7.2 million
in actual documented profits over the past 8 years during which we experienced the
worst bear market since the Great Depression. Copies of our brokerage account
statements showing this $7.2 million in profits is presented in the Appendix.
Trade Management
Once a call option (or put option) is selected for purchase using Prime Trade Select,
we then use three simple Trade Management rules to cut losses, protect profits and
reduce risk. Smart trade management is an essential part of successful option trading
and gives you the discipline needed to consistently and methodically profit from the
option markets in any type of market condition.
High Accuracy Option Trading
Combining Prime Trade Select with our 3 Trade Management rules has resulted in high
accuracy option trading. Our personal trading account option portfolios currently have
$1.7 million in profits with no losing trades and an average return of 223.5%. Our
advisory service Option Portfolio currently has $397,958 in live trading profits with no
losing trades and an average return of 497.6%. Our personal and advisory service
option portfolios combined currently have 34 winning trades and no losing trades
using the High Accuracy Option Strategy you are about to learn.
Winning Trade Dilemma
As you can see from these profit results, our High Accuracy Option Strategy has
produced a lot of profitable call option trades. This poses a dilemma . . . do you hold a
winning call option trade for further upside profit potential or do you take profits in
case the underlying stock declines in price with the possibility of a profitable option
trade turning into a loss?
We know from experience that it is very difficult to watch a winning trade develop into
a losing trade. This is very hard on your psyche as a trader and can help you lose
confidence in your ability to be a successful trader.
4
Unlimited Profit Potential + Limited Risk = Path to Success
Fortunately, we have found a way to avoid this dilemma by purchasing ‘insurance’ on
your profitable call option trade. Put options profit as the price of the underlying stock
declines. If you have a winning call option trade, purchasing a put option can help
‘insure’ you against loss of your call option investment in the event the underlying
stock declines in price. At the same time, purchasing a put option does not limit the
upside profit potential of your call option if the underlying stock continues to increase
in price. An unlimited profit potential with limited downside risk is the path to
successful option trading.
Our Trade Management Rule #2 utilizes the ‘30% Rule for Protecting Profits’. This rule
calls for us to protect a call option profit by purchasing a put option whenever our call
option has a 30% or higher open trade profit.
Transforms Option Trading
As you will learn shortly, purchasing this put option insurance can even GUARANTEE
that your trade will be successful!
Purchasing put option insurance transforms option investing from one of the riskiest
investments in the investment universe to one of the lowest risk investments.
Once you buy the put option protection for your call option investment, you can forget
about your option trade! No need to monitor the markets or world events. Bad
earnings reports don’t matter. A severe selloff in the markets actually produces more
profits with this strategy. You can place the trade and take a vacation!
This strategy is particularly successful during volatile or choppy markets. Because
there is a long position (call option) which profits as the underlying stock moves up in
price and a short position (put option) which profits as the underlying stock moves
down in price we call this a ‘Market Neutral’ Spread Strategy.
There are plenty of new profit opportunities available every day with the
Optioneering™ Market Neutral Strategy. The Strategy is easy to implement and does
require you to monitor the markets.
Optioneering™ Market Neutral Strategy
Implementing a Market Neutral Strategy Trade
● Buy a call option
● Buy a put option
5
Real People . . . Real trades . . . Real Profits
The Hughes Optioneering™ Team “practices what they preach”. The Team is in the
trenches every trading day successfully profiting from every type of market condition
from severe bear markets to highly volatile, non-trending type markets.
Team members Ryan and Chuck Hughes were awarded a total of 12 World Trading
Championship trophies including seven first-place, four second-place and one thirdplace finish. The World Trading Championship is a highly competitive, real money
trading contest in which competitors from around the globe display their trading skills
trading real money. All profit results are audited by CPAs before being posted on the
sponsor’s website.
339.8% Real Time Return Last Year
Despite the difficult market conditions last year, Chuck had a 339.8% real time return
trading the Optioneering™ strategies with a second-place finish in the trading contest.
Chuck has more first place finishes in the trading contest than any other trader in the
history of the competition.
We are showing you these real time profit results to build your confidence in the
Optioneering™ strategies. Because they really do work... and there is no reason they
can’t work for you as well. We are showing you actual profit results so you can feel
comfortable and confident that you are learning from someone who knows what
they’re talking about!
We will next explore the Prime Trade Select process for finding option trades with a
high probability of success.
6
High Accuracy Option Trading Part 1
Prime Trade Select
Prime Trade Select is Part 1 of our High Accuracy Option Trading Strategy. Prime
Trade Select has a long history of selecting options with the best profit potential and
has three simple steps listed below. Once you get experience with the process it
should only take a few minutes to determine if a stock is on a ‘Buy’ or a ‘Sell’ signal.
STEP 1: Determine the price trend of stock using the
50/100-Day EMA System
STEP 2: Select a low risk entry point using the Keltner
Channels
STEP 3: Use the ‘1% rule’ to Select an Option Strike Price
with a high probability of success
Keep It Simple
Contrary to what you may have learned, option trading does not have to be
complicated. Our mantra is to keep it simple. Options are ‘derivatives’ that derive their
value from the price of the underlying stock.
● Call options profit as the underlying stock moves up in price
● Put options profit as the underlying stock moves down in price
A lot has been published about option strategies that invest in options based on
whether an option is under-valued or over-valued according to the Black-Scholes
Pricing Model. These option strategies are very complex and require high-level
mathematical calculations to compute an option’s Alpha, Beta, Delta, Gamma or
Theta.
We never understood the logic of investing in an option because it was slightly under
valued at the time of purchase. Under-valued options can become more under-valued.
The price movement of the underlying stock determines an option’s
value and the resulting profit/loss for an option trade.
When you purchase a call option, your profits are determined by the price movement
of the underlying stock. If we can select a stock moving up in price, purchasing a call
option on that stock can produce enormous profits and will allow us to harness the
leverage provided from option investing.
7
Prime Trade Select Step 1
Step 1: Determine the Price Trend
“What goes up must come down spinning wheel got to go around.”
- Blood, Sweat and Tears
What really makes stock prices go up or down? Is it really as simple as what goes up
must come down and vice versa? How do I select stocks with the best profit potential?
Stock prices are constantly fluctuating and many times there seems to be no ‘rhyme
or reason’ to this constant price fluctuation. The air waves and the Internet are
flooded with analysts and experts who try to predict the future price moves for stocks.
Often they have no real answers to our same questions and are just as baffled by why
a stock is going up or going down. Where does that leave us? Let’s face it; to the
average investor the stock market can seem complicated and confusing.
Stocks can go up or down for no apparent reason. Apple reports great earnings but
the stock plummets. The price of oil drops and the inflation report is tame but the
major stock market indexes dive. Pfizer reports terrible earnings but the stock rallies.
With the spinning wheel, going round and round, the ups and downs of the markets
can leave anyone’s head going round and round. When it comes right down to it, the
reason why stock prices are going up or down seems to be anybody’s guess. You
might as well try to read tea leafs.
Highly paid analysts would have us believe that a company’s earnings outlook drive
stock prices. Yet how many times have you seen the stock of companies with good
earnings plummet while those with terrible earnings soar? Just like bad things happen
to good people, big stock declines can happen to good companies. It is a fact of life
with no true explanation.
But none of that matters for one simple reason. At the end of the day, if there are
more buy orders for a stock than sell orders then the price of the stock will go up. And
if there are more sell orders for a stock than buy orders, then the price of the stock
will go down. It’s just that simple. Everything else is just noise. Everything else does
not matter.
To make real money in the stock or option markets you don’t need to know why a
stock price rises or falls, you just need to know two things: when to buy and when to
sell. If you can quantitatively measure the buying and selling pressure of a stock then
you will know in advance whether the price of a stock is likely to go up or down. And
you will then know if you should take a bullish or bearish option position.
In other words, if you get a reading on the buying pressure and selling pressure for a
stock you can successfully assess whether a stock is likely to go up or go down in
price.
8
There are numerous ways to measure the buying and selling pressure of a stock. I
want to teach you several methods. That way you can use all the methods or just
work with the methods you are most comfortable. Remember comfort and ease are
what we are aim for!
Successful option trading can be reduced to two simple rules:
1) Buy call options on a stock if the buying pressure exceeds
the selling pressure
2) Buy put options on a stock if the selling pressure exceeds
the buying pressure
The best way to measure buying and selling pressure is to track the daily price
movement of a stock. If the daily price of a stock is increasing then the buying
pressure is exceeding selling pressure and the stock is a ‘buy’. If the daily price of a
stock is decreasing then the selling pressure is exceeding buying pressure and the
stock is on a ‘sell’ signal.
One of the most important rules we learned as novice investors was; you want to
purchase a stock or call option only if the buying pressure exceeds selling pressure as
indicated by the price of the stock trending up.
