Effective stock strategies and portfolio management

Limits of Liability / Disclaimer of Warranty: The authors of this information and the accompanying materials have used their best efforts in preparing this course. The authors make no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this course.

They disclaim any warranties (expressed or implied), merchantability, or fitness for any particular purpose. The authors shall in no event be held liable for any loss or other damages, including but not limited to special, incidental, consequential, or other damages.

This manual contains information protected under International Federal Copyright laws and Treaties. Any unauthorized reprint or use of this material is strictly prohibited. We actively search for copyright infringement and you will be prosecuted. ŠCopyright protected, 2013

www.lampstradingtips.com Visit Lamp’s Trading Tips for updated market commentary, interviews with traders, technical and fundamental lessons on investing and much more!

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Table of Contents: PART ONE: GETTING STARTED Foreword ........................................................................5 Introduction ....................................................................5 Have the Company Pay for Everything ...........................6 Patience is a Virtue .........................................................6 Your First Step ................................................................7 What you need to get Started ........................................8 Managing Your Portfolio is Managing Your Business .....9 Psychological Expectations .............................................10 Setting Goals ...................................................................11 The Value of Your Education ..........................................12

PART TWO: UNDERSTANDING THE BASICS Options ...........................................................................14 Introduction to Options ..................................................................................... 14 What is an Option .............................................................................................. 14 Understanding Options Terminology ................................................................ 15 How Options are Priced..................................................................................... 16 How Options are Displayed ............................................................................... 18 The Bid/Ask Spread ........................................................................................... 19 Call Options ....................................................................................................... 19 Put Options ........................................................................................................ 20 The Greeks ......................................................................................................... 21 Getting your Account Ready for Options .......................................................... 22

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Margin ............................................................................23 Day Trading .....................................................................24 Financial Advisers ...........................................................24

PART THREE: BUILDING YOUR PYRAMID Strategy ..........................................................................27 Trading Stocks ................................................................................................... 28 Speculative Stocks ............................................................................................. 37 Investment Stocks ............................................................................................. 39 Allocation and Diversification ........................................................................... 40

Implementation ..............................................................41 Mindset...........................................................................41 You ..................................................................................44 Think Differently ................................................................................................ 44 Develop your Mindset ....................................................................................... 45

PART FOUR: LAMP’S TRADING RULES Putting it Together ..........................................................50 Conclusion ......................................................................51 Calculating Value ............................................................52 Full risk disclosure...........................................................53

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Part One: Getting Started FOREWORD Thank you for downloading my eBook. I hope that it will give you a good starting point and lead you to consistent profitable investments.

I would like to start by saying that this is not a get rich quick guide. I am not providing a magic formula or the next hot stock. If you’re looking for a quick fix or overnight riches then you need to close this book.

The goal of my website is to teach you some simple and proven investment strategies that will generate income for you over the long run.

This eBook is for individuals looking to get started and intermediate investors looking for a set strategy or a better way to manage their portfolios.

One of the main reasons I created this website and dedicated my time to educating other investors is because of what happened in 2008 with the financial markets. The economy as we knew it was on the brink of collapse. I had heard the worst stories from families and individuals who lost their retirement savings in less than 6 months. I just really don’t want that to ever happen to anyone again; I would like to show you how to prepare for such events in the future should they happen. With that being said…..

If you are ready to take your financial education to the next level then please keep reading…..

INTRODUCTION Today’s markets are so different to what they used to be only a decade ago. The days of buy and hold are over and the days of buy and hedge are among us. Thanks to the internet revolution and the easy access to powerful trading software much of the playing field between Wall Street and Main Street has been leveled out. You don’t need to be on the floor of an exchange to make a high number of transactions anymore; all you need is a computer. Yes, some might argue that the gap between Wall Street and Main Street will always be huge, but I do believe we have come a long way.

I truly believe the stock market is the best and easiest way to get started investing. Unlike investing your money into a property or business venture, in the stock market you don’t need a building, you don’t need employees, you don’t need any people skills, you pretty much don’t need anything but your computer and an internet connection. You also don’t need as much startup capital as you would if you were to invest in most business and real estate ventures. You also have an abundance of up to date information right at your fingertips.

You might be hesitant to put your money into the market after what all your friends have told you “it’s risky” “you can’t make money” “I’ve only heard horror stories” “that’s only for the guys on Wall Street” and I don’t blame your friends. They have only spoken to people who have never had a set strategy or 5

the right mindset to approach the market. If you enter with this mindset of course you’re never going to make any money!

Ruben in the movie Ocean’s Eleven said it best:

“The stock market is not beyond the realm of human understanding” He was right; once you understand how it works you will realize that everything you’ve heard was not true. Your friends that have told you that investing is “risky” are also wrong. While there will always be an element of RISK involved, it is not risky if you understand your strategy, plan accordingly and MANAGE your risk.

HAVE THE COMPANY PAY FOR EVERYTHING There are so many wonderful perks to investing in the stock market. Having the company pay for everything is just one of them. Want to get a new iPhone? Have Apple pay for it. Want to get free Chipotle burritos? Have Chipotle pay for it. How do you do this? Very simple…you make money from the company’s stock and then you use that to purchase whatever your heart desires.

For instance Hewlett Packard has paid for the last 2 computers I bought, Sprint has paid for my cell phone bill for about 2 years, Black Berry maker Research in Motion has paid for a lifetime supply of Blackberry’s, and Microsoft has paid for every cent I’ve ever spent with them.

Pretty sweet system is it not? It also feels good to tell yourself when walking out of a store that your purchases were “on the house”

PATIENCE IS A VIRTUE Just like Rome wasn’t built in a day, neither was your investment knowledge. It takes serious patience, perseverance, discipline, courage, disappointment, and hopefully some fun along the way.

With every piece of information that you take in you become one step closer to being successful and being in control of your finances. I urge you to please stick with it and don’t give up when road blocks present themselves. You will make mistakes and you will have failed investments, you need to be able to accept this fact and how you handle this and how much you can learn from these mistakes will determine how successful you become.

Let me tell you how painful my start was….

When I got started I had absolutely no idea what I was doing. I thought I knew how to analyze companies and understand how the markets work but I was sailing into storm with a paddle boat. I was a sucker for emails promising their recommendation is the next Google or Apple. My first 7 months I CONSISTENTLY made bad decisions which led to constant losses! I was extremely frustrated because I had spent so much time reading and absorbing information that I felt like it was impossible to ever 6

succeed in the market. Imagine making constant losses for 7 months STRAIGHT….it’s a very scary thought to most people and looking back I’m surprised I stuck through it. I remember very vividly one point where I was convinced that I was done and I was about to give up. I had lost a lot of money the week before and was set on making it back with a trade I put on Microsoft. I had placed an options trade on MSFT and it turned against me. I told myself that I was done because I couldn’t handle the frustration and disappointment from working hard and getting no reward from it. I eventually got over the fact that I had lost so much money and decided to continue trying.

After 7 months I had my first meaningful profitable trade on Citi bank. Few moments in my life I remember that I was that happy. Seeing a large profit in my account felt amazing. Looking back on that trade it was the dumbest thing I could have ever done and I got EXTREMELY lucky. I basically put all my chips on red and spun the roulette wheel. At the time it seemed like a good idea but now that I know more I realized it was a terrible idea. For the next 8 months I was making some profitable trades but for the most part I was throwing darts at a newspaper trying to pick stocks.

It wasn’t until about a year and a half that I had developed a strategy to where I ACTUALLY understood what on earth was going on. I finally managed to allocate my portfolio into different types of profitable investments in order to make consistent income. My goal is to teach you my strategy so that you can avoid all the frustration and disappointment I endured. My dad always told me that a smart man learns from other people’s mistakes and an idiot learns from his own. It’s your chance to be the smart man/woman and learn from my mistakes.

YOUR FIRST STEP The very first step that I need you to do before you proceed any further is to understand your own personal financial situation. I was absolutely shocked to hear how many people have no idea what their monthly expenses are. What you need to do is understand ENTIRELY what your financial situation is and how much you are able to invest.

The first thing I need you to do is print off the last 3 months’ worth of bank statements. If you have more than one bank make sure you have every one of your statements in front of you. Next you are going to create categories for your expenses such as groceries, eating out, car payments, mortgage, rent, gym membership, entertainment, and any other category that might pertain to you. Create a column for each category. Then look at your bank statements and write down each and every single expense in the corresponding column. You don’t have to write exactly what it was for; just write the amount in the correct category.

Once you are done go ahead and add it all up. It is going to give you a good average of how much money you are spending each month. For the vast majority of you out there you will most likely be shocked and a little disappointed as to how much you are spending (most likely on things you don’t need) Now that you have an estimate of your monthly expenses you should be able to identify areas where you can actually save. Is it really necessary to spend $4 a day on Starbucks coffee when making your 7

own will cost $4 a week? Look for these sorts of areas where you feel you spend too much and try reducing it.

The next step is to calculate your liquid net worth. By liquid net worth I mean cash. There is no point of you calculating your total net worth to see how much money you can actually invest. You’re not going to sell your car to buy stock are you? Look at how much cash you have and ask yourself how much are you willing to invest? Take a moment to identify how much money goes into your savings each month. Think about future expenses you may have. Only you will know how much you can actually afford to invest based on your financial situation and your personality. This exercise is simply to help you take control of your finances and figure out how much you are able to invest.

Once you have your number you can move onto the next step….educating yourself on how to grow your money.

WHAT YOU NEED TO GET STARTED There are only a few items you need to get started with your investing and you probably have them already.

1) A computer 2) A cellphone (Preferably a smart phone) 3) An internet connection 4) An online broker You probably have all of these already or might just be missing one. I recommend you open a brokerage account with TD Ameritrade. It won’t cost you anything except 15 minutes of your time and all the lessons and demonstrations I provide are on their trading platform. I’m not going to go in depth about my recommended broker; if you want more details go to my website and read about it on the “brokers” tab.

The most common question asked when starting out: How much do I need to get started? Well my personal recommendation is that you start with no less than $2000. This is just my recommendation.

Starting with $2000 will give you a decent amount of buying power. You can start with less but it will be difficult to use a good strategy with very little capital.

Another question often asked is if you need to buy trading software? The answer to this question is a very resounding NO! If you have a good online broker you will receive a trading platform as part of you being a client and it won’t cost you anything extra. Since I am a client of TD Ameritrade I use their trading platform called Think or Swim which is the best trading platform available. You get it free when opening an account with them. I have seen trading software that costs thousands of dollars that doesn’t compare to Think or Swim. I have also seen software that costs a couple hundred dollars that only provides one or two features that are already built into the Think or Swim platform.

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In addition you can download a good free trading platform online called Meta Trader. To conclude NO you don’t need to spend hundreds or thousands of dollars on trading software. It all comes free from your broker.

