6 Step

6 Easy-To-Follow Steps
To Your
First
$Million
Foolproof Options Strategy
for Soaring 50x Growth
By Chuck Hughes
Hughes Optioneering
Copyright 2013 by Legacy Publishing LLC. All Rights Reserved.
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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
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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.
2
Introduction
Welcome to the first step in achieving your financial freedom. I gained my financial
freedom several years ago and I can tell you it is a great feeling! I was able to retire
from my job and now have the freedom to work only when I want to work from the
comfort of my home. My investing earnings enabled me to purchase a second home in
California last year. I now enjoy playing tennis and hiking the beautiful mountains and
coastlines of the California Central Coast with my family. As I write this Report I have a
spectacular view of Carmel Beach and Pebble Beach which has inspired me to record
the path I took to arrive here.
Our Goal: Turn $20,000 into One Million Dollars

You too can follow my path. The goal of this Report is to explain the 6 Steps that I used
to achieve my financial independence. More specifically I will show you how to turn
$20,000 into one million dollars. Let me be your guide on this financial journey. I will
explain in detail each step so that you will hopefully be able to duplicate my success.
This is an ambitious goal but it can be done. This report contains both historical and
actual trade results that confirm that the six steps really work.
Follow My Path
I realize that there is a lot of advice out there on how to invest. The one unique thing
about this Report is that it contains actual trade examples and copies of my brokerage
statements that document the success of the investing techniques. The enclosed copies
of my brokerage statements and tax returns show a total of $1,394,557.80 in investing
profits which led to my financial independence. Most of the financial advice I come
across on a daily basis is all theoretical and based on trying to predict the future. I am
hoping that the 24 years of historical results and the documented actual profits
generated by following the enclosed systems will give you the confidence and
inspiration to follow my path. I call my investing systems the Fail Safe Financial
Program as this program has been a Fail Safe way for me to generate investing profits
over the past 22 years.
3
Step One
Compounding a High Rate of Return
Is the Key to Achieving Our Goal
The quickest way to achieve our goal is to get a high rate of return on our investments
and to compound our returns each year. If we can average a 50% yearly return then
$20,000 grows to $1,000,000 in less than ten years through the magic of compounding.
Year Starting Percent Yearly Ending

Investm ent R eturn Profit Value
1 $20,000 50% $10,000 $30,000
2 30,000 50% 15,000 45,000
3 45,000 50% 22,500 67,500
4 67,500 50% 33,750 101,250
5 101,250 50% 50,625 151,875
6 151,875 50% 75,938 227,813
7 227,813 50% 113,906 341,719
8 341,719 50% 170,859 512,578
9 512,578 50% 256,289 768,867
10 $768,867 50% $384,434 $1,153,301
If we can average a 50% yearly return then $50,000 grows to $1,000,000 in about 7
years. If we can start with $100,000 then it will take about 5 years for our funds to
grow to $1,000,000.
Year Starting Percent Yearly Ending

Investm ent R eturn Profit Value
1 $50,000 50% $25,000 $75,000
2 75,000 50% 37,500 112,500
3 112,500 50% 56,250 168,750
4 168,750 50% 84,375 253,125
5 253,125 50% 126,563 379,688
6 379,688 50% 189,844 569,531
7 569,531 50% 284,766 854,297
8 854,297 50% 427,148 1,281,445
9 1,281,445 50% 640,723 1,922,168
10 $1,922,168 50% $961,084 $2,883,252
4
How Do We Achieve an
Average Yearly Return of 50%?
We can see from the preceding tables that we can reach our goal of growing $20,000
into one million dollars if we can maintain an average yearly return of 50%. Most
fortunes today have been made by inheritance, investing in real estate, investing in the
stock market or by starting your own business.
I was not lucky enough to be related to Howard Hughes and I am one of eleven
children so early on I had to rule out a large inheritance. Investing in real estate or
starting your own business can take a lot of capital to start and can be very time
consuming. I had to rule out these two choices because of my full time job and raising
my family. So I made my fortune investing in stock market and in particular options.
I started out with a $4,600 trading account as this is all I could save at the time. But
within my first two years of trading I made $460,164 which was more than I made the
previous six years as an airline pilot . My 1985 tax return showed $69,030 in capital
gains related to option trading. By 1986 my tax return showed $391,134 in capital gains
from option trading and I was well on my way to achieving my financial freedom
through stock and option investing. Copies of these tax returns follow. These results
show that it is possible to compound a high rate of return through stock and option
investing and realistically attain our goal of growing $20,000 into one million dollars.
The enclosed brokerage statements in this report show that my trading accounts
currently have a $1,273,579 balance. I make my living trading the systems presented in
this Report and have a genuine desire to help others understand and succeed in trading
the financial markets.
Leverage Is the Key to a High Return

Over the last 76 years the US stock market (as measured by the broad based S&P 500
Index) has maintained an average annual return of 11%. If you invested in the S&P
500 Index and maintained an average annual return of 11% it would take more than 37
years to turn $20,000 into $1,000,000. That is obviously too long of a time frame to
achieve our goal. In my experience the best way to achieve a high rate of investment
return is to invest in options. Options give you the leverage you need to generate a
high rate of return which can enable us to achieve our goal.
5
6
7
Step Two
Invest in Options to Achieve
A High Rate of Return
Lets look at some option examples so that you can understand the important concept
of leverage and how leverage can provide a high rate of return. For those of you not
familiar with option investing bear with me for a minute as there is a mini-course on
the basics of option investing to follow. The option quote table below contains actual
call option prices (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying call
options is a bullish strategy as the value of a call option will increase as the price of the
underlying stock increases. Hewlett Packard stock is currently trading at 32.78. Lets
focus on the March 35-Strike call option (circled).
10% Stock Price Increase = 950% Option Return

Buying the 35-Strike call option gives us the right to buy 100 shares of HPQ at 35.00. If
we were to purchase the 35-Strike call option we would expect to pay the ask price of
.10 cents or $10 per option (.10 x 100 shares = $10). Lets assume HPQ stock increases
10% in price from the current price of 32.78 to 36.05 (not an unusual assumption as
HPQ stock has increased more than 60% over the past year). With a stock price of
36.05 the 35-Strike call option would be worth 1.05 points or $105 (stock price of 36.05
minus 35-Strike price = 1.05 option value). When you purchase options you can sell
them any time prior to option expiration. So the option we purchased for .10 points
could be sold for 1.05 points. Selling the 35-Strike call at 1.05 would produce a 950%
return (1.05 sale price minus .10 cost = .95 profit divided by .10 cost = 950% return).
Hewlett-Packard Co. (HPQ) At 3:49PM ET: 32.78 0.18 (0.55%)
CALL OPTIONS Expire at close Fri, Mar 17, 2006

Strike Symbol Last Chg Bid Ask Open Int
25.00 HPQCE.X 7.90 0.00 7.60 7.80 303
27.50 HPQCY.X 5.40 1.00 5.10 5.30 479
30.00 HPQCF.X 2.80 0.15 2.65 2.75 4,797
32.50 HPQCZ.X 0.70 0.15 0.65 0.70 38,350
35.00 HPQCG.X 0.05 0.05 0.05 0.10 30,226
8
9.5 to 1 Leverage = Profit Opportunity
Options Are Highly Leveraged and
Can Provide a High Rate of Return
Which Allows Us to Achieve Our Goal Quick ly
Stock Investor
Buys HPQ Stock at 32.78
Stock Increases 10% to 36.05
Results:
Big Investment $3,278
Small Profit 10%
Option Investor
Buys 35-Strike Call Option for $10
Stock Increases 10% to 36.05
Call Option is Worth $105 (Stock Price of 36.05 minus 35.0 Strike = 1.05
Option Value)
$105 Option Value Minus $10 Cost = $95 Profit

$95 Profit Divided by $10 Cost = 950% Return
Results:
Small Investment $10
Big Profit 950%
A 10% Price Increase in Stock = 950% Call Option Return

Which Allows Us to Exceed Our Goal
9
The Power of Leverage
The table below compares the profit potential of purchasing Hewlett Packard stock at
todays price of 32.78 versus the HPQ March 35-strike call option at .10 points. If HPQ
stock increases to 38.00 stock investors realize a 15.9% return but option investors
realize a 2900% return. If HPQ stock increases to 40 stock investors realize a 22%
return but option investors realize a 4900% return.
15.9% Stock Return = 2,900% Option Return = 29 to 1 Leverage
22% Stock Return = 4,900% Option Return = 49 to 1 Leverage
Hewlett Packard 35.00 36.00 37.00 38.00 39.00 40.00

Stock Price
Stock Profit 2.22 3.22 4.22 5.22 6.22 7.22
Stock % Return 6.8% 9.8% 12.9% 15.9% 19.0% 22.0%
Value of 35-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Call Option
Option Profit 0.00 0.90 1.90 2.90 3.90 4.90
Option % Return 0.00 900% 1900% 2900% 3900% 4900%
Important Note: The use of leverage is a doubled-edge sword that can lead to
significant losses with adverse market moves. For this reason all of the Fail Safe
Systems presented in this Report that use leverage are all limited risk strategies which
limit your losses to your initial investment regardless of adverse market moves. This
prevents you from being on the wrong side of a leveraged trade that could trigger a
margin call or require you to add funds to your account.
10
Options Work Just as Well in a Down Market
Options work just as well in a down market. The option quote table below contains
actual put option prices (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying
put options is a bearish strategy as the value of a put option increases as the price of
the underlying stock decreases. Hewlett Packard stock is currently trading at 32.78.
Lets assume that HPQ stock declines in price 10% from 32.78 to 29.50. Lets focus on
the March 30-Strike put option (circled).
10% Stock Price Decrease = 900% Option Return

Buying the 30-Strike put option gives us the right to sell 100 shares of HPQ at 30.00. If
we were to purchase the 30-Strike put option we would expect to pay the ask price of
.05 cents or $5 per option (.05 x 100 shares = $5). Lets assume HPQ stock decreases
10% in price from the current price of 32.78 to 29.50. With a stock price of 29.50 the
30-Strike put option would be worth .50 points or $50 (strike price of 30.00 minus
29.50 stock price = .50 option value). When you purchase options you can sell them
any time prior to option expiration. So the option we purchased for .05 points could be
sold for .50 points. Selling the 30-Strike put at .50 would produce a 900% return (.50
sale price minus .05 cost = .45 profit divided by .05 cost = 900% return).
PUT OPTIONS Expire at close Fri, Mar 17, 2006