Trying to profit by investing in a stock with a price that is trending down is very
difficult as it requires that you correctly predict when the price of the stock will
‘bottom out’ and resume a price up trend so that your stock or call option purchase
can be profitable.
Buying a stock because it is cheap and then trying to predict when a stock’s price will
bottom out can be nearly impossible to forecast correctly on a regular basis. This
‘crystal ball’ type of approach can leave the investor in a vulnerable position. A safer
approach would be to wait until a stock’s price is in an uptrend before investing.
A stock’s price movement reflects all of the known information about a
company so let the price movement of the stock tell you when you
should buy and sell!
One of the most effective ways to measure buying and selling pressure is to look at
the daily price movement of a stock. There are numerous methods for tracking the
daily price movement. I want to teach you one of my favorite and most effective
ways. It is using a price chart.
Price charts are a great way to get a visual look at the daily price changes and the
price trend of a stock. It is the price trend that will determine if the stock is on a ‘buy’
or ‘sell’ signal and whether a bullish or bearish option trade should be taken.
9
For example, if the daily price trend of a stock is increasing then the buying pressure
is exceeding selling pressure and a bullish option position should be initiated. If the
daily price trend of a stock is decreasing then the selling pressure is exceeding buying
pressure and a bearish option position should be initiated. Let’s take a closer look at
price charts and how this tool will lead us to the path of success.
Daily Price Trend of a Stock Is Increasing = Bullish Option Position
Daily Price Trend of a Stock Is Deceasing = Bearish Option Position
Using Price Charts
Price charts are a great tool that helps us determine a stock’s price trend. The daily
price chart below displays the daily price movement for Apple stock over the past
month. The horizontal axis at the bottom of the chart references the time period of
the chart which is one month in this example from March 8th through April 8th. The
vertical axis on the right side of the chart represents the price of Apple stock and in
this example ranges from 218 to 242.
The vertical bars display the daily price movement of the stock. Each vertical bar has
a horizontal line which represents the stock’s closing price for the day. On March 22nd
the daily bar shows that Apple stock traded in a range from about 220 to 226
(circled). The closing price on March 22nd which is represented by the horizontal bar
was about 225.
Note: The price charts of Apple were downloaded prior to Apple’s 7 for 1 stock split so
price chart examples are not split adjusted.
Daily Price Movement
10
Determining the Price Trend
As noted previously we only want to buy a stock or call option if the buying pressure is
exceeding the selling pressure as indicated by the price of the stock trending up. The
best time to buy a stock is after the stock is already in a price up trend. We want to
avoid stocks that are in a price down trend.
Daily price charts like the one just presented for Apple allow us to instantly see the
price trend of a stock. We like to take this visual look at a stock’s price movement one
step further and actually measure the price movement. The easiest and simplest way
to measure price movement is to use what are called ‘moving average lines’.
Next, we are going to take a look at when to buy and when to sell. This concept
always reminds me of an old Kenny Rogers song:
You got to know when to hold 'em, know when to fold 'em - Know
when to walk away, know when to run.
Yes, with stocks you need to know when a stock is on a ‘buy’ signal or ‘sell’ signal.
You are about to learn indicators that can quantitatively measure if a stock is moving
up in price or moving down in price.
These indicators let us know in advance the most likely future price movement of a
stock. We will then know if we want to establish a bullish or bearish option trade for a
stock.
11
Determining the Most Likely Future Price Movement
Moving Average lines are a great trading tool that allows us to know in advance the
most likely future price movement for a stock. I know the term Moving Average line
may seem complicated but a Moving Average line is simply the average closing price
of a stock over a specified time period. For example, the 50-Day Moving Average line
represents the average closing price of a stock over the past 50 days.
Many times the real price trend of a stock can be obscured by the daily price
fluctuations. The daily price chart below for Apple stock covers the 3 month period of
November, December and January. As we learned in the previous price chart example
for Apple, the vertical bars display the daily price movement of the stock.
This price chart shows a rally for Apple stock until mid-November and then a price
decline into mid-December. This price decline is followed by another rally into the
beginning of January followed by another price decline in January. Despite the daily
price fluctuations the stock price was little changed over the 3 month period.
Three Month Price Action Shows No Clear Trend
12
Let’s take another look at a price chart for Apple stock that covers a longer time
period but includes the November, December and January period just mentioned. This
price chart also includes the 100-Day Exponential Moving Average (EMA) line for Apple
stock. We prefer to use Exponential Moving Averages over Simple Moving Averages as
we have found Exponential Moving Averages to be more accurate in determining the
price trend. Exponential Moving Averages give more weighting to recent price
movements than Simple Moving Averages which give every day an equal weighting.
100-Day EMA Line is Sloping Up
Clearly Indicating a Price Up Trend
100-Day EMA Line
Trending Up
The 100-Day Exponential Moving Average (EMA) line is sloping up clearly indicating
Apple stock is in a price up trend. Moving average lines give us an instant visual
reference of the current price trend of a stock.
1) If the moving average line is sloping up, the stock is in a price up trend and
buying pressure is exceeding selling pressure. Bullish option trades for the stock
should be established.
2) If the moving average line is sloping down, the stock is in a price down trend
and selling pressure is exceeding buying pressure. Bearish option trades for the
stock should be established.
It is that simple! Moving averages tell us if a stock is on a ‘buy’ signal or ‘sell’ signal
instead of trying to predict the future price movement of a stock. You can easily and
quickly obtain moving average lines from numerous websites which will be covered
shortly.
13
Buy and Sell Signals
One of the easiest ways to clarify whether a stock is a ‘buy’ or a ‘sell’ is to look at the
shorter term 50-Day Exponential Moving Average (EMA) line in relation to the longer
term 100-Day Exponential Moving Average (EMA) line.
If the shorter term 50-Day EMA line is above the longer term 100-Day EMA line it
indicates the price momentum for the stock is to the upside which confirms the price
up trend. We should initiate bullish option trades for the stock.
If the shorter term 50-Day EMA line is below the longer term 100-Day EMA line it
indicates the price momentum for the stock is to the downside which confirms the
price down trend. We should initiate bearish option trades for the stock.
50-Day EMA Line Above 100-Day EMA = Price Up Trend = Buy
50-Day EMA Line Below 100-Day EMA = Price Down Trend = Sell
Buying and Selling Pressure
When the shorter term 50-Day EMA line is above the longer term 100-Day EMA line it
is an indication that the buying pressure for a stock is exceeding the selling pressure.
And the most likely future price movement of the stock is up. The stock is on a ‘buy’
signal.
When the shorter term 50-Day EMA line is below the longer term 100-Day EMA line it
is an indication that the selling pressure for a stock is exceeding the buying pressure.
And the most likely future price movement of the stock is down. The stock is on a ‘sell’
signal.
50-Day EMA Line Above 100-Day EMA = Buying Pressure Exceeding Selling Pressure
50-Day EMA Line Below 100-Day EMA = Selling Pressure Exceeding Buying Pressure
14
‘Buy’ Signal Example
Let’s look at an example of a ‘buy’ signal. The Apple stock daily price chart below
displays the 50-Day EMA line and the 100-Day EMA line. The moving average lines
indicate that Apple stock entered a price ‘up’ trend in April (circled) as the 50-Day
EMA crossed above the 100-Day EMA line.
When the 50-Day EMA crossed above the 100-Day EMA it was a good indication that
buying pressure was exceeding selling pressure and you want to take bullish option
trades for Apple. As long as the 50-Day EMA line remains above the 100-Day EMA line
Apple stock remains a ‘buy’ and bullish option trades should be maintained.
In this example the Apple 50-Day EMA line crossed above the 100-Day EMA line in
April. We have been purchasing Apple stock and call options after the April buy signal
as long as the 50-Day EMA line remains above the 100-Day EMA. Apple stock remains
in a price ‘up’ trend as the 50-Day EMA line remains above the 100-Day EMA line
indicating that buying pressure continues to exceed selling pressure. Monitoring the
50-Day and 100-Day EMA lines is an easy and effective way to determine the current
price trend which tells us if we should be taking bullish or bearish option trades for
Apple stock.
If the 50-Day EMA crosses below the 100-Day EMA it would indicate a reversal to a
price ‘down’ trend as the selling pressure is now exceeding the buying pressure. You
should take bearish option trades for the stock when this occurs. We will look at an
example of a sell signal next.
50-Day EMA line Above 100-Day EMA line = Buy
50-Day EMA Line
100-Day EMA Line
Buy
50-Day EMA Crosses
Above 100-Day EMA = Buy
15
‘Sell’ Signal Example
Let’s look at an example of a ‘sell’ signal. The daily price chart below shows the daily
price movement and the 50-Day and 100-Day EMA lines for Merck stock. This chart
reveals that in February the Merck 50-Day EMA line crossed below the 100-Day EMA
line (circled) resulting in an EMA System ‘sell’ signal for Merck stock.
When the 50-Day EMA crossed below the 100-Day EMA it was a good indication that
selling pressure was exceeding buying pressure and you want to establish bearish
option positions for Merck stock. You want to hold on to the bearish option positions
for Merck while the price trend is ‘down’ and at this point the length and severity of
the price decline is still unknown.
As long as the 50-Day EMA line remains below the 100-Day EMA line Merck stock
remains a ‘sell’. Merck does not qualify as a buy until the 50-Day EMA line crosses
above the 100-Day EMA line.
Monitoring the 50-Day and 100-Day EMA lines is an easy and effective way to
determine the current price trend which tells us if we should be establishing bullish or
bearish option positions for Merck stock.
50-Day EMA Below 100-Day EMA = Sell
50-Day EMA Crosses Below 100-Day
EMA Indicating a Price Down Trend