MANAGING YOUR PORTFOLIO IS MANAGING YOUR BUSINESS One thing that I have never understood is that individual investors don’t understand that managing their own portfolio is much like managing a business. The reason investing in the stock market is the best business in the world (in my opinion) is because you don’t have any competition. You don’t have to worry about someone opening a shop right next to yours selling the same thing you do. You don’t have to worry about your product or service becoming obsolete. Starting and managing a portfolio is so much easier than starting a new business, or buying a real estate investment. You don’t have to look for employees, vendors, a building or anything like that! You don’t need to spend time on the phone or interact with anyone if you don’t want to. It’s just you and the numbers! Also the amount of information available to you is unlike any venture you can get into. You have constant up to date news as to what is going on in the markets all at your fingertips. Imagine running a pizzeria and getting a text message updating you on your competitors’ new recipes.

Most of you will be able to relate to general business expenses. What I mean is that you understand a business has revenues and it has expenses. The difference between these numbers is the profit. If you have a body shop that repairs cars your revenue is driven by the amount of money you make from people needing their cars fixed, and your expenses are the wages you pay to your workers (Among other things).

The same would be true for a real estate venture. If you own a single family home that you rent to someone else your revenue is the monthly payment your tenant makes and your expenses are your mortgage payments.

I’m sure you understand this concept of revenues minus expenses equals profits?

Since your portfolio is in fact a business you will have revenues and expenses. Here is a different way to think of your losses. Think about your gains as your business’ revenue and your losses are simply your expenses. At the end of the month your portfolio (business) deducts gains (revenues) from your losses (expenses) to arrive at profit! What I’m trying to show you is that managing a portfolio is just like managing a business only much easier, and yet people associate the stock market with insurmountable stress and uncontrollable losses.

Seriously people it’s nothing like that…..

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PSYCHOLOGICAL EXPECTATIONS When it comes to putting up money in the hopes of making money there is a HUGE psychological aspect that needs to be understood. At some point you are going to make money and at some point you are going to lose money. You might think that making money is something anyone can handle. Well there is a lot more to it than you might think. Making money by “not working for it” is a concept a lot of people will never understand. If you have never made any money except from a paycheck this might apply to you. Seeing money coming in from means other than a paycheck could require some getting used to.

Having large gains in your portfolio could change your investment behavior. You could become arrogant and start making stupid decisions that will lose you money.

On the other hand we have losses. This is what stops most people in their tracks…the fear of losing.

Being scared of putting your hard earned money into something that could potentially lose you money is a scary thought to most people, but if you ever hope to have some sort of financial security then you HAVE to take that first step.

Being able to handle your losses and still make rational decisions is a SKILL that you need to develop.

The only way to develop this is by having a plan where your day to day losses don’t affect you. Having the ability to handle losses is a vital asset when it comes to managing your portfolio. I will show you some ways to help you handle your losses with a clear mind and not an emotional one.

For example…..

A friend of mine runs a successful home business and was explaining to me what he does. He told me that the line of work he is in is very competitive and requires a decent amount of capital to get started.

He asked me if I would like to look into doing the same thing as him and I said sure. He told me that when starting out it’s almost a sure bet that I would lose money until I got the hang of things. What I said next is important because to be able to say this takes experience: “That’s okay; I already know how it feels to lose money” What I’m saying is that I already know how it feels to experience losing money and so I became less and less fearful of the idea. I realized that I have a set strategy that works and I stick to my strategy, so day to day losses don’t mean anything to me because over the long term I will be in the green.

The same works for every business venture….your plan is what reduces your fear of losing. If you have a good plan and stick to your plan you will end up in the green. Always remember:

Money is expendable There will always be more to be made on another day from another opportunity.

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SETTING GOALS One thing you need to do for yourself is to set some goals. Things that you want to achieve in your finances. Perhaps personal milestones you would like to reach. I am NOT talking about profit goals. I do not want you to set any goals at this point in time as to how much money you would like to make. The goals I’m talking about are your learning goals. For example; You could set a goal to spend 1 hour a week learning a new options strategy.

You could set a goal to spend 30 minutes a week researching and keeping up to date with the companies in your portfolio.

You could set a goal to speak with someone who is knowledgeable about the markets once a week.

Hopefully you get my point here. Set goals that are not profit related, just education related. Give yourself the desire to learn more. The more you know the more confidence you will have when it comes time to send your orders.

Goal setting is a very important part of being successful in the markets. It also gives you something to think about and something to do. When you have some free time and you’re not sure what to do with it, just look at your goals and start working on the ones you haven’t achieved.

Your task before you read further is to set 3 EDUCATIONAL goals for yourself. They should be weekly goals (short term) similar to the ones I listed above. They should be specific and hopefully have a number in there, for instance “read 3 articles a week in the WSJ”. Start small and build on that, don’t bite off more than you can chew. And most importantly….WRITE YOUR GOALS ON PAPER!!!!

I said in the previous paragraph about how important goal setting is and the sad part is that about 70% of people reading this won’t write their goals down. Nothing I can do about that, but I strongly encourage you to do so.

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THE VALUE OF YOUR EDUCATION I am going to assume that most of you graduated from college or at least went to college. If you didn’t that’s fine too you will still understand what I am saying……

Here is what I don’t understand….

Your standard college degree takes 4 years or 8 semesters to complete. Most students take longer, but for this example we are going to use 8 semesters. At an average of 4 months a semester that means it takes 32 months to earn a standard college degree.

I’m going to throw out a number here and say an average college will cost $20000 a year. That includes everything from tuition to room and board. You might have paid a lot more than that or you might have paid less, but $20,000 is a good estimate. With $20,000 a year that comes out to $10,000 a semester, and $80,000 over 4 years.

After college an average student will get a full time job that pays $40,000 a year. With the way things are right now this number is a little ambitious, but depending on what city you live in this could be attainable.

So on AVERAGE using my made up numbers a student will spend 32 months of their time and $80,000 of their money on their education. After they graduate they will have to work full time for 2 whole years in order to break even on the money they spent educating themselves.

Therefore it REALLY bothers me when I hear people say they don’t want to spend $100 improving their financial education when seriously they can make it back in ONE single trade!

I just don’t understand how the perceived value of a college education can be so high and the perceived value of one’s financial education can be so low.

Here is a quick story for you to drive this point home…..

A friend of mine who would hang out at my place in college all the time would play video games and watch me work on the computer. He saw me working on a new business venture for some time and was curious as to what it was that I was doing, so one day he asked me what I was working on. I told him I was learning how to start an Ecommerce website, and that when I initially started I knew absolutely nothing about it. I had been on the computer all day reading about how to get started, and he had seen that I was working really hard at this.

He asked me how long I had been working on this project and I told him about 4 months. He then proceeded to ask me the most important question that everyone wants to know: “how much money have you made?” I told him I hadn’t made a single penny and that I was just learning how to do it. He laughed and said he would never waste four months of his time if it didn’t make him any money. I proceeded to ask him how long he had been in college for….immediately it dropped a perspective bomb

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over his head. He had been in college for 4 and a half years with tens of thousands of dollars in student loans waiting to be paid when he graduates and he hadn’t made ANY money from what he was studying.

Change your perspective about the value of your FINANCIAL education. Sacrifice your time to INCREASE your knowledge. Your financial knowledge is what is eventually going to set you financially free.

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Part Two: Understanding the Basics OPTIONS Introduction to options Before you close this book and tell yourself you will never be able to understand options just read through the introduction and all the way through to the examples. I’m going to say this right now that options are not the easiest thing in the world to understand but I’m going to do my best to simplify the concepts. After reading through this introduction I promise you that you won’t become an options expert, and chances are you probably won’t fully understand the concept of what an option is but bear in mind that it does take some time to understand how options work. Whatever work or job you’re doing now, I’m sure you didn’t learn how to do it over night. Most options traders have many years of experience; so again just be patient in your learning and you will grasp the concepts.

Options are one of the greatest things to have happened to the financial markets. They are mainly used for two purposes. The first is making money or speculative purposes if you will and the second is hedging your positions. The great thing about the speculation part is that the leverage options provide is much higher than stock. The side that our strategy focuses on mostly is the part where we use options for hedging purposes.

If you know what options are you can skip over the introduction section HOWEVER I would like for everyone to read the part on options pricing. If you’re new or experienced I would like for you to read that part so that we can all be on the same page.

What is an option?

An option is what we call a “derivative instrument” or derivative for short. It’s a derivative because it derives its price from another underlying security, eg; a stock price. The options we deal with are going to be exclusively options on stocks. There are index options, options on futures and a whole lot more that we don’t need to know for the strategy we are going to use.

The definition of an option is: “The right but not the obligation to buy or sell an underlying security at a predetermined price on a predetermined date” If there is a blank stare on your face right now, just keep reading….

I’m going to explain options and then give you examples to tie it all together.

There are two types of options: Call options and Put options. You buy a call option when you think the underlying stock is going to increase and you buy a put when you think the underlying stock is going to decrease.

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A call option gives the buyer the right but not the obligation to BUY an underlying security at a predetermined price on a predetermined date.

A Put option gives the buyer the right but not the obligation to SELL an underlying security at a predetermined price on a predetermined date.

There are four market participants in the options market: 1) 2) 3) 4)

A buyer of a call A seller* of a call A buyer of a put A seller* of a put

*The correct terminology for seller of an option is actually “writer” but most people just use the word seller.

There is a distinct difference in the role that buyers and writers (sellers) of options have in the market place. A buyer of an option has the right but not the obligation to buy or sell the security, however the writer (seller) has the OBLIGATION to buy or sell the security to the buyer should they exercise their right. When options were first introduced the creators thought that maybe people would be too scared to trade options because what if the writer doesn’t deliver on their promise? They then created a clearing house that steps in between buyers and sellers in order to guarantee that options promises are made!

Understanding options terminology In order to understand options you have to understand the terminology that comes with it.

1) The predetermined price The price at which you can buy or sell the underlying security is called the strike price or exercise price.

This strike price is the price that the underlying security must be above or below (depending on the option whether it’s a call or put) in order for you to make a profit.

2) The predetermined date Unlike stocks that you can hold indefinitely; options have an expiration date meaning you can’t purchase them and expect to hold it forever. Regular options “expire” every THIRD Friday of every month. Some stocks have weekly options which expire at the end of the week. These are sometimes called nontraditional options.

3) American vs. European Options There is a difference between “American” options and “European” options. An American option allows you to exercise your right to buy or sell ANYTIME before the expiration date. A European option only 15

allows you to exercise your right to buy or sell ON the expiration date. American options tend to have a higher price tag because of the fact that you can exercise at any time.

3) In the money, At the money, Out of the money For a call option it is said to be “In the money” (ITM) when the strike price is BELOW the underlying stock price. The call option is said to be “Out of the money” (OTM) when the strike price is ABOVE the underlying stock. It is said to be “At the money” (ATM) when the stock price equals the strike price.

For a put option it is said to be “In the money” (ITM) when the strike price is ABOVE the underlying stock price. The put option is said to be “Out of the money” (OTM) when the strike price is BELOW the underlying stock. It is said to be “At the money” (ATM) when the stock price equals the strike price.