27.50 HPQOY.X 0.05 0.00 N/A 0.05 13,200
30.00 HPQOF.X 0.05 0.00 N/A 0.05 21,661
32.50 HPQOZ.X 0.40 0.05 0.45 0.55 24,820
35.00 HPQOG.X 2.30 0.10 2.40 2.45 5,504
37.50 HPQOU.X 4.70 0.00 4.80 5.00 291
A 10% Increase in Stock Price = 950% Call Opt Return

A 10% Decline in Stock Price = 900% Put Opt Return
Making Options the Most Profitable and Most

Versatile Financial Investments Available Today
11
Option Basics
Before we examine the strategies that enabled me to accumulate my fortune lets start
with the basics in case you are not familiar with option investing. There is no need to
worry about complex mathematical formulas with all of those funny symbols. Simple 4th
grade arithmetic is all we need to use to be a successful options investor. Even if you
are familiar with option investing this may be a good overview of the different ways you
can use options to profit during both up and down markets which makes options the
most versatile financial investments available today. The mechanics of option investing
can be a little intimidating especially for novice investors. The focus of this Chapter is to
teach you the basics of option investing. Option investing has been a very rewarding
experience for me and I want to pass on all of my knowledge of options to you so that
you too can experience the excitement and rewards of option investing.
Options are contracts. The terms of option contracts are standardized and give the
buyer the right to buy or sell the underlying stock at a fixed price which is known as the
strike price. Option contracts are valid for a specific period of time which ends on
option expiration day. There are two types of options calls and puts. Simply stated a
call option is a contract that gives you the right to buy a stock at a specified price which
is called the strike price on or before the expiration date of the option. The price you
pay for an option is called the premium. A put option is a contract that gives you the
right to sell a stock at a specified price called the strike price on or before the
expiration date of the option.
Options are also known as derivatives which means they derive their value from
another source. Stock options traded on the major exchanges in the US derive their
value from the underlying stock. For example, General Electric stock options derive their
value from the underlying General Electric common stock. Unlike the risky derivatives
you may have heard about, options traded on the major exchanges are issued,
guaranteed and cleared by the Options Clearing Corporation (OCC). The OCC is a
registered clearing corporation with the Securities and Exchange Commission (SEC) and
has received an AAA credit rating from Standard & Poors Corporation for its ability to
fulfill its obligations as counter-party for option trades.
There Are Two Ways to Invest in Options
1. Buy Options 2. Sell Options
12
Buying Options
Buying an option is similar to buying a stock. The goal is to buy low and sell high or
buy high and sell higher. One option contract normally controls 100 shares of the
underlying stock. If you purchase an option for 6.00 points the premium cost would be
$600 ($6 x 100 shares = $600) and $600 would be debited from your brokerage
account to pay for the premium. If you later sell this option for 9.00 points you will
realize a $300 profit (buy low and sell high).
Buy at 6.00 and Sell at 9.00 = 3.00 Profit
If you buy an option for 6.00 points and later sell it for 4.00 points you will realize a
$200 loss.
Buy at 6.00 and Sell at 4.00 = 2.00 Loss
Buying call options is a bullish strategy. The value of a call option increases as the price
of the underlying stock increases. Lets refer to the previous example for the Hewlett
Packard (HPQ) Mar 06 35-Strike call option. The table below demonstrates how the
intrinsic value of the 35-Strike call option increases as the price of Hewlett Packard
stock increases.
Buying Calls Is a Bullish Strategy
Value of HPQ 35-Strike Call Option Increases

As Price of HPQ Stock Increases Above 35.0
Hewlett Packard 35.00 36.00 37.00 38.00 39.00 40.00

Stock Price
Value of 35-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Call Option
13
Buying put options is a bearish strategy. The value of a put option increases as the
price of the underlying stock decreases. Lets refer to the previous example for the
Hewlett Packard (HPQ) March 30-Strike put option. The table below demonstrates how
the intrinsic value of the 30-Strike put option increases as the price of Hewlett Packard
stock decreases.
Like the previous call option purchase example, the goal of a put option purchase is to
buy low and sell high. One put option contract normally controls 100 shares of the
underlying stock. If you purchase a put option for 6.00 points, the premium cost would
be $600 ($6 x 100 shares = $600) and $600 would be debited from your brokerage
account to pay for the premium. If you later sell this option for 9.00 points you will
realize a $300 profit (buy low and sell high).
Buy at 6.00 and Sell at 9.00 = 3.00 Profit
If you buy a put option for 6.00 points and later sell it for 4.00 points you will realize a
$200 loss.
Buy at 6.00 and Sell at 4.00 = 2.00 Loss
Buying Puts Is a Bearish Strategy
Value of HPQ 30-Strike Put Option Increases

As Price of HPQ Stock Decreases Below 30.0
Hewlett Packard 30.00 29.00 28.00 27.00 26.00 25.00

Stock Price
Value of 30-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Put Option
14
Risk/Reward
Risk Limited
Buying Options
Profits Not Limited
Truncated Risk
When we buy options our risk is limited to the purchase price of the option. In the
previous example, the HPQ March 35-Strike call option is trading for .10 points or $10
per contract. If we were to purchase this option our risk would be limited to the $10
purchase price regardless of the price movement of HPQ stock. We cannot receive a
margin call with option purchases.
Profits Not Limited

When we buy options our profits are not limited. The table on Page 11 demonstrates
that the value of the HPQ 35-Strike call option continues to increase as the price of HPQ
stock continues to increase. There is no limit on profit potential as the option will
increase one point in value for each point the stock increases above the strike price of
the call option. The table on the previous page demonstrates that there is no limit on
the profit potential of the 30-Strike put option (unless HPQ stock drops to zero) as the
put value continues to increase as the price of HPQ stock continues to decrease.
Excellent Risk/Reward
The unlimited profit potential for option purchases allows us to take full advantage of
truncated risk. Normally if we establish a portfolio of ten options we only need two or
three options to be profitable to produce an overall positive return for the portfolio. This
results in an excellent risk/reward ratio for option investing.
15
Selling Options
Selling an option is similar to shorting a stock. Shorting a stock is just the opposite of
buying a stock. When you buy a stock you buy first and then sell later hopefully at a
higher price to realize a profit. When you short a stock or option you sell first and then
buy later hopefully at a lower price to realize a profit. When you short an option, profits
are realized by selling high and buying low. If you sell an option for 9.00 points and
then later buy back this option at a lower price a profit will be realized. For example,
selling an option for 9.00 points and later buying back the option for 6.00 points results
in a $300 profit (sell high and then buy lower).
Sell at 9.00 and Then Buy at 6.00 = 3.00 Profit
Selling an option and then subsequently buying back the short option at a higher price
will result in a loss. If you sell an option for 7.00 points and buy it back for 9.00 points a
$200 loss will be incurred.
Sell at 7.00 and Then Buy at 9.00 = 2.00 Loss
Selling a call option is a bearish strategy. Call options decline in value as the price of the
underlying stock declines. Being short call options produces profits as the price of the
underlying stock declines in price. If you sell a call option and the call option
subsequently decreases in price then you can buy back the short call at a lower price
which will result in a profit for the call seller (Sell high and buy low). The Yahoo Finance
option quote table below lists actual option prices. Lets assume we short the Mar 30-
Strike call option at 2.65. When we sell an option we can expect to sell at the bid price
of 2.65 (circled). The table on the following page demonstrates the risk profile for the
short HPQ 30-Strike call option so that you can understand this important concept.
CALL OPTIONS Expire at close Fri, Mar 17, 2006

25.00 HPQCE.X 7.90 0.00 7.60 7.80 303
27.50 HPQCY.X 5.40 1.00 5.10 5.30 479
30.00 HPQCF.X 2.80 0.15 2.65 2.75 4,797
32.50 HPQCZ.X 0.70 0.15 0.65 0.70 38,350
35.00 HPQCG.X 0.05 0.05 0.05 0.10 30,226
16
Value of HPQ Call Option Decreases
As Price of HPQ Stock Decreases
Selling Calls Is a Bearish Strategy
Short 30-Strike Call Option Profits

As the Price of HPQ Stock Decreases
Hewlett Packard 34.00 33.00 32.00 31.00 30.00 29.00 28.00

Stock Price
Value of 30-Strike 4.00 3.00 2.00 1.00 0.00 0.00 0.00

Call Option
Short Call Option -1.35 -0.35 0.65 1.65 2.65 2.65 2.65
Profit/-Loss
This table demonstrates the profit/loss profile of shorting the Mar 30-Strike call option
at 2.65 points. This table shows that profits are produced as the value of the 30-Strike
call option declines. When we sell options our profits are limited to the premium
received for selling the option. In this example our profits are limited to $265. If HPQ
stock closes at or below 30.0 at option expiration then the 30-Strike call option will
expire worthless and the full $265 profit will be realized (sell at 2.65 and buy at 0 =
2.65 point profit).
Selling Put Options

Selling put options is a bullish strategy. Put options decline in value as the price of the
underlying stock increases. Being short put options produces profits as the price of the
underlying stock increases in price. If you sell a put option and the put subsequently
decreases in price then you can buy back the short put at a lower price which will
result in a profit for the put seller (Sell high and buy low).
17
The Yahoo Finance option quote table below lists actual put option prices. Lets assume
we short the March 35-Strike put option at 2.40. When we sell an option we can expect
to sell at the bid price of 2.40 (circled). The table that follows demonstrates the risk
profile for the short HPQ 35-Strike put option.
PUT OPTIONS Expire at close Fri, Mar 17, 2006

27.50 HPQOY.X 0.05 0.00 N/A 0.05 13,200
30.00 HPQOF.X 0.05 0.00 N/A 0.05 21,661
32.50 HPQOZ.X 0.40 0.05 0.45 0.55 24,820
35.00 HPQOG.X 2.30 0.10 2.40 2.45 5,504
37.50 HPQOU.X 4.70 0.00 4.80 5.00 291
Value of HPQ Put Option Decreases