Sell
100-Day EMA
50-Day EMA
The 50/100-Day EMA trend following system is your road map to
investing success. Trend following is a powerful, systematic approach
that allows us to profit from the powerful profit opportunities available
from trading options.
16
Historical Results of EMA System
The 50/100-Day EMA System is a rule based system with clearly defined ‘buy’ and
‘sell’ rules. This enabled us to do historical testing with the help of the Omega
Research Trade Station program using the 50/100-Day EMA Cross Over System just
presented. Historical profit results are based on buying a stock when its 50-Day EMA
line crosses above the 100-Day EMA and selling a stock when its 50-Day EMA line
crosses below the 100-Day EMA. The profit/loss for each trade is calculated and a
cumulative total is maintained for each testing period.
The EMA System is universal in nature and has been profitable for short term
investing across a wide range of markets including: stocks, options, indexes, closedend funds, zero coupon bonds, mutual funds, index funds and sector funds. The fact
that the system is profitable in virtually every type of market confirms its credibility as
a viable, robust approach to trading the financial markets.
Included on the following page are profit results for a well-diversified sampling of both
growth and value stocks that represent a broad cross section of 26 different industry
groups. This sampling includes small, mid and large cap stocks. Historical profit
results were generated over a recent twenty four year period.
Profitable with Low Risk
Keep in mind that four bear markets occurred during this period. Results are based on
trading one hundred shares of stock for each ‘buy’ signal and do not include
commissions.
Let’s review the tests conducted using the first stock tested Aetna Health Care (AET).
The first time Aetna’s 50-Day EMA crossed above the 100-Day EMA during the test
period one hundred shares of Aetna were purchased at 10.18.
The profit/loss for each AET trade was calculated by the Trade Station software and
the profits totaled $5,376 over the test period based on trading 100 shares for each
buy signal. This $5,376 profit represents a 528% return on the initial investment of
$1,018.
The software divides the total profits by the total losses to calculate the Reward to
Risk Ratio. Aetna had a Reward to Risk Ratio of 3.9 as there were 3.9 dollars of profit
for each 1 dollar of loss. There were 10 losing trades over the 24-year period and the
average losing trade incurred a -$120 loss.
17
24-Years of Historical Results
Stock
Profit on
100
Shares
$5,376
Profit
Adobe Systems
$5,679
4.4
Altria
$4,602
Analog Devices
Aetna
Factor
Shares
$1018
% Return
on
Initial Cost
Avg
Loss
528%
-120
$5
126200%
-173
3.2
$220
2092%
-180
$3,559
2.0
$92
3868%
-251
Applied Materials
$2,419
3.0
$3
96760%
-70
Auto Data Process
$2,878
3.5
$182
1581%
-98
Bunge
$3,282
100.0
$1,585
207%
0
Centex
$3,810
4.3
$216
1764%
-143
Cisco Systems
$5,474
10.1
$8
68425%
-100
Corning
$6,153
12.4
$178
3457%
-54
CVS Drug
$4,237
2.7
$505
839%
-250
Eaton Vance
$1,682
6.7
$10
16820%
-27
eBay
$2,453
3.7
$120
2044%
-156
EMC Corp
$7,257
80.0
$5
145140%
-18
Franklin Resources
$5,264
3.2
$5
112000%
-18
General Electric
$3,675
5.2
$130
2827%
-97
Golden West Fin’l
$3,700
4.4
$40
9250%
-78
Home Depot
$4,092
4.0
$4
102300%
-174
Illinois Tool Works
$5,924
4.8
$176
3366%
-225
Intel
$2,845
3.5
$39
7295%
-71
Johnson & Johnson
$4,877
4.5
$227
2148%
-181
KB Homes
$6,654
3.4
$840
792%
-202
Legg Mason
$4,212
7.1
$187
2252%
-78
Microsoft
$2,651
2.8
$10
26510%
-108
M&T Bank
$6,445
5.5
$37
17419%
-95
NVR Inc
$50,070
5.0
$1,080
4636%
-1050
PMC Sierra
$15,603
41.5
$225
6935%
-48
Procter & Gamble
$3,096
3.1
$223
1388%
-108
Sun Microsystems
$3,342
7.5
$25
13368%
-26
Texas Instruments
$4,227
3.7
$184
2297%
-111
Taro Pharma
$4,551
4.7
$87
5231%
-113
Unitedhealth
$7,627
9.5
$32
23834%
-91
Water Corp
$4,898
4.5
$375
1306%
-471
Yahoo!
$7,964
63.0
$132
6033%
-129
$210,578
12.7
$8,204
2,567%
-150
Totals / Averages
3.9
Initial
Cost
100
18
Average Yearly Return of 107%
The total initial investment required to buy 100 shares of each of the 34 stocks over
the test period was $8,204. This $8,204 initial investment produced a total of
$210,578 in profits over the test period which equates to a 2,567% return. The
average yearly return was 107% which would enable us to double our initial
investment every year on average. This average 107% annual return was achieved
without the use of leverage or margin. Trading options instead of stock would have
resulted in a much higher rate of return over the test period as options provide
leverage.
The historical results demonstrate that the EMA System has the ability to produce
handsome short term profits with very low risk. Of the trades that were losing trades,
the average loss over the twenty four year period was $150 and when compared to
the total profits of $210,578 demonstrates the ability of the system to keep losses to
a minimum. The average Reward to Risk ratio was a very healthy 12.7 with over 12
dollars of profit for each 1 dollar of loss again demonstrating a very favorable riskadjusted return.
The preceding investing results demonstrate the importance of ‘investing with the
trend’. The 50/100-Day EMA System allows us to know in advance the most likely
future price movement of a stock and reduces the entry and exit timing risk
associated with short term investing.
It is a versatile, effective method for profiting in any type of market and can quickly
identify stocks on a ‘buy’ or ‘sell’ signal. This allows us to profit from trading options
by taking bullish option trades for a stock on a 50/100-Day EMA System ‘buy’ signal
and taking bearish trades for a stock on a 50/100-Day EMA System ‘sell’ signal.
Equally important is the ability of the system to avoid large losses which can quickly
ruin an investment plan. The system keeps losses to a minimum and almost always
exits a trade before a big loss occurs. Following a discipline that keeps losses to a
minimum is one of the most important characteristics of a successful trading program.
Keep in mind that the worst bear market since 1932 occurred during this test period.
19
The 50-Day and 100 Day-EMA Lines Are
the ‘Key’ to Developing a Profitable Strategy
The stock market is in a constant state of flux. The constant up and down price
movement of a stock makes it difficult at times to see the real price trend of a stock.
That is why it is important for a trader to become comfortable with the 50/100-Day
EMA lines.
The position of the 50-Day EMA in relation to the 100-Day EMA gives us a quick and
accurate indication of a stock’s current price trend. If the stock is in a price up trend
bullish option trades should be initiated. And if the stock is in a price down trend
bearish option trades should be initiated.
In order to be a successful option investor we do not have to know what an analyst’s
rating is for a stock or the current earnings projection. All of that information is
already reflected in a stock’s price movement which can be quantitatively measured
by the 50/100-Day EMA lines.
This simple but effective trend following system is mechanical in nature and instantly
tells you if you should be taking a bullish or bearish option position. We prefer
mechanical systems as they take the emotion out of trading. There is no judgment or
interpretation involved. You don’t have to rely on trying to predict future price
movement.
Follow the Price Trend Instead of Trying to Predict It
“Prediction is very difficult, especially if it’s about the future.”
- Nils Bohr
The 50/100-Day EMA System allows us to ‘invest with the trend’ instead of trying to
predict the price direction of a stock. The historical studies presented demonstrate
that price trends tend to continue in the same direction and can continue on longer
than one may initially expect.
Our investing experience confirms that the 50/100-Day EMA System allows us to
know in advance the most likely future price movement of a stock and whether we
should be initiating bullish or bearish option trades.
20
Downloading the 50/100-Day EMA Lines
The 50/100-Day EMA Lines can be easily downloaded from www.StockCharts.com. On
the home page type in the stock symbol and click “Go”. In this example I typed in the
symbol for Apple stock AAPL.
Once you click “Go” the default chart for Apple will appear. Below the default chart for
Apple select “Daily” under Periods and “1 Year” under Range. Under Overlays select
“Exp Mov. Avg” and Under Parameters select “50”. Then select “Exp Mov. Avg” on the
second row and Under Parameters select “100”.
Click “Update” and the Apple price chart with the 50/100-Day EMA Lines will be
displayed (see price chart on the following page).
21
Apple One Year Price Chart with 50/100-Day EMA Lines
22
Surviving the Financial Armageddon
By John Weston
There are times in your life that you will never forget. Dates that you know exactly
where you were and what you were doing. In our family we have this thing about
remembering where you were on significant events in history. My Grandfather would
always say that he was out looking for his kids the day Pearl Harbor was attacked. My
Dad was collecting glass bottles for money on the beach the day that the stock market
crashed in 1929. My Mom was home watching TV the day President Kennedy was
assassinated. I was at the office during the terrorist attack on September 11th. I
remember sitting there watching the TV with utter disbelief and terror.
Unfortunately, I now have another unpleasant day to remember. I am thankful that no
one has injured or killed. But the loss of people’s dreams and financial security
became palpable. That day would be September 15, 2008. This day will go down in
history as the beginning of the worst financial crisis in the United States since the
Great Depression. Due to the Lehman Brothers and Fannie Mae bankruptcy, the Merrill
Lynch buyout and the AIG insurance company insolvency, today could be considered
one of the worst global financial storms in history. Some call it a ‘Financial
Armageddon’. Over thirty trillion dollars of highly leveraged mortgage securities that
went bad have caused a financial meltdown that has frozen global credit.
The day of September 15, 2008 started out no different than most. I was cruising into
my desk that morning nursing my second cup of coffee, entertaining thoughts of when
the market volatility is going to give us a decisive trend. Well, be careful what you
wish for . . . the market was about to show us and the rest of the world a very
decisive trend. The market began a precipitous sell off. Of course, the Hughes
Optioneering Team was already on top of it . . . in the early AM hours they knew the
Asian markets were selling off. They had a feeling already that things were going
south and the ride was going to be a rough one.
Fortunately, the Optioneering EMA Trend System had already positioned us on the
right side of the trend in the global currency, commodity and equity markets. In
Chuck Hughes’ August blog he recommended that readers take short positions in the
global markets just as he had done over the summer. The EMA Trend System issued