Options are traded in contracts. One options contract represents 100 shares of the underlying security.

For a call option you have the right to buy 100 shares of the underlying for every 1 contract you purchase.

For a put option you have the right to sell 100 shares of the underlying for every 1 contract you purchase.

This purchase price of an option is called a premium. You pay a premium in order to receive the right to buy and sell the underlying security.

How options are priced Everyone needs to read this chapter, even if you’re experienced. I just want to make sure that everyone is on the same page. The way options are priced is an important part to understand for the strategy that we are going to be using.

There are different models used to price options, the most popular ones are The Black-Scholes model and the Bjerksun-Stensland model. You don’t need to know this stuff in detail like how the risk free rate and standard deviation affects the price of the option. We simply need to know the basics of how options are priced.

1) Price of the stock The price of the underlying stock will have an effect on the price of the option premium

2) Strike price The further ITM the option strike price is; the higher the premium will be. This part of the options price is called the “intrinsic value”

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3) Time left to maturity The more time left to maturity the higher the premium of the option will be. This is called “extrinsic value” or “time value”

4) Implied volatility This is the most important part of options pricing that we need to consider and I will spend some time explaining this. The other 3 pricing factors are givens; meaning it makes sense to have an option be more expensive if it has more time to expiration, or it makes sense for the option to be more expensive if it’s further ITM. The concept of implied volatility or IV is important to understand for our strategy. Implied volatility is displayed as a percentage. (More on that later) Ever heard in the sport of boxing or mixed martial arts the term “Pound for Pound” as in “He is the best pound for pound fighter in the world” What this means is that the fighter in question is technically the best in the world, however if he is put in the ring with someone in a higher weight class he might not win because he is at a size disadvantage. If you take the size factor out of the equation then he is the best fighter in the world. “Pound for pound” he is the best.

Well implied volatility is our pound for pound comparison to options pricing. If you take a $500 stock and a $20 stock, you will expect that the options premiums on the $500 stock should be much higher, right? You would be correct. Think of the $500 stock as a stock in the heavy weight division and the $20 stock as a lightweight. Now let’s take away the weight class or the stock price, which one is better now?

Which one has the more expensive options premium?

This is where IV comes into play. The higher the IV on a stock; the higher the options premium (On a relative basis or pound for pound basis). .

Let’s look at an example The $500 stock has January options that have an average IV of 35% The $20 stock has January options that have an average IV of 105% Let’s look at ATM options premiums. The $500 stock has an ATM premium of $7, whereas the $20 stock has an ATM premium of $2. On a dollar for dollar basis it is evident that the $500 stock has a higher options premium, however, on an implied volatility or “pound for pound” basis the $20 stock has more expensive options.

Keep this concept of IV in mind; once we get to the strategy part it will become very important.

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How options are displayed When looking at how options are displayed you will see a long list of the different strike prices and their premium. This is called an options chain and you need to know how to read an options chain. Here is how an options chain looks on the Think or Swim platform.

The options highlighted in red represent options that have weekly expirations. The above image shows all the options currently available for the underlying stock.

If you click the drop down arrow on a specific month or week it will open all the options available for that month/week. It looks like this‌.

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You should be able to identify a few things. Calls are displayed on the left and puts displayed on the right with the strike price down the middle. I have set up my options chain in a unique way to display the information most relevant to my strategy.

I have in my options chain displayed the following information on both the call and put side: 1) 2) 3) 4) 5) 6) 7) 8) 9)

Implied Volatility Delta Theta Net Change Percentage Change Volume Open Interest Bid Price Ask Price

All this information is in some way or another necessary for the strategy that we are going use.

The Bid/Ask Spread When viewing an options chain you will see a Bid price and an Ask price. The BID price is the price at which you can sell (write) options. The ASK price is the price at which you can buy options. The difference between these two prices is called the Bid/Ask spread or spread for short. Stocks that are highly liquid meaning there are plenty of buyers and sellers in the market tend to have lower B/A spreads on their options. Stocks that are smaller in terms of trade volume often have B/A spreads on their options that are slightly wider. This will be an important factor when it comes to placing orders which we will discuss in part two.

If at this point you still have no idea what you just read, just keep reading through to the examples.

Examples should help when explaining something as confusing as options.

Here are some examples of options in play. I’m going to start with basic examples of how buying options works.

I’m assuming most of you know how the purchase of stock works, and how the shorting of stock works.

You buy a stock in the hopes of the price going up, and you short a stock in the hopes of the price going down.

Call options Assume the company Headphones Inc. (TICKER: HEAI) is currently trading at a price of $61.10. You expect the price to go up over the next 3 months and so you decide to buy a call option. You decide you want an ITM call option with a strike price of $60 and expiration 3 months out. Let’s assume it’s January, so you buy an option with a March expiration. The premium for this particular option is $2.10. Now 19

remember that each option contract represents 100 shares, so this particular option will cost you $2.10x100=$210. Your investment is $210 and this is the maximum amount that you can lose.

March comes along and the price is at $65. You can exercise the option meaning you can purchase the shares at $60 and then sell them in the open market for $65. It would look something like this: Exercise the option: You now own 100 shares of HEAI at a price of $60 or $6000 worth of stock. You can sell these 100 shares at a price of $65 or $6500, meaning your profit on exercise is $500. Your total profit is this value minus the premium paid for the option: Profit: $500 less Premium: $210 =$290. Your total profit on this investment is $290.

You don’t have to exercise the option; you can sell it back into the market. Using the same example above, let’s say the option premium at the time of expiration is $3.00. You can sell the option for a profit. Since you paid $2.10 or $210 you can sell it for $3.00 or $300, this will give you a profit of $90.

Most options traders don’t exercise their options; they simply sell them back into the market. I almost always sell my options back into the market place.

Sticking with the example above, let’s say March comes along and the price of HEAI is $58 meaning it’s below your strike price. You obviously wouldn’t exercise your option because that would mean you’re buying the stock at $60 when you could be buying it at $58 in the open market. Here’s what happens when your options are below the strike price at the day of expiration. You could let the option expire “worthless” meaning you do nothing and you lose your initial investment of $2.10 or $210. You could sell back the option on the day of expiration assuming it still has some value. If it’s trading at $0.30 you could sell it and get $30 for it ($0.30x100)

Put options The buying of put options works much the same way as call options do, the main difference is in the exercising of the option. I’m not going to get into as much detail as the previous example since the dynamics work the same.

The difference with put options is that it gives you the right to sell an underlying security at a specific price instead of buy. The other difference is that ITM put options have strike prices ABOVE the underlying stock instead of below like call options.

Let’s look at the same example from above.

Headphones Inc. (TICKER: HEAI) is currently trading at a price of $61.10. You expect the price to go DOWN over the next 3 months and so you decide to buy a PUT option. You decide you want an ITM put option with a strike price of $63 and expiration 3 months out. (Notice the strike price is ABOVE the underlying stock price) Let’s assume it’s January, so you buy an option with a March expiration. The premium for this particular option is $3.00. Each options contract represents 100 shares, so this particular option will cost you $3.00x100=$300. Your investment is $300 and this is the maximum amount that you can lose.

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March comes along and the price is at $57. Since this particular put option is expiring ITM, you have the option of exercising it or selling it back into the market place. I’m going to show you how the exercise of put options is different to that of call options. A put option gives you the right to SELL an underlying stock instead of BUY. In order to exercise this option you would first BUY the stock which is now $57 and then you would exercise your right to SELL this particular stock at $63 which is the strike price of your put option. Your profit on the trade looks like this…

(100x$57=$5700)(The purchase of your stock) (100x$63=$6300)(The sale of your stock) (100x$3.00=$300)(The options premium) Final profit=$6300-$5700-$300=$300 Just like with a call option you can always sell the option back into the market place if you don’t want to exercise it or if you don’t have the money to exercise it.

The Greeks Some of you might have heard of “The Greeks” being used on options. Greeks are basically the instruments used by options traders to understand the movement and pricing of options. There are a couple of Greeks used for understanding options such as Delta, Gamma, Theta, Rho, Vega, and there are also secondary Greeks which few people know about. Option Greeks can be a complex topic and explaining these in detail is beyond the scope of this course. The only two that we are going to focus on and that will be the most relevant to our strategy are Delta and Theta.

Simply put Delta is the speed of the option. It is a measure of how closely the option price tracks the underlying security’s price.

Theta is the measure of how quickly the option premium decays over time. Remember we said that options have time value built into the premium. Theta measures how quickly this time value erodes over time.

These two are important measures that we need to understand for the strategy we use. Examples follow…..

Delta You can view the delta of an option from your trading platform. It is listed as a number under the delta heading. Delta also happens to be a measure of risk, which we will get into once we delve into our portfolio strategy. Let’s look at the following example; You have a stock that is trading at $50. The $55 call option is $3.00 and the option has a delta of 0.5.

What this means is that for every one dollar change in the underlying security, the corresponding option 21

will change 50 cents. So the next day that same $50 stock is now worth $49, the option will be worth $2.50 (Other things held constant). Also if that same stock is trading at $51 the next day, the option will be worth $3.50. This is how closely the option traces the underlying stocks price. (This example assumes all other things held constant).

Let’s look at another example: The same $50 stock but now the call option has a strike price of $25 which is a deep in the money option. The premium for this particular option is $17 and the delta of the option is 1.00. 1.00 is the highest delta an option can have. What this means is that for a one dollar move in the underlying stock; the option price also moves one dollar.

So if our stock opens the next day at $49, the option will be worth $16 since the stock moved one dollar, the option moved one dollar. This is not too difficult to understand I don’t think, and delta is an important part to understand for risk management. We use it quite a bit in analyzing a key part of our strategy.

Theta Theta is a measure of how much time value the option loses every day. It is sometimes called theta decay or time decay. I usually say time decay or just decay when referring to theta. Theta is displayed as a number just like delta in the form of a decimal. Basically you will just look at theta and it will tell you how much the option premium loses as each day goes by. For instance a theta of 0.03 means the option loses 3 cents a day. A theta of 0.5 means the option loses 50 cents a day in time decay.

Let’s follow the same example from the delta explanation. We have our $50 stock with a $55 call priced at $3.00. The option has a theta of 0.05 meaning it loses 5 cents a day no matter what direction the stock moves.

Tomorrow morning the markets open and this same stock opens at the same price of $50 meaning it didn’t move up or down, it remained perfectly flat. The corresponding option will now be worth $2.95 since it lost 5 cents of time value. Theta is just one of those concepts we have to grasp in order to better understand our trading strategy.

Like I said there are more of these “Greeks” involved but to keep things simple and relevant to what we need to know for our strategy the only two we need to understand are delta and theta.

Getting your account ready for options In order to buy/sell options you need to approve your account for options trading. This is a very simple task. You need to contact your broker and ask them how you can approve your account for options trading. You usually have to fill out one form and send it to them; it takes no longer than 10 minutes.

