Alexander Green’s Options Primer

Welcome!

This primer is for anyone interested in learning more about options trading, including how options can be so profitable.

Because the fact is, while traditional stock trading can (and will) hand us some nice gains, options can quickly multiply your profits by 10X or more.

And the good news is… you don’t need to use complicated strategies or formulas.

My Ultimate Value System will do all the work for you.

Simply wait for my recommendations and enter into any trade you like.

Take Your Pick

As a subscriber to The True Value Alert, you’ll receive both traditional stock trades and options trades.

The service was designed this way for maximum flexibility… and maximum profitability. As a subscriber, you have the ability to follow both parts of the portfolio or mix and match as you see fit.

For example, some investors may wish to follow the stock recommendations with little to no allocation to options. Others may wish to allocate more heavily to options.

By operating these sections in tandem, you’ll be able to tailor your personal risk tolerance and capital availability.

Let me explain how these trades can deliver a big boost to your investment returns.

You Make the Call

In the options market, there are only two types of options… calls and puts.

Of course, there are many different strategies and complicated combinations of options. But ultimately, it all comes back to these two sides of the coin.

Now, it’s important to understand that you can achieve nearly everything you want on an investment basis with options. Just as you would with any stock, bond or mutual fund.

The key element to understand here is that an option is a derivative…

Its value is derived from something else – a stock, a commodity, an index, etc. In our case, we’ll be dealing with only call options on individual stocks.

So we won’t be doing anything complicated or difficult to understand… If a stock I recommend goes up in value, the gains on the option will very likely be multiples of that.

That brings me to the main purpose of buying options: to gain leverage.

Gaining “leverage” – in the context of stock options – simply means using a small amount of money to control a larger amount of stock.

That’s the true power at play and what gives you the real potential to increase your investment tenfold.

In technical terms, options allow you to limit your initial capital outlay while taking a directional position in an underlying stock.

This means you’re putting a much smaller investment at risk versus the direct purchase of shares.

But the potential rewards are exponential. It’s just like buying a house with a 10% down payment. You have to put up only a fraction of the price, yet you get to control the whole house.

In the simplest of terms, you’re using options as a substitute for the stock or commodity itself.

Watered down, if you buy a call option, you’re hoping the underlying investment (for purposes of this report, I will always be referring to stocks) goes up in value.

The more the stock’s price goes above your strike price on the call, the more money you make. Simple enough, right?

Why Buy Options?

For many investors, the question is “why buy call options at all?”

There are three very good reasons…

No. 1: Total Control

A call option is an investment that gives you the right (but not the obligation) to buy or sell a specific stock (or in some cases an entire index of stocks) at an agreed price within a set period of time.

No. 2: Leverage

The amount you pay (called the “premium”) for a call option costs far less than the equivalent underlying security. The resulting leverage increases the potential return on your investment.

Let’s say you buy shares of XYZ Corp. at $30 per share. A few weeks later, the stock is selling for $33. You sell, netting $3 per share – or a 10% profit.

But suppose you bought a call option instead, with a strike price of $30 per share and pay a $1.50 per share premium. When the price hits $33, you exercise the call option to buy the shares for $30 and then sell them for $33. You make $3 per share minus the $1.50 premium, or a net profit of $1.50 per share. At a $1.50 per share premium, that’s a 100% profit!

No. 3: Limited Risk

What scares many investors away from the options market is the fact that options have a limited lifespan and can expire worthless. That’s true… However, the premium is the limit of your risk.

Following up on the example above, if you bought shares of XYZ Corp. at $30 per share and they fall to $25 per share, you’ve lost $5 per share. With a call option, the most you lose is the premium amount, which is $1.50 per share in this example.

When I recommend a stock, I’ll also look closely at the available options. If a good opportunity exists (with adequate volume), I will recommend an option trade in addition to the stock.

This dual recommendation gives you the opportunity to tailor the trade to your specific risk preferences and capital availability.

In some circumstances, you might prefer to buy a stock directly. In other cases, you might want to buy just the option. And at times, maybe you want to buy both. The choice of whether to use options is 100% yours.

How to Set Up Your Options Account

In order to buy call options or trade any type of options, you must have an account that allows you to do so.

It sounds easy, and it actually is. You just have to know how to deal with your broker.

Now, every broker has different criteria for who can trade options and how much money or equity you need in your account. Trust me, it’s not the government that makes these rules, it’s your broker. If your broker gives you a hard time, then find another one.

If you already have a brokerage account, then all you need to do is apply for permission to trade options. It’s a form that you have to sign that asks what types of strategies you want to pursue. Tick off the box that applies to buying call options. Then you must also have a margin agreement. If you have traded any type of option, even in your retirement account, you will have already filled one out. It’s a requirement for trading any type of option.

When you contact your broker for this approval, they’ll ask you a series of questions. If you do this online, you’ll be asked the same questions. They will center on how much experience you have with options trading.

However, buying calls is a simple, straightforward process and where most new option investors are allowed to get their start. So getting approved to buy call options shouldn’t be a problem.

Trading options using your online account is even easier…

It’ll take you less than two minutes, even if you’ve never done it before! Every brokerage firm will have an online tutorial if you need help. Although each brokerage firm’s online trading platform will be slightly different, they all require the same information.

