Bernie Schaeffer - Option Advisor - Top Gun Trading Techniques

Option Advisor: Top Gun Trading Techniques
Current Calendar Option Advisor Handbook Archives Help
Welcome to the Crash Course in Options

Trading:
Top Gun Trading Techniques
Dear Subscriber:
Thank you for subscribing to The Option Advisor! You

have made a wise investment decision, and you'll find my
unique trading strategy to be both rewarding and easy to
apply.
As promised, listed below are links to your Crash Course

in "Top Gun Trading Techniques". Please review the
course materials in the following order to maximize their
educational value to you:
Bernie Schaeffer
At A Glance
1. Characteristics and Risks of Standardized Options - This guidebook

should be called "Everything You've Always Wanted to Know About
Basic Option Trading But Were Afraid to Ask".
2. Your Step-by-Step Guide to Making Your First Successful Option
http://www.schaeffersresearch.com/services/oa/flightpack/ (1 of 3) [01/06/2003 1:38:40 PM]

Trade - Executing a successful option trade has never been easier.

You'll learn exactly what to do when you pick up the phone to make your
first option investment.
3. The 6 Most Dangerous Errors Made by Amateurs When Trading

Options - Substantially reduce your investment risks by understanding
what the most common errors made by novice option traders are, and
how to avoid them.
4. 25 Amazingly Profitable Ways to Trade Options - This special guide

reveals 25 inside techniques and strategies for boosting the success and
profitability of your option trades.
5. How to MAXIMIZE Option Trading Profits - This in-depth audio

presentation reveals the specific fundamental, technical and strategic
factors that contribute to an ideal option trade.
6. Brokerage Firms That Go the Extra Mile for Option Investors - This
exclusive report gives you all the important details for selecting exactly
the right brokerage firm for your specific option investing needs.
In short, the Flight Pack contains all the information you need to start making
successful option trades right out of the gate.
We will notify you via e-mail of every Option Advisor Hotline update along
with its web address. However, you may also access Hotline updates by
calling: (513) 674-9741. Telephone Hotline updates are available every
Monday at 7:30 p.m. Eastern Time, and at noon Eastern Time the day
following a +/- 100-point close on the Dow.
And, in addition to your monthly Option Advisor newsletter, you will also
receive Special Bulletins at times when there are unusual profit opportunities.
The Option Advisor is published on the fourth Friday of each month. You can
also act immediately on my recommendations by calling my telephone hotline
message on the Thursday before publication (once every month) after 10:00
p.m. Eastern Time, or by accessing the Option Advisor website. This way,
you can implement my recommendations on Friday.

Customer Service Help Line

We never leave you stranded. If you don't understand a strategy...if you need
terminology clarified...if you have an important question...if anything at all
seems confusing, simply call Customer Service Help Line toll-free at (800) 327-
8833 for immediate clarification. My representatives are ready and willing to
assist you with any subscription-related question you may have.
I again welcome you as a subscriber, and I look forward to serving you well in
the years ahead!
Sincerely yours,
Bernard G. Schaeffer
Senior Editor
P.S. -- Remember, you can access our Telephone Hotline Number and our
Option Advisor website at any time. All "between issue" hotline updates are
made on Monday evenings at 7:30 p.m. Eastern Time. And, on the Thursdays
before publication, the hotline messages begin at 10:00 p.m. Eastern Time.
We will notify you via e-mail of these updates.
Note: The copyrighted Option Advisor Top Gun Trading Techniques and Option Advisor
recommendations are specifically intended for your personal and confidential use as a subscriber.
For your protection, any other usage or dissemination of the above mentioned materials or
information is prohibited.

Top Gun Trading Techniques - Characteristics and Risks of Standardized Options
Top Gun Trading Techniques Table of Contents

Introduction to The Option Advisor Flight Pack by Bernie
Welcome:
Schaeffer
Section
Characteristics and Risks of Standardized Options
1:
Section Your Step-by-Step Guide to Making Your First Successful
2: Option Trade
Section The 6 Most Dangerous Errors Made by Amateurs When
3: Trading Options
Section
25 Amazingly Profitable Ways to Trade Options
4:
Section
How to MAXIMIZE Option Trading Profits
5:
Section
Brokerage Firms that Go the Extra Mile for Option Investors
6:
Characteristics and Risks of Standardized

Options
Before you begin trading, it is important to understand that options involve risk.
Prior to buying or selling an option, an investor must have a copy of
Characteristics and Risks of Standardized Options.
You can access and download the booklet on The Options Clearing
Corporation's (OCC) website at:
http://www.schaeffersresearch.com/services/oa/flightpack/cboe.asp (1 of 2) [01/06/2003 1:40:40 PM]

Top Gun Trading Techniques - Characteristics and Risks of Standardized Options
http://www.theocc.com/publications/risks/risks.jsp
This link reference is provided as a courtesy and does not imply that the OCC
is endorsing Schaeffer's Investment Research or its products. This booklet is
also available for free from your broker or from any of the U.S. options
exchanges or you can call SIR toll-free at (800) 327-8833 and we'll be happy
to send you another one.
http://www.schaeffersresearch.com/services/oa/flightpack/cboe.asp (2 of 2) [01/06/2003 1:40:40 PM]

Top Gun Trading Techniques - Making Your First Successful Options Trade

Welcome:
Schaeffer
Section
1:
2: Option Trade
3: Trading Options
Section
4:
Section
5:
Section
6:
Your Step-by-Step Guide to Making

Your First Successful Option Trade
1. Before trading options, you must set up an options account through a
brokerage house. (THE OPTION ADVISOR recommends using a
discount broker. That way, you keep your costs to a minimum.)
2. Once you select the options you want to trade (THE OPTION
ADVISOR makes this easy and dependable with clear, precise
http://www.schaeffersresearch.com/services/oa/flightpack/first_trade.asp (1 of 3) [01/06/2003 1:41:33 PM]

recommendations), tell your broker which options you want to buy

and/or sell. Your order will sound something like this: "I'd like to buy the
XYZ Corp. September 60 call (or put) option." Translation: you want to
purchase the right to buy (or sell) XYZ Corp. stock at $60/share (the
strike price). This right expires on the 3rd Friday of September (the
expiration date). As the purchaser of an option, you are not obligated to
either buy or sell the stock. You can choose to close out your position at
any time, or you can let your option expire.
3. Always give your broker a maximum entry price (sometimes called a

"limit" order) for the option. This price is the most you will pay for each
option on an underlying stock. By entering a "limit" order, you protect
yourself from overpaying. (THE OPTION ADVISOR lets you know
precisely the highest price you need to pay for every recommendation.)
4. Your broker will give you the current price of the option and ask how
many contracts you want to buy/sell. Important: each standard option
contract is based on 100 shares of the underlying stock; thus an option
quoted at 2 would cost you $200 before commissions. (THE OPTION
ADVISOR suggests you use only your trading capital for options
trading. Never buy puts or calls with money needed to pay bills.
Intelligent trading decisions are rarely made when "scared money" is
involved.)
5. THE OPTION ADVISOR recommends that you place a "limit order" at

your maximum entry price or below (1) for the day only, or (2) good-till-
canceled. These ensure your order being filled at or below your
maximum entry price. The "day" limit order expires at the close of the
market that day if not filled. This is advantageous if the underlying stock
should move against you the following morning. Day orders should be re-
submitted 20 minutes after the market opens the following day. Good-till-
canceled limit orders are best for those who don't have the flexibility to
call their brokers each morning. However, a good-till-canceled order will
be held by your broker until you cancel it.
6. Your broker will confirm when your order is filled. This should be done
over the telephone and/or through the mail.
7. You can also place an exit price at this time, using a good-till-
canceled sell order. (THE OPTION ADVISOR provides a target profit

for every recommendation, and a table to help you determine the exit
price.) Setting an exit price now will eliminate emotions from your
trading, letting you "take the money and run" to the next trade.