There are different levels of options approval. For the strategy we are going to be covering you need the most basic level of options approval. Usually brokers will have 3 levels of options trading approval. You only need level 1 or tier 1 options approval.

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MARGIN Margin in its simplest form is money that is borrowed from your broker to purchase securities. Margin gives you the ability to leverage your money into more buying power.

Before I go any further I want to point out that margin trading has many benefits but also carries a high degree of risk and you should understand these risks before you consider using margin.

Think about this….you want to purchase a rare and expensive baseball card and sell it for a profit. You are $500 short on the purchase price so your friend offers to cover the $500 that you don’t have. Once you sell the card you pay your friend back and keep the profit.

The same works with trading….you have enough money to buy 95 shares of a company, but you really need to buy 100 in order to make your strategy successful. Instead of not being able to do this strategy all together you are able to borrow the additional money from your broker in order to buy the additional 5 shares.

The amount of margin or borrowed money you are given varies from broker to broker and also varies based on your account. Usually but not always you will be given a 100% margin allowance, meaning for every dollar you have in your account you receive an additional dollar from your broker, eg; if you deposit $2000 in your account and it’s eligible for margin trading then you will have $4000 to buy stock with.

Having the ability to use margin on your account requires you to make your account eligible for margin trading. This is similar to approving your account for options, you simply have to fill out a form provided by your broker and after a few days of them reviewing it you should be all set.

Before considering using margin I would strongly recommend you read the margin handbook provided to you by your broker. It will outline exactly what you can and can’t do. It will explain in detail the risk involved in using margin and how to avoid a margin call. It also specifies the margin allowance as set by the Financial Industry Regulatory Authority (FINRA). Margin allowance means how much margin you can use on a specific stock, this varies depending on the price of the stock and is outlined in your margin handbook.

A margin call is issued when you don’t have enough money in your account to cover the margin requirement set by your broker, and this can lead to a forced sale of your positions without your consent. This can be avoided if you monitor your account and not over leverage your account.

I would recommend that you approve your account for margin trading. If you’re worried or don’t understand the concept speak to your broker or read over the handbook. You could always do some more research yourself. If you don’t feel comfortable with the idea of using your brokers money to make trades then you don’t have to. Even if your account is eligible for margin trading it doesn’t mean that you actually have to use it.

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DAY TRADING I’m not going to spend too much time on day trading but I do want to give you an introduction to what it is. This has become a hot topic these days and I’ve seen quite a few expensive info products pop up making ridiculous claims about how you can quit your day job and become a successful day trader.

My advice is that you DON’T quit your job and start day trading. Day trading takes not only discipline but a special kind of discipline. To a degree you have to trade like a robot in order to be successful. If you have the slightest bit of emotion as a day trader you are most likely going to fail.

Remember how I said in the stock market you don’t have any “competition”, well in day trading it works a little bit differently. You will be “competing” against high frequency trading (HFT) super computers that use the most complex algorithms known to man in order to spot trends before humans do. These computers are supposedly responsible for over 70% of the volume traded on the futures markets.

With all that being said there are plenty of day traders out there who are very successful and make a lot of money trading only a few hours a day from the comfort of their home. It is most definitely possible to make money day trading but I just don’t recommend anyone start here.

If you are interested in the subject you can shoot me an email and I will point you in the right direction and help you get started. Also before you buy any ridiculously overpriced software PLEASE contact me first. Most likely I will tell you it’s a waste of money and your broker’s trading platform is better but no pain in looking. I personally know a very successful day trader who trades 2 hours in the morning 5 days a week and consistently makes a couple thousand dollars a day doing so. He has a live trading room every morning where you can actually watch him trade. I have sat in a couple of his live rooms and made some money following his trades.

If this is something that interests you; go to my contact page on my website and send me an email with the subject “live trend trading” and I will set you up so that you can sit in one of his live trading sessions.

You will be able to watch a successful trader make money and follow his trades.

A NOTE ON FINANCIAL ADVISERS When I was just starting out I felt overwhelmed by the amount of information out there and all the different investment instruments available, different strategies, different opinions and all that stuff. I thought to myself that someone who doesn’t have the time to study all this would have a difficult time keeping up with all the changes in the markets and keeping up with the news. I thought that the average person should just go ahead and give their money over to someone who knows what they are doing. I thought that it would be best for them to give their money over to some sort of financial professional that should be given the responsibility of managing their money.

After years of experience I realized that giving your money over to a financial professional, financial expert, financial advisor or whatever name they go by these days is a terrible mistake. (In my opinion). I 24

thought back to the day when I used to think it was okay for someone to hand over their money to a financial expert and I buried my face in shame because later I realized that this is unacceptable.

After years of research and practice I realized that it’s not difficult to manage your own portfolio if you have a plan. The whole point of you reading this is to learn how to manage your own money, right?

Well, I have consolidated what you need to know into this instructional series and given you step by step guides on how to successfully manage your own portfolio so that you never have to give your money and trust over to someone else!

Here are my thoughts on financial experts: Their main priority unfortunately is themselves. Unlike doctors, financial advisers DO NOT owe you a fiduciary duty, and therefore they DO NOT have to act in your best interests. A doctor can’t tell you that you need a hip replacement if in fact you don’t need one. Financial advisers have no such obligation.

They care about their own wellbeing before yours. They could put you into investments that are NOT in your best interest in order for them to receive higher commissions. They could also trade frequently in order to run up your transaction costs. In addition your money means something to you; to them your money is just a number.

For example: If you are a truck driver and give $5000 over to your financial expert to manage on your behalf; that $5000 to him/her is nothing more than a number. It doesn’t really mean all that much to them, you will be put in the same category as everyone else. To you that $5000 represents long haul trips between different states, hard work, time away from home, time away from your family, etc…

See the difference? You care about your money more than anyone else does and so you should be prepared to take care of it better than anyone else will.

The other problem with financial advisers is that you have to remember you are an individual and you have UNIQUE financial needs. You will be put into a generic investment strategy that is given to people your age and risk tolerance. Your exact needs won’t be met because only you can fully understand and meet your financial needs!

I would like to tell you a story about advisers, specifically my college academic adviser. This made me finally realize why you need to look out for yourself and not hand over your trust to someone else.

During my time in college I almost always managed my own class schedule. I got the required class curriculum and I scheduled classes based on what I knew I needed and what would fit my schedule the best. As I entered my junior year and became an upper-class man I was required to go see my accounting adviser. This was not a choice I had to see him in order to schedule.

I came in with the schedule I needed and told him this is what I was going to be taking. He looked at my schedule and told me he wants me to change it. I was confused but listened to what he had to say. He changed my classes around and told me I had to be in specific classes for certain reasons. I thought to 25

myself; well he is an academic adviser so he has to know what he is doing and if he recommends something then it has to be right. Against my better judgment I scheduled the classes he recommended.

It turns out that he put me into the generic first semester junior classes that he puts everyone into. I was signed up for classes that I didn’t need and that were terrible for my schedule. It took me a while to get everything back to the way I initially knew was best for me.

So you see I had done my due diligence on what would be best for MY needs. I went to an adviser who managed to change my mind because I saw him as someone who knew more than I did. Yes he knows much more than I do about classes and all that but he does not know what is best for MY specific needs.

Financial experts are no different. They have probably been educated in prestigious universities and hold professional certifications, and yes they know a lot more than you do, BUT they don’t know more than you about your OWN personal needs and goals. This is why I strongly recommend you manage your own money, and this is why I have dedicated my time to helping you do just that. ‌.which finally brings us to the most important part of this book; how do YOU invest your own money???

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Part Three: Building Your Pyramid

The pyramid is what I have created to show you what I believe is necessary for successful investing. I will explain each part in detail. The strategy part will take the longest as it’s what most of you got this book for. I will outline in detail the strategies I have been using to make consistent profits. I will also show you some snapshots of my account to see that the stuff I’m showing you actually works. On that note let’s jump into the first layer of the pyramid….

STRATEGY: Notice that this is at the base of the pyramid. I put it there because at the base or foundation of your journey to successful investing you need some sort of strategy, some plan that you are going to use consistently to make money. The key to a successful strategy is one that is consistent, meaning that it will stand the test of time. It doesn’t have to work all the time in fact if you find a strategy that works all the time please send it my way!

The way I manage my portfolio is in a 3 tiered layer that can be adjusted based on your desired level of risk. You can invest heavier in one section than another depending on how much risk you’re willing to take on. Here are the three segments I divide my portfolio into and I’m going to explain each in great detail

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The Three Level Strategy: 1) Trading stocks (Hedged Positions) 2) Speculative stocks 3) Investment stocks -Value investments -High yielding dividend stocks Trading stocks I just chose this name for this segment because I didn’t know what else to call it. This part of my portfolio includes stocks that are usually terrible companies for investments, but are great for trading and making a steady income! What I mean by terrible companies is that they don’t generally offer any value, they have poor financial statements and their product or services’ ability to generate profit might be questionable. Now you might be thinking why on earth would you be interested in a company that I just said is terrible. Understand this; just because a stock might look like a bad investment from one perspective does NOT mean that you can’t make money from it.

So why am I interested in these companies that I use for trading purposes? One simple reason: their options have a high implied volatility! Remember we spoke about implied volatility when it comes to options pricing in a previous chapter? If you missed the part on implied volatility I strongly recommend you go back and read it.

The strategy behind this is to find a company that has options with high implied volatility. We then buy the company’s stock in lots of 100 shares and simultaneously write (sell) a call against the stock. This particular strategy is called a “Covered Call” and is probably the most basic of options strategies. There are a large number of investors/traders who use this strategy but they use it on stocks that have low implied volatility and thus they generate a small premium. This is not what we want; we want a stock with high implied volatility that can generate us consistent income every month or every week.

I’m going to show you the dynamics of how this simple strategy works and then give you examples, and then prove that this in fact does work on a consistent basis by showing you some of my gains over the last year.

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Here is how you set up a covered call: 1) But 100 shares of the underlying stock 2) Write (sell) 1 call contract The reason this strategy is called a covered call is because your options contract is “covered” by your existing stock purchase. If you were to write an options contract and NOT own the stock it would be called an uncovered position or more often a “naked” position. Naked writing of options involves special risks and is an advanced strategy, in fact your broker will most likely NOT approve your account for the ability to write naked options and so we won’t even get into that. I just wanted to explain the difference.

Here is an example of how a covered call works….

You purchase 100 shares of a company for $50. Your initial investment is $5000. You simultaneously write a $55 call for $3.00 with 3 weeks left to expiration.

When expiration date comes around and the stock in question is trading below $55 (Below your call price) you get to keep the premium of the option. ($3.00x100=$300) You just made $300 in realized profit.

The next Monday morning the markets open and you still own 100 shares of the company in question but now since the options you wrote the previous month expired you don’t have a covered call position.

You simply have a long position on the stock, so what do you do? You write another call for that month!