As Price of HPQ Stock Increases
Selling Puts Is a Bullish Strategy
Short 35-Strike Put Option Profits as the

As the Price of HPQ Stock Increases
Hewlett Packard 32.00 33.00 34.00 35.00 36.00 37.00 38.00

Stock Price
Value of 35-Strike 3.00 2.00 1.00 0.00 0.00 0.00 0.00

Put Option
Short Put Option -.60 0.40 1.40 2.40 2.40 2.40 2.40
Profit/-Loss
18
The previous table demonstrates the profit/loss profile of shorting the Mar 35-Strike put
option at 2.40 points. This table shows that profits are produced as the value of the 35-
Strike put option declines. When we sell options our profits are limited to the premium
received for selling the option. In this example our profits are limited to $240. If HPQ
stock closes at or above 35.0 at option expiration then the 35-Strike put option will
expire worthless and the full $240 profit will be realized (sell at 2.40 and buy at 0 =
2.40 point profit).
Risk/Reward
Risk Not Limited

Selling Options
Profits Limited
Risk Not Limited

When we short options our risk is not limited. In the previous example, the HPQ March
30-Strike call option is trading for 2.65 points or $265 per contract. If we were to sell
this option our risk would not be limited. As the price of HPQ stock increases above the
30-Strike price, the value of the 30-Strike call also increases. This would produce losses
for a short call option position and can result in a margin call. The table below
demonstrates this relationship. For this reason it is recommended that you short options
only if they are covered which will be explored later in this report.
Short 30-Strike Call Option Incurs Losses

As the Price of HPQ Stock Increases
Hewlett Packard 34.00 35.00 36.00 37.00 38.00 39.00 40.00
Stock Price
Value of 30-Strike 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Call Option
Short Call Option -1.35 -2.35 -3.35 -4.35 -5.35 -6.35 -7.35
Profit/-Loss
19
Profits Limited
When we sell options our profits are limited. In the two option sale examples just
presented our profits would be limited to $265 for selling the HPQ 30-Strike call and
$240 for selling the 35-Strike put option. These short option examples demonstrate that
the risk profile for shorting options is just the opposite of buying options. When we
short a call option our profit is limited to the option premium sold regardless of how far
the underlying stock declines in price. The risk is not limited when we short a call option
and losses are cumulative as the price of the underlying stock increases.
Option Pricing
Option premiums consist of intrinsic value and time value. At option expiration options
lose all time value and consist of only intrinsic value. The intrinsic value of an option is
derived from the current price of the underlying stock. The intrinsic value of a call
option is calculated by subtracting the strike price of the option from the current stock
price.
Calculating Intrinsic and Time Value

Lets review the steps for calculating intrinsic and time value by using todays actual
option prices for Hewlett Packard (HPQ). Today is April 12th and HPQ stock is currently
trading at 32.50. The August 30-Strike call option is priced at 4.10 points. The intrinsic
value of this option would be calculated by subtracting the 30-Strike price from the
current stock price of 32.50 points which results in an intrinsic value of 2.50 points.
Time value is calculated by subtracting the intrinsic value from the total value of the
option. In this example the total value of the 30-Strike call option is 4.10 points.
Subtracting the intrinsic value of 2.50 would result in a time value of 1.60 points.
Current Stock Price of 32.50 - Strike Price of 30.00 = 2.50 Intrinsic Value
Option Price of 4.10 - Intrinsic Value of 2.50 = Time Value of 1.60
At option expiration in August if HPQ stock is trading at 32.50 the 30-Strike call option
would consist of only intrinsic value which in this example would be 2.50 points. This
option would have no time value at option expiration.
On April 12th the HPQ August 35-Strike call option is priced at 1.50. This call option is
out-of-the-money and would have no intrinsic value. It would only consist of 1.50
points of time value. This option would gain intrinsic value if HPQ stock trades above
35.00.
Current Stock Price of 32.50 - Strike Price of 35.00 = 0.00 Intrinsic Value
20
The intrinsic value of a put option is calculated by subtracting the current price of the
stock from the strike price of the put. On April 12th Hewlett Packard stock is trading at
32.50 and the HPQ August 35-Strike put option is priced at 3.70 points. The intrinsic
value of this put option is 2.50 points and would be calculated subtracting the stock
price of 32.50 from the 35-Strike price. The time value would be 1.20 points and is
calculated by subtracting the intrinsic value of 2.50 from the option price of 3.70.
How to Read Option Symbols

An option symbol is comprised of several components that define the underlying stock
or ETF and information about the specific option contract. An option symbol consists of
the stock or ETF trading symbol, year of expiration, month of expiration, expiration
date, option type (call or put) and strike-price.
There are many financial websites available today that will give you option quotes. I like
to use Yahoo Finance or the Chicago Board Options Exchange website at
www.cboe.com to obtain option quotes.
The symbol for the General Electric Jan 2015 20-Strike weekly call option is
GE150117C00020000. Lets look at the components of this weekly option symbol.
GE, 15, 01, 17, C, 00020000
GE is the trading symbol for General Electric
15 is the expiration year 2015
01 is the expiration month of January
17 is the expiration date which is Friday January 17th in this example
C designates a call option (put options are designated with a P)
00020000 designates a 20-Strike price
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Option Expiration
Option expiration is normally at the close of trading on the third Friday of the option
expiration month. In this example, the January 2015 call option would expire on Friday
January 17th (third Friday in January). At option expiration all in-the-money options are
exercised and assigned (calls and puts) automatically. Your broker handles the entire
option exercise/assignment transaction. A call option is in-the-money if the strike price
is lower than the stock price. A put option is in-the-money if the strike price is higher
than the stock price.
Most option contracts are never exercised. They either expire worthless or are closed
out prior to option expiration. If you are long or short a put or a call and the option is
in-the-money approaching option expiration you must close out your option position
prior to the close on option expiration day or the option will be automatically be
exercised/assigned. Options can be closed out at any time prior to option expiration.
LEAPS
LEAPS (Long-term Equity Anticipation Securities) are long term options with expiration
dates that are one to three years away. LEAPS options are not available for all stocks.
LEAPS options can be used for writing covered calls, call option purchases and
establishing option spreads. LEAPS options expire on the third Friday in January.
Stock Option Point Values

Normally, 1 stock option contract covers 100 hundred shares of the underlying stock.
Therefore an option with a 3.5 point premium would cost $350 (100 shares x $3.5).
Exercise and Assignment

Exercise is the term used when the buyer of an option uses his/her right to purchase or
sell the underlying security at the terms of the option contract. Assignment is the term
used when the seller of an option is obligated to deliver the underlying security at the
contract specification. When the option buyer exercises his/her option contract, the
seller of that option contract receives a notice of assignment from their broker. The
seller of the option contract must then deliver the underlying security at the specified
price. Your broker handles the entire option exercise/assignment transaction, and the
resulting cash profit/loss or stock position is transferred into or out of your account.
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Option Profits Are Derived From Stock Price Movement
You may recall from our previous discussion that options are derivatives that derive
their value from the price of the underlying stock. The intrinsic value of a call option will
increase one point for each point its underlying stock increases above the strike price.
The intrinsic value of a put option will increase one point for each point its underlying
stock decreases below the strike price.
Intrinsic Value of Call Option Increases One Point for Each

Point Its Stock Increases above the Strike Price
Intrinsic Value of Put Option Increases One Point for Each

Point Its Stock Decreases below the Strike Price
A lot has been published about option strategies that invest in options based on
whether an option is undervalued or overvalued according to the Black-Scholes Pricing
Model. These option strategies are very complex and require high-level mathematical
calculations to compute an options Alpha, Beta, Delta, Gamma, Theta etc. I never
understood the logic of investing in an option because it was slightly under valued at
the time of purchase. Undervalued options can become more undervalued. The price
m ovem ent of the underlying stock determ ines an options value and the
resulting profit/ loss. When you purchase a call option your profits are determined by
the price movement of the underlying stock.
Lets refer again to the example for the Hewlett Packard 35-Strike call purchased at .10
points so that you fully understand this important concept. The table below clearly
demonstrates that the price of HPQ stock determines the profit/loss of the 35-Strike call
option. If we can select a stock moving up in price, purchasing a call option on that
stock can produce enormous profits and will allow us to harness the tremendous
leverage provided from option investing.
HPQ Stock Price 35.00 36.00 37.00 38.00 39.00 40.00
Value of 35-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Call Option
Option Profit/Loss 0.00 0.90 1.90 2.90 3.90 4.90
Option % Return 0.00 900% 1,900% 2,900% 3,900% 4,900%
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Step Three
Buy Call Options on Stocks
That Are Moving Up in Price
There is a lot of investment advice available today on selecting stocks. I think in general
investors suffer from informational overload from the financial press. Im sure you
have watched many of the financial programs that are available on TV or read about
investing on the internet. While these programs provide a valuable service, this
information can be conflicting and confusing at times. One analyst recommends selling
Google as the stock is overvalued and next analyst recommends buying Google which is
cheap now compared to its future earnings potential. How does the average investor
interpret this confusing advice and formulate a method for selecting stocks?
Dont Select Stocks by Trying to Predict the Future

The problem with this type of advice is that it all comes down to trying to predict the
future. The truth is that no one can consistently predict the future! If someone
could predict the future or had inside information about a sure thing they would trade
their own account and become wealthy. They certainly would not disclose this type of
information to the public for free.
The best hope for the average investor to successfully select stocks is to play the game
of percentages and probability. You want to put the odds in your favor by using a
methodology that has a long history of success and does not rely on guessing future
price movement. The best way to accomplish this is to utilize a simple mechanical
system that does not require subjective interpretation or guesswork. I prefer systems
that have a long history of profitability in any type of market condition and also incur
little risk.
Eliminate Emotions
Emotional decision-making is often an investors worst enemy. Utilizing a mechanical
investing system removes this emotional element from investing. An investing system
eliminates gut feelings, second guessing, whims, uninformed decision making and a
host of other emotions which are often responsible for investors failing to consistently
select profitable stocks.
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In this busy world we live in, few investors have the time to formulate an effective
stock selection method. A simple investing system can help alleviate this problem. A
good investing system can provide investors the discipline necessary to overcome the
dual emotional enemies of fear and greed which prevent investors from making proper
decisions.
A Good Investing System + Discipline = Success