‘go short’ signals for most foreign currencies, commodities and equity markets in the
June – July time frame.
By the end of the day the Dow Jones Industrial Average had lost over 500 points in
ONE DAY! But the Optioneering Team option trading accounts had a positive return for
the day.
The copy of the brokerage account Profit/Loss Report that follows shows $14,987.22
in closed trade profits on September 15th and the Team’s open trades had a 14.5%
return for the day. The Team’s other three global ETF trading accounts had similar
returns. The Hughes Optioneering Team locked in solid profits today and also created
option spread trades that increase the profit potential of existing option trades and
help preserve profits. Protecting profits is a very important requirement for profitable
trading during volatile markets.
23
14.5% Return in One Day While Dow Dropped 504 Points
Sept 15th Closed Trades
Open Trade Profit
24
Step 2: Selecting a Low Risk Entry Point
Now that we know how to determine a price trend, the next step for the Prime Trade
Select process is timing our entry point for entering bullish and bearish option trades.
We will look at selecting a buy point for bullish trades first.
One of the simplest but most effective entry timing indicators are the Keltner
Channels which can quickly and easily be downloaded from investing websites such as
www.StockCharts.com. Steps for down loading the Keltner Channels follow.
The Keltner Channels function as an overbought/oversold indicator that can help us
select a buy point for stocks and call options that are on a EMA System ‘buy’ signal.
Overbought is a term used to describe a stock that has been increasing in price over a
period of weeks or months with very few price pullbacks. Oversold is a term used to
describe a stock that has been decreasing in price over a period of weeks or months
with very few prices increases.
Stocks in a price up trend do not advance in a straight line. There are always price
corrections or retrenchments along the way. Like the tide there is an ebb and flow in
the price movements in stocks. This is the natural order of the markets . . . stocks
advance and then the price declines inevitably as profit taking occurs.
Stocks can remain in an overall price up trend as these price declines occur as long as
the price decline is not severe enough to cause the 50-Day EMA line to cross below
the 100-Day EMA line which signals a trend reversal from a price up trend to a price
down trend. When this occurs a stock should be sold.
The Keltner Channels are a valuable timing tool as the channels can help us prevent
buying stocks when they are in an overbought condition. When stocks become
overbought they are vulnerable to profit taking and minor price declines within the
context of remaining in a price up trend. The Keltner Channels can help us avoid
buying stocks when they become overbought and instead buy stocks and call options
when they become oversold.
When you avoid buying stocks that are overbought and instead buy
stocks when they are oversold (but still in a price up trend) you
greatly increase your odds of selecting a profitable trade.
25
Let’s take a look at an example of the Keltner Channels and how they can help us
select our entry point. The price chart below displays the daily price movement for
Apple stock along with the three Keltner Channels. There is an upper channel, middle
channel (which is the dotted line) and a lower channel.
When a stock trades near the upper channel it is an indication the stock is becoming
overbought and will most likely encounter selling pressure and then trade back down
towards the middle or lower channel.
When a stock trades near the lower channel it is an indication the stock is becoming
oversold and will most likely encounter buying pressure and then trade back up
towards the middle or upper channel.
If you are considering buying Apple stock or weekly call options, you don’t want to
buy if the stock is trading near the upper channel as there is a good chance the stock
will encounter selling pressure near the upper channel and then decline in price.
It is better to wait until the stock trades near the middle or lower channel before
buying. This results in a better entry as the stock most likely will trade back up
towards the upper channel.
Note: Apple trade examples were taken prior to the Apple 7 for 1 stock split and
prices are not split adjusted.
Upper Channel
Apple Stock Price
Middle Channel
(dotted line)
Lower Channel
26
Circled below are examples of Apple stock trading above the upper channel. When a
stock is trading above the upper channel it is better to wait for the stock to decline
towards the middle or lower channel before buying.
When a stock is trading near the middle or lower channel there is a good probability
that it will rally back towards the upper channel.
In each of these examples, after the stock traded above the upper channel it declined
back towards the middle or lower channel within a week or two except for the
example that occurred in mid-July. In this example the retracement took a little longer
as the stock traded near the upper channel in mid-July and did not retrace back to the
middle channel until mid-August. This happens occasionally in strong bull markets.
Currently Apple is trading above the upper channel and has stayed above the upper
channel for several weeks not presenting any buying opportunities. In our experience
this is very rare. Currently Apple stock would have to decline to about 236 before it
touches the middle channel.
Don’t Buy When a Stock Is Trading Near the Upper Channel
Don’t Buy When a
Stock Is Trading Near
the Upper Channel
27
Identifying the Keltner Channel Price Levels
Whenever you download a Keltner Channel price chart, the price chart will list the
price levels for the Lower, Middle and Upper Channel. Currently the Lower Channel
price level is 229.39 (circled below). The Middle Channel price level is 236.01 and the
Upper Channel price level is 242.64 (circled below).
Lower Channel Currently at 229.39 Price Level
Middle Channel Currently at 236.01 Price Level
Upper Channel Currently at 242.64 Price Level
If you are considering buying Apple stock or weekly call options, you would want to
wait until the price of the stock declines to the middle or lower channel price level
which is the 236.01 to 229.39 price level in this example.
28
Actual Trade Examples Using the Keltner Channels
Our brokerage account trade confirmations below list purchases we made for Apple
stock. The confirmations list the date of purchase and purchase price.
We used the Keltner Channels to help select our purchase entry point. We bought
Apple stock and call options when the stock was trading near the middle or lower
channel which lowers my entry risk of buying stock when it is overbought and due for
a price correction. These actual entry points are circled below.
You can see from the price chart that Apple stock did not decline in price much below
our entry points. Using the Keltner Channels to help time our entry points reduced the
risk of our stock purchase. With Apple stock trading near 249 we now have a
substantial profit for our stock purchases.
We Bought AAPL Stock When It Was Trading Near the Middle or Lower Channel
We Bought AAPL Stock
When It Was Trading
Near the Middle
or Lower Channel
29
Timing Our Stock and Call Option Purchases
We have found the Keltner Channels to be a valuable timing tool that helps us select a
low risk entry point for our stock and call option purchases. Buying a stock when it is
trading near the lower or middle channel but still on an EMA System ‘Buy’ signal can
help prevent buying stocks when they are in an overbought condition and are
vulnerable to price declines.
Buy Stocks When They Are Trading Near the Lower or Middle Channel
We like to buy a stock when the stock is trading near the middle or lower channel and
is oversold. When a stock is oversold there is a good probability that it will rally back
towards the upper channel providing us with a lower risk buy point.
We avoid buying a stock when it is trading near or above the upper channel and is
overbought. When stocks become overbought they are vulnerable to profit taking and
will most likely encounter selling pressure.
The Keltner Channels can help us avoid buying stocks and call options when
they become overbought and instead buy stocks when they become oversold
lowering the overall risk and increasing the profit potential of stock and
option trading.
Let’s review the two Step selection process so far for Apple stock. Apple stock is in a
price up trend with its 50-Day EMA line above the 100-Day EMA line.
The second step is to purchase Apple stock or call option using the Keltner Channels
to help identify a lower risk entry point. Currently the middle Keltner Channel is at the
236 price level and the lower Keltner Channel is at the 229.40 level. If Apple stock
declines to the 236 to 229.40 level, then we want to enter our buy order to purchase
the stock or call option.
Selection Process for Apple Stock or Call option
● Stock is on an EMA System ‘Buy’ signal with 50-Day EMA line above 100-Day EMA
line
● Keltner Channels indicate a good buy point would be between 236 and 229.40
Step 3 for the Prime Trade Select process is using the 1% Rule for selecting an option
strike price which will be covered shortly.
30
Timing Call Option Purchases
The price charts that follow show examples of entry points for call option purchases
using the Keltner Channels. The stocks in these examples were on a EMA System
‘Buy’ signal and retraced near the Middle or Lower Keltner Channel.
Our brokerage account Transaction Reports show the date that we purchased a call
option and that date is circled on the price chart above.
Notice how the Keltner Channels allowed us to get low risk entry points for our call
purchases as the price of the stock rallied after our call option purchase. In our first
example Caterpillar was on an EMA System ‘Buy’ signal.
CAT Retraced Near Lower Keltner Channel
Which Enabled a Low Risk Entry Point
Stock Rallied After Entry
31
Wells Fargo on EMA System ‘Buy’ Signal
Retraced Near Lower Keltner Channel
32
Cigna on EMA System ‘Buy’ Signal
Bought CI 50-Strike call @ 17.00
33
S&P 500 ETF on EMA System ‘Buy’ Signal
ETF Rallied After Entry
34
High Probability Buy Signals
The price chart below displays the Keltner Channels for Baidu stock. Occasionally the
price of a stock will become very oversold even though the stock is on a 50/100-Day
EMA ‘buy’ and will actually close below the lower Keltner Channel. Notice how the
price of Baidu stock closed below the lower Keltner Channel (circled).
This oversold condition normally sets up a very powerful rally! If you purchase a stock
or call option when it closes below the lower Channel there is a high probability that
your trade will be profitable. Our brokerage confirmation below shows that we
purchased 200 shares of Baidu at 98.17 when the stock closed below the lower
Channel.
Bought 200 Shares BIDU @ 98.17
Buying Baidu stock when it closed below the lower Keltner Channel has so far
produced a 22% return. These high probability signals do not occur very often. We are