Top Gun Trading Techniques - The 6 Most Dangerous Errors Made by Amateurs When Trading Options

Welcome:
Schaeffer
Section
1:
2: Option Trade
3: Trading Options
Section
4:
Section
5:
Section
6:
The 6 Most Dangerous Errors

Made by Amateurs When Trading Options
Have you ever lost money trading options before, or has someone told you
that options are a losing game? That's probably because the methods being
used to trade options were faulty or overly simplified. I've identified six reasons
why the majority of option players fail to make money, and in turn, why I've
been able to be so successful in my Option Advisor newsletter
recommendations.
http://www.schaeffersresearch.com/services/oa/flightpack/errors.asp (1 of 4) [01/06/2003 1:41:49 PM]

1. Inappropriate short-term selection methods
Selecting the right stock (and the best corresponding option) is the first
step in successful option trading. Some option traders will take a
situation they just read about in the news as an option play. Others tend
to look at longer-term measures like a stock's valuation as an indication
of a stock's short-term potential. This mismatching of timeframes is one
of the biggest mistakes made by those who trade options. My staff and I
sort through the entire universe of stocks with listed options, in order to
pinpoint only those situations which look most attractive for sharp short-
term movements. The Option Advisor uses a methodology based on not
one, but all of the key short-term factors that drive stock prices --
technical, fundamental, monetary and sentiment.
2. Betting against trends
Trends in prices, whether up or down, have a tendency to last longer

than people expect. Most traders lose the bulk of their money betting
against trends. I've specifically developed my indicators to tell me not
only the nature of the trend, but also the investing public's view of the
current trend. What I've found is that a prevailing disbelief of an existing
trend gives a confirmation that the trend will continue, since there's
money on the sidelines that will eventually be convinced to buy into the
trend before it ends. Thus, my approach in buying options with the trend
allows you to trade on the right side of the market.
3. Inability to take a loss
Sure, everybody loves to hear about gains and profits, as this is what we
all seek to achieve. While "loss" has negative emotions attached to it,
the key is not to be emotional in trading, but rather to stay objective in all
trading decisions. If the market is not validating my analysis, I have
specific exit rules that get my subscribers out of option purchases before
their expiration, so that big losses can often be avoided and capital can
be preserved for future trades which are likely to be more profitable.
4. Lack of discipline
Many option traders fail because even when they do have gains, they let
them slip away by not knowing when to get out and take a profit. Often,
you should be taking a profit when the position is moving most obviously

in your favor. What I've been able to teach option traders is that a
mechanical system for entry and exit prices must be in place before the
trade is initiated. I pre-determine the highest price that should be paid to
enter the option, and the subsequent price that, when reached, will
automatically force profits to be taken. This allows traders to prevent
profits from slipping away, and enforces the discipline necessary in any
successful trading approach.
5. Poor money management
Every smart option trader knows that even with a winning approach,
money management is crucial in building an account's value. The
primary consideration is how much to invest in each trade every month.
Often, amateur option players come into the business and make some
nice gains right off the bat. Then, thinking this is a simple way to riches,
they let all their capital (including all their profits) ride on a subsequent
trade that wipes them out. Then they vow to never trade options again.
The answer here is to first know the rules of the options game: there is
great upside on winning trades, while you can also lose all of your
investment in a particular option trade. Clearly no matter how good your
approach, you will never win 100% of the time, and you should not
allocate all (or even the majority) of your trading capital to any particular
trade. How much do you invest? Each month, I tell Option Advisor
subscribers how much of each portfolio's cash reserves should be
devoted to the recommendations in a particular newsletter. And my
Handbook describes money management in great detail, so traders can
trade confidently with the proper commitment of their financial resources.
6. Consensus thinking
Amateur traders tend to bet with consensus thinking, which is a sure way
to lose in option trading over time. Whether it's an article in a national
publication, a hyped new product or a "tip" you're betting on, Wall Street
has a way of already discounting such news before it becomes widely
disseminated. By that time, smart traders are looking for opportunities to
bet opposite from the conventional wisdom. I've learned that you can use
options very successfully in contrarian bets. Understand that a contrarian
does not always "zig" when others say "zag," but rather looks for
extreme viewpoints which are apt to spotlight the key turning points in
stock prices. That's what defines true contrarians, and that's a major
reason why I've been so successful for those who subscribe to The
Option Advisor.


Top Gun Trading Techniques - 25 Amazingly Profitable Ways to Trade Options

Welcome:
Schaeffer
Section
1:
2: Option Trade
3: Trading Options
Section
4:
Section
5:
Section
6:
25 Amazingly Profitable Ways to Trade

Options
1. Options Trading and Your Financial Situation
Trade options in accordance with your financial situation. Never risk

funds that you cannot comfortably afford to lose. Although trading
options can yield huge profits, there is always the risk of a loss. If you
are trading with funds that may be needed for other purposes, the axiom,
http://www.schaeffersresearch.com/services/oa/flightpack/25_ways.asp (1 of 12) [01/06/2003 1:42:05 PM]

"You never make money with scared money," may well apply. Your
buy/sell decisions might be based on factors external to the market,
which can severely decrease your chances of being successful.
We recommend that you devote about 20 percent of the funds that you
would have invested in common stocks in The Option Advisor
recommendations and invest the remaining 80 percent in riskless
instruments such as Treasury Bills. Use The Option Advisor to
maximize your chances for profits on your risk capital.
2. Options Trading and Your Temperament
Trade options in accordance with your temperament. Even if you are

trading with your risk capital, you may be the type of individual who
prefers to sacrifice some profit potential to reduce the chances of a total
loss. In this case, more conservative strategies, such as covered call
writing, are more suitable for you. On the other hand, if you prefer to
maximize your profit potential and are willing to take an increased risk of
large losses to achieve this objective, your strategy would be to
purchase individual puts and calls outright. The Option Advisor
maintains three separate portfolios (the Aggressive, LEAPS, and Put
Selling Portfolios) to accommodate investors with these different
risk/reward preferences.
3. Diversify!
A major advantage of trading in options is truncated risk, whereby your

loss is limited to your initial investment, yet your profit is theoretically
unlimited. Diversification will allow you to use truncated risk to its
maximum advantage. While some of your positions will inevitably be
unprofitable, each profitable position can offset several unprofitable
trades. For example, assuming equal dollars invested in each of five
option positions, a bottom line profit will be achieved if three of the
positions yield profits of 100 percent, even if the remaining two positions
result in total losses.
Diversification should be two-dimensional. This is accomplished by

purchasing calls and puts (see below for a discussion of puts.). You are
then insulated from the impact of overall market movements. The