Mechanical systems remove the pressure of making buy/sell decisions based on gut
feelings or trying to predict the future. Decisions are instead governed by a
predetermined set of rules that have historically provided consistent, market beating
returns. Knowing when to sell is one of the most important components of a successful
investing plan and one of the leading causes of investor failure. A good mechanical
investing system provides clear sell instructions with every trade and eliminates this
emotional obstacle to profitable investing.
A Simple But Effective Way to Select Stocks

One of the simplest and most effective ways of selecting stocks is to use a moving
average cross over system to tell us when to buy and when to sell a stock. I have
had many years of success using this simple indicator that reveals whether a stock is in
an uptrend or a downtrend. In my experience the best way to determine the
intermediate term price trend of a stock over the next 3 to 6 months is the cross over
of the 50-Day Exponential Moving Average with the 100-Day Exponential Moving
Average (EMA). When a stocks 50-Day EMA crosses above its 100-Day EMA it signals
that the intermediate price trend of the stock is up and the stock or its related call
option can be purchased. When the 50-Day EMA crosses below the 100-Day EMA it
signals that a stocks intermediate price trend is down and the stock or its related call
option should be sold. I have been using this simple system for many years to purchase
stocks and call options and it has proved to be a very profitable way to select stocks.
Follow the Trend Instead of Trying to Predict It

The Exponential Moving Average cross over system allows us to trade with the trend.
Trading with the trend is an essential element of profitable trading and is important for
your trading success. Beginning traders have a tendency to try to pick market tops and
bottoms when initiating a trade. This type of strategy requires that you correctly predict
the future price movement of a stock. It is very difficult if not impossible to predict
future price movement with any consistency. The best time to buy a stock is when an
uptrend is already established. A stock should be sold if it enters a down trend. The
studies presented in this Report demonstrate that trends have been proven to be more
likely to continue in the same direction than to reverse. Trends also tend to persist
much longer than most investors would expect.
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Exponential Moving Averages
Exponential Moving Averages (EMA) are similar to simple moving averages except that
more weight is given to the more recent days used in calculating the moving average.
Simple moving averages are calculated by equally weighting each day to calculate the
average. For example, in calculating a 50-day simple moving average, todays data
would be equally weighted at 2% (100/50 = 2). An exponential 50-day moving
average, however, would give todays data a 3.92% weighting. A 100-day simple
moving average would give todays data an equal 1% weighting (100/100 = 1) whereas
a 100-day exponential average would give todays data a 1.98% weighting.
My experience with trading moving averages over the years has led me to favor
exponential averages over simple moving averages. Exponential moving average cross
over systems issue fewer buy and sell signals over a given time period than simple
moving average cross over systems. This results in fewer false signals for the
exponential moving average systems compared to simple moving average systems
which tend to generate more whipsaws or frequent trend changes. As a result, an
exponential moving average system produces considerably more profits than a simple
moving average cross over system.
Sample 50-Day EMA Chart for E*TRADE Financial Corp

E*TRADE FINANCIAL CORP Quotes are updated at 16:00:42 3/23/2006
Symbol Last Last vole Volume Change %Change Previous Open High Low
ET 25.760 7900 2245400 -0.240 -0.923 % 26.000 26.000 26.040 25.580
Bid Bid size Ask Ask size Yield Dividend 52 High 52 Low Earnings P/E Ratio
N/A N/A N/A N/A 0.000 % 0.000 26.750 10.530 1.120 23.000
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The preceding chart is a daily price bar chart for E*TRADE Financial (ET) common stock
courtesy of AskResearch.com. The Ask Research website can quickly and easily
calculate a stocks exponential moving averages (directions on downloading EMAs to
follow). The vertical bars represent the daily trading price range for ET. To calculate the
50-Day exponential moving average price, the closing prices of E*TRADE stock for the
last 50 days are added together and then divided by 50 and then adjusted by the
exponential factor that gives extra weight to more recent days. Tomorrow the 50-Day
exponential average price is recalculated and plotted again. This exponential average
price would then be plotted each day on the price chart. Eventually you will have a
moving average line that represents the 50-Day exponential moving average. The 50-
Day exponential moving average price for E*TRADE for today March 23rd is 23.77
(circled on preceding price chart). You can see from this chart that the 50-Day
Exponential Moving Average line was in a downtrend in April and bottomed out in May.
Then the 50-Day EMA started to move up again in June and remained in an uptrend
until today.
Defining a Trend
I like to use an exponential moving average cross over to define a trend. For example,
an up-trend would exist if the 50-Day Exponential Moving Average (EMA) line crossed
above the 100-Day EMA. A down trend would exist if the 50-Day EMA crossed below
the 100-Day EMA.
E*Trade 50-Day and 100-Day Moving Average Cross Over

Refer to the E*Trade Financial price chart below. The 50-Day EMA crossed above the
100-Day EMA in June at around the 14.0 price level which is depicted by the Buy Here
arrow. This buy signal indicates that E*Trade stock and call options should be
purchased. The 50-Day EMA remains above the 100-Day EMA and E*Trade is still in an
uptrend. E*Trade is currently trading at 25.76 and this buy signal currently has an
11.76 point open trade profit which translates to an 84% return.
50-Day EMA
Buy Here
100-Day EMA
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Trading with the Trend
I have learned the hard way that it is better not to buy a stock that is in a down trend.
This is hard to do sometimes as the financial press is flush with great stories about
stocks and the big profit potential associated with these stories. I also have my
favorite stocks that have been good to me over the years. If one of these stocks sells
off I am tempted to buy it at a lower price even if it is in a downtrend. There were too
many occasions, however, when I have bought a stock in a down trend only to see the
down trend continue. I now normally limit any purchases of stocks or call options to
those that are in an uptrend as defined by the 50/100-Day EMA. It is just as important
to sell a stock when it enters a down trend.
The daily price fluctuations of a stock can obscure a stocks real direction. The
preceding example demonstrates that a moving average line smoothes out the daily
fluctuations and clarifies the trend with a quick glance. The moving average cross over
makes it easy to see if a stock is in an uptrend or down trend. The stock market is an
efficient mechanism for discounting future company earnings prospects. When a stock
drops in price it is usually an indication that the street is anticipating lower earnings.
Stock Price Reflects All of the Known Information

One of the advantages of the 50/100-Day EMA system is that the price movement of a
stock can be measured. Measuring price movement is the key to developing a
successful trading system. A stocks price reflects all of the known information on a
company. The 50/100-Day EMA moving average cross over can give us an instant
picture of whether a stock is in an uptrend or down trend. In order to be a successful
investor we do not have to know what an analyst thinks of a stock or what the latest
earnings projections are. All of that information is reflected in the price movement of a
stock.
Short Selling
I have done extensive research on moving average cross over systems. During the long
term secular bull market that started in 1982, short selling based on a moving average
crossover has not been profitable with few exceptions. Those exceptions would include
the 2002 2002 and 2007 2009 bear markets during which selling short was
profitable. The profits realized during this bear market from short selling, however, do
not make up for many years of losses that occurred from short selling during the long
term bull market.
On balance, short selling is not recommended for the average investor as it incurs
unlimited risk if the stock that you short rallies in price. In the risk spectrum, short
selling ranks as one of the riskiest strategies in the investment universe.
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Limiting Risk
Investors who use moving averages as a guideline to enter and exit trades can often
save themselves from large losses by selling a stock (or related call option) when its 50-
Day EMA line crosses below the 100-Day EMA. The price chart below is a 50/100-Day
EMA chart for Movie Gallery Inc a retailer with 2,511 stores. The price of this stock
peaked last June at 34.13 when it was trading at a hefty Price/Earnings ratio of 210.
The 50-Day EMA crossed below the 100-Day EMA in August at the 24.0 price level. This
moving average cross over was a warning that for whatever reason, the stock was now
in a down trend and the stock and related call options should be sold. The stock is now
trading at 2.36. This is a good example of how a moving average cross over sell signal
can save investors from devastating losses when a stock enters a down trend.
MOVIE GALLERY INC Quotes are updated at 16:00:02 3/24/2006
Symbol Last Last vole Volume Change %Change Previous Open High Low
MOVI 2.360 900 2193602 -0.060 -2.479 % 2.420 2.370 2.420 2.280
Bid Bid size Ask Ask size Yield Dividend 52 High 52 Low Earnings P/E Ratio
2.280 200 2.600 500 5.000 % 0.120 34.130 1.680 0.160 15.000
Sell Here
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Downloading On the 50/100-Day EMA Lines
The 50/100-Day EMA Lines can be easily downloaded from www.StockCharts.com.
On the home page type in the stock symbol and click Go. In this example I typed
in the symbol for Apple stock AAPL.
Once you click Go the default chart for Apple will appear. Below the default chart
for Apple select Daily under Periods and 1 Year under Range. Under Overlays
select Exp Mov. Avg and Under Parameters select 50. Then select Exp Mov.
Avg on the second row and Under Parameters select 100.
Click Update and the Apple price chart with the 50/100-Day EMA Lines will be
displayed (see price chart on the following page).
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Apple One Year Price Chart with 50/100-Day EMA Lines
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Historical Results of Fail Safe EM A System
Meeting Our Goal
The Fail Safe EMA System is a rule based system with clearly defined buy and sell
rules. This enabled me to do historical testing with the help of the Omega Research
Trade Station program using the 50/100-Day EMA Cross Over System just presented.
Historical profit results are based on buying a stock when its 50-Day EMA crosses above
the 100-Day EMA and selling a stock when its 50-Day EMA crosses below the 100-Day
EMA. The profit/loss for each trade is calculated and a cumulative total is maintained for
each testing period. I first tested the EMA System many years ago and have been
actually trading it since then with great success.
The Fail Safe EMA System is universal in nature and has been profitable across a wide
range of markets including: stocks, indexes, closed-end funds, zero coupon bonds,
mutual funds, index funds and sector funds. The fact that the system is profitable in
virtually every type of market confirms its credibility as a viable, robust approach to
trading the financial markets.
Included on the following page are profit results for a well-diversified sampling of both
growth and value stocks that represent a broad cross section of 26 different industry
groups. This sampling includes small, mid and large cap stocks. Historical profit results
were generated over a recent twenty four year period (or when a stock first traded).
Profitable with Low Risk