always on the lookout for these type of high probability signals to make trade
recommendations for our option advisory service.
The Keltner Channels are a very valuable timing tool that allows us to select lower risk
entry points that have a high probability of being profitable. Some additional high
probability trade examples follow.
Buy Signal
BIDU 22% Rally From
Oversold Buy Signal
35
Our brokerage confirmations that follow show that we have been buying stocks and
ETFs on a 50/100-Day EMA System ‘buy’ after the stock or ETF closed below the lower
Keltner Channel. Notice how these stocks and ETFs did not decline much after the high
probability buy signal which created low risk entries. We also purchased call options
on most of these stocks and ETFs.
Bought 100 Shares Nasdaq ETF @ 81.48
Bought 400 Shares Nasdaq ETF @ 81.89
Buy Signal
36
Bought 100 Shares AAPL @ 333.00
Buy Signal
Buy Signal
37
Bought 1,000 Shares S&P 500 ETF @ 49.04
Bought 400 Shares S&P 500 ETF @ 49.96
Bought 1,000 Shares S&P 500 ETF @ 49.96
Buy Signal
38
Chevron 45% Rally From
Oversold Buy Signal
Buy Signal
Netflix 102% Rally From
Oversold Buy Signal
Buy Signal
39
Caterpillar 85% Rally
Buy Signal
Tesoro 72% Rally
Buy Signal
40
Timing Bearish Entry Points
The Keltner Channels can also be used for timing bearish entry points. We want to
establish bearish option positions on stocks/ETFs that are on EMA System ‘Sell’ signal
trend but become temporarily over bought during counter-trend rallies.
The Keltner Channels indicate an overbought condition for a stock/ETF when the
stock/ETF is trading near the mid to upper channel or above the upper channel.
Stocks in a price down trend do not decline in a straight line. There are always price
rallies along the way. Stocks can remain in an overall price down trend as these price
counter trend rallies occur as long as the price rally is not strong enough to cause the
50-Day EMA line to cross above the 100-Day EMA line which signals a trend reversal
from a price down trend to a price up trend. When this occurs short positions should
be closed out.
The Keltner Channels are a valuable timing tool as the channels can help us prevent
establishing short option positions when the underlying stock/ETF is in an oversold
condition. When stocks become oversold they are vulnerable to counter trend rallies
within the context of remaining in a price down trend. The Keltner Channels can help
us avoid establishing short positions when the underlying stock/ETF becomes oversold
and instead establish short option positions when the underlying stock/ETF becomes
overbought.
When you avoid establishing short positions when the underlying stock/ETF
is oversold and instead establish short positions when the underlying
stock/ETF is overbought (but still in a price down trend) you greatly increase
your odds of selecting a profitable short trade.
41
The price charts that follow are examples of stocks/ETFs that are in confirmed price
down trend but became temporarily over bought when the stock/ETF price rallied back
up to the middle or upper channel presenting numerous low risk entry points for
establishing short option positions.
42
43
44
“I can see clearly now, the rain is gone,
I can see all obstacles in my way
Gone are the dark clouds that had me blind
It’s gonna be a bright (bright), bright (bright)
Sun-Shiny day - ”
Johnny Nash
Yes, the Keltner Channels clear the clouds of confusion and pave the way to clear
decision making. Once you understand the channels of success it will become very
clear when you should establish bullish and bearish option positions.
The Keltner Channels are a great tool that can help you establish low risk entry points
for your option trades which in turn can increase the profit potential and accuracy of
your option trades!
On the following page we will show you how to download the Keltner Channels and
make them yours! For us, the Channels are the end all. There is no better guide to
help me push away confusion and doubt. Securing a low risk entry point in trading is
huge! This tool is invaluable! Learn it, embrace it, and use it!
In summary, we have experienced many years of success using the Prime Trade
Select process to select option trades with the best profit potential. I hope you learn
and embrace this valuable trading tool.
45
Downloading the Keltner Channels
The Keltner Channels can be easily downloaded from www.StockCharts.com. On the
home page type in the stock symbol and click “Go”. In this example I typed in the
symbol for Apple stock AAPL.
Once you click “Go” the default chart for Apple will appear. Below the default chart for
Apple select “Daily” under Periods and “1 Year” under Range. Under Overlays select
“Keltner Channels”. The default Parameters are 20,2.0,10.
Click “Update” and the Apple price chart with the Keltner Channels will be displayed
(see price chart on the following page).
46
Apple One Year Price Chart with Keltner Channels
47
Step 3: Use the 1% Rule For Selecting an Option Strike Price
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. The option strike price selection then becomes just as
important as the selection of the stock itself.
As discussed in our Guide titled “A Practical Guide to Understanding Options”, option
premiums consist of time value and intrinsic value. Options lose all time value at
expiration and consist of only intrinsic value so when you buy an option you are
buying a decaying asset.
Due to the time decay characteristics of options, when we buy an option we want to
minimize time value and maximize intrinsic value. The best way to achieve this is to
purchase an in-the-money option. As a general rule, we like to limit time value portion
of an option to less than 1% of the stock price per month in order to minimize time
value and maximize intrinsic value.
For example:
● If you purchase a 1-month option on a stock trading at 100 limit the time value
to 1 point or less (1 point/100 =1%/1 month =1%)
● If you purchase a 2-month option on a stock trading at 100 limit the time value to
2 points or less (2 points/100 =2%/2 months =1%)
If you limit Time Value to 1% of the stock price, the stock price only needs to increase
1% in order for the trade to breakeven. A 1% breakeven has a much better
probability of being profitable than a strike price that requires let’s say a 10 to 15%
price increase to breakeven.
Let’s look at an option trade example to demonstrate the profit/loss characteristics of
the option purchase strategy and illustrate the 1% Rule for selecting an option strike
price.
48
Cigna stock symbol CI was on a 50/100 Day EMA System ‘Buy’ signal. The price chart
below shows that Cigna retraced near the Lower Keltner Channel setting up a call
option purchase opportunity.
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 purchase. Buying the option when CI stock was temporarily oversold but
still on a EMA System buy signal lowered our entry risk. This turned out to be a low
risk entry as CI did not retrace below our buy point and is now trading around 85.
Buy CI 50-Strike Call @17.00
Option Calculators
The Hughes 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 at option expiration.
49
As noted previously, 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 Hughes Optioneering Option Calculators are
available to members of our advisory service which we will discuss later in this
Manual.
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 20% decrease in price. 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. The maximum risk on this trade is $1,700
which is the cost of 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 116.0% option profit would be realized (circled). If CI stock price
remains flat at 66.71 a 1.7% loss will be realized (circled) and a 20% decrease in CI
to 53.37 would result in a 80.2% option loss (circled).
50
Our Trade Management Rule # 1 ‘The 30% Rule for Walking Away’ will be covered
shortly. This Rule calls for exiting losing option trades before they develop into large
losses. We normally exit an option trade if the price of the option drops 20 to 30%
from our purchase price. If this CI call option trade went against us we would be
prepared to exit with a 20 to 30% loss in order to prevent this trade from developing
into a large loss. Preventing losing trades from developing into large losses is an
essential part of successful trade management.
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 flat stock price results in a small 1.7% option loss
● 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 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% to breakeven. Any increase above .29 becomes profit.
Strike Price
+ Premium
= Breakeven
51
50.00
17.00
67.00 stock price
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 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. W do not own any out-of-the-money options so let’s take a look at today’s
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. I picked
Priceline.com because the stock is on an EMA System ‘buy’ signal but is currently
oversold and has just retraced below the middle Keltner Channel.
52
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 PCLN 1270Strike call using the call option purchase calculator.
53
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 15% increase to a 15% 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) and a 15% increase in PCLN to 1,336.76 would result in a
429.8% option profit (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
higher risk out-of-the-money call option purchase.
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.
54
Also, when you purchase an out-of-the-money option you cannot utilize the trade
management rule of existing an option trade if the value of the option drops 20 to
30% below the purchase price. This is due to the fact that out-of-the-money options
can easily lose 50 to 100% of their value in a day or two with an adverse price move
in the underlying stock.
Our CI in-the-money trade example does not require a large upward price move in the
underlying stock to break even or to produce a profit. And if necessary, we can also
use our trade management rule to exit losing trades before they turn into large losing
trades. The goal of the High Accuracy Option Trading Strategy and trade management
rules is to avoid losing 100% of your option premium investment.
Trade Off
After many years of trying to ‘Hit a Home Run’ by investing in out-of-the-money
options we realized that this type of strategy was too risky as we had too many outof-the-money options expire worthless. No matter how good your stock selection is,
there will be periods when you are wrong and cannot afford to risk the total loss of
your investment.
Every trader has a different risk tolerance and must decide if they want to trade inthe-money call options with lower risk and a smaller profit potential or out-of-themoney calls with high risk and the possibility of a 100% loss of the option premium.
The out-of-the-money calls, however, have a higher profit potential than in-themoney calls.
Purchasing an out-of-the-money call option requires a substantial price increase in the