Option Advisor strives to provide you with the most attractive call and
put situations every month. Further details on truncated risk and two-
dimensional diversification can be found in The Options Handbook.
4. Put Options
Trade in puts as well as in calls. Many people believe that the only way
to make money in the market is to take a bullish position on an
advancing stock. This orientation is compounded by the general fear of
selling short, where one’s loss is theoretically unlimited. You can take a
bearish position by buying a put, yet enjoy the advantage of limited risk
offered by all options.
Remember also that ex-dividend stock price adjustments help put

owners, while they are a negative for call owners (see #24 on page 12
for a discussion of ex-dividends.) Each month, The Option Advisor
researches numerous attractive put and call situations to provide you
with the most potentially profitable option opportunities.
5. Target Your Profits
Set your profits objects in advance. You should calculate your target exit
point at the time you make your option purchase. By doing so, you will
avoid the consequences of one of the major stumbling blocks to
achieving trading profits - greed. It is virtually impossible for most
investors to set reasonable profit goals once an option has advanced
substantially in price. That "extra point" or "extra half-point" becomes a
moving target with each advance in the option’s price. It is not surprising
that, more often than not, the target is not achieved, and the investor is
forced to panic out at tumbling prices (thereby becoming a victim of
stumbling block number two - fear).
The Option Advisor gives you all the information you need to easily
calculate your target exit point for each option position. You merely use
the target profit percentage included with each recommendation. Once
you make your option purchase, set your price objective and do not
deviate from it, regardless of the temptation. Further detailed
explanations of target exit points and profit objectives, as well as a table
of pre-calculated target exit points, can be found in The Options

Handbook.
6. Protect Your Capital
You can protect your trading capital by using the appropriate asset
allocations listed in each month’s newsletter. Also, aggressive traders
should always establish a closeout date to exit a position that has not
achieved its profit objective. For instance, in The Option Advisor
Aggressive Portfolio, this date should be one to two months prior to
option expiration. By establishing a closeout date, you protect your
trading capital by avoiding the accelerated deterioration in option
premium (time decay) that occurs in the final month of trading. (Our Put
Selling portfolio, on the other hand, is designed to take advantage of this
time-erosion component of options.)
7. The Best Broker for Instant Executions
Use a broker who has voice contact (i.e., a direct telephone connection)
to the options trading floor. This is not the only factor in choosing your
broker, but in the fast-moving options market, a voice contact broker
offers instantaneous connection to the options trading floor. This gives
you a better chance of entering a trade at or below the maximum entry
price that we use in our recommendations.
8. Keep Your Commission Costs Down
Shop around for attractive commission rates. Of course, commission

rates should not be the only factor involved in selecting a broker.
However, since options trades are of very short duration, the cost of a
"round-trip" commission can have a significant impact on your bottom
line. Many of the discount brokers have sharply reduced the cost of
trading options. Also, a number of traditional full-service brokers are
willing to discount their full ticket commissions for active options
accounts. It never hurts to ask.
Discount brokers advertise regularly in Barron’s, Investor’s Business

Daily, and The Wall Street Journal. We also provide a list of brokers who
go the extra mile for options traders.

9. When to Ignore Your Newspaper
Don’t be misled by the closing options prices as listed in your

newspaper, as many of the less-active options do not trade throughout
an entire market session. In fact, the many of these less-active options
will often have their last sale early on in the trading day. (For that matter,
it’s entirely possible for an option to not trade at all on a given day.)
Naturally, if the underlying stock makes a significant move later in the
day, the closing options prices could be far out of line. Since complete
option volume figures are not generally published, it is not possible to
use printed volume as a gauge for the timeliness and accuracy of the
closing price.
Solution: Use the "Options Quotes" feature at SchaeffersResearch.com

to get the closing bid/asked quotation and the volume for each option
you are following (or have your broker do this for you). Either way, you
will have a big head start in the next morning’s trading over those who
base their trading decisions on the prior day’s "closing prices."
10. Interpreting Options Quotes
Don’t be confused by apparent discrepancies between an option’s last

sale and the bid/asked quotation. The options market is very fast
moving, and adjustments are made quickly in response to price
movements in the underlying stock. These adjustments are most quickly
reflected in the bid/asked quotation. For example, if an option is quoted
at "2 bid, 2-1/8 offered" with the last sale occurring five minutes ago at 1-
15/16, be assured that the "true current market" is reflected in the
bid/asked quotation. Be sure to incorporate the proper option pricing
information in your trading decisions.
11. Be Careful at the Opening Bell
Never place an order to buy or sell an option "at the market" on the
opening. Even the more actively traded options are not very liquid in
early trading, so market orders are likely to be executed at unfavorable
prices.
12. Beware of Market Orders

Confine your market orders during the day to the most actively traded
options, such as index options. In most cases, you will get better
executions with limit orders. If you are in a hurry to execute, buy at the
offering price or sell at the bid price. As a compromise, you can give your
broker discretion to execute your order at a price 1/16 or 1/8 of a point
away from the current market. This protects you from sudden changes in
the market, and eliminates the "anything goes" possibility inherent in
market orders.
Note: The options exchanges have introduced automatic execution

procedures that provide much better executions for market orders on
many option series. If you are trading an option on automatic execution,
a market order is a viable approach. Check with your broker.
13. The 4:00 p.m. Trap
Never put yourself in a situation where you must close (or feel you must
open) a position right before the closing bell. Most options are not very
liquid late in the session and, like the situation at the open as described
above, market orders will likely get filled at unfavorable prices. You’re
better off waiting for the following trading day.
14. Maximizing Your Liquidity
Use volume and liquidity data to help determine the proper size for each
option position. If every option were characterized by large trading
volume and small "bid/asked" price spreads, the amount you invest in
each option would be based almost solely on your financial situation and
temperament, as well as by the need to diversify. Unfortunately, this is
not often the case.
For example, let’s say you wanted to buy 10 contracts of a particular call
option, but discovered that an average of only three contracts per day
were traded over the past few weeks. In checking with your broker at
midday, you learn that the option is bid at 10, offered at 11-1/4, and that
no contracts have traded as yet. This presents a very difficult situation
for the potential buyer of 10 contracts. You may be able to purchase all
10 contracts at 11-1/4, but this is a very large premium (12.5%) over the
bid price. Worse yet, you may only be able to buy two or three contracts

at 11-1/4, with the remainder at 11-1/2 (or more). If you conservatively

decide to place a bid at 11 (or even 11-1/8), your order may not execute
for days (or at all, if the underlying stock price rises). Even if you
ultimately buy all 10 contracts, it could be in separate transactions of
one, two, or three at a time, thus costing you significant additional
commissions. Furthermore, the stock price may have moved against you
while you were acquiring the options, making your option purchase price
unattractive.
Solution: Avoid such options unless you are buying one or two contracts
(this, however, results in relatively high commission costs). If you are
very interested in the underlying stock, try to find an option on the same
stock with a different expiration date and/or striking price that has greater
volume and liquidity.
Or: Perhaps there is a comparable stock in the same or similar industry

with more attractive options. The short-life and longer-term options
recommended by The Option Advisor are typically more active and
liquid than average. The Option Advisor also publishes unique data on
volume and liquidity for every recommended option to greatly simplify
your decisions concerning the proper size of your position.
15. Use Limit Orders Intelligently
Watch your limit orders carefully (or have your broker watch them for
you). You cannot walk away from limit orders the way you can with
stocks. Since the true value of an option directly depends upon the price
of the underlying stock, your "bargain bid" of 15 minutes ago may
eventually be executed at a very disadvantageous price. For example,
take a stock at 50 with a call option bid at 6 and offered at 6-1/2. You bid
6, the stock drops quickly to 48, and you are the proud owner at 6.
Unfortunately, you shouldn’t have paid more than 4-1/2 at a stock price
of 48.
The moral: You should be in constant contact with your broker on

outstanding option limit orders to check whether they should be revised
or canceled.
16. Avoid the Thundering Herd

