Stock Option

Front 1

Buy Long

Back 1

Buying stock to hope that it will go up

Front 2

Sell Short

Back 2

Selling without owning the stocks to hope the stock will drop
Analogy: play station

Front 3

Buying Call

Back 3

Buying only the premium hoping for stock to rise.
Time is critical.
Analogy: paying reservation fee for house in case want to buy if value increase
Role: House buyer
A bullish strategy
Opposite is selling call

Front 4

Buying Put

Back 4

Buying stock premium (insurance) hoping stock will fall
Analogy: Buying house insurance incase house devalued
Role: Insurance buyer
Opposite is selling put

Front 5

Premium

Back 5

The fee/amount for the right to buy option contract
Analogy: Booking/reserve momey

Front 6

3 most important things in stock option

Back 6

Premium
Strike price
Expiration date

Front 7

Covered Call

Back 7

Profiting from stocks already in your portfolio. When owning a stock, gets to sell more than the purchase value and keeps the premium if stock increase.
Or earns only premium when stock fall.
Analogy: Renting a house/stock
Opposite: Protective puts
For stock owners

Front 8

Selling Call

Back 8

Aim for stock to fall.
Analogy: House owner give a chance to potential buyer by accepting reservation through a premium.
Hope the house value drop so potential buyer wont be interested anymore.
Role: House owner
A bearish strategy
Opposite is buying call

Front 9

Selling Put

Back 9

Hope that stock goes up.
Analogy: Insurance seller who hope the house will be good. if not then seller will sold a "naked put" low valued stock and hope stock will stay the same or rise.
Role: Insurance seller
A bullish strategy
Opposite is buying put

Front 10

Long position margin

Back 10

50% in account

Front 11

Short position margin (selling short)

Back 11

150% margin in account

Front 12

Protective puts

Back 12

Have right to sell at original ourchase price if value fall.
Like insuring your stock
Opposite: Sell covered
For stock owners

Front 13

strike price

Back 13

fix price / lock in price

Front 14

ROI calculation

Back 14

Profit
------- = ROI
Investment

(profit divide investment)

Front 15

underlying security

Back 15

specific stock

Front 16

2 most profitable strategy

Back 16

buying calls and buying puts especially for sideway markets

Front 17

Options chain

Back 17

chart, option price, table

Front 18

expiration date

Back 18

1. 12 times every year, one for every month
expire day on 11:59am, 3rd sat of the month. but you cant trade on sat so friday, 4pm is last chance.
2. 1 - 3 months for short term call plays.
3. 4 - 6 months for more conservative trades.
4. More time = more conservative, best for new option traders.
5. Less time = More aggressive.
6. Whatever timeframe you feel option will rise + 1 month.

Front 19

LEAPS (long term equity anticipation security)

Back 19

option with more than 1 year to expire.
but need pay more

Front 20

Option Greeks

Back 20

Formula use to establish time value of option

Front 21

Delta

Back 21

relationship between movements of stocks and corresponding options
Ideal delta is 0.70 - 0.90
Never trade lower than 0.50 delta

Front 22

Trading mission plan

Back 22

Use conservative option strategies to generate 5 - 15% per trade, not whole account, monthly cash flow and never lose more than 50% on any option play.

Learn all lessons from bad invesment you've made in the past

Front 23

Three way for stock direction to profit

Back 23

up - calls
sideways - covered calls
down - put or spread

Front 24

option comission

Back 24

$10 - $15 per trade for stock
$25 - $30 per trade for option

Front 25

Preset strike price

Back 25

Between 5 - 25 (2.5 increment)
5, 7.5, 10, 12.50, 15, 17.50, 20, 22.50, 25
Between 25 - 100 (5.0 increment)
25, 30, 35, 40, 45, 50, 55, 60, 65, 70, 75, 80
Above 200 (10 increment)
200, 210, 220, 230, 240, 250, 260, 270, 280

