OK so let’s start with some Options Basics and then get directly to the point.
What is an Option?
An option is the right, but not the obligation, to purchase or sell a stock at a specified price, called a strike price, for a specific period of time until expiration date.
What is a Call Option?
A call option gives the holder the right to purchase a specified quantity of the underlying stock at a specified strike price by a specified expiration date.
What is a Put Option?
A put option gives the holder the right to sell a specified quantity of the underlying stock at a specified strike price by a specified expiration date.
How does an Option Trade work?
Example: an issuer sells a call option, granting the holder the right to purchase 100 shares of a specific stock at $50 per share by a specified expiration date. At expiration date, if this stock is trading at $47, the holder would not exercise the option because it would not be prudent to pay $50 for a stock that is worth $47.
However, if at expiration date the stock price is $54, the call option holder could purchase 100 shares of the stock, NOW worth $5,400, for only $5,000.
What is the premium relating to an option?
The premium is the price paid for the option. The premium is a factor of the intrinsic value of the option (the difference between the current price of the stock and the strike price) and the time value premium the value that a speculator is willing to pay for the possible performance of the option until it expires).
The time value premium lessens as time approaches expiration, to the point of 0 on expiration date.
How is my investment protected compared to high-risk option trades?
The time value premium is a direct function of the volatility Factor that we analyze with computer modeling of historical price performance.
This is the fundamental premise of our investment strategy
By writing or selling call options with high volatility factors for short term periods, our clients capture excess time value premiums which erode away from the buyer, and accrue to our clients as time approaches expiration date.
How does your options strategy protect against the price rise in the underlying stock?
The client protects against a price rise by buying a long-term call option with a strike price above the current selling price of the underlying stock. Computer modeling will determine the theoretical value of said call option. We search for undervalued long-term call options (9 or 10 month options) with sophisticated computer analysis.
Why is this strategy profitable for our clients?
This is profitable because buying short-term call options give speculators extreme percentage leverage on an upward price movement in the underlying stock. This is fine if you have a crystal ball to predict a short-term upward price move. No one is so astute that they can make such a prediction with accuracy.We take the other side of the transaction by advocating you SELL (write) this short-term call option, instead.
- If the stock price rises, our client is perfectly hedged, and both parties profit.
- If the stock price remains static, our clients profit by lowering their cost basis in the call option that they own.
- If their cost is lowered to 0, or produces a credit, by following this procedure for several periods, the profits can be substantial.
If this strategy is so profitable why doesn’t every investor use it?
First – most investors are impatient for a greater and faster return on their investment, this being 100+% return in less than one year. However, banks and major corporate pension plans use conservative investments in options to balance their portfolios.
This conservative investment is not a get-rich-quick plan or silver bullet. It produces a simple, steady return on your investment over time. We tell our clients: “Let the other guy gamble and take the risks, stay with the sure bet, and win.”
Second – most investors don’t have the tools or expertise to successfully use these sophisticated techniques. Our staff has over 30 years of experience in using these strategies. We’ve witnessed both Bull and Bear markets in to make worthwhile Returns on investments, regardless of market performance.