Don’t stampede into an option. Options often take a little while to get
rolling once the underlying stock starts a big move. The ideal time to buy
the option is in this "percolating stage" just before the public rushes in. If
you wait much longer, you will find yourself "stampeding with the herd"
and paying "retail plus" for your option. Even if you are very enthusiastic
about the underlying stock, it is usually best to stand aside at this point
and wait for more favorable price relationships. Amid the enthusiasm
and euphoria of the moment, ask yourself whether you really should be
buying an out-of-the-money option that has already advanced a full point
on a move of 1-1/4 points in the underlying stock!
17. How to Handle a Partial Execution
Don’t be overanxious on a partial execution. After you have placed an

order to buy 10 options at 8-3/4, your broker make get back to you
saying, "You bought five at 8-3/4, it’s your bid at 8-3/4 for the remaining
five, the option is offered at 9-1/4." Instead of immediately paying the
extra 1/2-point for the five options to fill your total order, wait a while.
Since it is "your bid," any options that come in to be sold at the market or
at 8-3/4 (or less) will be yours (up to a limit of five, of course). Your
chances are pretty good as long as the underlying stock remains in a
reasonable trading range. Of course, you and your broker should remain
in close contact so that adjustments can be made in your order to
respond to significant movements in the stock.
18. Demand Reasonable Executions
Don’t be afraid to question what appears to be a bad execution. For

example, you may have entered a "buy at the market" order for an
actively traded option, where the bid/asked spread was "10 bid, 10-1/2
offered." If your broker reports that you purchased your options at 10-
3/4, while the current bid/asked spread remains unchanged and the
underlying stock has traded in a narrow range, you are entitled to an
explanation. Your broker can obtain from the trading floor a sequential
listing of all trades in that option before and after your execution. If the
execution still appears out of line, it can be appealed to the exchange
itself.
Two important points to remember: The best way to help avoid this

situation is to place limit orders through your broker. Also, try to be

objective about the overall quality of your executions—it is usually the
excellent ones we forget very quickly.
19. Percentages and Bid/Asked Spreads
Don’t lose track of the concept of percentages when looking at bid/asked

spreads. Always look at the spread as a percentage of the bid price. It is
one thing to decide to pay the offering price when the bid/asked is "15
bid, offered at 16." You are paying 6.7 percent more than the bid price
(1÷15) to achieve an immediate execution. It is quite another thing,
however, to "pay asked" when the spread is "3 bid, offered at 3-5/8."
That "mere" 5/8-point extra translates into a premium of 20.8 percent
more (5/8÷3) than the bid price. Although this does not mean that you
should never pay the extra 5/8, you should definitely factor these
percentages into all of your trading decisions.
20. How to Understand Option Pricing
An options trader must be aware not only of the expected direction of the
underlying stock, but also the expected magnitude of the movement
(volatility) that the options market assumes to price the option. For
example, if the options market is pricing for a 10-percent gain in the
stock over a given period, and you correctly project a 20-percent gain
over the same period, you will make money buying calls on that
underlying stock. Thus, options traders will have a major edge if they
have a method to determine the likely price change of a stock over a
given period and then can assess the relative attractiveness (or
unattractiveness) of the option premiums. This is important not only in
the Aggressive portfolio, but doubly so in the LEAPS portfolio because of
the added time for a stock to move. Volatility considerations are of
primary importance for options players when the focus is on the
magnitude of a move, rather than the move’s direction.
21. Option Expirations and How to Handle Them
Be aware of option expiration dates and times. Options cease trading on

the third Friday of the expiration month. If your option is in the money, it
would still be possible to exercise the option if you notify your broker

prior to 5:30 p.m. eastern time (you should always alert your broker in
advance in these situations). Exercising a call would involve purchasing
the shares of the underlying stock at the exercise (or striking) price,
while exercising a put would involve delivering the shares of the
underlying stock in exchange for consideration equal to the number of
shares delivered times the exercise price. We do not recommend
exercising your equity options, due to the large cash outlays and relative
high commission costs involved. Instead, we recommend selling your in-
the-money options prior to expiration.
22. Profit from Index Options
Profit opportunities abound in index options. These options allow the

investor to take a leveraged position on the movement in the overall
market. Index options can be used in a number of different ways to
maximize your profits and reduce your risk. One of the most exciting
ways to use index options is very short-term trading, with holding periods
of one day to two weeks. While short-term index option trading has
tremendous profit potential, many traders are unsuccessful due to
buying overpriced options, inaccurate market forecasts, and trading on a
hunch or emotion. The key to successful index option trading is having a
disciplined, unemotional approach that can reduce risk while maintaining
the reward potential. Our QQQ Speculator and OA Wealthbuilder
services help traders overcome the problems that plague many novices
who trade index options. For further information on this exciting area of
investment, call your Schaeffer’s Investment Research account
representative at (800) 448-2080.
23. Keep Your Eye on the Bottom Line
Investors trade options to achieve worthwhile bottom-line profits in a

relatively short time frame. The big advantage in options trading involves
truncated risk - you can never lose more than your original investment,
but your potential profits are theoretically unlimited. Successful options
traders almost always have more losing trades than profitable trades, but
they still achieve substantial bottom-line gains. How? Their winners yield
far more dollars per trade than are lost in their losing trades. It only takes
two $2,000 profits in five separate $1,000 investments to achieve a
minimum 50-percent bottom-line gain, assuming that all three remaining

positions lose 50 percent each. Never look for perfection from your
option trades. A reasonable "batting average" will still yield large profits.
Just as in baseball, a ".400 hitter" in options trading is very rare indeed.
24. Ex-Dividends and How to Handle Them
Keep careful track of ex-dividend dates. On the day a stock trades ex-
dividend, its price will be adjusted downward by the full amount of the
dividend. As this date approaches, options premiums reflect the
upcoming "automatic decline" in the stock’s price. To the uninitiated, put
option premiums will appear inflated and call option premiums deflated,
particularly if the stock pays a large dividend. For example, if a $50 stock
is going ex-dividend for $1 the next day, the closing options prices will
reflect a stock price of $49. An analysis of option premiums based upon
the $50 price would be inaccurate and possibly quite costly to the
uninformed investor.
Solution: Ex-dividend information for all stocks can be found in Barron’s,

Investor’s Business Daily, The Wall Street Journal, and Daily Graphs
chart books. Or, ask your broker.
25. How to Handle Stock Splits and Stock Dividends
Keep careful track of stock dividend/stock split dates. On the day a stock
dividend becomes effective, all option striking prices are adjusted. For
example, if XYZ stock is selling at $100 and has declared a 100-percent
stock dividend (or a "two-for-one" stock split), the option with a striking
price of 100 will have a striking price of 50 on the effective date of the
stock dividend. Furthermore, a holder of 10 contracts with the 100
striking price will become a holder of 20 contracts with a new striking
price of 50. In the case of an odd stock dividend of less than 100 percent
(for example, a 50-percent stock dividend or "three-for-two" stock split),
new odd striking prices will be created. In the case of our $100 stock, the
100 striking price will become 66-5/8 and will be listed in the newspaper
as XYZ o 66-5/8. The o indicates that this is an old or pre-split contract.
In the case of a stock dividend of less than 100 percent, the post-split
contracts are adjusted differently. In our "three-for-two" example, a
holder of 10 contracts prior to the split would still own 10 contracts, but
each contract would represent the right to purchase 150 shares rather
than 100 shares. The true premium of such a contract would be the

published premium increased by 50 percent. Upcoming stock

dividends/splits will have a significant impact on the terms (or quantity) of
your outstanding options contracts. Complete information on stock splits
and stock dividends for the stocks underlying all recommended options
can be found in Barron’s, Investor’s Business Daily, The Wall Street
Journal, and Daily Graphs chart books. You can also ask your broker.