Front 26

At-the money

Back 26

An option with strike price equal to actual stock price

Front 27

In-the-money

Back 27

The option has value if it is exercised at the strike price

Front 28

Out-of-the-money

Back 28

The option has no value if it is exercised at the strike price

Front 29

Rules to live by

Back 29

1. Only invest money you can afford to lose
2. The trend is your friend
3. Time is your enemy (if you buy)
4. If you are wrong, GET OUT.
5. Remember asset allocation, dont all in one industry.
6. Invest the same amount in each play.
7. Focus on a few strategies (7)
8. Dont over trade (24 hours)
9. Use stops to aoid large losses (30% - 50% for option)

Front 30

5 steps investing formula

Back 30

1. Searching for an investment
2. Fundamental analysis
3. Technical analysis
4. Portfolio management
5. industry group

Front 31

Fundamental analysis
phase 2 analysis

Back 31

1. Chart/price pattern
2. Volatility
3. Zacks
4. Marker guide
5. News

Front 32

Technical analysis
Time your entry & exit

Back 32

1. Moving average
2. MACD
3. Stochastics
4. Volume
5. Support & resistance

Front 33

Portfolio management

Back 33

1. Track your current holdings
2. Trade stocks you woild like to own
3. Easily stay on current news
4. Set price & indicator alerts
5. Quickly view charts of stock

Front 34

Industry group analysis

Back 34

1. Industry group rotation
- see for yourself where big money is flowing
- ride the crest of the trend, stop following it

2. Best & worst industries
- easily find the best moving groups and the stocks in these groups.

3. About 50% of a stocks move is related to its industry group.

4. Avoid good stocks in bad groups

5. If good stock in bad group/industry will be ok only if there is a few competition in that group, 3 - 6.

Front 35

Leverage

Back 35

Controlling something high value without putting out a lot of money

Front 36

Phase 1

Back 36

Finding 25 stocks

Front 37

Phase 2

Back 37

Determine if stock should be in portfolio
Reduces the emotion of investing
Limits the risks of investment

Front 38

EPS

Back 38

Earning per share

Front 39

Price/trend pattern

Back 39

1. 1-5 years.
2. Choose a buy signal that is on a uptrending stock.
3. At least 2.5 or higher in price pattern, best is 4.0

Front 40

Volatility

Back 40

1. Depends on personal preference and risks tolerance. The more volatile, the more risky.
2. Newer traders should acoid excessive volatility.
3. The lower volatility, the higher score.
4. 4.0 means less volatile, 2.0 means average compare to baseline.
5. Above 2.0 are for more conservative traders.
6. High volatility creates expensive options.
7. Low volatility means less expensive options ( this is what we wan to buy low, sell high.)
8. Key factor in an option price.
9. Measures the magnitude of stock's movement, not direction.

Front 41

Zach

Back 41

Section 1
1. Check EPS estimate for coming year. doesnt matter how big or small, what matter is the increment and how fast is it growing. but watch out for seasons, e.g christmas.
2. Look out for next 5 year growth rate at least 20% or higher.
Section 2
1. Company vs industry (competitors)
2. Growth rate /earning over the last 12 months.
3. Current growth rate / earning in last 12 months.
4. Next growth rate / earning in next 12 months.
5. Next 5 years earning.
Section 3 (mean estimate vs actual esp)
1. Quarterly earning surprises (what the analyst thought the company will do)
2. The actual EPS should always be bigger than the mean estimated.
Section 4
1. Current rating, the kind of recommendation by analyst.

Front 42

Market guide report (past anaylsis)

Back 42

Section 1
1. Look at return on equity ROE, efficiency indicator. the higher numbee the more efficient. At least 18.00 or higher. Every 3 point lower than 18.00 will lower the grade. But depends on industry as well.
2. To check consistency of growth each year
(growth rate/revenue, earning per share EPS). Should be at least 25% or more over the last year. Sales/revenue is greatest influence of stock.
3 EPS higher than sales is a sign of efficiency.

Front 43

News

Back 43

1. Must not affect price.Either pass or fail.
2. For fail 2 things must happen. Bad news about bad earnings, lost key contract, lawsuit.
3. The price must go down as result of bad news.
4. Usually the bad/red down signal will come before the bad news.
5. When receive the signal, just SELL!
6. Same thing with good signal will come before good news.

