FFO Options1: Welcome to Your First Million!

Dr. Scott BrownStock Options

Your First Million Is Here!If you are 75% of the population you:

Aren’t a millionaire or anywhere close. You are in a job you would quit if you hit the

lottery. You are not in your dream home.

Stock OptionsAre the fastest way for the little guy to make his or

her first million!$20,000 or even less can grow to a fortune over a

million in a few short years to a decade!Can be traded for annual income from home in

your pajamas and are far more versatile and useful than stocks… no more dangerous commuting!

What’s an Option?An option is a legally binding contract

between two people to buy or sell 100 shares of stock at a fixed price over a specific time period.

Two Types:Calls – give the owner the right, but not the

obligation, to buy stock at a specific price over a specific period of time.

Puts – give the owner the right, not the obligation, to sell stock at a specific price over a specific period of time.

Option Buyers vs. Option SellersBuyers – Have rights.

Rights to buy stock (If purchased a call option).

Rights to sell stock (If purchased a put option).Buyers pay option sellers for this right.

Sellers – Have an obligation to fulfill the contract if the buyer decides to use the option.Obligated to buy stock (If sold a put option).Obligated to sell stock (If sold a call option).Sellers are paid by option buyers for taking on

this obligation.

Long vs ShortLong:

Means you bought or own something. Example: If you buy any financial asset, you are “long”

the position. Example: If you buy a call option, you are “long” the

option.You have Rights.

Short:Means you receive cash upfront from selling an

asset you don’t own and then incur some type of obligation. Example: If you short a call, you get cash up front and

have the obligation to sell 100 shares of stock at a specific price over a specific time.

You have Obligations.

Long vs Short (Cont.)

LONG SHORT

CALL Right to buy stock Obligation to sell stock

PUT Right to sell stock Obligation to buy stock

Getting Out of a ContractYou can get into an option contract by either

buying or selling a call or put. To get out of this contract, you have to enter a

closing transaction (aka reversing trade) which means you must do the reverse set of actions that got you into the contract.Example: If you are short an option, you can get

out of it by simply buying the options back. Getting out of the contract does not mean you

avoid the losses accrued up to that point. All you are doing is going long and short the

same contract, therefore eliminating all profits or losses beyond that point.

The Options Clearing Corporation (OCC)

Is a highly capitalized and regulated agency that acts as middleman to all transactions.

It acts as the buyer to every seller and the seller to every buyer.

It guarantees that short sellers will follow through with their obligations to the option buyers.

Not a single case of unfair or partial performance has occurred since its inception (1973).

Additional TerminologyUnderlying Asset – for a call or put option is 100

shares of stock. Strike Price (aka Exercise Price):

If you exercise a call, you must pay the strike price since you’re buying the stock.

If you exercise a put, you’ll receive the strike price since you are selling shares of stock.

Expiration Date:Last day the option buyer has the right to exercise

the option and the seller has the legal obligation to fulfill the contract if the option buyer chooses to exercise.

Normally the Third Friday of the expiration month.

Additional Terminology (Cont.)

Parity – option trading for purely intrinsic value (no time value).

Wasting Assets –options lose their time value at expiration, but not their intrinsic value.

Time Decay: Does not occur in a straight line over time.Is exponential - Loses value slowly at first, and

progressively accelerates more and more each day.

Key Concepts – Part 1Options are derivative assets. Their prices

are derived from the price of the underlying stock.

Your “lock in” price is called the “strike or exercise price”.

You’re not ever required to buy or sell stock if you trade options.

The exercise price multiplied by 100 shares equals the total exercise value.

Options are standardized.

Bid and Ask PricesThe price of an option is called the premium.Bid Price:

Represents the highest price that a BUYER is willing to pay.

It is also the price at which you can sell an option with certainty. If you are selling, then always check the bid price as your maximum proceeds for shorting.

Ask Price: Represents the lower price that a SELLER is willing to

receive. It’s the price that you can buy the options with certainty.

If you are buying, then you should always check the bid price as your minimum cost for going long.

Intrinsic Values & Time ValuesIntrinsic Value – “immediate value” at the time the option is

purchased.Example: If you buy a July $35 call & Stock is trading at

$37.11, then the Intrinsic Value = $37.11 - $35 = $2.11. Time Value – any additional value that the option has above

the intrinsic value. Above example: If July $35 call is trading at $2.70 and the

intrinsic value is $2.11, then Time Value = $2.70 - $2.11 = $0.59.

Formulas:Total Value (Premium) = Intrinsic Value + Time ValueIntrinsic Value (Calls) = Stock Price – Exercise Price

(Assuming positive number).Intrinsic Value (Puts) = Exercise Price – Stock Price

(Assuming positive number).Time Value (Call & Puts) = Premium – Intrinsic Value.

MoneynessIn the money – means that options that have

intrinsic value purchase. Out of the money – means that options that

have no intrinsic value.At the money – means that the option is

neither in nor out of the money. Option whose strike is closest to the stock price.

Moneyness (Cont.)CALL OPTIONS

Moneyness Relationship to Stock

In-the-money Stock Price > Strike Price

At-the-money Stock Price = Strike Price

Out-of-the-money Stock Price < Strike Price

PUT OPTIONS

Moneyness Relationship to Stock

In-the-money Stock Price < Strike Price

At-the-money Stock Price = Strike Price

Out-of-the-money Stock Price > Strike Price

Stocks vs. OptionsSimilarities:

Options are securities.Options trade on national SEC regulated exchanges.Option orders are transacted through market makers and

retail participants with bids to buy and offers to sell and can be traded like any other security.

Differences:Options have expiration dates, common stocks can be held

forever (unless the company goes bankrupt).Options exist only electronically, stocks have certificates.No limit to number of options that can be traded on a stock,

common stocks have a fixed number of shares outstanding. Options do not confer voting rights or dividends, unlike

stocks.

Disclaimer DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO BE RELIABLE BUT CANNOT BE

GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS.  In our opinion, we believe, it may be possible, that heavy smoking and drinking may be hazardous to your health.  If you choose to smoke and drink while trading, The Delano Max Wealth Institute nor Dr. Scott Brown is liable for any damage it may cause.  If you slip and fall on the ice, we're not liable for that either.