Here’s an example of how this strategy works year round….

January Purchase: 100 shares at $50 Write: 1 call contract for $3.00 with a $55 strike price Date of expiration: Stock is $52, so you have made $300 in realized profit since the option expired worthless.

February Markets open after January options expire and you want to cover your position again Write: 1 Call contract for $3.50 with a $56 strike price Date of expiration: Stock is $49, so you have made $350 ($3.5x100=$350) in realized profit since the option expired worthless A question you might be asking now is what happens if the stock expires ITM and not worthless. Here is how it works….

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March Markets open after February options expire and you cover your position again Write: 1 call contract for $3.00 with a $53 strike price Date of expiration: Stock is now trading at $55, meaning the option that you wrote is now ITM and the buyer can exercise their right to buy the stock from you at a price of $53.

When this happens you will get “assigned” which means the stock you own will get “called away”. The next Monday when the markets open you will no longer own these 100 shares as they have been bought from you at a price of $53 You still keep the premium on the option as profit which for the March option would be $300 ($3.00x100).

You still keep the profit on the stock from where you bought it until the exercise price. Since you bought it at $50 and it got called away at $53, you have a realized profit on the long position of $300 [($53x100)-($50x100)] What you don’t get is the profit ABOVE the strike price. You don’t keep the profit of $200 [($55x100)($53x100)] since the buyer of the option exercised their right to purchase the stock from you at a price of $53 instead of $55 in the open market.

In conclusion your total profit on this investment is: January options: $300 February options: $350 March options:$300 Stock profit: $300 Total profit: $1250 Pretty simple is it not?

This is a strategy that we use for generating INCOME. Notice how every month we are receiving the options premium as a REALIZED profit. You can use this strategy indefinitely; continuously writing calls and receiving income every month.

One thing you have to learn if you’re going to use options is the risk profile of your options strategies.

The risk profile shows you what your max gain and max loss is as well as your break-even point. A risk profile is easiest to understand when drawn on a graph and you can generate a risk profile very easily on your Think or Swim platform. It’s one of the options under the “analyze” tab.

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Here is an example of what a risk profile looks like for a long position and a covered call position.

The stock example I am using is a stock that is currently trading at $34.06, but for ease of this example we will say $34. For a basic long position your max loss is the amount of money you invest in the stock.

Let’s assume for this $34 stock that we purchase 100 shares which brings our total investment to $3400.

Our max loss is the $3400 if the stock goes to $0 that is. Our max gain is infinite; the stock can increase indefinitely. Our breakeven point is the price we paid for the stock which is $34. If the stock stays at $34 we have not made a profit or a loss.

Here is what that will all look like in a graph.

The white line represents all the information I just mentioned in a graphic representation.

A covered call strategy has a completely different risk profile.

We are going to be using the same example above with our $34 stock. In addition to purchasing the stock we are going to write a $36 call. The call is currently trading at $1.30 so one contract will earn us $130 if it expires worthless Take a look below at how a covered call position looks and then I will explain in the following paragraph.

Pay attention to the RED line and not the white line in the graph

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First thing you should notice is that at one point the red line becomes flat. This represent where your profit is capped which means you can’t make any more money on this position beyond a certain price.

This price is the strike price of the option you wrote. The reason you can’t make any more money above the strike price is because anything above this price and your stock will get called away.

Notice also from the graph that your breakeven price is LOWER than the price you paid for the stock.

Instead of the breakeven price being $34 as it would on a regular long position; the breakeven price is now $32.70. (Stock price: $34 – Options premium: $1.30 = $32.70) If the stock falls to this price you will be at the breakeven point.

The one disadvantage of this strategy is that your profit is capped to the strike price of the call option you write. The advantages are that your breakeven price is reduced thus reducing your risk and it gives you the ability of generating income every month. It’s a very popular strategy and is sustainable.

Hopefully now you understand how to set this strategy up.

Buy long 100 shares of stock Write 1 call contract If you recall earlier I mentioned that I use this strategy on stocks that have high implied volatility on their options. You can use it on any stock though, I just advocate high IV because it makes the writing of calls really worth it.

Let’s look at this strategy from a couple of angles; specifically which calls we should write and how it affects our risk.

In the above example I showed you how to write a covered call using an OTM option. What if you wrote an ATM or ITM option?

Whether you write ITM, ATM, OTM options it will affect your level risk and the potential for reward. The higher the reward the likely the higher the risk.

Simply put the further OTM the option is the higher the risk and the higher the reward. The risk is higher because the further OTM you go the less option premium you will receive, thus your breakeven point will be higher. The closer to the money you go or ATM the lower your reward will be since your strike price is lower, but your risk will be reduced since you will receive more options premium and thus lower your breakeven price.

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Executing your covered call strategy Remember earlier we spoke about the Bid/Ask spread on options. (The difference between what you can buy the option for and what you can sell it for). This is an important factor when writing our calls.

Stocks that have high implied volatility tend to not be as liquid as stocks with a lower IV. This is not always the case, but from my experience it’s usually that way. What this means is that the stocks we are creating covered calls for will have wider B/A spreads. This is something that is not ideal but there is a way to somewhat compensate for this wide B/A spread and that is to use limit orders and NOT market orders when writing your call contracts.

If you were to send a market order on your option trade; it will be filled immediately and you will enter at an unfavorable price. Instead of market orders I ALWAYS use limit orders when creating a covered call strategy. Let’s say the bid price for the option you are planning on writing is $3.00 and the ask price is $3.80.

Bid price: $3.00 Ask price: $3.80 Spread: $0.80 In this case if you place a market order it will be filled at $3.00. This means that your maximum realized gain when this option expires will be $300 ($3.00x100).

I don’t like getting my option orders filled at the market price so what I do is set limit orders and wait to see if they get filled. A limit order is an order where you set the price you want to enter the position and if it doesn’t reach this price your order doesn’t get filled.

Continuing on this above example what I will do is the following: I will set my first limit order to sell a contract at $3.70. I will wait about 30 seconds to see if it gets filled.

Since I put my limit order 10 cents below the ask price it will most likely not get filled.

After 30 seconds my order doesn’t get filled I set my next limit order to $3.60 and do the same thing. I wait a few seconds to see if it gets filled, if not I cancel my order.

Next I will place my order at $3.40 and I will have a decent chance to get filled at this price.

Let’s assume my order does get filled at $3.40. This means that I sold my call option at a price of 40 cents above what I would have received had I sold at the market price. This means that I have $40 more in potential profit if the option expires worthless.

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Like I said I ALWAYS use limit orders and it has made me hundreds of extra dollars than if I had placed market orders. So remember to always use limit orders when the bid/ask spread is wide and over time it will add up to make a big difference!

Closing your position before expiration You don’t always have to wait until option expiration day, you can at any point “buy back” your option which will close your position. You know how you can BUY an option and then SELL it back into the market? When you SELL an option you can BUY it back which will close your existing position and you will be out of the trade. Examples follow…..

Let’s say you wrote a $2.00 contract. A week before expiration you find a better opportunity somewhere else and decide you want to sell the stock and close the options position. The current option that you wrote for $2.00 is now worth $0.80. You can buy back the position you previously wrote for $0.80. What this means is that you will have a profit on the contract of $1.20 ($2.00-$0.80=$1.20) or in dollar terms $120 ($1.20x100).

Theta Remember how we learned about theta in part one? The reason theta is important to this strategy is because theta decay or time decay is beneficial for this strategy. The more time goes by the more the option loses value for the buyer and thus more money in your pocket. I like to add to my positions when I know there will be a 3 day weekend. If the markets are closed on a Monday for holidays that means you have 3 days’ worth of theta decay on your position.

Delta Remember how we also learned about delta? Delta is important to understand from a risk perspective.

When you purchase 100 shares of stock your delta is effectively 100. Since you purchased 100 shares your risk is 100 delta. What 100 delta means is that for every $1 move in the stock price you will make or lose roughly $100. Let’s say that you write a call and the call option you write has a delta of 0.3. Since one options contract represents 100 shares of stock your delta will be negative 30 (0.3x100). It is negative 30 because you SOLD (wrote) a contract.

The NET delta position on this particular strategy in this case is 70 (100 stock delta – 30 options delta) This is the measure of your risk for this particular trade. Notice how writing options reduces your delta (risk)!

Options that are deep ITM meaning the strike price for the call is far below the current trading price tend to have very high deltas. Generally speaking the further ITM an option is the higher the delta, the further OTM an option is the lower the delta.

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If you are a very conservative investor you could write deep ITM call options that have a delta of 1.0.

This would mean your delta on your long position would be 100 (From the 100 shares you buy) and negative 100 from the options contract (1.00x100) Your NET delta position would be 0 (100-100). This means in theory that your risk is 0. This particular scenario is called a “delta neutral” position or a “delta hedge”. Since this particular option has a delta of 1.00 it means that for every dollar change in the stock the corresponding option moves $1.00. With an option that carries a 1.0 delta, the corresponding theta is 0 meaning it theoretically doesn’t lose any value as time passes by.

If you think about it since there is theoretically no risk involved in this position, there isn’t any reward either, right? Since the option tracks the stock dollar for dollar there is no way you can make any money! This is not true; there is always money to be made! Only in theory are you not able to make money from this position but in reality you are. The only time I would ever use a delta neutral strategy on a covered call play is if I anticipate the stock to fall quite a bit in price over the next month. Here is an example…

XYZ Company is trading at $50. While looking for a delta neutral strategy I decide to buy the stock at $50 and write a $25 call for $23.00. (Notice how expensive this option is…it’s because it’s deep ITM) I create a delta hedged position because I’m not sure where the stock will go over the next month and I would like to use a conservative strategy since it’s my first time trading this company. At this point if this stock goes up I can’t make any money since the delta of the option is 1.00. If the stock goes up all I will lose is the commission paid to open the transaction and the commission for having the option assigned to me. On the downside the stock will have to fall $23 from its current price of $50 in order for me to breakeven.

The reason you are able to make money from delta neutral strategies is because you have the ability to buy back your options position when/if the delta changes. Delta is not a set number; it changes as the price of the stock changes. Let’s assume using our above example that the $50 stock we purchased falls to $43 on the day of expiration. Your $23 option that you previously wrote is now only worth $15. You can buy back the position for $15 and have a NET realized profit of ($23-$15=$8) or $800. Remember also that you have a net unrealized loss on the stock of $700 ($50-$43).

You’ve bought back your options position for a realized gain of $800 and you’re sitting on a $700 unrealized loss from you stock. What do you do now when the opening bell rings on Monday morning?

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You have a couple of options here….

You could hold the stock and let it bounce back up if you have done your due diligence and believe it will, or you could write another options contract and earn some income from the premium. In this case you can decide what type of call option you want. Are you going to write an ITM ATM or OTM contract?

It depends on the amount of risk you are willing to take on. You can write a $50 call which is the price you paid for the stock or you could write a call closer to the money at the current price let’s say $45 or $47. Again it all comes down to your risk tolerance; there is no right or wrong answer here.