Front 44

MG-Zack (combined score)

Back 44

1. Combined score should be at least 3.25 or higher.

Front 45

Buy signals / indicators
(works better, if stock fit these profile, price pattern, volatility, zachs, matket guide, news and MG-Zach

Back 45

1. Moving average
2. MACD
3. Stochastics
4. Volume
5. Support & resistance

Front 46

Techical indicator / signal theory

Back 46

For stocks, you can never get a valid buy or sell indicator just based on one indicator.

Front 47

Moving average

Back 47

1. Moving average are trend indicator
2. Show average price of stock over past 30 days.
3. Not very useful when going sideways. High numbers of red and green arrows when moving sideways.
4. Useful when stocking is trending up or down.
5. Green arrow appears when stock has closed above moving average, after it has stayed below the moving average for period of time.
6. Moving average is support level for pull backat up trend. Commonly act as a support area on pull backs within up trend. Particularly true on first pull back after a breakout from sideway move.
7. Resisting point for downtrend.

Front 48

MACD (moving average convergence divergence

Back 48

1. Short term momentum indicator.
2. The indicator that will give you the most signal as early warning to when momentum is showing.
3. Will also alternate between red and green.

Front 49

Stochastics

Back 49

1. Measures the winning battle between buyers and sellers
2. Overbought (buyers in control), oversold (sellers in control).
3. Red arrows means seller coming in.
4. Green arrows means buyers coming in.
5. Then slowest moving indicator.
6. When stochastic are between 25 and 75 lines look at ghe slope of the indicator to determine current color of arrow (upsloping = green, downsloping = red).

Front 50

Irregular buy signals

Back 50

1. Ghost green/red on Stochastic, missing green / red arrow, happen usually on a 5 year chart, still considered as a signal.
2. Watch out for missing arrows because they may not need to be aligns.
3. Remember moving average stays green if the stock does not close below the moving average line.
4. If the stock has stayed abot moving average as this one did another green will not appear. Same with ghost green if doesn't past bottom line (25). When curve or slope happen but doesn't touch 25, it may still be okay.

Front 51

Volume

Back 51

1. Confirmation of movement.
2. Shows how many shares are traded every day.
3. Volume surge typically mark the beginning of trend.
4. High volume surge shows commitment by institution.
5. High volume is 1.5 x the average 20 day volume.
6. Observe only big comparison/difference on volume.
7. Does not matter how many trade per day, compare previous 20 days.
8. Means institution buying/selling stock aggressively.
9. Look at price to check selling / buying, moving average.
10. When 3 signal occur, must have confirmation that big money on your side, through volume surges.

Front 52

Support & resistance

Back 52

Support: Any price area a stock going down has pulled back to and railed off of in the past.
Resistance: Any price area a stock has railed up to and fallen away from in the past.
(usually large volume is required to break through strong support or resistance, and once broken old resistance become new support, vice versa)

Front 53

Simple buy signal rules

Back 53

1. Uptrending stock with 3 green arrows (Moving average, MACD & Stochastic)
2. Sideways moving stock with 3 green arros and a volume surge. (1.5 x the average volume). Make sure they break through the resistance first. Usually means confirmation of big volume.
3. Don't proceed to buy if found out too late about it.
3. The 3rd arrow is the last buy signal price. Get in to as close to the price as you can.
4. If you missed buy signal by 5 days and it hasn't move much, you can still buy, only if it is still around the same price. But if stock price has increased to 5%, 10% or 15%, don't buy. Because it will likely turnover soon.

Front 54

Order entry type (Market Order and limit order)

Back 54

1. Don't put market order as first thing in morning, because market maker will increase price.
2. If you are entering the first thing in the morning, use the limit order.
3. Limit means the max limit of the original price.

Front 55

Strong buy signal that fit phase 2

Back 55

1. Stock grade well in phase 2, MG-Mack 3.25+
2. Price pattern score 2.50 or higher. Looking to eliminate stocks with weak price pattern. 6 months trend or longer.
3. Strong industry group as stable or increasing group rank (competition) of 70+ or group chart not in downtrend for the past 2 - 3 months. (Make sure it is strong when/at the buy signal comes).
4. Institutional money entering the stock. Volume surge - 1.5 x average volume when buying signal occurs or uptrending stock with accumulation/distribution indicator 60 or higher.