Top Gun Trading Techniques - How to MAXIMIZE Option Trading Profits

Welcome:
Schaeffer
Section
1:
2: Option Trade
3: Trading Options
Section
4:
Section
5:
Section
6:
"How to Maximize Option Trading Profits,"

an audio lecture by Bernie Schaeffer
You need RealPlayer software installed on your computer to hear the audio
file. If you have problems running the audio file after clicking the link below,
visit the RealPlayer website at: http://www.real.com
http://www.schaeffersresearch.com/services/oa/flightpack/maximize_profits.asp (1 of 12) [01/06/2003 1:42:52 PM]

Click Here To Listen To Bernie Schaeffer's Lecture
The following is a transcript of Bernie Schaeffer's lecture:
I'm Bernie Schaeffer, senior editor of The Option Advisor, and Chairman of
Schaeffer's Investment Research.
For the next half-hour or so I will be pinpointing those factors that contribute to
what I call the ideal option trade. I've grouped these factors into three
categories - technical, fundamental and strategic. I'll close by giving you four
conditions that should be immediate trade killers as well as ten major mistakes
to avoid.
The first technical principle is to buy calls on stocks in uptrends and buy puts
on stocks in downtrends. This may sound very trite, but this rule prevents you
from trying to pick a bottom in a weak stock or pick a top in a strong stock - a
very dangerous tactic when you're trading options.
While "the trend is your friend" is overdone as a trading rule, it is preferable to

the "sticking your head in front of a freight train" approach of trying to pick tops
and bottoms. Remember, an uptrend isn't going to stop dead in its tracks just
because you decide to buy puts. You might ask how you determine if the stock
is in an uptrend or downtrend. The easiest way is with moving averages. If the
stock is above its 50-day and 200-day moving averages, for example, it is
clearly in an uptrend. It should be at least above its 50-day if you are buying
calls.
The second rule from the technical standpoint would be to buy calls at support
levels and buy puts at resistance levels. An option trader needs to have the
odds tilted in his favor to the greatest extent possible. To do so you must
develop a trader mentality. Traders buy pullbacks and short rallies because the
odds strongly favor this strategy, despite the natural inclination of the
speculator to want to do just the opposite. So when an uptrending stock pulls
back to support, conquer your emotions and consider buying some calls.
The third rule would be to look for confirmation in the industry sector. If IBM
and Digital Equipment are weak, and Compaq Computer and Hewlett-Packard
are strong, a decision to buy Apple Computer calls is not made any easier. But
if most of the key stocks in the sector are rising in tandem, your decision to

play on the call side has greater validity. In fact, most good option trades are
based on a sector viewpoint first, and on an individual equity viewpoint last.
Finally, you should opt for steady non-volatile trends in the underlying equity,
rather than spectacularly volatile ones. A smooth, low-volatility uptrend will
keep option premiums low, and allow you to score big profits on calls if the
trend continues. The volatile spectacular gainer probably has very high option
premiums to match, making it very difficult to profit, even if you're right on the
direction. I know these stocks can be very tempting, but you're going to be
subject to whipsaws all over the place if you confine your trading to them.
Remember, with high option premiums you must be very right to make big
profits.
Look at the fundamentals. Normally the fundamentals are not very important
for a short-term approach like option trading. In fact, one of the biggest mistake
novice options traders make is to trade off a fundamental research report. The
time horizons just don't mix. But there are two fundamental factors a sharp
options trader can take advantage of.
The first factor would be earnings surprises. A stock whose earnings report
was better than Wall Street's expectations usually rallies on the news. But
that's not all. First, the rally usually goes further than the initial move, and
second, the more favorable the earnings report the more likely the next report
will also be a positive surprise (even though analysts will adjust their
expectations for the better earnings).
You as an options trader can profit from these situations in two ways. First, if
you are really nimble, buy short-term calls as soon as the positive earnings
surprise is announced, and close out a week or two later. Remember, by
positive earnings surprise, I mean that the report exceeded Wall Street's
expectations, not simply that this year's earnings exceeded last year's.
The second way to profit would be the longer-term play. You can buy four, five
or six month calls, or even the longer-term calls (known as LEAPS) if they exist
for that particular company. Close out a week or two after the next quarterly
earnings report.
Everything I've said here can also be applied to negative earnings surprises,
by playing puts. If you use a full-service broker, he should be able to provide
you with his firm's earnings estimate for a particular company, so you can

determine if the surprise occurs, real time. Three other sources would be The
Wall Street Journal, which now prints a list of positive and negative earnings
surprises every day, Value Line, which shows quarterly earnings estimates by
company, and Analyst Watch, published by Zacks, Inc., which also provides
earnings estimates for individual companies.
The second factor from a fundamental standpoint that you can play, would be
to consider buying options on stocks that are about to split - if you have a
strong bullish or bearish opinion. Since lower-priced stocks have greater
volatility and volatility determines a good portion of the price of an option,
option premiums often jump after a stock split. For example, if your sixty dollar
stock has a 60-strike call selling for 3, post-split the 30 strike call may sell for 1-
3/4 instead of 1-1/2. Since you would have two 30 strike calls, you would end
up with two times 1-3/4 or 3-1/2 in premium, instead of the 3 you started out
with.
Several caveats here. First, this doesn't always work. Sometimes pre-split
premiums get bid up in anticipation of the split. Second, try to pick a strike that
will be an even strike after the split. Odd strikes, like 27-1/2, for example, often
lack liquidity. And third, don't do this purely to play the split. Be sure you have
a strong opinion on the stock in addition, so you don't have to close out the
option if you don't get a volatility pop in the split.
My next segment involves the all-important concept of trading strategy. The

first principle of trading strategy would be to take your profits based on price,
and limit your losses based on time. I've heard stock option traders bemoan
the fact that certain exchanges, at certain times, were not taking stop orders.
In my opinion, they are doing these people a favor. The very worst strategy
when trading equity options is to use stops, for the following good reasons.
First, options are cheap vehicles to which you are committing a small amount
of capital. You know your risk is limited to that small dollar amount. So why use
stops and potentially eliminate a big profit? The way to limit your losses is to
buy a 3-month option, and close it out automatically after one month. In other
words, you are using a time stop to prevent your losses from running too far, or
from going into expiration and potentially losing all of your premium.
The second reason not to use stops in your options trading is that with the wild
swings in the equity options market and in the stock market, your chances of
getting stopped out are very high, even if the floor practice of "gunning the

