Uncle Bob Williams - Uncle Bobs Money: Generating Income with Conservative Options Trades

Uncle Bobs Money

Generating Income
with Conservative
Options Trades

By Uncle Bob Williams
www.UncleBobsMoney.com

Uncle Bobs Money: Generating Income with Conservative Options Trades
Copyright 2011 Jumping Ahead, Inc.

All rights reserved. No part of this book may be used or reproduced in any manner whatsoever including Internet usage, without written permission of the author.

DISCLAIMER

Neither Jumping Ahead, Inc. nor any of its directors, officers, shareholders, personnel, representatives, agents or independent contractors (collectively, the "Operator Parties") are licensed financial advisers, registered investment advisers or registered broker-dealers. None of the Operator Parties are providing investment, financial or legal advice, and nothing in this book or on the UncleBobsMoney.com website should be construed as such by you. This book and the UncleBobsMoney.com website should be used as an educational tool only and is not a replacement for licensed investment advice. You should seek advice from an independent financial advisor if you have any questions relating to the information found on, or your activities in connection with, this book or the UncleBobsMoney.com website.

The full disclaimer can be found at the end of this book.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options, available at: http://www.optionsclearing.com

CONTENTS

WE BELIEVE

Proven money-making secrets should not belong to the privileged few.

Every investor should know how to generate income using conservative options trades so the risk of loss is low.

It's important to shatter the mystery and secrecy to end the status quo, where options pit traders and large investment firms with math geniuses onboard are able to earn consistently using options trades while the rest struggle to find the same strategies they use.

TO THIS END:

This book provides all the learning materials you need to understand how to make income-generating options trades.

You can learn what you need to know, then walk away to start trading options profitably without ever coming back to us.

But we do hope you'll join our community of successful options investors, where you'll access super-easy tools to take the process of successfully finding, trading and monitoring your options trades to maximum profitability.

This is not a typical "What are Options" course. We can find plenty of well written and technical explanations about Options and Options strategies at almost every Broker that provides Options Trading.

For standard explanations, we suggest reviewing the current list at:
http://www.UncleBobsMoney.com/links

We are going to try to show what Options are, and what specific information we need to know to successfully trade the Strategies at Uncle Bobs Money:
http://www.UncleBobsMoney.com

[1] STOCKS VS. OPTIONS

Stocks and Options are very different and when we understand the difference, it will remove all of the mystery, mystique and 'danger' from Options.

If we buy a stock, say 100 shares of Acme Company for $50 per share, which works out to be a $5,000 total investment, plus a transaction fee from our Broker:

Since the risk a stock will go up or down is 50/50, and since the value of the stock can go to zero, many people like to buy Mutual Funds. If we buy a Mutual Fund that tracks the S&P 500, our investment risk is still 50/50, but that risk is spread out over 500 companies. The hope is that all 500 companies will do well overall; meaning that they hope the share price overall will go Up and that the risk of all 500 companies going bankrupt is small.

For people who are more advanced Stock Traders, they will also sell a Stock that they don't own, which is called "Selling Short" or just "Short". These Traders are betting that the Stock price will go down, and they will be able to buy the shares they just sold at a lower price. IE: We sell 100 shares of the stock at $50 per share (we get paid $5,000), and if the price goes down to say $49 per share, we buy the 100 shares that we sold before but didn't own. (It cost us $4,900 to buy those shares.) And we walk away with a $100 profit.

So, all the above should be clear for most people who have Stock and Mutual Fund investments.

What the heck is an Option?

An Option is not a Stock, and it doesn't work like a Stock, so when we think about Options, we need to remove our "Stock Thinking" hat, and put on a new hat that is quite similar to an Insurance Policy. Yep, Options are like Insurance.

Lets buy an Option on Acme Company stock. (we'll get into the parts of an Option next - but lets first look at the basics, how the Option compares to a Stock.) It's OK if you don't understand the Options Terminology that follows, we will explain them shortly. Let's say that we buy 1 Contract, on a CALL Option at the $53 Strike which has an Expiration 2 months from now, and we pay $1.00 per share for that Option. 1 Option Contract = 100 shares of stock, so the total cost for this Option is $100.

The graph doesn't go to zero because our loss is limited to how much we pay for the Option.

We can see that as the price of the stock goes above $53 per share, our profits start to skyrocket. In fact, the profits of our Option will be many, many times greater than the profit of the Stock.

In this case, our total investment is only $100, and that is the maximum we can lose.

The Options trader also has the possibility to buy PUT Options, which means we will make money if the price of the stock goes DOWN. The Options trader can buy the $47 PUT Option, and if the price of the stock goes below $47, we can also make massive profits with a very limited loss. We will explain PUTs and CALLs later, so dont worry if any of this is unclear.

We see that with Options, we can put a small amount of money at risk, and our potential for profits is very, very high. So high its what Dan Sheridan of Sheridan Mentoring calls "Mafia Money".

But don't get excited yet.

The CALL Option that we purchased has an Expiration Date, and if the stock doesn't go above $53 before expiration, then our Option will expire worthless and we will lose our $100 investment in that Option. The same is true with the PUT Option, if the stock doesn't go below $47 before expiration, then our Option will expire worthless and we will lose our $100 investment in that Option.