Basic Option Strategies for Income

1. Basic Option Strategies for Income Enhancing Profits for Building Wealth Walnut Creek – December 16, 2009

2. Topics Covered so far • This is the fourth and final discussion in this series of discussions on basic option strategies • Session 1: Option Basics • What options are and how they work (calls and puts) • The option Greeks and what they mean • Time Decay and its implications • Basic Long strategies – Their potential rewards and risks • The advantages of being a seller of options

3. Topics Covered so far Session Two: Basic Selling Strategies Naked Put Selling – Get paid to buy stock at a discount Covered Calls – Better than Dividends Session Three: Vertical Credit Spreads Bull Put Spreads Bear Call Spreads

4. Tonight’s Topic • Adjustment Strategies for Vertical Spreads gone bad • The goal of the game is to make money • Select high probability trades that can make money even if the trade doesn’t do what you think it will – Make money whether the underlying goes up, down or sidways

5. Credit Spreads – Basic things to remember • Keep time on our side • Don’t panic if the trade doesn’t behave like you want it to from the beginning • Select volatile stocks • Higher premiums – more potential for profit • Easier to repair. • Plan exit / repair strategies before entering the trade • Don’t be greedy – Get out when profit target has been met

6. Critical Point about the Market • I have a crystal ball so I know with certainty what the market will do tomorrow!!!! • It will go up • It will go down • or • It will go sideways

7. Critical Point about the Market • The truth is, no one knows with certainty what the market will do tomorrow • We use Technical Analysis to make a prediction about what the market or a stock is likely to do • It’s a little like forcasting weather - far from perfect • It gives you an edge, but there will be times when you’ll be wrong – We need to plan for those times!

8. FSLR Trade Management

9. FSLR Trade Management

10. FSLR Trade Management

11. FSLR Trade Management

12. FSLR Trade Management

13. FSLR Trade Management

14. FSLR Trade Management

15. FSLR Trade Management

16. FSLR Trade History

17. General Rules • Identify Levels of support and resistance • Look for a strong level of support (or resistance) above or below the short strike • Check for next level of support or resistance (want the underlying to have a long way to move if it breaks with conviction (a break with much larger volume than normal) • Don’t adjust a trade until the trend is broken – Wait for Confirmation

18. Example of support break

19. Actions you can take • Buy back the short strike and let the long run • Help offset the cost of buying back the short strike by selling vertical spreads (can be OTM or ITM) as the situation dictates • Buy a put or call option (will gain value to offset the decrease in value of the short vertical spread • Roll spread out and up or down • Use your imagination – But Don’t Panic!!!!

20. Actions you can take • Practice with paper money until you master the art • Don’t expect to be perfect – You don’t have to be to make money • Get a trading buddy - It helps to discuss ideas with someone else • Be persistent – Don’t give up – You can do this!!!!

21. “You know you’re a trader when you’re wrong and still make money” Tom Sosnoff – Founder, Thinkorswim “It is not necessary to try to get rid of fear in order to succeed” T. Harv Eker – Secrets of the Millionaire Mind Notable Quotes