Keep in mind that four bear markets occurred during this period. Results are based on
trading one hundred shares of stock for each buy signal and do not include
commissions.
Lets review the tests conducted using the first stock tested Aetna Health Care (AET).
The first time Aetnas 50-Day EMA crossed above the 100-Day EMA during the test
period 100 shares of Aetna were purchased at 10.18. When Aetnas 50-Day EMA
crossed below the 100-Day EMA at 9.15 100 shares of Aetna were sold. The profit/loss
for each AET trade was calculated by the Trade Station software and the profits totaled
$5,376 over the test period based on trading 100 shares for each buy signal. This
$5,376 profit represents a 528% return on the initial investment of $1,018. The
software divides the total profits by the total losses to calculate the Profit Factor. Aetna
had a Profit Factor of 3.9 as there were 3.9 dollars of profit for each 1 dollar of loss.
There were 10 losing trades over the 24-year period and the average losing trade was
incurred a -$120 loss.
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24-Years of Historical Results
Stock Profit on Profit Initial Cost % Return on Avg
100 Shares Factor 100 Shares Initial Cost Loss
Aetna $5,376 3.9 $1018 528% -120
Adobe Systems $5,679 4.4 $5 126200% -173
Altria $4,602 3.2 $220 2092% -180
Analog Devices $3,559 2.0 $92 3868% -251
Applied Materials $2,419 3.0 $3 96760% -70
Auto Data Process $2,878 3.5 $182 1581% -98
Bunge $3,282 100.0 $1,585 207% 0
Centex $3,810 4.3 $216 1764% -143
Cisco Systems $5,474 10.1 $8 68425% -100
Corning $6,153 12.4 $178 3457% -54
CVS Drug $4,237 2.7 $505 839% -250
Eaton Vance $1,682 6.7 $10 16820% -27
eBay $2,453 3.7 $120 2044% -156
EMC Corp $7,257 80.0 $5 145140% -18
Franklin Resources $5,264 3.2 $5 112000% -18
General Electric $3,675 5.2 $130 2827% -97
Golden West Finl $3,700 4.4 $40 9250% -78
Home Depot $4,092 4.0 $4 102300% -174
Illinois Tool Works $5,924 4.8 $176 3366% -225
Intel $2,845 3.5 $39 7295% -71
Johnson & Johnson $4,877 4.5 $227 2148% -181
KB Homes $6,654 3.4 $840 792% -202
Legg Mason $4,212 7.1 $187 2252% -78
Microsoft $2,651 2.8 $10 26510% -108
M&T Bank $6,445 5.5 $37 17419% -95
NVR Inc $50,070 5.0 $1,080 4636% -1050
PMC Sierra $15,603 41.5 $225 6935% -48
Procter & Gamble $3,096 3.1 $223 1388% -108
Sun Microsystems $3,342 7.5 $25 13368% -26
Texas Instruments $4,227 3.7 $184 2297% -111
Taro Pharm $4,551 4.7 $87 5231% -113
Unitedhealth $7,627 9.5 $32 23834% -91
Water Corp $4,898 4.5 $375 1306% -471
Yahoo! $7,964 63.0 $132 6033% -129
Totals / Averages $210,578 12.7 $8,204 2567% -150
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Average Yearly Return of 107%
The total initial investment required to trade 100 shares of each of the 34 stocks over
the test period was $8,204. This $8,204 initial investment produced a total of $210,578
in profits over the test period which equates to a 2,567% return. The average yearly
return was 107% which would enable us to double our initial investment every year on
average. This average 107% annual return was achieved without the use of leverage.
Buying call options instead of purchasing stock would produce considerably higher
returns and would enable us to easily achieve our goal of a 50% annual return.
The historical results demonstrate that the Fail Safe EMA System has the ability to
produce handsome profits with very low risk. The average losing trade over the twenty
four year period was $150 and when compared to the total profits of $210,578
demonstrates the ability of the system to keep losses to a minimum. The average Profit
Factor was a very healthy 12.7 with over 12 dollars of profit for each 1 dollar of loss
again demonstrating a very healthy risk-adjusted return.
The preceding trading results demonstrate the importance of trading with the trend.
The 50/100-Day Fail Safe EMA System is a versatile, effective method for profiting in
any type of market. Measuring the price movement of a stock with moving averages is
the key to a profitable mechanical trading system as price movement reflects all of the
known information about a stock. We can ignore news items, analysts projections, tips
and rumors. All of that information is already discounted in the price of a stock.
Equally important is the ability of the system to avoid large losses which can quickly
ruin an investment plan. The system keeps losses to a minimum and almost always
exits a trade before a big loss occurs. Following a discipline that keeps losses to a
minimum is one of the most important characteristics of a successful investing program.
Keep in mind that the worst bear market since 1932 occurred during this test period.
EMA System Gravitates Towards Best Opportunities

Trading with the trend allows the Fail Safe EMA System to gravitate towards the best
trading opportunities. The stock market is in a constant state of change as evidenced by
industry groups that move in and out of favor. The Fail Safe EMA System allows me to
take profits on my stocks and options when the 50-Day EMA crosses below the 100-Day
EMA. The secret to successful trading is to use a system that measures price movement
which will guide you towards the stocks that are currently in an uptrend and steer you
away from the stocks that are in a downtrend. This type of a system can produce
profits in bear markets as well, as there are always stocks in an uptrend even during a
bear market.
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Recent Results
Exceeding Our Goal
My Inner Circle Advisory Service gives recommendations on purchasing call options on
stocks that are in a price uptrend with their 50-Day EMA above the 100-Day EMA. The
tables that follow list actual quarterly profit results for open trades that were
recommended by the advisory service. Results are based on investing about $10,000 in
each recommendation. Smaller accounts could purchase one option contract per
recommendation. The average portfolio gain is 119.1% demonstrating that it is possible
to not only achieve our goal but to exceed it! For more information on the Inner Circle
Advisory Service please log on to www.ChuckHughesIC.com
June 30th
Option Purchased Entry Number Last Profit Percent
Price Contracts Profit
Aetna Inc. (Call Jan 55) 15.00 6 29.00 $8,400 93.3%
Aetna Inc. (Call Jul 55) 13.00 8 27.70 $11,760 113.1%
Allstate (Call Jan 45) 8.40 12 15.10 $8,040 79.8%
Allstate (Call Jul 45) 7.80 13 14.80 $9,100 89.7%
Biotech HOLDRs (Call Jan 140) 28.40 3 32.00 $1,080 12.7%
CIGNA Jan 90 Call 19.10 5 20.90 $900 9.4%
Edison Int'l (Call Jan 30) 5.10 20 11.10 $12,000 117.6%
Edison Int'l (Call Oct 30) 4.80 20 10.70 $11,800 122.9%
EnCana Call Jan 30 8.70 12 10.60 $2,280 21.8%
Hudson City Call Jan 7.5 3.80 26 4.00 $520 5.3%
Johnson & Johnson (Call Jan 50) 8.10 12 15.50 $8,880 91.4%
KB Home Jan 60 Call 18.70 6 19.20 $300 2.7%
Occidental Petrol (Call Jan 45) 9.20 12 32.40 $27,840 252.2%
SPDR Utilities (Call Dec 26) 4.40 23 6.00 $3,680 36.4%
SPDR Utilities (Call Jan 25) 6.00 17 7.40 $2,380 23.3%
UGI Corp (Call Jul 20) 2.80 36 8.00 $18,720 185.7%
Unitedhealh Jan 35 Call 12.40 8 18.00 $4,480 45.2%
Unitedhealth Jan 35 Call 15.40 6 20.20 $2,880 31.2%
United Tech (Call Jan 40) 13.70 8 13.70 $0 0.0%
United Tech (Call Nov 45) 7.50 14 7.20 -$420 -4.0%
Valero Energy (Call Jan 30) 10.70 10 49.30 $38,600 360.7%
Total Profit / Average Gain $174,420.00 78.3%
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September 30th
CIGNA Jan 90 Call 19.10 5 29.30 $5,100 53.4%
Edison Int'l (Call Oct 30) 4.80 20 17.30 $25,000 260.4%
EnCana Call Jan 30 8.70 12 28.40 $23,640 226.4%
Express Scripts (Call Feb 45) 13.60 7 18.30 $3,290 34.6%
Fording (Call Dec 36.625) 5.80 18 7.00 $2,160 20.7%
Hudson City Call Jan 7.5 3.80 26 4.50 $1,820 18.4%
Humana Call Feb 40 10.30 10 9.40 -$900 -8.7%
Johnson & Johnson (Call Jan 50) 8.10 12 13.80 $6,840 70.4%
Occidental Petrol (Call Jan 45) 9.20 12 40.90 $38,040 344.6%
SPDR Utilities (Call Dec 26) 4.40 23 7.90 $8,050 79.5%
SPDR Utilities (Call Jan 25) 6.00 17 9.40 $5,780 56.7%
UGI Corp (Call Oct 20) 2.80 36 8.40 $20,160 200.0%
Valero Energy (Call Jan 30) 10.70 10 83.20 $72,500 677.6%
Viropharma (Call Feb 12.5) 5.50 18 8.90 $6,120 61.8%
Total Profit / Average Gain $279,010.00 139.8%
December 31st
Allegheny Tech Apr 30C 7.40 13 7.40 $0 0.0%
Amerisource May 35C 7.50 13 8.20 $910 9.3%
Apple (Call Jan 40) 16.10 6 34.80 $11,220 116.1%
BHP May 25C 8.60 11 10.20 $1,760 18.6%
Biotech HLDR Jan 140C 28.40 3 64.40 $10,800 126.8%
Biotech HLDR Jan 140C 37.20 3 72.00 $10,440 93.5%
Broadband HLDR May 12.5C 6.10 16 7.00 $1,440 14.8%
Express RX (Call Feb 45) 13.60 7 41.60 $19,600 205.9%
Google (Call Mar 300) 58.20 2 138.50 $16,060 138.0%
Moodys May 50 Call 12.00 8 14.80 $2,240 23.3%
Occidental (Call Jan 45) 9.20 12 41.00 $38,160 345.7%
Southwestern Mar 30C 7.60 13 8.60 $1,300 13.2%
Valero Energy Jan 15C * 5.35 20 39.20 $67,700 632.7%
Total Profit / Average Gain $234,810 139.2%
40
200.1% Average Return Despite Difficult Markets
Despite the stalled global economies and European Debt Crisis, my Inner Circle Advisory
Service currently has $1,205,579.24 in open trade profits and an average return of
200.1%. There are currently 115 winning trades and 1 losing trade resulting in 99%
winning trades.
Portfolio Profit/Loss Percent Winning Losing