Front 56

Group rank

Back 56

The larger the group, the more significant the group rank become.

Front 57

Volume surge

Back 57

1.5 x average volume when buy signal occurs. Typically this confirmation occurs when the stock is breaking out of sideway move, but it can occur during a trend.

Front 58

Stop-loss

Back 58

1. Place beneath the current price of stock. If touch will automatically sell off stocks
2. Place it below recent support once we enter the trade.
3. Where you place the sell stop determine how many shares you should buy and ultimately determine your risk in the play.
4. Sell-stop order if free and it can be called or modified for free. You are only charged a comission if the order is executed.
5. Initial sell-stop: place it 3% below the recent support, 3% below the lowest price in the 2 weeks prior to the buy signals.
6. 3% below other support areas identified on the chart. Other support will be present for some signals but not far other options.
7. Continuing moving sell-stop up on each subsequent set pf 3 reds.

Front 59

Good money management

Back 59

1. Diversifying across a number of stocks in different industry group. Most stock in same group will move in same direction.
2. Selling losers quickly, most big losers start off as small losers.
3. Letting winners run, be patient and wait for signals, especially when market is in strong uptrend.
4. Never lost more than 1% to 2% of total account value on any one trade.

Front 60

Poor money management

Back 60

1. Trying to hit a home run while putting most of your capital into one play
2. Hanging on to your losers, Sell immediate once you lose, don't wait.
3. Selling winners too quickly, you can never get huge returns of 100% if you are selling after a quick 10% or 20% more.

Front 61

Green arrow

Back 61

The stock must stop going up, it must turn around, pull back or go sideways, turn around and start the rally, that's when the green arrow appears.

Front 62

Calculating risk, lost and shares to buy

Back 62

Example: Joe can lose $300 for any given trade. Buy signal at $59, sell stop 3% below $52 recent low is $50.50. Risk is $59 - $50.50 = $8.50 (risk)

Divide acceptable loss by risk (300/8.50)
35 shares would be corect position size for this individual.

When buying an option, you can never lose more than what you put into the play.

Front 63

Basic sell signals

Back 63

1. Sell on 3 red arros and broken support.
2. Most common support area in uptrending stock is the moving average.
3. Rather than selling immediately when the most recent arrow on each indicator is red, move sell stop up to protect profits.
4. Use 3 and 3 rule.

Front 64

3 and 3 rule

Back 64

1. 3 red, movesell stop to 3% below recent support.
2. When most recent arrow on each individual indicator is red (3 reds), move sell stop up to a price that is 3% below the lowest price the stock traded at during the formation of the 3 reds.
3. Does not matter how many days apart the red arrows are. Determine lowest price from the day of the first red to the day of the last red and move sell stop accordingly.

Front 65

Price vs fundamentals

Back 65

Price will always break down before the fundamentals breakdown. Price is a great leading indicator.
If you don;t wan to use sell stop so often you may use 5 year chart.

Front 66

Black Scholes Model Formula

Back 66

1. Created in 1973
2. Include current stock price, strike price, time until expiration, cos of money and volatility(
3. About what the option should be worth, to find it undervalue (for buy option) or overvalue (for sell option). We buy undervalue and ideally sell overvalue.

Front 67

All option quote contain 2 parts

Back 67

1. Intrinsic value + time value = option quote.

Front 68

Intrinsic value

Back 68

1. True value of the option e.g. stone.
2. Stock value - strike price = intrinsic value

Front 69

Time value

Back 69

1. Option quote - intrinsic value = time value.

Front 70

Deciphering on option premium

Back 70

1. Historical volatility - past 6 months
2. Implied volatility - expected volatility , future.
3. Theoretical value - Black Scholes
4. Delta
5. Gamma
6. Theta

Front 71

Historical volatility

Back 71

Shows the historical level of volatility for the underlying stock. Think of this as the average volatility (baseline).

Front 72

Implied volatility

Back 72

Measures the current volatility of the underlying stock. When compared to the historical volatility, it can be determined whether the stock's current volatility is above or below normal. When they don't know they make it expensive, e.g. pharmaceutical product wavering approval.