So regardless of which platform you use, there are several pieces of information you must have before you execute a trade:

• Underlying stock symbol
• Strike price
• Expiration date
• Limit price for the trade
• Number of contracts you’re going to trade.

I’ll provide all the information above (with the exception of the number of contracts to trade) when I send you a True Value Alert option recommendation.

A Summary on Options

An option is an investment that gives you the right (but not the obligation) to buy or sell a specific security at an agreed price within a set period of time.

Every option is identified with a specific stock – or in some cases, an entire index of stocks (you can buy options on the S&P 500, for instance).

So whenever you place an options trade, the movement of the underlying stock will affect the success or failure of your investment.

Options come in two standard varieties: calls and puts.

Options trade in lots of 100 shares. One “contract” equals 100 shares.

One call option gives you the right to buy 100 shares of a particular underlying stock at a specific price (the exercise price or strike price) before a specified date in the future (the expiration date).

All options have expiration dates. They could be a matter of weeks or months.

If you don’t exercise your right within the given time, the option expires worthless.

You can view options prices yourself using a number of websites, including Yahoo Finance and BigCharts – and of course, your own brokerage account.

When you buy a call option, it is as if someone is saying to you, “I will allow you to buy 100 shares of this company’s stock, at a specified price per share, at any time between now and the expiration date.”

And it’s further understood that, “For that right, I expect you to pay me a fee.”

That fee is called a premium. The amount of premium will vary considerably depending on the exercise price and time until expiration, as well as the stock’s volatility.

If you’re new to options, I hope this is enough information to give you the confidence to get started.

Whether you’re a novice investor or a veteran, I think you’ll find that my Ultimate Value System for selecting stocks will supercharge your returns.

And that is particularly so with options, where making 10X or more returns could start to become a regular occurrence in your portfolio.

Last but not least, if there is anything you don’t understand about a specific trade I have recommended, feel free to call our dedicated VIP team at 888-570-9830 or send us an email at mailbag@oxfordclub.com.

Glossary of Options Terms

ASK: The lowest price one is willing to receive for an options contract.

AT THE MONEY: When the current market value of the underlying stock is the same as the exercise price of the option.

BID: The highest price an investor is willing to pay for an options contract.

BLACK-SCHOLES MODEL: The industry-standard model that helps determine the value of an option based on several factors. Developed by Fischer Black and Myron Scholes.

CALL OPTION: An investment that speculates a stock’s price will rise to a specific level within a specific amount of time.

CLOSING TRANSACTION: A transaction in which, at some point prior to expiration, the options holder or options seller closes out the position, thereby removing any obligation to fulfill the contract.

CONTRACT SIZE: The amount of shares subject to being purchased or sold upon the exercise of a single options contract. The standard contract size for options on stocks is 100 shares. One call options contract gives its holder the right upon exercise to purchase 100 shares of the underlying stock. (Also: “unit of trading”).

COVERED CALL: An options strategy in which you sell a call option against a long position in any underlying stock.

EXPIRATION DATE: The date in the future that a strike price must hit before the option to be acted upon (expiration is always the end of day on the third Friday in the specific month in which the option expires).

IN THE MONEY: A call option is said to be “in the money” if the current market value of the stock is above the exercise price of the option. A put option is said to be “in the money” if the current market value of the stock is below the exercise price of the option.

INTRINSIC VALUE: This reflects the amount, if any, by which an option is in the money.

LEAPS: Long-Term Equity Anticipation Securities. These are long-term options with expiration dates up to one, two or three years in the future.

LEVERAGE: Techniques used to multiply potential gains or losses. Common ways to employ leverage are borrowing money on margin or using derivatives such as options.

LIMIT ORDER: An order placed with a brokerage to buy or sell a specific number of shares or contracts at a set price (limit price). They allow investors to enter or exit a trade at a specified buy or sell price. It is particularly useful on low-volume or highly volatile stocks and options.

LONG POSITION: The status assumed by investors when they execute a “Buy” order in the market. If you own a stock or a call option, you are long the market. You are anticipating an increase in the market value of the underlying stock.

MARKET MAKER: A certified securities dealer who has an obligation to sell when there is a surplus of “Buy” orders and buy when there is a surplus of “Sell” orders.

NAKED OPTION: A options position where the seller of an options contract does not own the underlying security. Naked trading is considered very risky since losses can far exceed the premiums received.

OPENING TRANSACTION: A purchase or sale transaction by which a person establishes a position as either the holder or the writer of an option.

OPTIONS CHAIN: A listing of all options for any given asset. Tells investors the various strike prices, expiration dates, and calls and puts available.

OUT OF THE MONEY: If the exercise price of a call is above the current market value of the stock, or if the exercise price of a put is below the current market value of the stock, the option is said to be “out of the money” by that amount.

POSITION SIZING: Investing the same amount in every investment.

PREMIUM: The price of the option. The price that the holder of an option pays and the writer of an option receives for the rights conveyed by the option. The premium plus commission is the buyer’s cost for purchasing an option.

PUT OPTION: An investment that speculates that a stock’s price will decline to a specific level within a specific amount of time.

SECURITY: In the financial world, a security is a financial instrument that represents an ownership position in a publicly traded corporation. The reference is most often to a stock.