Return Trades Trades
Stock Portfolio $208,277.40 110.9% 21 0
Dividend Portfolio $190,126.00 132.6% 19 0
Option Portfolio $254,217.00 424.6% 13 0
Option Spread Portfolio $169,101.00 474.3% 13 0
Buy Write Portfolio $140,700.07 91.2% 19 0
Put Option Strategy $97,225.17 59.1% 15 0
Microcap Portfolio $145,932.60 107.7% 15 1
Total Profits/Avg $1,205,579.24 200.1% 115 1
Log on to www.ChuckHughesIC.com and click the Trade Results link for updated profit
results.
41
Step Four
Invest in Option Spreads
To Profit in Up or Down Markets
In addition to purchasing call options using the Fail Safe EMA System, I also like to
trade option spreads which can profit in up or down markets. I have had great success
with two types of option spreads:
1. Market Neutral Spreads

2. Debit Spreads
Market Neutral Spreads are created by purchasing both a call and put option on the
same stock. The purchase of a call option and the related put option creates an option
spread that provides unlimited profit potential and at the same time limits your
downside risk. The call option purchase provides unlimited profit potential if the
underlying stock moves up in price. The put option purchase provides unlimited profit
potential if the underlying stock moves down in price. This spread has the added
benefit of limiting risk which in most cases is limited to a few hundred dollars.
Debit Spreads are created by buying a call option and selling a call option with a higher
strike price on the same stock. Buying a call option will produce profits as the
underlying stock increases in price. Selling a call option will produce profits as the
underlying stock decreases in price.
Profiting During Market Declines = Less Risk

I have made hundreds of spread trades recently and they are a big part of my overall
trading strategy. Spread trades when used in combination with call option purchases
have provided diversification for my overall portfolio which has smoothed out my profit
flow. Purchasing put options and selling call options both profit during market sell offs
when their underlying stocks decline in price. Profiting during market declines reduces
the overall risk of your trading portfolio.
Lets explore market neutral spreads first by analyzing some of my recent trades. I
included my account brokerage confirmations for my latest trades on the following
page. Lets examine the profit/loss potential for the first confirmation for American
Express (AXP).
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43
In the first example I purchased the American Express (AXP) April 50-Strike call option
symbol AXPDJ for 5.30 points (circled) and the 55-Strike put option symbol AXPPK for
1.35 points. The total cost of this spread was $665 (5.30 points + 1.35 points).
American Express stock was trading at 54.64 when I made this trade. Lets assume that
by option expiration AXP stock increases 30% in price to 71.03. The intrinsic value of
the 50-Strike call option would be 21.03 points.
71.03 Stock Price Minus 50-Strike Call = 21.03 Point Call Value
If you subtract the 6.65 total cost of the spread from the 21.03 point value of the call
option a $1,438 profit would be realized at expiration (21.03 6.65 cost = 14.38
profit). The $1,438 profit would result in a 216% return on our $665 initial investment
(1,438 divided by 665 X 100 = 216% return). So a 30% up move in AXP stock would
produce a 216% call option return. With the AXP stock price of 71.03 the 55-Strike put
option would have no value at expiration as the price of the stock is greater than the
strike price of the put.
30% Increase in AXP Stock = 216% Return for Call Option
Now lets assume AXP stock decreases 30% at option expiration to 38.25. The intrinsic
value of the 55-Strike put option would be 16.75 points.
55-Strike Put Minus 38.25 Stock Price = 16.75 Point Put Value
If you subtract the 6.65 total cost of the spread from the 16.75 point value of the put
option a $1,010 profit would be realized at expiration (16.75 6.65 cost = 10.10
profit). The $1,010 profit would result in a 151% return on our $665 initial investment
(1,010 divided by 665 X 100 = 151% return). So a 30% down move in AXP stock would
produce a 151% put option return. With the AXP stock price of 38.25 the 50-Strike call
option would have no value at expiration as the price of the stock is less than the strike
price of the call.
30% Decrease in AXP Stock = 151% Return for Put Option
The table below lists various assumed changes in AXP stock at option expiration and the
resulting profit/-loss for the spread.
% Change AXP Stock 30% 20% 10% Unchanged -10% -20% -30%
Stock Price 71.03 65.57 60.1 54.64 49.18 43.71 38.25
50-Strike Call Value 2,103 1,557 1,010 464 0 0 0
55-Strike Put Value 0 0 0 36 582 1,129 1,675
Total Spread Value 2,103 1,557 1,010 500 582 1,129 1,675
Spread Cost 665 665 665 665 665 665 665
Spread Profit/-Loss 1,438 892 345 -165 -83 464 1,010
Percent Return 216.3% 134.1% 51.9% -24.8% -12.4% 69.7% 151.9%
44
Profit Potential 216% If AXP Stock Increases In Price
Profit Potential 151% If AXP Stock Decreases In Price
Maximum Risk of $165
The preceding table demonstrates that this market neutral spread trade can profit from
an increase or decrease in American Express stock. The purchase of the 50-Strike call
option provides unlimited profit potential as AXP stock increases in price and the 55-
Strike put option provides unlimited profit potential as AXP stock decreases in price.
This spread would incur a loss if AXP stock price is flat or slightly lower at option
expiration. The maximum risk for this spread, however, would only be $165 (plus
commission) regardless of the price movement of AXP stock. This small risk would allow
us to rollover our funds into another trade at option expiration if this spread trade
incurs the $165 loss.
$1,438 Profit Potential with a Maximum Risk of $165

You may recall from the Option Basics Chapter that purchasing just the call option can
result in a total loss of the premium paid if AXP stock closes below the strike price of
the call at option expiration. Similarly, the purchase of just the put option can result in a
total loss of the premium paid if AXP stock closes above the strike price of the put. The
profit potential for this actual trade example is $1,438 and the maximum risk is $165
providing an excellent return potential in relation to risk.
Rules for the Fail Safe Market Neutral Spread System

1. Purchase a call option
2. Purchase the related put option
Listed on the following page is the profit/loss potential for the three other Fail Safe
Market Neutral Spread trades I took recently (corresponding brokerage confirmations
are included on Page 43).
45
American International Group Profit Potential if Stock Increases: 142%
Stock Price: 66.70 Profit Potential if Stock Decreases: 111%
Buy 60-Strike Call @7.70 Maximum Risk: $100
Buy 70-Strike Put @3.30
% Change AIG Stock 30% 20% 10% Unchanged -10% -20% -30%
Stock Price 86.71 80.04 73.37 66.70 60.03 53.36 46.69
70-Strike Put Value 0 0 0 330 997 1,664 2,331
Total Spread Value $2,671 $2,004 $1,337 $1,000 $1,000 $1,664 $2,331
Spread Cost $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100
Spread Profit/-Loss $1,571 $904 $237 -$100 -$100 $564 $1,231
Percent Return 142.8% 82.2% 21.5% -9.1% -9.1% 51.3% 111.9%
Alcoa Profit Potential if Stock Increases: 105%

Buy 30-Strike Put @1.40
% Change AA Stock 30% 20% 10% Unchanged -10% -20% -30%

Stock Price 38.16 35.22 32.29 29.35 26.42 23.48 20.55
25-Strike Call Value 1,316 1,022 729 435 142 0 0
30-Strike Put Value 0 0 0 65 359 652 946
Total Spread Value $1,316 $1,022 $729 $500 $500 $652 $946
Spread Cost $640 $640 $640 $640 $640 $640 $640
Spread Profit/-Loss $676 $382 $89 -$140 -$140 $12 $306
Percent Return 105.5% 59.7% 13.8% -21.9% -21.9% 1.9% 47.7%
Exxon Mobil Profit Potential if Stock Increases: 106%

Buy 62.5-Strike Put @3.10
% Change XOM Stock 30% 20% 10% Unchanged -10% -20% -30%
Stock Price 77.91 71.92 65.92 59.93 53.94 47.94 41.95
62.5-Strike Put Value 0 0 0 257 856 1,456 2,055
Total Spread Value $2,791 $2,192 $1,592 $1,250 $1,250 $1,456 $2,055
Spread Cost $1,350 $1,350 $1,350 $1,350 $1,350 $1,350 $1,350
Spread Profit/-Loss $1,441 $842 $242 -$100 -$100 $106 $705
Percent Return 106.7% 62.3% 17.9% -7.4% -7.4% 7.8% 52.2%
46
Debit Spreads
Debit Spreads are created by buying a call option and selling a call option with a higher
strike price on the same stock. This creates a net debit in your brokerage account that
is equal to the difference between the premium paid to purchase a call minus the
premium received for selling a call with a higher strike price. For example, if you
purchase a 50-Strike call option for 5.00 points and sell the 55-Strike call for 2.00 points
the net cost of the spread would be 3.00 points or $300 (5.00 2.00 = 3.00). The
maximum risk in this example would be the $300 cost of the spread regardless of the
price movement of the underlying stock. Debit spreads have limited risk and limited
profit potential.
The sale of the call option helps reduce the cost of the call option purchase and allows
you to purchase more options. This can increase diversification and help reduce risk.
The short call option also profits if the underlying stock decreases in price. This can
provide profits for the spread if the underlying stock price remains flat or decreases
slightly. This is a slight advantage compared to a call option purchase which only profits
if the underlying stock increases in price. Debit Spreads are highly leveraged and can
produce large profits with just a small move in the underlying stock. This is an
advantage compared to the Market Neutral Spread which requires a large move in the
underlying stock to generate profits. Lets look at some actual debit spread trades I
made recently to illustrate this point (brokerage confirmations for these trades follow).
5% Stock Price Increase = 74% Option Profit