stops" didn't exist. Take advantage of these wild swings by targeting a price on
the upside of at least a double, and putting in a "good 'til cancelled" order with
your broker to sell at that price. You might find that you will hit your target with
a smaller-than-expected movement in the underlying stock, once you have
your order out there in advance.
The second trading strategy principle: never trade with more than a fraction of
your capital, and always diversify when you trade. This is the one factor that is
the downfall of most option traders. Typically, someone with a hundred
thousand dollars in investment funds that has been devoted to stocks and
mutual funds will take fifty thousand dollars, invest it all in one three-week
option, blow their entire investment, and swear off options forever.
In this example, they should have taken ten thousand dollars at most and
bought options on four or five different underlying stocks, preferably some mix
of puts and calls. I say preferably because a mix of call and put positions
should be taken a majority of the time. However, the market does go through
obvious trending phases and a portfolio of all calls or puts is one way to
maximize returns in such trending phases, which occur only about 10-15% of
the time. Remember, options are cheap, and the advantage of something that
is cheap is it allows you to diversify, and it allows you to participate with a
small investment relative to your total trading capital.
My final trading rule might come as a surprise to some of you - go light on

index options unless you have access to professional advice. I know index
options are very popular. And everyone seems to have the "I knew exactly
what the market was going to do but my stock went the wrong way" mentality
at some time or another. Whereupon, they promptly go bust trading index
options. Why? First, market timing is a sophisticated combination of science
and art that most investors don't have the time and resources to be successful
at.
Second, you are by definition undiversified when you trade indices. Either
you're right or you're wrong. As an individual speculator, you're much better off
buying a package of different equity options and keeping your risk
manageable. And finally, index options are very expensive compared to equity
options, which means they tend to be priced above their true volatility. There
are, however, options strategies to take advantage of such expensive options
such as holding trades for very short time periods. And to reiterate, those who
seek to trade index options should heed the advice of a professional in this

area. Only those with sophisticated pricing models will be capable of sorting
through the index options to find those index options which are not richly
priced. This overpricing has been particularly true over the past several years
with index puts. So, even if you're right, you've paid so much in initial premium
that your profits are often sub-par or non-existent. One index option trading
method with which I have found particular success with is a strategy called a
credit spread. This strategy involves selling an out-of-the-money option and
protecting this naked sale with the purchase of a further out-of-the-money
option, for a net collection of premium. By utilizing this strategy, you take
advantage of the premium decay that often kills your average index option
buyer.
I now want to get into the factors that I consider to be trade killers. I think that if
one could pick up anything about trading options, it's the principle that you
don't have to be in there all the time. You don't have to be trading unless the
situation is just right. The fact that there are many, many hundreds of equity
options from which to choose allows you to walk away from a trade which is
not properly configured. And, I'll give you four negative factors, any one of
which should possibly kill a trade.
First, if there is heavy, out-of-the-money call open interest, and you're

considering a call trade; or if there is a heavy, out-of-the-money put open
interest and you are considering a put trade, you should forget it! Why? First,
the fact that there are so many speculators that agree with your assessment
should be an immediate red flag for you. Option speculators, I must say, are
usually wrong, and when they agree in large number, they are even more
wrong than they usually are. You don't want to be part of the crowd when
you're speculating in options.
Second of all, the options trading floor is going to be on the other side of this
open interest. And since we're all big boys and girls, we realize that they have
an incentive to try to cap or floor the stock by trading it. While this is not
admitted to in equities, this is an open practice in futures options. Very often
you will hear on the newswires that oil futures closed below a certain level
because there were a lot of open call positions that the trading floor didn't want
to see expire with any value. This is something that you at least have to be
aware of. So, from a contrary opinion or sentiment standpoint, and in terms of
the options floor being on the other side of your trade and wanting your trade
to be unsuccessful, you've got to avoid those situations where there is heavy
open interest.

How do you determine what this heavy open interest is? First of all you have to
have the source for picking up the open interest in the various options
contracts. Again, by open interest, I mean the number of positions that being
held overnight in particular options series. It's really a summation of all the
trading volume that takes place from the inception of that option to date of
positions that were not closed out in-between. You can pick up open interest
by strike from the Barron's options section, for example, or from the Daily
Graphs Stock Option Guide, where it's displayed next to each chart. You can
convert the open interest at the most active out-of-the-money strike to an
equivalent share volume very easily. Just take the open interest, and multiply it
by a hundred. If that resulting open interest is at least twice the average
trading volume of the underlying stock, I would consider that to be heavy.
Now you have to be a little bit careful in the so-called cycle month, for
example, the January, April, July, October months for IBM and the February,
May, August, November months for Hewlett-Packard. These cycle months
tend to have a lot of covered call options written in them. A lot of that open
interest can be covered calls, which is not particularly a negative for putting on
a speculative trade. You can usually note the situations that involve a lot of
covered calls because the average daily option volume is pretty low compared
to the open interest, often less than five percent or so of the open interest. But,
if in doubt, avoid those situations where the open interest is heavy on the side
in which you are looking to put the trade on.
The second trade killer: if there is chart resistance at your call strike, or if there
is chart support at your put strike, don't do the trade. By entering a trade under
these circumstances, it puts you in the position of betting on a breakout. While
the rewards are great if you are correct, the odds are too low to be playing this
with options. If you want to play a situation like that, play it with a stock, so you
have the staying power to wait until the breakout actually occurs rather than
watching your options expire before the breakout happens.
Another trade killer would be if earnings per share are due in the next week or
two, particularly for the high-PE stocks or tech stocks. This becomes just too
much of a flip of a coin. In these situations, the actual earnings are often way
off the estimates, and the shares react violently when the earnings come out. If
you're lucky that day you may make money, and if you're unlucky you'll get
killed. This is not the kind of approach you want to take in options trading. It's
the kind of approach you want to take in a casino.

Finally, the last trade killer. It involves implied volatility. If the implied volatility
on the option you are looking to trade is far in excess of what the historical
volatility of the stock is, particularly if the recent share volatility has not been
high, do not do the trade. I might add, it is OK to pay up on volatility if the
recent share action has been far more volatile than it's been historically,
because those option prices are simply reflecting some new information that
has occurred recently, particularly if you expect this high volatility to continue.
For example, I remember a situation with Dillards Department Stores way back
in the last half of 1990. The stock's historical volatility was very low, the recent
volatility picked up, and the options looked expensive on a historical basis. But
then what happened was the stock went from 80 to 60 to 90 in a matter of less
than three months, so in retrospect those options were not very expensive.
They were just continuing the more recent trend of high volatility.
But then there are other examples of where the high volatility is based purely
on expectations, and you just want to avoid these situations like the plague.
For example, just before the January 15th, 1991 war deadline in the Middle
East, the put options on Homestake mining were bid up to very high levels
even though the recent volatility on the stock was not very high. People were
expecting all kinds of things to happen after the war deadline. Well, the stock
plunged, along with gold on January 17th. But if you bought out-of-the-money
puts on Homestake, you didn't make any money that day. You don't want to be
right and not make money on your options trade. There are enough situations
where you're wrong and you lose money. You don't want to lose money on
situations where you're right.
So the rule of thumb would be - avoid options where the implied volatility is
greater than one and one half times a measure of the historical volatility. And if
you don't have access to options software to determine these volatilities and
comparisons, I would strongly suggest The Daily Graphs Stock Option Guide,
which provides all this information in a nice readable, tabular form.
Okay, now I'm going to go ahead and give you the ten major mistakes to avoid.
First, don't buy too little time. Once you have selected an attractive stock, you
will find there are a number of option expiration months from which to choose.
Most of you should avoid options that expire in just a few weeks or days. I'm
sure many of you have had experience with these. The typical investor is not
geared for such an extremely short time frame. Professionals are ones that
thrive in a market like this. The time value decay, as you know, in the final
weeks is extreme. I suggest the average option player buy options with about