underlying stock price in order to be profitable and incurs considerably more risk than
an in-the-money option. As indicated by the PCLN trade example just presented a flat
or slightly down price movement in the underlying stock at option expiration can
result in a total loss of your investment for an out-of-the-money option.
Current Real Time Profit Results for Prime Trade Select
The Hughes Optioneering Team has been using Prime Trade Select successfully for
many years in every type of market condition. Prime Trade Select has generated more
than $7 million in actual profits over the past 10 years during difficult market
conditions.
Let’s take a look at the current real time results for Prime Trade Select. Copies of our
online brokerage account Profit/Loss statements that follow contain a list of our
current option trades. The name of the option, 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 Prime Trade Select is currently
performing well across a variety of stock and ETF options.
55
Prime Trade Select
Produces $1.7 Million in Actual Profits
With An Average Return of 223.5%
Copies of our brokerage account Profit/Loss Reports for our two option trading
accounts that follow show that we currently have $1,756,533.72 in open trade profits.
There are 18 winning trades and no losing trades resulting in 100% accuracy. The
average return per trade is 223.5%.
Trading Account #1
$1,356,052.06 Profit
Note: The actual profit results presented here may vary with the actual profit results presented
in other Legacy Publishing LLC publications due to the different strategies and time frames
presented in other publications. The cost basis for some of the options in this portfolio may be
reduced by rolling over profits at option expiration which is one of the Hughes Optioneering
Trade Management Rules.
56
Trading Account #2
$400,481.66 Profit
57
Money Management Guidelines
Before we discuss our 3 Trade Management Rules which are Part 2 of the High
Accuracy Option Trading Strategy, let’s discuss the general money management
guidelines that we use every day in managing our portfolio risk. The overall goal of
the High Accuracy Option Trading Strategy is to maintain at least a 3 to 1 profit to loss
ratio. This ratio is calculated by dividing your total profits by your total losses and is a
good overall measure of reward versus risk.
In our 60 years of combined trading experience we discovered that successful risk
management can be achieved by following basic guidelines:
●
●
●
●
●
●
●
Never risk more than your initial investment
Limit the size of your trading positions
Close out your losing trades before they develop into large losses
Don’t limit your profits by selling winning trades with a small profit
Take both long and short trades
Take both directional trades and spread trades
Invest using several different types of strategies for diversification
In order to achieve at least a 3 to 1 profit to loss ratio you must practice sound risk
management by closing out your losing trades before they develop into large losses
and by not limiting your profits by selling winning trades with a small profit.
This defies human nature as most traders want to do just the opposite and take a
quick 10% profit as soon as possible. People like the euphoria associated with winning
and will take a small profit even though they are giving up a potentially greater profit
later by holding on to winning trades. Most traders tend to trade with limited upside
and unlimited downside. They will sell a stock when they have a small profit but
continue to hold losing stocks eventually winding up with a portfolio of losers.
A successful trader wants to achieve the highest profit to loss ratio possible. A high
profit to loss ratio is a good indication that you are keeping trading losses to a
minimum. Many investors with good trading systems fail because they don’t pay
enough attention to risk. Maintaining a trading discipline that forces you to think in
terms of reward versus risk can help you become a successful trader.
When you establish an option trading portfolio, there is no way to predict which
holdings are going to produce big profits over time. Typically, if you own a diversified
portfolio of let’s say eight options, usually there are two or three of the eight options
that produce a big profit that accounts for most of the gain for the entire portfolio.
It’s the big winners not the small winners that produce profitable portfolios.
You can’t tell in advance which of the eight option trades might produce a large profit.
So you want practice sound risk management and continue to hold on to the profitable
trades and take small losses with losing positions before they develop into large
losses.
58
Once we have our option position established, we will exit trades before they develop
into big losses. We will normally sell an option before it incurs a 20% to 30% loss
from our entry price. If you are willing to risk 20% on a trade then you should be
expecting a 60% profit on a profitable trade if you want to maintain a 3 to 1 profit to
loss ratio.
Taking small losses is essential to your trading success as it may take years for you to
recover from a large loss. For example, if your portfolio suffered a 50% loss it would
require a subsequent gain of 100% for your portfolio just to break even!
Let’s assume you had a $10,000 portfolio that incurred a 50% loss which resulted in
the value of your portfolio declining to $5,000. You would have to achieve a 100%
return on your $5,000 portfolio in order break even with the value returning to
$10,000.
A 75% portfolio loss would require a subsequent gain of 300% for your portfolio just
to break even!
Taking small losses before they develop into big losses has allowed the Hughes
Optioneering™ Team to maintain a better than 3 to 1 profit to loss ratio over the long
term. The brokerage confirmations below show that we took a 13%, 9%, 13% and a
15% loss respectively for the four options trades listed which are good examples of
taking small losses before they develop into large losses. We can take several small
losing trades and still have a profitable portfolio if one trade has a large profit.
59
Managing Profitable Trades
The brokerage confirmations below show that we took a 255%, 312% and a 241%
profit respectively for the three options trades listed which are good examples of the
‘big winners’ you want to have in your portfolio by holding on to your winning
positions. You could take 5 or 6 small losing trades and still achieve an overall
100% portfolio return with just one of these big winning trades!
Maintaining a trade management discipline of holding on to our winning trades and
selling losing trades before they develop into large losses has been an important part
of our trading success and has allowed us to maintain a better than 3 to 1 profit to
loss ratio over the long term.
“If you must play, decide upon three things at the start: the rules of the
game, the stakes and the quitting time.”
Chinese Proverb
60
All High Accuracy Option Trades are Limited Risk Trades
All of the High Accuracy Option strategies presented in this manual utilize limited risk
trades. With limited risk trades the most you can lose is your initial investment
regardless of adverse market moves. Limited risk trading is absolutely essential when
trading volatile and unpredictable markets. You won’t receive a ‘margin call’ from your
broker or be asked to add funds to your brokerage account to avoid the forced
liquidation of your positions.
High Risk Investments
The investments listed in the table that follows are what we categorize as ‘high risk’
investments because you can lose more than your initial investment. An adverse
market move could wipe out your initial investment and could trigger a margin call
that would require you to add funds to your account. You would be legally liable to
pay back any and all losses that are sustained in your brokerage account. It only
takes one unexpected overnight world event to wipe out a trading account that utilizes
unlimited risk trades.
High Risk Investments
Investment
Futures Trading
Forex Trading
Shorting Stocks
Selling Uncovered or ‘Naked’ Options
Futures trading usually involves 10 to 1 or even 20 to 1 leverage. It doesn’t take
much of an adverse market move for you to lose all of the cash in your account and
worse yet owe your broker money in a margin call. You may think the odds are low
that this could happen to you but it can happen. It only has to happen once and you
are out of the game.
The # 1 Rule of Trading
Never Put Yourself in a Position to Lose More Money than You Invest
Lehman Brothers, Bear Sterns and AIG did not go bankrupt because there was a 5%
default rate in mortgages. A 5% default rate could easily be absorbed with 1 to 1
leverage. They went bankrupt because they were highly leveraged and risked more
money than they invested. The world financial system collapsed because the # 1 Rule
of Trading was violated. Limited risk trading is essential for your investing success.
61
Trade Management Rules
Our three Trade Management Rules are Part 2 of our High Accuracy Option Trading
Strategy. As you will soon discover, Trade Management is a very important part of the
success of the High Accuracy Option Trading Strategy.
Rule 1: Use the 30% Rule for ‘Walking Away’
Rule 2: Use the 30% Rule for ‘Protecting Profits’
Rule 3: Roll Over Options to Reduce Risk and Compound
Returns
Avoiding a 100% Loss
Before we explore our Trade Management Rules let’s take a look at the risks we face
as option traders. The price below is a daily price graph of the VIX Volatility Index.
The daily price movement of the VIX Index is depicted in the vertical lines. As you can
see from the graph there are dozens of price spikes for the Index over the three year
period displayed in the graph. Each of these volatility spikes represents a market
selloff.
62
Options are leveraged and provide more profit potential compared to stock investing
but the leverage also incurs more risk. If you have bad timing when you enter a trade,
it can easily result in a 100% loss of your option premium. The goal of the High
Accuracy Option Strategy is to avoid big losing trades. Remember if you take a 75%
loss on an option trade, your next trade would need a 300% gain just for you to break
even!
Using the Keltner Channels to find a low risk entry point can help you avoid being
stopped out of your trade during market sell offs that occur on a regular basis. And we
learned that using the 1% Rule for selecting an option strike price gives us a much
higher probability of realizing a profitable trade than an at-the-money or out-of-themoney strike price.
We will next look at the 30% Rule for ‘Walking Away’ which can help prevent a losing
trade from developing into a big losing trade.
63
Trade Management Rule #1
Rule 1: Use the 30% Rule for ‘Walking Away’
Whenever we enter an option trade we use a protective stop to exit the trade in case
the underlying stock declines in price. If an option’s price drops 20% below our entry
price, we make a mental note to start looking to exit the trade before the trade incurs
a 30% loss (on a closing basis). This helps prevent the trade from developing into a