To summarize the risk; Covering your positions with ITM calls contains the least amount of risk and has the lowest potential reward ATM calls contain more risk that ITM calls, but less than OTM calls.

OTM calls contain the most risk and have the most potential reward. The further you go OTM the more risk it contains and the more your potential reward.

I almost always write calls that are OTM, not necessarily far OTM but I like to leave some room for upside stock potential. Not because I have a high tolerance for risk but because I like to give my strategies room to make me money. Rarely will I write an ATM call. You will notice sometimes that writing OTM calls are a waste of your time because they are worth so little that it doesn’t make sense to do it, in this case look for ITM and ATM calls. If this is the case it usually means the IV on the options is too low for a covered call play, and in this case I look for opportunities elsewhere.

There you have it…the first strategy that I use to make money on a consistent basis. This is no secret strategy it’s very simple to use once you get the hang of it. Thanks to recent developments on the Think or Swim platform you are able to automate this strategy. You are now able to “roll” your strategy into the next month once your options expire. I don’t use this feature because I like to keep full control over what’s happening with my trades. If you would like to automate this process the option is there.

To prove to you that this strategy works, here is my gains summary from trading just ONE contract on ONE company:

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You might be thinking how do you find these companies? In my eBook Calculating Value I show you how to screen for these stocks. If you haven’t already bought Calculating Value, I suggest you do so.

Calculating Value-Full Content Description

Speculative stocks Speculative investments are ones that may or may not be huge hits. Generally these are companies that have been severely beaten down in price. Perhaps they are developing something very new in their industry that could cause the stock to double in price. It’s a high risk investment with the possibility of high reward.

When it comes to speculative plays you only use a SMALL portion of your total portfolio (Less than 5%).

The purpose of these plays is to use a small amount of money that if you were to lose it; it wouldn’t damage your portfolio, but if it were to go your way you would hit it pretty big. A lot of times speculative plays will be penny stocks or stocks that trade below $10 a share.

The best way to find speculative stocks is to listen to the news. A lot of times they are being talked about because they are developing “something big” or perhaps some hedge fund manager put the stock on his/her radar. There is no set way of finding these stocks other than to keep your eyes open. If you are reading this then I’m hoping you are a member of my website and so you will be receiving these speculative stocks from time to time if I spot anything worthwhile you will know about it.

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When we look at these speculative companies, we are not necessarily concerned with the company itself (fundamentals, financial statements, etc.) we are more concerned with the stock and its ability to increase in price. We are concerned with the qualitative factors rather than the quantitative factors. I have made double digit returns from companies that are awful on paper. It really doesn’t matter in this case and when we are looking for speculation we don’t necessarily have to focus on the company itself.

The market drives the price and you have to understand that what the market perceives is MUCH more important than actual reality.

Let me give you an example of how my latest speculative play turned out.

By just reading and listening to the news and what people are saying you will start to see opportunities galore in stocks that have huge potential. My most recent speculative play was Sprint (TICKER: S) and here is how I “discovered” this diamond in the rough.

When it was trading around $5 (Summer 2011) I was following it but not by any means looking to enter a position. At the time Sprint didn’t have the iPhone; only AT&T and Verizon had it. Out of nowhere after an earnings report sprint skyrocketed from about $5 to $5.70 and then fell even faster all the way to $2.50. This is when I put the company on my radar. I thought they provided a good service and had the potential of increasing from this low $2.50 level. I said I was going to wait until they officially have the iPhone available and then I would consider entering a position. Once they made the iPhone available on their service the price was still around this level. I thought now was the time to enter into a company that was very beaten down in price and in my mind provided a good service. I entered at a price of around $2.30 and then a second batch at around $2.60. It went back above $5 in no time. Breaking the $5 mark was also a big deal because most hedge funds can’t invest in stocks that are below $5. Once it broke the $5 mark institutional investors were able to consider entering a long position.

Like I said I don’t have a set way that I look for speculative plays; I don’t have a screener that searches for certain criteria. You just have to keep your eyes open and listen to what is going on in the markets.

Another reminder is that these are speculative plays and so we DON’T bet the house or your children’s college fund on them. You put in a smaller portion of your portfolio.

Finding these is something that does take some experience so don’t be frustrated if you’re not an expert right off the bat.

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Investment stocks This particular part of the portfolio comes in two different segments. The first is value investing and the second is dividend yield investing.

Value Investing I’m sure most of you have heard the term value investing. Value investing is the practice of finding stocks that are undervalued or finding their “fair price”. This practice has been around for a long time. If you’ve heard of Benjamin Graham also known as the “Emperor of Wall Street” he was said to be the first person to use value investing principles to find stocks at their fair price. In 1934 Benjamin Graham and David Dodd published a book called Security Analysis which identified sound investment principles that should lead to building a successful portfolio.

Benjamin Graham was also a professor at Columbia University and one of his students happened to be Warren Buffet. Mr. Buffet was also the only student to have ever received an A in his class. He was mentored by Benjamin Graham and later became famous for his ability to spot undervalued companies.

The practice of value investing is used by hedge fund managers and any serious investor managing a large portfolio.

The ability to calculate a company’s fair value is a vital skill that every investor should possess. It’s also not as hard as you might think. This topic of value investing is what most people are interested in learning which is why I have created an entirely separate eBook covering this topic more in depth.

No matter what your goals or risk tolerance you should have the ability to find undervalued companies and add them to your portfolio. If you are either in retirement or approaching retirement it is especially important for you to be able to spot undervalued companies.

To actually calculate a company’s fair value is a step by step process that I have outlined in my Calculating Value eBook. I have developed this knowledge from my years of studying finance. It’s an in depth process that I take you through on how to calculate what a company’s fair price is based on its earnings and current economic conditions.

If you are serious about managing your portfolio effectively then I recommend you get it.

Click here for your instant download-Calculating Value Dividend Yield Investing As you might imagine this part of your portfolio should comprise of high paying dividend stocks. You might be thinking how this is different to value investing because value investments generally pay decent dividends. The difference between having these stocks is that they have to pay VERY high dividends. When I say very high I mean that the absolute minimum has to be an 8% dividend. For the most part I only consider stocks that pay double digit dividends. You might also be thinking that there is 39

absolutely no way that a company can sustain a double digit dividend. A fair thought but these companies are most definitely out there and a very large portion of my portfolio is invested in one of these companies. In Calculating Value I show you how to find these companies and how and why they are able to sustain double digit dividends.

Allocation and Diversification The last topic that we need to address is how much of your portfolio you should allocate to each segment. The only answer to this is it depends. It depends largely on your risk tolerance and the amount of capital you have to start with.

Now is the time to develop a game plan as to how much money you are allocating to each segment. I can’t specifically break down the risk of each segment and tell you which has the highest risk and which has the lowest because it varies drastically from industry to industry and company to company.

What I can say is that the Value investing and Dividend yield investing segment of your portfolio is generally considered to have lower risk than the Covered call and speculative strategies.

Honestly I can’t rank these from highest to lowest in terms of risk because it really does vary. Depending on your personal situation you might be interested to only invest in value stocks and dividend yield stocks. I know most of you have the desire to preserve wealth and plan for retirement and so you might be looking to put a larger part of your money into high paying dividend stocks. Perhaps if you’re a college student and you’re interested in taking on some extra risk with your birthday money then you might focus your attention more on speculative stocks.

As for diversification again that is a decision only you can make. It depends on your risk tolerance and the amount of money you have to start with. Let’s define diversification quickly because it means different things to different people. Diversification is spreading your money between stocks; anywhere between 10-20 stocks.

For me personally I don’t diversify much. I have never owned stock in more than 4 different companies at one time. I believe that focusing your attention on one thing is better than spreading your attention all over the place. If you have heard of Jim Cramer from Mad Money, he recommends you spend 1 hour a week reading up on the companies you own. Well if you own 10 different companies that comes out to 10 hours of work each week. If you have a small amount of money let’s say $2000, then diversifying your capital between 10 different companies is going to make it very hard to make any money. You also have to take into consideration that diversifying is expensive because you have to pay commission on every trade. With that being said there is nothing wrong with wanting to diversify your capital. Just because I’m not a big fan of it doesn’t make it “wrong”. Having a diversified portfolio or not having a diversified portfolio is a matter of opinion and personal preference.

The allocation of your funds really depends on your situation and risk tolerance. What you need to do from here is sit down and look over your goals and think long and hard about what YOU want from your

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investments. From here the next step would be to start looking for the companies that will meet your needs.

As you might know I don’t provide stock picks on my website, I only provide education which in my opinion is much more important. It goes back to that story of if you give a man a fish you feed him for a day but if you teach him how to fish you feed him forever. That’s my philosophy; I want to teach you how to fish for yourself instead of handing out stock picks. I know there are many newsletters out there providing stock picks promising triple digit gains and a number of them are actually pretty good. The problem is that they don’t know YOUR personal financial situation and risk tolerance. My goal is instead to teach you how to manage your own money because you know what is best for yourself. What happens if that person picking stocks for you decides to discontinue their newsletter? If I stop updating my site you will still have the knowledge that I have left you with and you will still be able to continue investing.

IMPLEMENTATION The base of the pyramid is the strategy because you need a strong foundation to start on. The next step as you might imagine is the implementation of this strategy. Good investors and bad investors, good traders and bad traders, they all have the same strategy. Yes you read that right they have the same strategy! So how on earth are they different then? The only difference is that good investors and traders ACTUALLY stick to their strategy! Sounds easy enough doesn’t it? How hard can it be to stick to a strategy that works? You will realize as you read further specifically into the part where I talk about emotion why it isn’t as easy as you might think. The bottom line is that there is literally no point of you having a strategy that works if you are not going to use it.

Never underestimate the power of DOING. You learn the most when you are doing something and getting hands on experience. You have to be willing to implement what you learn otherwise it is, for the most part, worthless.

If you’re a beginner and a little scared or if you’re an intermediate investor and you’re skeptical you can always test things out before you actually put any real money down. You can “paper trade” something until you get comfortable enough to trade it with real money. On the Think or Swim platform there is also an option called “on demand” where you can set the platform to a specific date and then fast forward to see what would have happened if you did what you did. There is no rush to get started. Start when you feel comfortable, if you feel you need to paper trade first then by all means go ahead and paper trade. The stock market is not going out of business so don’t feel like you have to rush into things.

MINDSET The correct mindset in certain situations is all that’s needed for successful decision making. Correct mindset would also solve a lot of today’s problems. Truly speaking the mindset that you approach something with will determine the outcome. Most people believe that to be a successful investor or 41

trader you need a certain strategy. This is in fact far from the truth; what you need is a certain mindset.

What good is a strategy if you don't have the mindset to implement it?