three months of life and close out your position no later than four weeks prior
to option expiration, so you avoid the black hole, so to speak, in the decline in
option premium in that final month, if the position doesn't move or moves
against you. My experience in trading front-month options has been quite
good, but realize that analyzing options is my full-time occupation.
Second rule: stay away from options more than two strike prices away from the
current price. Such out-of-the-money options are generally lower-delta plays
meaning it takes a big move in the stock to create a small increase in the value
of the option. In turn, this increases the risk-to-reward ratio of purchasing this
position.
And I'll add an additional rule for you beginning option traders; and that would
be, you should consider sacrificing some profit potential and lowering your risk
by buying in-the-money options. Under no circumstances should beginning
option traders purchase out-of-the-money options without professional advice,
no matter how tempting the low premium looks to you.
The third rule: and I have alluded to this earlier; and I'll say it again, don't
confine yourself to call options; trade in puts as well as in calls. This rule
applies to trading-range markets, which occur about 85-90% of the time. A
particular mistake of beginners is to believe that the only way you can make
money in the market is to take a bullish position on an advancing stock. And
this orientation is usually compounded by the general fear of selling short, of
unlimited risk and all the bugaboos about selling short. But with the
widespread trading of put options, you can take a bearish position by buying a
put, enjoy the advantage of limited risk offered by all options, and also benefit
from the fact that very often puts are pretty cheap in comparison to calls. The
indices are another story all together, as many of you know, where actually put
options can become more expensive than calls.
My fourth rule: again I will restate, don't over-commit your funds. As I said
earlier, sound money management is vital to successful options trading. You
can't trade options as you would stocks and mutual funds. You have the
possibility of multiplying your option stake many times over and that's very
tempting, but you also face the possibility of losing your entire investment. So,
the first step toward intelligent money management in options trading is to
trade with only the portion of your capital with which you can comfortably - and
I emphasize comfortably - devote to speculation. By limiting your exposure you
can act rationally and sleep soundly, neither of which is possible when your

nest-egg is at risk in the options market.
The fifth major mistake to avoid: don't put all your eggs in one basket. Diversify
your options positions in a two-dimensional way. Number one: you should
have at least two option positions on different stocks, three would even be far
preferable to two. And number two: invest in calls and puts, and if you are
concerned about a short-term decline in an uptrending market, remember that
you can add a put or two to your portfolio as a hedge.
Number six: don't pyramid your option trading profits. Never risk your entire
trading capital on a single trade. This rule holds regardless of how successful
you've been previously, and regardless of how attractive that next trade
appears. There will always be losing trades, so by compounding your capital
after a few profitable trades, you are exposing yourself to some potentially
painful dollar losses once that loser comes along. The analogy here is sitting at
a Black Jack table and just letting your money ride with every winning hand.
No doubt, you're going to have a loser. Always keep a large portion of your
trading capital in reserve. You'll then have the staying power to ride out the
losers, so you can ultimately profit from the winners, including those winners
that show paper losses early, but are eventually closed out for gains. Those
situations happen all the time. This is also why we avoid stops. I would
suggest that you commit to no more than 10-20% of your total trading capital
devoted to options to any single equity option trade.
Another rule: option trading isn't for perfectionists, and the rule says don't
expect perfection. You trade options in order to achieve a worthwhile bottom-
line, and the emphasis is on bottom-line profits in a relatively short time frame.
The big advantage in options trading involves truncated risk. You can never
lose more than your original investment, but your potential profits are
theoretically unlimited.
Now you'll find that successful options traders almost always have more losing
trades than profitable trades, but they still achieve substantial bottom-line
gains. This is because their winners yield far more dollars per trade than are
lost in their losing trades. It takes only one five thousand dollar profit in four
separate one thousand dollar investments to achieve a minimum 50% bottom-
line gain, even if all three remaining positions are total losses.
Never look for perfection in your options trades. A reasonable batting average
will still yield large profits. A four hundred hitter in options trading is very rare

indeed, just as it is in baseball.
Number eight: don't trade without a profit plan and a projected closeout date.
This is extremely important. The options market is very fast moving. On a
particularly wild trading day, it's been possible to quadruple your money on
stock index calls in a matter of hours, before the market reverses direction and
you're sitting in a losing position. Always select a target profit at the time you
establish your option position, and stick to it. I suggest a target profit of at least
100% for each trade. A full-service broker can monitor your positions for you
and sell when you achieve your targets, or you can enter your sell orders at
your targets in advance. This is the route I would recommend.
Many greedy options traders have seen their profits evaporate, and often turn
to losses after they refuse to take a healthy profit in their attempt to strike it rich
from just one trade. Never attempt to strike it rich from just one trade. You
should also select a date on which you will close out your position if your target
is not achieved. This also is extremely important. The average option trader
concentrating on 3-6 month options should typically have a close-out date no
later than one month prior to option expiration.
Number nine: avoid perennial takeover candidates. The call open interest on
these issues tends to be very large, which is negative, as I've previously
discussed. And option premiums tend to be sky-high, so if you keep buying
calls to replace those that have expired worthless in hopes that the takeover
will ultimately take place, your total expenditure could eat up most or all of your
potential profits even if you're right. Conversely, such issues offer excellent
opportunities for the covered call writer. Sell calls that are one or two strikes
out-of-the-money, and keep rolling them out every month. But you must be
psychologically prepared to lose your stock at a cheap price should a takeover
actually occur!
Finally: don't place orders at the opening or closing bells. Never place an order
to buy or sell an option at the market at the opening. Even the more actively
traded options are not very liquid in early trading and late in the session. It is
difficult for the options floor to hedge their positions with stock. So market
orders are often executed at unfavorable prices at the beginning of trading and
at very late in the options trading session.
Since we have some extra time, I'll throw in a few "bonus rules":

Number one: determine the strike price that you'd like to buy and then move
one strike "closer to the money". Why? Because most options traders
incorporate their most optimistic expectations for the underlying stock into their
strike price decision. They fail to take into account such things as unfavorable
market movements and small rather than big movement in the stock. So, if
XYZ Corporation is at 100 and you're looking at the 110 call, but the 105 strike
instead. And if you feel you can't afford the higher-price 105 call, then you
probably shouldn't be playing the riskier 110 call either. The only exception to
this rule would be in a situation where the 110 strike is significantly
undervalued compared to the 105, a situation that occurs rarely and is usually
quickly pounced on by professionals.
Number two: by the same reasoning, go to the next expiration month beyond
that which you were looking to buy. Most option players don't give themselves
enough time until expiration for their scenario to work out, and many novices
get caught up in the extremely difficult game of buying options with just a few
weeks or even days until expiration. And while we normally don't recommend
going more than one strike out-of-the-money, if you must buy a far out-of-the-
money option, make sure you have 4, 5, or even 6 months until expiration.
Number three: shop around for attractive "deep discount" commissions. If you
use a discounter, remember that the option rates for the "Big 3" of Schwab,
Quick & Reilly and Fidelity can be far higher than those for the deep
discounters. And if you trade actively with a "full-service" broker, negotiate a
discount off the firm's published rate schedule. It's done all the time. And
remember, full-service should mean keeping track of your orders, confirming
executions and providing you with advice when you want or need it.
In closing, I'd like to remind you that these trading principles plus much more
are covered in my new book "The Option Advisor: Wealthbuilding Strategies
for Equity and Index Options."
Thank you for spending this time with me.

