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Operation: Trading Options

Operation: Trading Options

Mike Burnick started in finance 30 years ago.

He did everything — from being a stockbroker, a trader, a research analyst, an investment adviser and a portfolio manager responsible for the day-to-day operations and investment allocation of a mutual fund.

Mike frequently appeared as a guest commentator on CNBC, Fox Business News, Bloomberg TV and nationally syndicated financial talk radio programs.

But he had the desire to expand my research. Mike wanted to write to the masses… and take what he learned in all my years and deliver it to investors who needed it most. Investors like you.

You see, confidence in Social Security is at an all-time low.

More and more it’s become necessary to be active in today’s markets to ensure your finances are protected throughout your retirement years.

Mike wanted to provide unconventional strategies for consistent, safe income — on autopilot.

In 2002, Mike joined Weiss Research as an analyst and writer. He focused on delivering content to readers that helped them grow their retirement. Grow their income. Protect their wealth in ways they never would have been able to otherwise.

And between 2008 and 2010, while most folks were losing everything, he researched disaster-proof investment strategies that allowed him to create over $200 million in growth.

Today, Mike brings his investment expertise, research and writing skills to you.

It’s possible to generate thousands of dollars every month… money you can use to pad your retirement, live a life of leisure and secure your future.

He’s here with us today to speak on options trading.

Let’s get started…

With Purpose,

Patrick Gentempo

Patrick Gentempo

mikeA Word About Options

Mike Burnick here and today my goal is to simplify what’s seen as a tricky topic amongst newer investors…

Options. The mere mention of the word is enough to send a shiver down many investors’ spines.

But the fact is options aren’t so tricky once you understand them. And they can be your ticket to supercharge your investment gains if you play them right. Even better, your risks can be even lower than other types of investing.

An option, just like a stock, is a security.

The biggest difference between stock trading and options trading is what you’re trading.

Stocks shares, of course, represent part ownership in a company. When you buy a stock, you buy a part of the company. When you sell your stock, you give up that ownership.

Options are a little more complicated.

An option is a contract that gives you the right (but not the obligation) to buy or sell a stock at a predetermined price on a predetermined date.

A “call option” gives you the right to buy a stock, and a “put option” gives you the right to sell it.

If you do decide to trade options, you’ll need to be sure your brokerage account is set up for options.

What You Need to Know About Options

The predetermined price of an option is called a STRIKE PRICE, and the predetermined date is called the EXPIRATION DATE. Buying (e.g., “going long”) options limits your risk to your investment.

The “underlying” is the stock that the option gives you the right to buy or sell.

The option’s price — how much the owner pays for it or receives for selling it — is called the PREMIUM.

Buying a CALL OPTION gives you the right to buy 100 shares of its underlying stock.

Buying a PUT OPTION gives you the right to sell 100 shares of its underlying stock.

And selling options is the exact opposite of buying them — simple as that.

The cost to buy or sell an option fluctuates just like a stock price.

Here’s an example…

Let’s say, for example, you buy a call option on General Electric with a strike price of $25 that expires in June. (I’m just using General Electric because it’s a stock everyone knows.)

With that option, you have the power to buy 100 shares of General Electric for $25 — no matter what the current share price is. The only hitch is that you have to EXERCISE your right to buy the stock by the June expiration date. After that day, your contract expires and you lose your rights to GE stock and the premium you paid for the stock.

A put option works the other way. So if you buy a put option on General Electric with a $25 strike price that expires in June, you have the right to sell 100 GE shares for $25 — again, no matter what the going price is. But you only have until June to exercise your rights. After that, the option expires and you lose the premium you paid for the option.

How Do I Read an Option Ticker?

Like stocks, options have unique ticker symbols that help investors identify all of their important information in a few moments. Here’s the anatomy of an options ticker:

So in the example above, we’re looking at that same General Electric June 2013 $25 call option.

All options contracts have certain things in common. The most important is the expiration date.

Every option expires on a set date, which you know before you buy the contract. Past that date, the option becomes worthless — and the rights to buy or sell stock that the option gives are no longer valid.

Conventional options expire the third Friday of their expiration month (July options expire the third Friday of July, for example). The dates built into options tickers help to simplify expirations dates.

You’ll also have a strike price for every options contract. This is a fixed price for the life of the contract. Say the underlying stock trades for $25. A put option strike price of $30 would allow you to sell 100 shares at $30 a pop — $5 higher than what the stock trades at.

Do I Have to Hold Options Until They Expire?

You can buy or sell an option whenever you want at its current premium, or market price — just like with any stock. When at option expires in the money, it will automatically be EXERCISED by your broker. Theoretically, you can then sell your stock for the intrinsic value that your option had when it expired, less any commissions and exercise fees.

When you WRITE an option by selling it short, you can be ASSIGNED if a buyer decides to exercise his option. Traders who are assigned are obligated to buy or sell shares of the underlying stock based on the option’s strike price. If the contract that you write is not assigned, it will expire worthless. This means we get to keep our income and no longer have any obligation to buy or sell shares.

Hopefully, I’ve answered all your options questions and alleviated any fears you have about them.

Here’s to growing your wealth,

Mike Burnick

Mike Burnick