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The Option Advantage THEOPTION ADVANTAGE 8 Reasons Options Work For The Smart Investor THE OPTION ADVANTAGE CONTENTS Introduction .................................................................................... 3 Options Basics ............................................................................... 4 Option Advantage #1: Cost Efficiency ......................................... 16 Option Advantage #2: Less Risk ................................................... 24 Option Advantage #3: Better Returns ......................................... 34 Option Advantage #4: More Ways to Profit ................................ 37 Option Advantage #5: Barriers to Shorting Stocks .................... 46 Option Advantage #6: Ability to Generate Income .................... 49 Option Advantage #7: Portfolio Protection ................................ 55 Option Advantage #8: Lock in Profits .......................................... 61 Level Up Your Trading - CALL NOW: 866-443-8018 2 Copyright ©2020 Market Rebellion, LLC. All Rights Reserved. THE OPTION ADVANTAGE INTRODUCTION Knowledge is having the right answer. about the risk management, cash efficiency, Learning is asking the right questions. leverage, and most of all, the possibilities that Before setting out to master the world are simply not possible by using stocks. Ask of options strategies, there’s one critical how they’ll benefit you. question you must ask: How do I benefit? It doesn’t make sense to spend time, effort, We have the answer: We call it the option energy, and money on anything if there’s advantage. no benefit for you. It doesn’t matter that options strategies may WHY OPTIONS? be the safest way to profit in today’s markets. It doesn’t matter that options allow you to Fear and greed drive the stock market – but help defend against risk by hedging, rolling, for the wrong reasons. Fear makes investors and morphing. What matters is how options sell too soon, and greed makes them gamble will benefit you. their way from losing positions. Both are losing strategies. But options provide the Market Rebellion is an industry leading opportunity to control the amount of risk group of options professionals with you’re taking, help get better returns, become decades of experience – ranging from floor more cash efficient, and hedge positions for trading, market making, private investing, bigger future gains. It’s an edge we call the and individual coaching. We’ve got the option advantage. knowledge. As you read this book, think Level Up Your Trading - CALL NOW: 866-443-8018 3 Copyright ©2020 Market Rebellion, LLC. All Rights Reserved. THE OPTION ADVANTAGE OPTIONS BASICS Options are a class of financial assets Options are assets, just like shares of called derivatives. We know what stock, bonds, or mutual funds. They you’re thinking: Derivatives are risky trade on regulated exchanges with and should be avoided. After all, they bids to buy and offers to sell. Options caused the collapse of a Bank, and are legally binding contracts, just like nearly created a worldwide financial any business contract. Because of this, meltdown with Long-Term Capital options trade in units called contracts, Management. Well, not really. while stocks and mutual funds trade in units called shares. Options were used in these, and many other financial catastrophes. But it was What makes derivatives a little different the user, not the options, that was to from other assets is that their value is blame. In the hands of a skilled surgeon, tied to the value of something else. That nobody would say a knife is dangerous. “something else” is called the underlying However, if someone chooses to asset. For this book, we’ll focus only juggle machetes to get lots of attention on stock options, also called equity on Facebook, you can’t blame the options. However, you can buy and sell emergency trip to the hospital on the options on nearly anything including knives. Options are incredibly versatile commodities such as corn, oil, or and powerful tools, which is why the gold. You’ll find them on stock market traders behind these catastrophes indexes, real estate, foreign currencies chose to use them. They were trying to – even the weather. If the underlying get lots of attention on Wall Street – by has some number associated with it, an juggling machetes behind the back in option contract can be created. the dark. It wasn’t the derivatives’ fault. We want to show you a different side of While derivatives may sound scary, options – the option advantage. you’ve used them many times, just by Level Up Your Trading - CALL NOW: 866-443-8018 4 Copyright ©2020 Market Rebellion, LLC. All Rights Reserved. THE OPTION ADVANTAGE different names. For example, let’s say