Making Money The Easy Way

1
Making Money - The Easy Way

• Or, How to profit from Options Trading in good
  times and bad

2
FTSE 100 Performance June 1998 to August 2004

• Over the last 6 years to Aug 04, the FTSE 100
  fell by 25
• During the same period, the total of all my
  investments has risen by 488, net of taxes AND
  living costs.
• 75 of my investment pot is used to trade FTSE100
  options.

3
Why do you trade the Stock Market ?

• Something to do now you have retired, with the
  hope of supplementing the pension?
• You feel you know a particular share well and are
  confident to buy some of its shares, in the hope
  of making a profit, after the tax man has taken
  his generous slice.
• You would like to use a proven investment system
  in the hope of replacing the day job.
• My reason is to regularly make easy money,
  month after month, irrespective of market
  direction, simply by trading Options in the
  FTSE100.
• Trading FTSE100 options IS my day job.

4
What type of Investor are you?

• Are you good at share picking and have lots of
  time to fully evaluate your selected stocks?
• Are you good at market timing - not only opening
  a trade at the right time BUT also closing the
  trade at the right time?
• Do you have the time, concentration and ability
  to day trade?
• Do you rely on others to trade for you?

5
Even the Best of British- can fail . . . . .
Miserably!
6
Are you long or short?

• Remember that if you buy a share, i.e. going
  long, you can only make a profit if the share
  price increases above the dealing and tax
  charges.
• With CFDs you can bet that the underlying will
  go down i.e.., shorting.
• With options trading you can profit from a
  strategy whether the underlying goes down, up, or
  sideways (within certain limits) and profits
  can be tax free.
• Why trade any other way?

7
Minimise your risk

• There are at least 2000 UK shares and trusts
  how much time will it take you to pick and
  regularly monitor winners?
• How many shares can you monitor successfully at
  the same time?
• Why take a risk trading just a few shares?
• Why not trade an index a basket of stocks
  (there is safety in numbers!) - to benefit from
  both rises and falls in the stock market?
• Stay focused, trade just one thing, for example,
  an index, because a few individual stock failures
  have little effect on the index graph.

8
My trading style

• I am no good at share trading I am always
  looking for excuses to stay in a trade even when
  the graph tells me to get out.
• I dont want to spend all day, every trading day,
  in front of the screen.
• I cant follow many different investment trades
  at the same time.
• I like to keep my stock market investing simple,
  reliable, consistent and not reliant on market
  direction.
• Which is why I only trade one thing FTSE100
  index

9
Options trading - Calls

• On 31st August 2004, sell a Nov 04 FTSE100 index
  call at 4525 for 92p and receive 920.
• You will keep all of this if the index remains
  below 4525 at expiry on 19th Nov.
• You only loose if the index closes above 4525
  92 4617

10
Options trading - Puts

• On 31st August 2004, sell a Nov 04 FTSE100 index
  put at 4525 for 101.5p and receive 1015.
• You will keep all of this if the index remains
  above 4525 at expiry on 19th Nov.
• You only loose if the index closes below 4525
  101.5 4423.5

11
Options trading Calls and Puts, known as
Straddles

• Sell a Nov 04 FTSE100 index call at 4525 for 92p
  and at the same time, sell a 4525 put for 101.5p
  and receive a total of 1935.
• You keep all of this if the index remains at 4525
  at expiry on 19th Nov.
• You only loose if the index closes above
• 4525 92 101.5 4718.5 or closes below
• 4525 92 101.5 4331.5
• By selling both calls and puts together, your
  break even points widen dramatically to 387
  points or or 4.

12
Nov 04 call, put and straddle
13
Moving the b/e goal posts

• What if the index rises or falls?
• Answer - Sell more straddles.
• Sometimes its necessary to sell only puts or
  calls or even to close the strategy altogether. .
  . . but at a profit 5 out of six times!

14
A Simple Example Step 1

• Just before two months out from Aug 04 expiry,
  open a 4425 straddle for 83.5p on the puts and
  115.5p on the calls

15
A Simple Example Step 2

• The index moves down, so move the strategy down
  by selling another straddle, this time at 4325
  for a total of 129.5p

16
A Simple Example Step 3

• By 4th August, the index had reversed and might
  go higher so sell 2 x 4375 puts for more
  premium (43.5p each) and better upside
  protection, looking to sell calls if a further
  reversal is likely.

17
A Simple Example Step 4

• On 6th Aug, the ftse dropped. I left it over the
  weekend to see if a sharp reversal was likely. It
  didnt happen so sold 2 x 4325 straddles for 82p.

18
A Simple Example Expiry

• Bingo! Another bumper month!

19
The Risks

• Not as great as being a Marconi shareholder
• Or a holder of many other safe shares for that
  matter!

20
The Risks . . . . . and Reward

• It is advisable to have lodged in your trading
  account, 5 x the premium received, so that if
  there is a sharp move up or down, the options
  broker or spread betting company is unlikely to
  demand extra funds.
• In the above example, which just happened to
  result in maximum possible gain, the total
  premium received was 5795. Multiplied by 5 say
  an account size of 30K. The profit was 2665
• The return on the above example was 9 per two
  months 68/year!

21
The Risks

• My type of options trading does not include any
  guaranteed protection against a sharp up or down
  move. This means I loose, on average one month in
  six but no losses since June of last year!
• I believe the cost of buying protection and the
  resultant narrower b/es and lower profits is not
  worthwhile.
• The above worked example shows how my type of
  strategy can be moved up or down to cope with
  gradual index movements.
• The most difficult loss period is not a sudden
  move as in 9/11 but the slow, continual drop,
  month after month, as in Summer of 2002.

22
The Risks

• I believe the cost of buying protection and the
  resultant narrower b/es and lower profits is not
  worthwhile consider a Nov 04 straddle with 4175
  protection and 16 narrower b/e.

23
The Risks

• When the next 9/11 or Oct 87 occurs, those
  trading naked options will suffer instant losses.
• BUT, a way out is to sell deep in the money,
  later month(s), puts, which can be closed out or
  left to expiry for a substantial profit.
• Do not over trade keep at least 50 cash above
  that required by an options broker and 75 above
  that required by a spread better.

24
The Reward

• If you survive the 1st years options trading,
  then the fund that you have amassed should enable
  you to overcome all possible combinations of
  market conditions.
• Welcome to the Easy Way of trading!