Today is March 27th. I purchased the Valero Energy (VLO) May 55-Strike call option for
6.20 points and sold the May 62.5-Strike call option for 1.90 points. These May options
expire in eight weeks. The net cost for this spread was 4.30 points or $430 (buy 55-
Strike @6.20 minus sale of 62.5-Strike @1.90 = 4.30 net cost). The maximum risk for
this trade is the $430 cost. The table below reflects the profit/loss potential for the
spread based on various closing prices of Valero stock at option expiration from a 10%
increase to a -5% loss. Valero stock is currently trading at 59.71.
% Change VLO Stock 10% 5% 2% Unchanged -2% -5%

Stock Price 65.68 62.70 60.90 59.71 58.52 56.72
50-Strike Call Value 10.68 7.70 5.90 4.71 3.52 1.72
62.5-Strike Call Value -3.18 -0.20 0.00 0.00 0.00 0.00
Total Spread Value 7.50 7.50 5.90 4.71 3.52 1.72
Spread Cost 4.30 4.30 4.30 4.30 4.30 4.30
Spread Profit/-Loss 3.20 3.20 1.60 0.41 -0.78 -2.58
Percent Return 74.4% 74.4% 37.3% 9.5% -18.2% -59.9%
Lets focus on the column that reflects a 5% increase in VLO stock at option expiration
to 62.70 (circled).
47
With Valero trading at 62.70 the 50-Strike call option we purchased will have an
intrinsic value of 7.70.
Stock Price of 62.70 Minus 50-Strike = Intrinsic Value of 7.70
The 62.5-Strike call option that we sold would incur a .20 point loss with a stock price
of 62.70. This would result in a negative -.20 point value for the short call. The total
value of the spread would be 7.50 points (7.70 minus .20 = 7.50 spread value). With a
current value of 7.50 points this spread would realize a 3.20 point profit at option
expiration after subtracting the 4.30 cost of the spread.
A 3.20 point profit results in a 74.4% return on my initial investment of 4.30 points. If
Valero stock is unchanged at option expiration, this spread would realize a 9.5% return.
As noted previously Debit Spreads have limited profit potential. In this example our
profits would be limited to 3.20 points regardless of the price increase in Valero stock.
Reaching Our Goal with 14 to 1 Leverage

So in this example of an actual spread trade a 5% stock price increase can result in a
74% return for the spread over an eight week period demonstrating the high 14 to 1
leverage available from this Debit Spread. Remember that leverage is the key to
achieving a high rate of return and a high rate of return enables us to reach our goal. If
we continue to roll over this trade we wind up with a 2,675% return after a year.
Call option Debit Spreads are a neutral to slightly bullish strategy that normally reach
their profit potential with a slight up move in the underlying stock. For this reason, we
want to select stocks that are in a price up trend. Using the Fail Safe EMA System is a
good way to filter stocks for potential Debit Spread trades and increases our chance for
success.
Rules for the Fail Safe Debit Spread System

1. Purchase a call option on a stock when its 50-Day Exponential Moving
Average is above the 100-Day EMA
2. Sell a related call option with a higher strike price
48
The Tables below illustrate the profit/loss profile for two other Debit Spread trades I
took recently with brokerage confirmations to follow.
Hewlett Packard: Buy May 30-Strike Call @3.90 and sell May 35-Strike call @1.00
Spread Cost: $290 Profit Potential: 72% over eight weeks
% Change HPQ Stock 10% 5% 2% Unchanged -2% -5%

Stock Price 36.58 34.91 33.92 33.25 32.59 31.59
35-Strike Call Value -1.58 0.00 0.00 0.00 0.00 0.00
Spread Cost 2.90 2.90 2.90 2.90 2.90 2.90
Spread Profit/-Loss 2.10 2.01 1.02 0.35 -0.31 -1.31
Percent Return 72.4% 69.4% 35.0% 12.1% -10.9% -45.3%
Titanium Metals: Buy May 45-Strike Call @4.90 and sell May 50-Strike call @2.35
Spread Cost: $255 Profit Potential: 96% over eight weeks
% Change TIE Stock 10% 5% 2% Unchanged -2% -5%

Stock Price 52.03 49.67 48.25 47.30 46.35 44.94
50-Strike Call Value -2.03 0.00 0.00 0.00 0.00 0.00
Spread Cost 2.55 2.55 2.55 2.55 2.55 2.55
Spread Profit/-Loss 2.45 2.12 0.70 -0.25 -1.20 -2.55
Percent Return 96.1% 82.9% 27.3% -9.8% -46.9% -100%
Trade a Diversified Portfolio with a Small Account

The average initial investment requirement for the three Fail Safe Debit Spread trades
just presented was $325 (plus commission). The low initial cost of Debit Spreads makes
them ideal for small accounts. A diversified portfolio of 8 to 10 Debit Spread trades
normally requires only a $2,500 to $3,500 trading account.
49
50
Step Five
Sell Option Premium for Income
Another option strategy I have used successfully for many years is selling covered
calls. A covered call is established by buying stock and selling its related call option.
Normally one call option is sold for each 100 shares of stock that is purchased. A
covered call is also known as a buy write or writing a covered call. The goal of the Fail
Safe Covered Call System is to generate income from selling call option premium.
Conventional wisdom dictates that high investment returns are always associated with
higher risk. I have found that investing in covered calls can provide high returns with
relatively low risk. This is especially true for writing covered calls using LEAPS options
which offer very high premium income and substantial downside protection. Some of
advantages of covered call writing would include:
Buy stocks at a discount Buying stock and selling a call option results in cash
being credited to your brokerage account that is equal to the premium of the call option
sold. This reduces your cost basis for the stock purchased. If you buy one hundred
shares of a stock for 60.0 points and sell a call option for 10.0 points it reduces the cost
of your stock to 50.0 points per share.
R eturns are increased Writing a covered call reduces the cost basis of the stock
purchased which increases returns. I just initiated 3 covered call trades using LEAPS
options which we will examine shortly. The average return potential for these three
trades is 80%.
Helps you lock in profits Writing covered calls forces you to take profits on your
stock if your stock gets called. Selling stock that is profitable is one of the more difficult
tasks of any investment program. It is sometimes difficult to do emotionally, but it is a
necessary part of effective money management, especially if your stock enters a
downtrend. The greed factor can sometimes cause us to hold onto a profitable stock
longer than we should.
P rovides substantial dow nside protection Writing covered calls reduces the
cost basis of your stock which provides protection for your stock position in the event of
price decline. This protection is not available if you simply own the stock. Writing LEAPS
covered calls can easily provide up to 20 to 50% downside protection for your stock
purchase in the event of a substantial price decline. The amount of downside protection
depends on the strike price of the call option sold.
51
Allow s you to exit a bad trade w ith a profit Covered calls can give you the
cushion you need to exit a bad trade with a profit. If a stock declines in price after
writing a covered call, the profit on the short call many times will allow you to exit the
trade with a profit. This cushion is created by the option premium received from selling
the call option.
As noted previously, a covered call trade is initiated by buying stock and selling the
related call option. At option expiration if the stock closes at or above the strike price of
the call option that was sold then the stock is called and the full profit potential of the
trade is realized. So selecting a stock that will close at or above the strike price of the
short call is obviously important to the covered call investor. We learned that the Fail
Safe EMA System is one of the best ways to select stocks that are in a price uptrend. In
my experience using the EMA System has been a good way to screen stocks that would
be good candidates for profitable covered call trades. I only write covered calls on
stocks that are in a price up trend. This increases my odds for a profitable trade. I avoid
writing covered call trades on stocks that are in price down trend as there is no way to
predict how long the down trend will continue.
Recent Trade Example

Lets examine the profit/loss profile of an actual covered call trade I made this week.
You can see from my brokerage confirmations that follow that I purchased 300 shares
of Apple Computer (AAPL) on October 24th at 56.478 and then on February 3rd sold the
AAPL January 90-Strike call option at 7.50 points. This option expires in about 11
months. When you write a covered call, the purchase of the stock and the sale of the
call option can be done simultaneously or you can purchase stock and then sell the call
option at a later date at a better price if the underlying stock increases in price. In this
example I purchased Apple stock and then entered a Good-Until-Cancelled (GTC) limit
order to sell the 90-Strike call option at 7.50 points. This increases the return for this
covered call trade as I was able to sell the 90-Strike call at a higher price compared to
the available price on the day I purchased the stock. Of course when you use a GTC
limit order to sell at a higher price there is always the possibility that your GTC order
will not be filled. The table below illustrates the profit/loss profile for this trade
assuming various prices for AAPL stock at option expiration.
AAPL Stock Price 50.00 60.00 70.00 80.00 90.00 100.00

Profit/Loss Stock -648 352 1,352 2,352 3,352 4,352
Call Value 0.00 0.00 0.00 0.00 0.00 10.00
Profit/Loss Call 750 750 750 750 750 -250
Net Profit/Loss 102 1,102 2,102 3,102 4,102 4,102
Covered Call % Return 2.1% 22.5% 42.9% 63.3% 83.8% 83.8%
We can see from the profit/loss profile table that the profit potential for this trade is
83.8% if Apple stock closes at or above the 90-Strike call option that I sold. If this
occurs then my stock will be called at option expiration and 300 shares of AAPL will be
sold at 90.0 and $27,000 will be credited to my account for the sale of the stock.
52
Your profit potential is limited with covered calls. In this example the profit is limited to
$4,102 per 100 shares regardless of how high AAPL stock closes at option expiration. If
Apple stock closes below the 90-Strike at option expiration then my profits will be less
than $4,102. Breakeven for this trade is 48.98 and is calculated by subtracting the 7.50
premium received for the sale of the call option from the 56.478 cost of the stock. If
Apple stock closes below the breakeven of 48.98 then a loss would be incurred. If Apple
stock closes at 50.0 at option expiration I will still realize a profit on this trade even
though Apple stock declined below my purchase price of 56.478. If Apple stock is
unchanged at my purchase price of 56.478 at option expiration I would realize a 7.50
point profit which translates to a 15.3% return.
The sale of the AAPL 90-Strike call provides 7.50 points of downside protection in the
event AAPL stock declines in price after my purchase and allowed me to purchase Apple
stock at a discounted price of 48.98. This increases my return potential compared to
just purchasing Apple stock.
Listed below are two additional profit/loss profiles for two other covered call trades I
made recently (with brokerage confirmations to follow).
Cameco: Buy 300 shares at an average price of 58.90 and sell Jan 85-Strike call @ 9.00
Profit Potential: 70%
CCJ Stock Price 50.00 60.00 70.00 80.00 90.00 100.00