eventually buy the shares. Not true. you go to Walmart to buy an Apple While you can choose to buy the shares, iPhone for $500, but they’re sold out. most traders just trade the option The manager expects to have more contract back and forth in the market. back in stock in 30 days so gives you a How does that work? rain check, which gives you the right to buy one iPhone for $500 over the next Let’s say you sell this rain check to your 30 days. You’re not required to buy it, friend for $100. A few days later, the but you have the right to do so – it’s iPhone is selling for $700. Your friend your choice. Now let’s say this iPhone can do the same thing as you. He may becomes in great demand and the sell it to another friend for $200. He prices are quickly moving higher. Ten bought it for $100 from you, and sold days later, they’re selling for $600. it to another for $200. He doubled his money – and never had to buy Now it’s time to think like a trader: the phone. That’s essentially how all Let’s say you decided not to buy the derivatives work. Options traders never iPhone, would you throw away the rain take delivery of anything. Instead, they check? Of course not. You could sell it just buy and sell the pieces of paper – to another person who does want the the contracts – back and forth in the phone. If someone is willing to pay $600 market. for the phone, he’d love to have your contract that allows him to only pay Derivatives weren’t created as a $500. The contract is theoretically worth legalized gambling for the wealthy. the $100 difference. After all, you could They were designed to reduce risks use the rain check to and manage cash flows. Here’s another buy the phone for $500, example of a derivative you’re probably and perhaps sell it on used. Did you ever go to buy a puppy eBay for $600. The rain that wasn’t yet weaned? The breeder check has value because may say it’s going to be another six it locked in a fixed price, weeks before you can take it home. $500 in this example. But now there’s a risk to you and the As the phone price breeder. If you leave, your risk is that rises, so does the rain another person may end up buying it, check’s value. In other or that the price rises. For the breeder, words, the rain check’s the risk is that you walk away and he value is derived from never sells the puppy. He also risks the value of something else – it’s a falling prices. Perhaps other breeders derivative contract. That’s it. Derivatives announce in tomorrow’s paper that are nothing to be feared. They they have the same breed of puppies allow for people to safely negotiate for sale and there’s suddenly a price prices, manage cash flows, and more war. How do both of you solve your importantly, manage financial risk. respective problems? Derivatives. The breeder may say. “Give me $50 New traders are afraid of options down as a good-faith deposit, and the because they’ve heard you must dog is yours, but you can’t take delivery Level Up Your Trading - CALL NOW: 866-443-8018 5 Copyright ©2020 Market Rebellion, LLC. All Rights Reserved. THE OPTION ADVANTAGE for six weeks.” Your risk is removed and so is the seller’s. That’s a type of derivative contract called a forward agreement. Chances are, you’ve used many forward agreements in your life, just under different names. Derivatives are an essential feature of any well-developed market and are designed to make things easier. Financial options give you the same flexibility, great risk management and income- producing strategies. It’s the option advantage. RIGHTS VERSUS OBLIGATIONS One of the most fundamental principles of options is that it’s a market of rights versus obligations. It’s the simplest way to break the market down. If you buy an option, you’ll OPTION BUYERS pay money, but receive a right to do something. Option HAVE RIGHTS buyers have rights. Of course, for every buyer, there must WHILE OPTION be a seller. If you sell an option, you’ll receive money, but have an obligation to do something. Sellers have SELLERS HAVE obligations. As you continue to learn options, you’ll avoid OBLIGATIONS a lot of confusion if you always remember that buyers have rights and sellers have obligations. What are those rights and obligations? It depends on the type of option you’re using. CALLS & PUTS – THE BUILDING BLOCKS There are two types of options: calls and puts. These provide the building blocks for all option strategies. No matter how complex an option strategy may sound, it’s constructed with calls and puts. Not all stocks have options trading on them, but those that do are called optionable stocks. If you buy a call option, you have the right to buy shares of stock for a fixed price over a given time – exactly like the rain CALLS AND check.
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