One place that a change of mindset would be welcomed is in Washington. I truly believe that this unfathomable amount of debt that the US is in right now could be solved with a change of mindset. I’m not saying it would solve every problem but I do think it would at least help. This mindset that “bigger is better” has gotten the country into a difficult situation. It is the mindset of “keeping up with the Jones’” The government is no different to how individuals think, but instead of the Jones’; they try keep up with other countries.

If the Jones’ buy a new Ford F-150 truck then I have to get a Ford F-250 the next day even though it will ruin my finances. I just have to keep up with them though right? This is the mindset that we need to get rid of. The mindset that borrowing money indefinitely and pushing problems into the future is okay. You hear Washington talking about increasing taxes….well let’s think of the government as an individual…..

As an individual if you have a job; you receive a paycheck. To the government their paycheck is taxes.

If you work for a company they are the ones that provide your paycheck. The governments’ company is the taxpayer; the taxpayer pays their salary and funds their projects.

Your payments each month are your expenses. Government spending is their expenses.

Your credit card debt, mortgage and auto loans are your debt. The amount of money the US owes to whoever they owe money to is considered their debt.

Almost everyone at some point says: “If only I made more money it would solve my problems” Unfortunately the people that say this have been saying it for the last 8 pay raises they have received.

Why? Because every time their pay increases their expenses SURELY follow.

The government is the same: “if taxes were higher it would solve our debt problems” Unfortunately it’s no different to an individual’s way of thinking; with increased income, expenses surely follow.

Recently and FINALLY legitimate budget talks were under way to actually increase taxes AND cut spending. Perhaps we have the new mindset we need in order to slowly tackle the debt….. And I mean SLOWLY. Anyways you get the idea now. Mindset is an important aspect when approaching your investments.

The mindset that you approach your investments with will eventually dictate your success. A negative and emotional mindset will eventually result in negative returns along with decisions based on emotional responses and not logical thoughts. A clear and positive mindset will have a positive effect on your overall returns and will lead you to make clear and concise decisions.

I have a routine in the mornings that I go through in order to put me in the best state of mind possible in order for me to make clear decisions. A lot of traders go through a routine before the opening bell to get into their “zone”. I usually follow a morning routine so that I feel comfortable before I sit in front of the 42

computer. I then close my eyes and take deep breaths about 5 minutes before the opening bell and finally I inhale a specific smell. I do this because smell provides the best memory and I once I smell a specific scent it puts me into my IPS (Ideal Performance State). I’m not saying that every time you have to make a decision that you should go through an entire routine to put you into your zone but I am saying that approaching decisions with the correct mindset is important.

Find your own IPS where you feel as if you make the best and rational decisions. You might have heard the term “trader phycology” it’s a topic that pops up a lot on trading forums and for good reason. Clearly the physiological aspect of handling and managing money is an important factor but people don’t take the time to develop their mindset.

Here’s what I suggest you do to develop your mindset into a rational decision making machine; The first thing I recommend you do is to think about a time when your thoughts are the clearest. Think about when it was you made the best decisions or came up with the best ideas. Honestly for me this comes when I go to bed and think the least. All of a sudden I get a rush of great solutions to my problems. What I do is keep a note pad next to my bed so I can write down all my ideas and solutions to my problems. Think about a time, or place, or situation when you think clearest.

Once you have this go ahead and write it down. From here on out you should make it a point that all your big decisions should be made during this time. Some decisions will have to be made earlier and you won’t have time to put yourself into your IPS. If this is the case make sure you are thinking CLEARLY before you do anything you will regret.

If you can’t find your IPS I suggest you start carrying around a journal. In this journal you should write how you feel throughout the day, during specific times, or after you eat certain foods.

I was in a doctor’s office once and my dad asked what he should do to help him sleep better. The doctor said the easiest way is to take sleeping pills. My dad said he doesn’t want to take pills to help him sleep.

The doctor said okay then drink a warm cup of milk before bed and eat some turkey, those are natural muscle relaxants. He then thought about it and said he doesn’t really like that solution because it doesn’t sound like it would work. The doctor then said for him to take a journal and put it next to his bed and every time a thought pops into his head to write it down and stop thinking about it, because the more you think about it the more your mind starts to race. If you write something down then you can forget about it and think about it in the morning. My dad then said that he doesn’t think that would help him at all. The doctor then said, “Well you see my problem here; everyone wants a solution, and when I give them a solution they don’t want to take the necessary actions to help themselves” I actually started to keep a journal next to my bed and write down my thoughts. It was somewhat life changing actually. I felt so much more relaxed at night not having to try and “remember” all my ideas at night so that I don’t forget them in the morning.

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So here is your task….start carrying around your journal and write down your thoughts. Write down how you feel during different times of the day and during specific situations in order to find your ideal performance state.

Remember the phycology behind investing is one of the most important things to your success!

I’m going to guess that about 1% of you will actually do the above exercise. If you’re serious about your financial future make sure that you’re part of that 1%.

YOU The final element of the pyramid is YOU. It is at the top of the pyramid because it is the most important element to your success. If you have read this far I will say that you’re ahead of the people who are on social media right now spying on their friends. Everything that I will attempt to teach you and everything that you teach yourself will all come down to who YOU are! More specifically is that YOU willing to put things into action??? You have to go out now and APPLY what you have learned or all this knowledge is useless.

Here is where you can really learn something about yourself. You’re here now so a part of you is dedicated enough to commit through an entire eBook. That tells me you’re serious about bettering your financial future, but how serious is the more important question? Did you write down your goals at the beginning? Are you going to carry a journal around to find the time you make the best decisions? Are you going to commit to creating an Ideal Performance State for yourself? Are you ACTUALLY going to implement these strategies?

You can feel as excited as you want after reading all this but if you don’t put it into action then it’s really all for nothing.

Think differently Something I found to be quite interesting was a certain trait that can be found in just about every rich person. Their number one priority is who THEY are. They are not too concerned with what they know or what they are doing, their main concern is their character, ie; who they are. It doesn’t matter to them what they currently know because they know their character will allow them to learn everything they need to know about whatever it is they are doing. Something interesting about rich people is that most of them can make money doing just about anything. Have you ever noticed how a CEO of a top fortune 500 company goes from one industry to another and is STILL successful? A CEO can go from being the head of a tech company to being the head of a retail company. How is it that they can go from one company to another completely different company and still be able to run it successfully? It’s because business is the same across all industries; they are able to be successful not because they know anything about the business but because they possess the traits of rich people. The same goes for making money in any form or fashion; it does not necessarily matter what you are doing, it matters who you are and if you are able to make that which you are doing successful.

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Henry Ford was asked what if he lost everything, and he replied that he would have it all back in about 5 years. Why? Because of who he is!

Here is a good example to show you just how different rich people think and how they use money to their advantage. This is a hypothetical example here but it will definitely drive the point home….

A rich person and an average middle class person both want to buy a car that costs $20,000. They both have enough saved up to buy the car outright. The middle class person decides to buy the car outright for $20,000 cash. The rich person decides to invest the money and have it generate the $400 per month required to finance the car over time.

The middle class person now has a liability on their hands having to pay for insurance, and a decrease in their liquid net worth.

The rich person also has less liquid net worth because they bought an asset, and has higher monthly payments since it’s financed. They also have debt on their account now since the car is financed, but there is an additional $400 monthly income from the investment that will make the monthly payments.

At the end of the day they both own the same car BUT their financial situation is different. The middle class person has a liability (car) that requires insurance payments every month. The rich person has an asset that pays for the car.

See the difference?

Develop your mindset This brings us to the question of how you are able to develop yourself into a “rich person” mindset.

It comes down to one thing…you need to ALWAYS think outside the box. This is difficult for almost everyone because we have been taught our whole lives to think inside the box. School teaches us the main street thinking that getting a job and working hard is the only way to make money, but we all know that is far from the truth. Business schools prepare us to work for others instead of grooming us to be creative and come up with our own ideas.

If you want to be successful in the world of making money outside of just working for a pay check you need to think differently.

Here are some ways to start thinking outside the box….

Next time you see your favorite restaurant open in your neighborhood; your first reaction is to get super excited about the fact that you are able to go there and get your favorite food. Instead of this being your first reaction; start thinking a little differently. Ask yourself how this might affect other similar businesses in the area? Ask yourself why they might have chosen that location? Start to think like the

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owner instead of the employee or the consumer. Once you start to do this often you will form a habit of thinking like a rich person and you will start developing the character you need in order to be successful.

Here is an example of how thinking outside the box can be beneficial for you in business and investing…

When Apple came out with the iPhone 5 they made them with a different input plug than previous models. Everyone was upset that they couldn’t use their new phone with older iPhone 4 products. Apple decided to make adapters for the new phones to be compatible with previous Apple devices. Instead of being upset like the rest of the crowd I decided I was going to try make some money from this opportunity. I found suppliers from China who were developing these adapters and decided to start selling them on Amazon and EBay. Here is an example that pertains more to what we are here to learn…

When Hewlett-Packard decided to challenge the Apple iPad with their own tablet; the HP Touchpad, it got me thinking. I read about the Touchpad and decided to go check it out at Best Buy. Not to buy the product but just to see how it might impact HP’s business. Since the price for the 16GB TouchPad was the same as the iPad my first thought was that it had to be just as good as the iPad in order to compete.

After playing around a little bit I couldn’t see that it was any better than the iPad which got me thinking why anyone would want to consider this product when it’s not any better than the industry leader and priced the same.

From here my next thought was that it runs a new operating system HP Web OS which was actually pretty cool, but the problem with it is that it doesn’t support many apps like the android and IOS systems do. My conclusion was that the product didn’t have much hope unless it was priced lower than the iPad. HP needed to try and be a low cost leader instead of trying to compete on a differentiation strategy. Sure enough a few months later HP decided to stop production of their touch pads and had a fire sale where they sold them for $150 for the 16GB and $99 for the 8GB. I decided to actually buy one at this price because I thought you couldn’t pass up an opportunity like this. I also made some money from buying puts on HP. See how thinking outside the box can be beneficial to your investing?

In conclusion your financial success will not be determined necessarily by what you know but by who you are. Are you willing to take the first step? Are you willing to think outside the box? Are you going to give up after the first bump in the road? You know the right answer to all these questions, it just depends on if you will implement those right answers.

Your task for this section is to train yourself to think differently from the crowd. That is all…

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Part Four: Lamp’s Trading Rules 1) If you don’t understand an investment then don’t invest in it!

This should be pretty straight forward; if you don’t understand something then stay away from it until you understand it. If you see an investment strategy and it just doesn’t make sense to you then don’t put any real money down. If it doesn’t make sense to you how a company makes money or how their stock has doubled over the last couple months even though their earnings reports have been negative then don’t invest in the company. This point right here has lost me money in the past. I heard about a company or strategy from a newsletter that was supposed to make me rich and I jumped right in even though I didn’t understand what I was getting into. I didn’t know how to manage risk or anything I just saw what I thought was a quick buck.

If something doesn’t make sense to you then don’t rush to get in; just take your time and understand what it is you’re putting your money into.