Top Gun Trading Techniques - Brokerage Firms

Welcome:
Schaeffer
Section
1:
2: Option Trade
3: Trading Options
Section
4:
Section
5:
Section
6:
Brokerage Firms that Go the Extra Mile for

Option Investors
To help you search for a broker that best meets your needs,
SchaeffersResearch.com provides a short list of brokers firms to compare and
investigate. The brokerage firms listed at the links below have supplied
information at SchaeffersResearch.com's request. Inclusion on this list does
not represent a recommendation or preference for any or all of these firms
over any other firm.
http://www.schaeffersresearch.com/services/oa/flightpack/brokerage_firms.asp (1 of 2) [01/06/2003 1:42:57 PM]

Top Gun Trading Techniques - Brokerage Firms
Please realize this does not represent a commission schedule. Commissions

vary depending on account activity and account size.
Auto-Trade
You may notice that certain firms offer automatic trading for
SchaeffersResearch.com customers. Customers may automate trading by
authorizing the use of limited discretion for order execution. Upon the receipt of
a recommendation, the broker implements a trade in either dollar amount or
quantity according to your prior allocation instructions. Please call each firm for
the specific details of their auto trading process.
NOTE: The information obtained for this listing is believed to be from reliable sources, but cannot
be guaranteed. In addition, SchaeffersResearch.com has no affiliation with any brokerage firm,
and cannot accept any responsibility for an individual's experience with any brokerage firm. The
responsibility lies solely with the customer in determining whether or not auto trading suits his or
her individual investment situation.
Click here to view broker list in PDF format
http://www.schaeffersresearch.com/services/oa/flightpack/brokerage_firms.asp (2 of 2) [01/06/2003 1:42:57 PM]

Bernie Schaeffer - Option Advisor - Top Gun Trading Techniques

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Bernie Schaeffer - Option Advisor - Top Gun Trading Techniques

Caricato da

Copyright:

Formati disponibili

Option Advisor: Top Gun Trading Techniques

Current Calendar Option Advisor Handbook Archives Help

Welcome to the Crash Course in Options

Thank you for subscribing to The Option Advisor! You

As promised, listed below are links to your Crash Course

1. Characteristics and Risks of Standardized Options - This guidebook

2. Your Step-by-Step Guide to Making Your First Successful Option

http://www.schaeffersresearch.com/services/oa/flightpack/ (1 of 3) [01/06/2003 1:38:40 PM]

Trade - Executing a successful option trade has never been easier.

3. The 6 Most Dangerous Errors Made by Amateurs When Trading

4. 25 Amazingly Profitable Ways to Trade Options - This special guide

5. How to MAXIMIZE Option Trading Profits - This in-depth audio

http://www.schaeffersresearch.com/services/oa/flightpack/ (2 of 3) [01/06/2003 1:38:40 PM]

Customer Service Help Line

http://www.schaeffersresearch.com/services/oa/flightpack/ (3 of 3) [01/06/2003 1:38:40 PM]

Current Calendar Option Advisor Handbook Archives Help

Top Gun Trading Techniques Table of Contents

Characteristics and Risks of Standardized

http://www.schaeffersresearch.com/services/oa/flightpack/cboe.asp (1 of 2) [01/06/2003 1:40:40 PM]

http://www.schaeffersresearch.com/services/oa/flightpack/cboe.asp (2 of 2) [01/06/2003 1:40:40 PM]

Current Calendar Option Advisor Handbook Archives Help

Top Gun Trading Techniques Table of Contents

Your Step-by-Step Guide to Making

http://www.schaeffersresearch.com/services/oa/flightpack/first_trade.asp (1 of 3) [01/06/2003 1:41:33 PM]

recommendations), tell your broker which options you want to buy

3. Always give your broker a maximum entry price (sometimes called a

5. THE OPTION ADVISOR recommends that you place a "limit order" at

http://www.schaeffersresearch.com/services/oa/flightpack/first_trade.asp (2 of 3) [01/06/2003 1:41:33 PM]

http://www.schaeffersresearch.com/services/oa/flightpack/first_trade.asp (3 of 3) [01/06/2003 1:41:33 PM]

Current Calendar Option Advisor Handbook Archives Help

Top Gun Trading Techniques Table of Contents

The 6 Most Dangerous Errors

http://www.schaeffersresearch.com/services/oa/flightpack/errors.asp (1 of 4) [01/06/2003 1:41:49 PM]

1. Inappropriate short-term selection methods

Trends in prices, whether up or down, have a tendency to last longer

http://www.schaeffersresearch.com/services/oa/flightpack/errors.asp (2 of 4) [01/06/2003 1:41:49 PM]

http://www.schaeffersresearch.com/services/oa/flightpack/errors.asp (3 of 4) [01/06/2003 1:41:49 PM]

http://www.schaeffersresearch.com/services/oa/flightpack/errors.asp (4 of 4) [01/06/2003 1:41:49 PM]

Current Calendar Option Advisor Handbook Archives Help

Top Gun Trading Techniques Table of Contents

25 Amazingly Profitable Ways to Trade

1. Options Trading and Your Financial Situation

Trade options in accordance with your financial situation. Never risk

http://www.schaeffersresearch.com/services/oa/flightpack/25_ways.asp (1 of 12) [01/06/2003 1:42:05 PM]

2. Options Trading and Your Temperament

Trade options in accordance with your temperament. Even if you are

A major advantage of trading in options is truncated risk, whereby your

Diversification should be two-dimensional. This is accomplished by

http://www.schaeffersresearch.com/services/oa/flightpack/25_ways.asp (2 of 12) [01/06/2003 1:42:05 PM]

Remember also that ex-dividend stock price adjustments help put

5. Target Your Profits

http://www.schaeffersresearch.com/services/oa/flightpack/25_ways.asp (3 of 12) [01/06/2003 1:42:05 PM]

6. Protect Your Capital

7. The Best Broker for Instant Executions

8. Keep Your Commission Costs Down

Shop around for attractive commission rates. Of course, commission

Discount brokers advertise regularly in Barron’s, Investor’s Business

http://www.schaeffersresearch.com/services/oa/flightpack/25_ways.asp (4 of 12) [01/06/2003 1:42:05 PM]

9. When to Ignore Your Newspaper

Don’t be misled by the closing options prices as listed in your

Solution: Use the "Options Quotes" feature at SchaeffersResearch.com

10. Interpreting Options Quotes

Don’t be confused by apparent discrepancies between an option’s last