100% loss.
30% Rule for Walking Away
•
•
If an option’s price drops 20% below entry price, start looking to exit before it
develops into a 30% loss
This helps prevent a 100% loss
Let’s look at one of our trade examples to illustrate the stop loss Rule. Our brokerage
account Transaction Report below shows that we purchased the JNJ Jan 80-Strike call
@ 23.72.
Bought JNJ 80-Strike call @ 23.72
If the price of our JNJ option drops 20% to around 18.98 (23.72 x .80 = 18.98) we
would make a mental note to exit the trade before the option drops 30% to around
16.60 (23.72 x .70 = 16.60) on a closing basis.
This helps prevent a total loss of our option premium if JNJ stock continues to decline
and allows you to move on to our next option profit opportunity.
64
Rule 2: Use the 30% Rule for ‘Protecting Profits’
Our next Trade Management Rule utilizes the Market Neutral Spread Strategy to help
protect profits for an existing profitable call option purchase trade. When we have a
30% or higher profit on a call option trade, we purchase a put option to help protect
those profits. Many times purchasing a put option can guarantee a profit for our call
option purchase.
At the same time, purchasing a put option does not limit the upside profit potential of
your call option if the underlying stock continues to increase in price. This allows us to
maintain our money management discipline of ‘holding on’ to winning option trades.
We know that our money management guideline of holding on to winning trades has
proven to be the best course of action in producing big portfolio profits. We also know
from experience that it is very difficult to watch a winning option trade develop into a
losing trade. This is very hard on your psyche as a trader and can help you lose
confidence in your ability to be a successful trader. Purchasing a put option protects
profits and allows us to hold our trade for further upside gain.
Because there is a long position (call option) which profits as the underlying stock
moves up in price and a short position (put option) which profits as the underlying
stock moves down in price we call this a ‘Market Neutral’ Spread Strategy.
Let’s look at an example of a Market Neutral Spread trade. CIGNA stock symbol CI
was on a Prime Trade Select ‘buy’ signal. Our online brokerage account Portfolio
Report below shows that we purchased the CI 70-Strike call option for 1.885 points or
$188.50.
Buy 2 Cigna Sep 70-Strike call options @ 1.885
65
CIGNA stock moved up in price after our call purchase so we had a profitable trade.
We then faced the trading dilemma. Do you hold on to a winning call option trade for
further upside profit potential or do you take profits in case CIGNA stock declines in
price with the possibility of a profitable option trade turning into a loss?
We then purchased a CIGNA put option which allowed us to lock in profits for our call
option trade no matter what happens and at the same time did not limit the upside
profit potential of the call option if CIGNA stock continues to increase in price. We
‘legged in’ to a Market Neutral Spread by purchasing the CI 77.5-Strike put option.
Our online brokerage account Portfolio Report below shows that we purchased the CI
77.5-Strike put option for 1.615 points or $161.50.
Buy 2 Cigna Sep 70-Strike call options @ 1.885
Buy 2 Cigna Sep 77.5-Strike put options @ 1.615
The Hughes Optioneering™ Team designed a Market Neutral Spread Calculator to
calculate the profit potential for Market Neutral Spread trades. This calculator allows
us to know in advance the Profit/Loss potential for a Market Neutral Spread trade
before we take the trade.
The Market Neutral Spread calculator will calculate the profit potential for a Market
Neutral Spread trade based on the price change in the underlying stock at option
expiration.
66
The Market Neutral Calculator below shows the profit/loss potential for the CIGNA
Market Neutral trade assuming various prices changes in CIGNA stock at option
expiration from a 20% gain to a 100% decline in this example. CI stock was trading at
77.72 at the time.
The first row labeled ‘% Change’ in the calculator below displays the +20% to -100%
assumed price changes for CI stock at option expiration (circled). The calculator will
calculate the profit/loss potential and percent return based on these CI stock price
changes.
The second row from the bottom labeled ‘Spread Profit’ lists the dollar profit potential
for the trade (circled) for the various assumed price changes. And the bottom row
labeled ‘Spread % Return’ lists the percent return profit potential (circled).
67
CIGNA Market Neutral Trade Profit Potential
Let’s examine in detail the profit potential for the CI Market Neutral trade. The
Calculator below shows that if CI stock price is flat at 77.72 at option expiration a
$422 profit and a 120.6% return will be realized (circled). This is the minimum return
for this trade no matter what happens.
A 10% increase in CI stock results in a $1,976 profit and a 564.7% return (circled).
And a 40% decline in CI stock results in a $2,737 profit and a 781.9% return (circled).
In the unlikely event CI stock declined to zero it would still result in a $7,400 profit
and a 2,114.3% return.
With the put option protection in place we don’t have to worry about protective stops,
bad earnings reports or big down moves in CI stock as we know big down moves
result in windfall profits.
Notice that profit potential for this trade is not capped. As CI stock moves up in price,
the profit potential for the trade continues to increase. And if CI stock moves down in
price, the profit potential for the trade also continues to increase.
68
Market Neutral Portfolio Profit Potential
We are now going to look at the profit potential for a portfolio of Market Neutral
trades. Our brokerage account Profit/Loss Report below shows that we have an
average return of 422.8% for the CIGNA, Costco, Johnson and Johnson, Starbucks,
Wells Fargo and Yahoo Market Neutral Spread trades. We utilized the Market Neutral
Calculator to calculate the average profit potential for our portfolio of Market Neutral
Spread trades.
Average Return of 422.8%
69
A 422.8% return is an excellent return under any circumstances! Let’s take a closer
look at the profit potential for this portfolio of Market Neutral trades. The table below
summarizes the profit potential for these trades.
We can see that if these stocks rally 10% on average at option expiration, the
portfolio will realize a 711% return (circled). A 20% increase in stock price would
result in a 1,319% return. There is no limit on the profit potential with this
strategy if the underlying stocks continue to increase in price.
Portfolio Profit Potential
Stock Price Change
20%
10%
0%
-20%
-40%
-60%
-100%
CIGNA
565%
343%
121%
337%
782%
1226%
2114%
Costco
5673%
2910%
1090%
6368%
11894%
17420%
28471%
Johnson & Johnson
515%
306%
138%
361%
780%
1199%
2038%
Starbucks
516%
325%
169%
318%
701%
1084%
1849%
Wells Fargo
309%
172%
61%
198%
470%
742%
1287%
Yahoo
335%
208%
81%
110%
364%
619%
1127%
1319%
711%
277%
1282%
2498%
3715%
6148%
Average Return:
A 711% or 1,319% return would be great but what happens if there is a market selloff
and the profits in this portfolio turn into losses? Here is where this strategy really gets
interesting . . . Let’s take another look at the profit potential table of this Market
Neutral portfolio. We can see below that if the stocks in the portfolio decline 20% on
average at option expiration, the portfolio will realize a 1,282% return (circled).
A 40% decrease in underlying stock price would result in a 2,498% return. And in the
unlikely event that the stocks in this portfolio decline to zero a 6,148% return will be
realized. The more the stocks in this portfolio increase or decline in price, the higher
the profit potential. If the stocks are flat you will realize a 277% return. We can’t
lose regardless of the price movement of the underlying stocks!
Portfolio Profit Potential
Stock Price Change
20%
10%
0%
-20%
-40%
-60%
-100%
CIGNA
565%
343%
121%
337%
782%
1226%
2114%
Costco
5673%
2910%
1090%
6368%
11894%
17420%
28471%
Johnson & Johnson
515%
306%
138%
361%
780%
1199%
2038%
Starbucks
516%
325%
169%
318%
701%
1084%
1849%
Wells Fargo
309%
172%
61%
198%
470%
742%
1287%
Yahoo
335%
208%
81%
110%
364%
619%
1127%
1319%
711%
277%
1282%
2498%
3715%
6148%
Average Return:
70
100% Loss Turns Into a 1,353.2% Profit Windfall!
As you can imagine this is a great way to invest! As veteran option traders with
decades of experience, we have been burned many times by unexpected market
declines. If you have a highly leveraged option portfolio a sudden market decline could
wipe you out. End of game.
And the worst feeling as a trader is to be sitting on a profitable portfolio only to see
that portfolio turn into a losing portfolio due to an unanticipated market decline. We
can tell you from experience this hard to get over and put behind you!
Unexpected sell offs can and do happen! For example, recently Mastercard stock
experienced sharp a selloff due to an unexpected bad earnings report.
The Mastercard stock selloff resulted in a huge profit windfall for the Market Neutral
Spread Strategy as we closed out a $41,680 profit and 1,353.2% return on
investment.
If we did not own the ‘insurance’ option we would have experienced a 100% loss
for our call option investment!
These types of selloffs occur on a regular basis. Regardless of which method or
indicator you use to select call option trades, unexpected selloffs can and do occur.
This can easily result in a total loss for your call option trade.
Bad earnings reports, disappointing unemployment reports, spikes in energy prices
and global geo political tensions can cause stock market declines that can decimate a
highly leveraged call option portfolio.
To us it is very comforting knowing our Market Neutral Spread portfolio is totally
immune to market selloffs. No more sleepless nights worrying about unexpected bad
news. Locking in profits no matter what happens in the markets allows us to eat well
and sleep well.
There is no need to monitor the markets and as noted previously, severe selloffs can
result in windfall profits.
Trading in Smaller Accounts
Another advantage to this strategy is that it can be traded in smaller accounts. The
total investment required to purchase one option contract in the Market Neutral
Option Spread portfolio just presented is $1,715.
71
$269,921.33 Profit in Retirement Accounts
The Market Neutral Spread Strategy is considered low risk and Market Neutral Spreads
can be traded in most retirement accounts. We have two different types of retirement
accounts in which we trade Market Neutral Spreads.
The brokerage account Profit/Loss Reports that follow show that we currently have
$269,921.33 in total open trade profits in our two retirement accounts with our Apple,
Facebook, Google, Halliburton, Health Care ETF, Home Depot, MMM, NASDAQ ETF and
TJ Maxx Market Neutral trades.
The ‘insurance’ put options in these two accounts guarantee that the Market Neutral
trades will profit regardless of the price movements of the underlying stocks even in