Front 73

Volatility Measure

Back 73

1. Implied volatility higher than historical volatility means OVERVALUED. An average overvalued of an option is about 20%.

2. Implied volatility lower than historical volatility means UNDERVALUED. We should look for about 20% or under, if it is a more than 20% then it is a very expensive option and can lose money.

3. Implied volatility fairly close to historical volatility means FAIRLY VALUED.

Front 74

T-Val (Theoretical value)

Back 74

1. T-val the theoretical value of the option based on the black scholes model.
2. Also known as the "fair value" what it should be.
3. It is used to determined if the current price of the option is over - valued, undervalued, or fairly valued.

MUST BE WITHIN 20%

Front 75

Trend

Back 75

1. Trend is your friend
2, Know the trend of the market, sector and stock.
3. Don't fight the trend.
4. The trend will tell you what to do, the indicator will tell you when to do it.

Front 76

VIX and VXN

Back 76

1. Volatility indicator
2. VIX measures the amount of puts vs calls
3. When VIX is high, means time to buy
When VIX is low, means lookout below.

Front 77

Chart trading pattern

Back 77

1. Looking at the expected move.
2. Average distance from each 30 days moving average bounce.
3. Measuring point from 30 days moving average to the high.
4. Use 1 year chart.
5, For bullish trades, use bounces to the upside.
6. For bearish trades, use bounces to the downside.
7. About the points of bounce away from "home" (moving average)
8. Figure the represent average number. And will know the pattern generally won't go more than that number of points.

Front 78

Technical analysis for options

Back 78

1. Trend stock and industry.
2. Indicators red and green arrows.
3. Support and resistance.
4. Volume: look for an increase.
5. These should be familiar from "the 5 steps online investing formula" material.

Front 79

Bullish signal

Back 79

1. Positive trend.
2. Green arrows.
3. No immediate resistance, bounces off support.
4. Higher than average volume on up days.
5. Volume increase (shows confirmation)

Front 80

Bearish signal

Back 80

1. Negative trend
2. Below the 30 day moving average or just breaking through it.
3. Peak in the MACD indicator "when mountain is heavy".
4. Higher than average volume on down days.
5. Volume increase (shows confirmation)

Front 81

8 Process to ensure profitability (for buying call)

Back 81

1. Decide if you're bullish or bearish.
2. Pick a stock to play.
3. Check the chart (stock & industry) - MA, MACD, Stochastic, Volume.
4. Choose an expiration date.
5. Choose a strike price.
6. Plan your exit.
7. Place your order.
8. Monitor your position.

Front 82

Planning exits

Back 82

1. Determined a price target for the stock by looking at the chart.
2, Exit at overheard resistance.
3. Exit on declining MACD and Stochastics.
4. Exit on a down day with heavy volume.
5. Use a percentage gain on your option as on exit target (e.g. if it goes up by 40%, sell)

Front 83

Monitoring Trade

Back 83

1. A least do a daily price check.
2. Sell when the target price is hit.
3. Sell on or before the expiration date.
4. Sell on the first sign of weakness e..g peak in MACD.
5. Sell half when you double your money.
6. Sell when you hit your stop-loss price.

Front 84

Buying puts

Back 84

1. Look for downtrending stocks in weak sectors.
2. Look for stocks that are trading below their moving average or just breaking through it.
3. Look for peaks in the MACD as the stock bounces down from the moving average.
4. Look for weak volume on the rallies and strong volume on the down days.
5. Look for a poor phase 2 score.

Front 85

Exchange traded funds (ETF)

Back 85

1. Profit from forecasting market or industry trends.
2. No need to identify individual stocks, just the overall direction of the market or an individual market sector.
3. No fundamental analysis necessary.

Front 86

Stock split (5 key points)

Back 86

1. Before the announcement.
2. Right after the announcement.
3. Between the announcement date and the split date.
4. Just prior to the split date.
5. After pot - split depression.
6. Stock split work best in a bullish market.
7. Only play stocks with good volume.
8. Stick with big companies.
9. Stay in-the-money for short term options.
10. Act quickly on announcement or don't play them.