2) Know what is happening with the companies you own I don’t expect anyone to know how the CEO likes his/her coffee but you should know what is happening with the company if you own stock in it. My recommendation is to spend about 30 minutes to an hour every week at the least reading up on the company/companies you have a position in. Most importantly around earnings dates and major events you should know what’s going on. If you hear something going on in the economy or market place that could change the business’ core way of making money then you should definitely know about it. The last thing you want is for a new fed policy to come out and make your stock drop 20% in a week. This has happened to me before where I wasn’t keeping track of what was happening with a company I had a large portion of my portfolio invested in.

3) Revenge trading will always get you in trouble If you lose a large portion of money on a trade don’t try and make it back by investing even more. This is just a bad idea. As the old cliché says “Cut your losses short and let your winners run”

4) When times are tough; stick to the basics.

When conditions are difficult always stick to your basics. If you have had a bad week or bad month in the market then it’s probably not the best time to try out that new vertical iron condor strategy you’ve

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been thinking about. Rather stick to what you know and paper trade your new strategy until you are in a slightly better position.

5) Emotion will always be your worst enemy. If you have a plan; don’t let emotion change it for you.

You have all heard about this thing called emotion and how it ruins portfolios. The classic thoughts of “My stock can’t go any lower”, “I’m not going to sell because it will come back up”, “This time it’s different” Those are emotions talking and not your brain. When you feel like emotions are taking over take a step back from your computer and think to yourself “Is this really the best thing for my portfolio or am I basing this decision off my emotions?”

Investing with emotions changes the plan you set when you were thinking with your head.

6) Quit hoping and start doing Very simple; if you sit and do nothing, nothing will happen. Everything you have read and everything you know is useless unless you apply it. Only you hold the key to your financial wellbeing. Have you heard the phrase “Knowledge is Power” well this is not true in the stock market… “Applied knowledge is Power!”

7) Do not fully leverage your portfolio This point ties in with revenge trading. I really recommend that you don’t invest your entire margin allowance. This will leverage your gains and your losses to a point you might not be comfortable with and if your trade turns against you then you could face a margin call. If you are used to seeing $100 gains and losses on a daily basis and all of a sudden you fully leverage your portfolio and start seeing $200 gains and losses; from a psychological standpoint you might not be able to handle these gains/losses. Specifically what I mean by this is if you see a $200 loss for the day; since you’re not used to such a high loss it might cause you to start making decisions with emotions instead of with your head.

Don’t bite off more than you can chew.

8) Do not rely solely on one investment, trade or company.

Specifically this means that you should not base your entire portfolio off of one single company. It’s perfectly fine in my opinion to have only one company that you trade a specific strategy but you have to have a backup plan. Things can change; the company could fall or increase to a price that doesn’t allow you to execute your strategy effectively, or the implied volatility could decrease so much that it doesn’t make it worth your time. In cases like this you should have a backup company that you would switch over to.

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9) Never put your gains and losses into perspective I always think of the money I am making/losing on my computer screen as monopoly money. That is seriously the best way to avoid all emotional based decisions from entering your trading plan.

What I mean by not putting your gains and losses into perspective is this….

Imagine in one day you have a gain of $650. If you put this gain into perspective for yourself you start to think about how $650 is the amount of money you make at your job every week. Then you might start to think how you have extra money this month so let’s go on a spending spree, and possibly worst of all you get over confident with the fact that you had a good day and you follow this with a stupid decision that ends up losing you money.

On the other hand if you had a $650 loss you might start to think that in one day you lost two months’ worth of car payments or 3 months’ worth of utility bills or whatever it might be that you’re paying for.

This is especially dangerous because you open a very welcoming door to your worst enemy and you start to think with your emotions instead of your head.

I don’t ever think about how much money I have made or lost in a day, week or month. I just focus on my strategy. I have developed a way of eliminating the thought of gains and losses and focusing on the strategy instead.

I don’t ever think of gains and losses in dollar terms; I think of them as points. In addition to this I lower the points to a smaller amount so that the numbers don’t seem high. For instance a $600 gain or loss will be a 60 point gain or loss. Instead of thinking I made $200 in a day I tell myself I’m up 20 points on the day and instead of thinking I have lost $70 in a day I tell myself I’m down 7 points. You see what I did? I take the dollar gain, change it to points and then take off a zero. This way you train yourself not to think in terms of how much money you have made/lost but instead how many points you are up/down.

Overtime you will become more and more immune to the daily or weekly gains/losses in your portfolio and you will start to focus entirely on your game plan instead.

10) Opportunities will ALWAYS be available The opportunities that you missed today are going to be there tomorrow. Perhaps in a different form but they will most definitely be there. Don’t be mad at yourself for missing a huge upward or downward swing in price on a position you thought of entering. That same opportunity will be there the next day you just have to find it. This is important to know because it teaches you to be patient. Sometimes you might feel rushed to jump into a position because you think it’s a rare opportunity. Believe me while it might be a good opportunity you DON’T have to rush into it because another one will be there tomorrow. Remember money is expendable; there will always be more to be made.

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Putting it together Here is a short story on my experience to show you how some of these come together: I was in a losing position but really needed to not be in this losing position. (Perfect opportunity for emotions to take over…and they did) I tried to make back the money I lost on this stock using the same strategy by putting even more money into the position. All my indicators told me that the stock was in a strong downtrend and was going to continue, yet my emotional self said no way it’s going back up. What ended up happening is I had put so much of my portfolio into this position that it almost wiped out an entire years’ worth of gains in less than 4 weeks.

Every morning I would wake up and see another huge percentage drop on my position. I couldn’t sleep and I kept having the worst nightmares. One night while I was lying in my bed during the time when I make the best decisions I had the solution pop into my head. I wrote it down so that I don’t forget it the next morning. This solution was very simple actually and it was to cut my loss and move on. See I was too scared and emotional to cut a loss because I was afraid the stock would bounce right back up. When I woke up and as soon as the trading bell sounded I closed my position and let me tell you it was the most important lesson I have learned. Yes I did take a big loss but I have never felt better because finally I removed all the stress that this bad investment decision was putting on me. I had somewhat of a revelation that day because I realized that wasting your time and worrying about losing positions is only going to affect you negatively. While I was hoping for a stock to go back up I was missing other opportunities.

I cut my losses and moved on. This was early in my career and I haven’t repeated this mistake.

The mistake most people make is that instead of cutting their losses short and letting their winners run they cut their winners short and let their losers run.

The psychology behind this is easy to understand…

In a winning position the thoughts are: “This has made me some money and can’t go any higher so I’m going to sell” In a losing position: “This can’t go any lower so let me hold on until it comes back up” Sound familiar?

I would like to mention that some of the most dangerous words you can put in your head “This can’t go any lower” Let me tell you that until a stock reaches $0 it CAN go lower. Right before the financial crisis of 2008 Bank of America (BAC) was trading above $50. It then proceeded to drop to the low $30’s. From 50

there it went to the low $20’s which is when you start to think that it can’t go any lower. It fell another 50% to below $10. From there it fell another 50% to below $5. Just when you think it can’t go any lower it fell to $3.14 in March, 2009. Don’t ruin your portfolio by believing something just CAN’T go any lower.

If you’re in a losing position cut your loss and move on.

Conclusion That concludes everything I have for you folks. I want to leave you with one more thought….

At this point the next thing for you to do is to start looking for investments and begin implementing this strategy I have shown you, or at least some part of it. The key word you need to understand is START! It’s time to take action and improve your financial position. Before you make any excuses about why now is not the best time for you to start I will tell you that now IS the absolute best time to get started.

There will NEVER be a perfect situation for you to start, so go ahead and start NOW! During a real estate webinar I attended the gentlemen presenting the webinar left us with this message: “After this you have what it takes to get started even at the most basic of levels. If you are still scared of investing or have any fear, well…that’s understandable, but you still need to get started, and for those of you who don’t plan on doing anything THEN STAY BROKE!!!! If you missed that last part what I said was STAY BROKE!!!!!!”

A very blunt message, but a VERY true message. Only by DOING can you actually make a change.

For those of you who wrote down your goals, opened an online brokerage account, approved your account for options trading, plan on finding your Ideal Performance State and who are ACTUALLY serious about improving their lives for the better then I suggest you get the next book in my series where I show you how to find trades and investments to add to your portfolio. I’ve spent a ton of my time putting everything together to help you find profitable investments.

If you haven’t already done so, go ahead and download Calculating Value today. It is truly unique and I doubt you will find anything like it anywhere else.

Be patient and persistent my friends and the profits will come.

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If you haven’t already done so, go ahead and download Calculating Value today. It is truly unique and I doubt you will find anything like it anywhere else.

Calculating Value-What the Numbers Actually Mean

Calculating Value presents a 10-step process to qualitatively and quantitatively value the fair price of a company using various numbers and information available to investors.

It will give you a broader understanding of the process of choosing investments, as well as an explanation on how to read and analyze earnings reports and company news.

It presents a unique way of valuing companies with similar pricing models used by some professional investors.

Finally, Calculating Value will show you how to develop entry and exit strategies based on the analysis that you will learn throughout the book As an added bonus, it contains details on how to implement one of the 3-part strategies outlined in this book.

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RISK DISCLAIMER U.S. Government Required Disclaimer Commodity Futures Trading, Commission Futures and Options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results

CFTC RULE 4.41 REQUIRED DISCLAIMERHYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE UNDER-OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN ATTAINABLE WITH COMMODITY AND OPTIONS TRADING CAN WORK FOR YOU AS WELL AS AGAINST YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THESE METHODS MAY HAVE WORKED IN THE PAST, PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A POTENTIAL FOR LOSS. A LOSS INCURRED WITH TRADING FUTURES CONTRACTS CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY RISKY AND SHOULD ONLY BE UNTERTAKEN BY INDIVIDUALS WITH ADEQUATE RISK CAPITAL.

The risk of loss trading commodities, options or futures can be substantial and involves a high degree of risk. You can lose money in excess of your margin deposits. You should only use risk capital for trading.

The use or placement of any stop-loss or stop-limit orders may not limit your losses and you could lose more than your intended amount of risk. Any trades, systems, methodologies or patterns discussed within the website or any of the product materials is for illustrative and informational purposes only and are not to be construed as specific advisory recommendations. This material and any opinions are for educational purposes only. We are not responsible for any trades that you may take or any losses that you may incur. Any trades that you may take are strictly taken at your own risk.

There are no certainties or guarantees in trading. Please consult with your own investment advisor, accountant, attorney, broker, or financial professional to determine the suitability of trading futures, commodities or options. All information we provide to you either written, on our website, in our books, interviews, videos or other interactive media is from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Readers and subscribers using this information are solely responsible for their actions and invest at their own risk. You assume full responsibility and full liability for any trades or trading risks and fully accept the liability of those actions and outcomes. We disclaim all liability for any losses or profits that you may incur as a result of your decision to trade.

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