the unlikely event that all of the stocks decline to zero.
Retirement Account #1
$199,052.70 Profit
72
Retirement Account #2
$70,868.63 Profit
We will next take a look at Trade Management Rule # 3 for rolling over options.
73
Rule 3: Roll Over Options to Reduce Risk and Compound
Returns
Trade Management Rule # 3 calls for us to roll over our option trades if the underlying
stock/ETF is still on an EMA System ‘Buy’ Signal and the trade is profitable.
Rolling over the expiring option allows us to roll over the profits on the expiring option
to the new option. Rolling over profits reduces risk by reducing the cost basis of the
new option and allows us to compound returns.
Our Portfolio Gains & Losses Report below shows that we closed out 36 XLV Jun 45
calls with a $31,051 profit and a Google Jun 950 call with a $7,670 profit.
74
Our brokerage account Transaction Report below shows that we then rolled over the
profits on the expiring XLV Jun 45 calls into the XLV Sep 45 calls.
Purchased 36 XLV Sep 45 calls @ 15.69
The cost of the 36 Sep 45 calls was $56,516. Rolling over the $31,501 profit on the
closeout of the Jun calls reduced the cost basis of the Sep calls to $25,015 which
reduced risk by more than 50% and allowed us to compound our returns.
Cost of new option $56,516
Profit on rollover
$31,501
Reduced cost basis $25,015
The reduced cost basis reduced our risk by more than 50% and allowed us to
compound returns.
We had a similar result with the rollover of our Google option. Our brokerage account
Transaction Report below shows that we rolled over the profits on the expiring GOOG
Jun 950 call into the GOOGL split adjusted Dec 450 calls.
Purchased GOOGL Dec 450 call @ 147.00
The cost of the Dec call was $14,693. Rolling over the $7,670 profit on the closeout of
the Jun call reduced the cost basis of the Dec call to $7,023 which reduced risk by
more than 50% and allowed us to compound our returns.
Cost of new option $14,693
Profit on rollover
$ 7,670
Reduced cost basis $ 7,023
The reduced cost basis reduced our risk by more than 50% and allowed us to
compound returns.
75
Rolling Over Market Neutral Trades
Let’s now take a look at an example of rolling over a Market Neutral Trade. Our
brokerage account Gains & Losses Report below shows we bought the Costco Jul 95
call for 15.40 and sold it at 22.57 for a 7.17 point profit.
Our brokerage account Transaction Report below shows that we then rolled over the
profits for the COST July option into the August 105 call. The 7.17 profit on the July
call reduced the cost basis of the August call from 12.65 to 5.48. This allowed us to
reduce our cost basis and risk and compound our returns.
We also purchased the COST August 115 put for 1.03 points which created a Market
Neutral spread that protected our profits.
76
The Market Neutral Calculator analysis below shows the profit/loss potential for this
Market Neutral trade assuming various price changes in Costco stock at August option
expiration from a 40% increase to a 60% decline.
The Analysis shows that the minimum profit on this trade is 100.8% regardless of the
price movement of COST stock (circled).
If COST stock goes up 10% we realize a 282.1% return at option expiration (before
commissions). A 20% increase in COST results in a 463.5% return. There is no limit
on the profit potential of this trade if COST stock continues to increase in price.
Conversely if COST stock declines 20% at option expiration a 215.6% return will be
realized. A 40% decline at option expiration results in a 578.3% return.
Minimum Profit = 100.8%
The preceding rollover trade examples demonstrate the ability of profit rollovers to
reduce the cost basis and risk of the new option and allow us to compound returns.
77
Current Market Neutral Profit Results
The table below lists the current open trade profit results for our advisory service
Market Neutral trade recommendations. The table lists the buy price, number of
option contracts, current price, dollar profit and percent profit for each option
recommendation. There are currently $156,509.00 in open trade profits and an
average return of 382.9% for the market neutral trade recommendations.
Even in the unlikely event that all of the underlying stocks in this portfolio go to zero
at option expiration, this portfolio would still be profitable.
Advisory Service Market Neutral Spread Portfolio
Current Profits: $156,509.00 and 382.9% Return
Entry
Option
Price
Last
Qty
Price
Dept Store Oct 32.5 call
$0.68
14
$21.70
Dept Store Oct 50 put
$1.15
14
$0.52
Telecom Co Oct 33 call
$0.24
8
$17.07
Telecom Co Oct 49 put
$1.57
8
$1.23
Credit Srvs Oct 490 call
$4.70
5
$153.22
Credit Srvs Oct 530 put
$17.70
5
$1.62
Leasing Srvs Sep 60 call
$10.40
5
$15.35
Leasing Srvs Sep 75 put
$2.77
5
$1.85
Credit Srvs #2 Sep 140 call
$11.15
2
$44.38
Credit Srvs #2 Sep 170 put
$5.25
2
$2.19
Regional Bank Sep 25 call
$2.60
8
$12.75
Regional Bank Sep 35 put
$1.09
8
$0.13
Health Care Sep 36 call
$3.52
10
$15.30
Health Care Sep 47 put
$1.39
10
$0.12
Financial ETF Sep 75 call
$4.72
5
$30.48
Financial ETF Sep 93 put
$6.35
5
$0.84
Home Improvement 50 call
$2.65
5
$29.73
$2.15
5
$0.10
Home Improvement 75 put
Total Profit / Avg Gain
Percent
Profit
Profit
$28,546.00
1114.2%
$13,192.00
911.0%
$66,220.00
591.3%
$2,015.00
30.6%
$6,034.00
184.0%
$7,352.00
249.1%
$10,510.00
214.1%
$10,125.00
182.9%
$12,515.00
521.5%
$156,509.00 382.9%
78
High Accuracy Option Strategy Profit Results
The table below lists the current open trade profit results for our advisory service High
Accuracy Option Strategy option trade recommendations. The table lists the buy price,
number of option contracts, current price, dollar profit and percent profit for each
option recommendation. There are currently $397.958.00 in open trade profits and an
average return of 497.6% for the High Accuracy Option Strategy option trade
recommendations.
Advisory Service High Accuracy Option Strategy
Current Profits: $397,958.00 and 497.6% Return
Entry
Option
Last
Percent
Price
Qty
Price
$13.50
7
$14.30
$
560
5.9%
$0.90
18
$10.12
$
16,596
1024.4%
Nasdaq Apr 85 call
$12.87
6
$21.92
$
5,430
70.3%
Health Care Plans Mar 80 call
$20.35
5
$22.68
$
1,165
11.4%
Home Improvement Mar 85 call
$3.49
24
$26.88
$
56,136
670.2%
Aerospace Mar 100 call
$3.72
5
$49.42
$
22,850
1228.5%
Credit Services Apr 75 call
$1.74
124
$12.35
$
131,564
609.8%
Electronic Equipment Apr 95 call
$5.25
4
$32.27
$
10,808
514.7%
Grocery Stores Apr 45 call
$9.10
7
$27.85
$
13,125
206.0%
Entertainment Mar 75 call
$14.67
5
$29.23
$
7,280
99.3%
Credit Services 2 Mar 225 call
$1.23
10
$44.75
$
43,520
3538.2%
Financial ETF Mar 115 call
$0.57
12
$33.33
$
39,312
5747.4%
Telecom Services Feb 33 call
$0.40
8
$
12,536
3917.5%
Health Care Mar 54 call
$0.50
23
$16.07
$16.62
$
37,076
3224.0%
Department Stores Mar 55 call
Regional Banks Apr 35 call
Total Profit / Avg Gain
Profit
Profit
$397,958.00
79
497.6%
If you would like to learn more about becoming a member of the Hughes
Optioneering™ Advisory Service then log on to www.WeeklyOptionAlert.com or call
our sales partner Brad toll free at (866)-661-5664 or (310)-647-5664. Click the ‘Trade
Results’ link for updated profit performance for the Hughes Optioneering™ Trading
Strategies.
Log On to www.WeeklyOptionAlert.com or
Call Brad toll free (866)-661-5664 or (310)-647-5664
Click Trade Results for Updated Profit Performance
80
Hughes Optioneering™ Advisory Services
Live Trading Profits Since 1999
We have maintained a web based option advisory service since 1999. Our advisory
services have produced consistent profits in every type of market condition including
two severe bear markets demonstrating the versatility of the Optioneering™ trading
strategies to profit during difficult market conditions.
The table below shows the advisory services have produced $8,306,497.08 in live
trading profits with no losing years.
$9,000,000
$8,000,000
$7,000,000
$6,000,000
Optioneering Advisory Services
Produced $8,306,497.08
In Live Trading Profits
Over the Past 16 Years
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
Consistent
Profits in
Good Times and Bad
$0
81
Appendix
82
Prime Trade Select Produces $7.2 Million in
Actual Profits Over the Past Eight Years
With An Average Return of 71.5%
We use Prime Trade Select to select trades for the Stock, Option, ETF, Option Spread,
Covered Call, Market Neutral and Married Put Strategies. Copies of our brokerage
account Profit/Loss Reports that follow show $7,213,930.20 in open and closed trade
profits utilizing Prime Trade Select. There are 488 winning trades and 22 losing trades
resulting in 95.6% accuracy. The average return is 71.5%
.
$7.2 Million in Actual Profits Over Past 8 Years
Total
Average Winning
Losing
Percent
Profits
Return
Trades
Trades
Wins
$7,213,930.20
71.5%
488
22
95.6%
Note: The profit/loss for option spread trades and covered call trades is calculated by
‘netting out’ the profit or loss for the long position and the short position. For
example, the CAMAM/CAMJR option spread trade circled below shows a $27,657.78
profit for the 11 long CAMAM options and a -$10,026.24 loss for the 11 short CAMJR
options resulting in a net profit of $17,631.54 for the spread trade.
presented in other publications. The cost basis for some of the options in these portfolios may
be reduced by rolling over profits at option expiration which is one of the Hughes Optioneering
Option and stock investing involves risk and is not suitable for all investors. Only invest money
you can afford to lose in stocks and options. Past performance does not guarantee future
results. No representation is being made that any account will or is likely to achieve profit or
losses similar to those shown.
83
Profits $500,278.76
Average Return 79.7%
Page 1 of 2
84
Profits $500,278.76
Page 2 of 2
85
Profits $50,104.14
86
Profits $199,052.70
87
Profits $206,259.32
Page 1 of 2
88
Profits $206,259.32
Page 2 of 2
89
Profits $400,481.66
90
Profits $70,868.63
91
Profits $1,356,052.06
92
Profits $323,069.44
93
Profits $315,756.53
94
Continued from previous page . . .
95
Profits $315,849.90
96
Profits $118,514.37
97
Profits $155,361.56
98
.
99
Profits $175,467.53
100
Profits $123,173.55
101
Profits $147,886.02
102
Profits $192,077.25
103
Profits $92,326.65
104
105
106
Profits $254,006.83
107
Profits $94,959.71
108
Profits $296,209.32
109
Profits $341,223.00
110
Profits $111,648.05
111
Profits $81,942.94
112
Profits $115,311.95
113
Profits $109,021.20
114
Profits $143,743.42
115
Profits $105,901.03
116
Profits $64,044.20
117
Profits $154,821.03
118
Profits $120,316.99
119
Profits $71,987.41
120
Profits $135,765.00
121
Profits $81,698.27
122
Profits $147,046.06
123
Profits $41,703.72
124

High Accuracy Option Trading Prime Trade

Transcription

Similar documents

Rassegna del 15/04/2010

News File

our Alpha API Brochure

KERFORD INVESTMENTS (UK) LTD KERFORD INVESTMENTS

Medicine Hat 08_27 PAGE 1 - Gotta Minute?! | Medicine Hat`s

Code of Conduct - The International Union of Bricklayers and Allied

newismWhy more than ever, consumers lust after

Issue 4 - The Technical Analyst

why trend micro?

Tsunami-Trading - Traders World Magazine

the official magazine of technical analysis

AM1707 ARM Microprocessor (Rev. E)