Profit/Loss Stock -890 110 1,110 2,110 3,110 4,110
Call Value 0.00 0.00 0.00 0.00 5.00 15.00
Profit/Loss Call 900 900 900 900 400 -600
Net Profit/Loss 10 1,010 2,010 3,010 3,510 3,510
Allegheny Tech: Buy 300 shares at an average price of 36.33 and sell the Jan 55-Strike
call @ 6.70
Profit Potential: 85.6%
ATI Stock Price 35.00 40.00 45.00 50.00 55.00 60.00

Profit/Loss Stock -133 367 867 1,367 1,867 2,367
Call Value 0.00 0.00 0.00 0.00 0.00 5.00
Profit/Loss Call 670 670 670 670 670 170
Net Profit/Loss 537 1,037 1,537 2,037 2,537 2,537
53
54
Rules for the Fail Safe Covered Call System
1. Purchase a stock when its 50-Day Exponential Moving Average is above
the 100-Day EMA
2. Sell the related call option
Out-of-the-Money Versus In-the-Money

Lets compare the returns for writing an out-of-the-money covered call versus an in-the-
money covered call. An in-the-money call is call option with a strike price below the
current price of the underlying stock. An out-of-the-money call is a call option with a
strike price above the current price of the underlying stock. The table below compares
the return profile for various strike prices for Analog Devices (ADI) call options (actual
prices). On November 6th Analog Devices stock was trading at 29.00.
In-the-Money
Buying ADI stock at 29.0 and selling the in-the-money January 20-Strike call for 15.70
points reduces the cost of purchasing ADI stock from 29.0 to 13.30 points which is a
substantial discount. This reduces your risk dramatically. This covered call has a 50.3%
return potential at option expiration if ADI stock closes at or above 20.0. ADI stock
could drop 31% from its current price of 29.0 to 20.0 at option expiration and this trade
will still realize the full profit potential of a 50.3% return. The downside protection is
substantial at 54%. ADI stock would have to drop from 29.0 to 13.30 at option
expiration before a loss would incur.
At-the-Money
At-the-money calls have a strike price that is closest to the current price of the
underlying stock. In this example the 30-Strike call would be the closest strike price to
the current 29.0 price of ADI stock. Buying ADI stock and selling the at-the-money 30-
Strike call for 10.60 points has a 63% return potential and 36% downside protection.
The increase in return compared to selling the in-the-money call comes at a cost of less
downside protection.
55
Out-of-the-Money
Selling the out-of-the-money 35-Strike call provides the most profit potential with a
75% return if ADI stock closes at or above 35 at option expiration. Selling the out-of-
the-money call option has less downside protection, however, than the in-the-money or
at-the-money call. Selling the out-of-the-money 35-Strike call results in 31% downside
protection compared to 54% downside protection for the sale of the in-the-money 20-
Strike call option.
Covered versus Uncovered

A covered call is different than selling an uncovered or naked call option that is not
covered by ownership of the underlying stock. You may recall from the Option Basics
section of this Report that your risk is unlimited if you sell a naked call option. Losses
continue to accumulate as the price of the underlying stock increases above the strike
price of the short call. When you write a covered call and the underlying stock increases
above the strike price of the short call option then the stock in your account is called
and you pocket the premium received for the sale of the call option. Lets look at an
actual covered call trade I made recently so we can understand the difference between
selling a covered call and selling a naked call.
On October 10th I purchased 100 shares of Google at 312.94 and sold one Google
December 340-Strike call at 8.10 points. This option expired nine weeks later on
December 16th. At option expiration on December 16th Google stock closed at 430.15
which was above the 340-Strike price and my 100 shares of Google stock was called
and sold at the strike price of 340. $34,000 was credited to my brokerage account for
the sale of 100 shares at 340. I realized an 8.10 profit for the sale of the Google 340-
Strike call. I purchased Google stock at 312.94 and later sold it at option expiration at
340 when it was called. I realized a 27.06 profit on my 100 shares of stock as a result
of the call. My total profit for this covered call trade was 35.16 points or $3,516.
Covered Call:
Sell 340-Strike Call at 8.10 = 8.10 Point Profit.
Buy 100 Shares of Stock at 312.94 and Sell at 340.0 = 27.06 Point Profit
Total Profit: 35.16 points
If I sold a naked Google December 340-Strike call on October 10th for 8.10 points I
would have realized an 82.05 loss. Google closed at 430.15 at option expiration on
December 16th and a short 340-Strike call would realize a 90.15 point loss minus the
8.10 premium received which results in an 82.05 point net loss.
Uncovered Call:
Sell 340-Strike at 8.10 = 90.15 Loss with Stock price of 430.15 Minus 8.10 Premium
Received
Total Loss: 82.05 Points
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A Good Defensive Strategy During Down Markets
In my experience the covered call strategy strikes a good balance between risk and
reward especially during bear markets which can devastate a stock only portfolio.
During the 2000 2003 bear market I was able to profit from covered calls even
though most stocks suffered severe price declines. The Fail Safe Covered Call Strategy
has two big advantages over stock and mutual fund investing during a bear market:
1. The Fail Safe EMA System will steer you away from stocks that are in a down
trend and will lead you to stocks that are in a bull mode
2. The premium received for selling call options provides downside protection in the
event your stock declines in price especially if you sell an in-the-money call which
can provide substantial downside protection
Covered Calls Produce $325,220 Profit

Covered Call Writing contributed to the $325,220 profit produced in the three trading
accounts listed below (two of which are retirement accounts). Keep in mind that these
193%, 52% and 50% returns were achieved during a bear market in the NASDAQ and
S&P 500 and during a period of extreme volatility in the financial markets. Copies of
brokerage account statements follow. Online trading software during that period did not
have the capability to calculate trading profits so monthly account balances were used
to calculate profits. Leverage or margin was not used.
October 1st 1999 through September 1st 2000 IRA Account # 789
Starting Additions Withdrawals Ending Net Percentage

Balance Balance Profit Return
$49,745 $79,927 $0 $244,747 $115,075 193.5%
October 1st 1999 through September 1st 2000 Keogh Retirement Acct # 937

$125,950 $0 $0 $191,778 $65,828 52.2%
February 1999 through February 2000 Account # 542

$115,246 $160,000 $0 $419,563 $144,317 50.8%
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Im Retired But I Still Collect a Weekly Paycheck
It was the best of times, it was the worst of times.
- Charles Dickens
I would like to take this opportunity to introduce you to one of the most profitable
and low-risk income strategies I have encountered in my 27 year investing career.
This income strategy has produced consistent returns during the volatile markets
over the last several years.
During the recent recession, US corporations have been slashing their dividends at
the fastest pace in over 50 years. The table below lists a few examples of the
painful dividend cuts imposed by major corporations.
Company Dividend Cut

JP Morgan 87%
Pfizer 50%
Wells Fargo 85%
Dow Chemical 64%
These type of dividend cuts are rare for blue chip companies. For example, until
recently Pfizer increased its dividend regularly for more than 40 years. And Dow
Chemical went almost 100 years without cutting its dividend.
At the same time these blue chip companies were slashing dividends, a little known
option income strategy was actually increasing cash pay outs to investors on a
weekly basis due to rich option premiums. So while it was the worst of times for
corporate dividend payouts, it was the best of times for investors who sell weekly
option premium to generate cash income.
Most investors are not familiar with the concept of selling weekly option premium to
generate cash income. Selling weekly option premium is a very simple but lucrative
income strategy.
When you sell an option, cash equal to the option price or premium is immediately
credited to your brokerage account. Unlike a traditional stock dividend you dont
have to own the stock on the dividend date to receive the quarterly dividend and
you dont have to wait a year to receive a 3% or 4% annual dividend yield.
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When you sell option premium, you can get paid up to a 20% to 30% cash payment
up front when the option is sold. You get to keep this cash payment regardless of
the price movement of the underlying stock.
Ideal Strategy for Todays Volatile Markets

Selling option premium to generate immediate cash income is the ideal strategy for
todays volatile markets and uncertain economy. We will look at an actual trade
example shortly that allowed me to purchase Morgan Stanley stock at a 30%
discount to its current price. When you buy stock at a 30% discount you can profit
if the stock price increases, remains flat or even declines 20% to 25% resulting in a
much higher probability that the trade will be profitable. This gives the option
income strategy a huge advantage over a stock purchase strategy and allows you
to profit in any type of market condition.
Added Dimension
This gives the option income strategy a huge advantage over a stock purchase
strategy and allows you to profit in any type of market. The option income strategy
works just as well with bearish trades which allow you to profit in bear markets
when stocks and ETFs are declining in price. Bearish income trades not only reduce
portfolio risk but can dramatically increase profit opportunities and provide a whole
new dimension to income investing.
Over 7.4 Million Dollars in Cash Income Over the Past 5 Years
Due to the versatility of the option income strategy and its ability to profit in up,
down or flat markets, I have been very active generating option premium income
during the recent severe bear market and the recent volatile markets. Copies of my
brokerage account trade confirmations posted on my website show that I collected
$7,485,348.68 in gross option premium income over the last five years. This
averages out to more than $124,000 in cash income per month. Brokerage
confirmations list the options I sold and the amount of cash that was credited to my
brokerage account for each option sale. I have been trading the option income
strategy for many years. During the 1990s I generated over 11 million dollars of
gross option income. Copies of my brokerage account statements documenting this
option income are presented in my Guaranteed Real Income Program manual.
The key to selling option premium to generate cash income is to make sure the
option you sell is covered. There are two ways to implement the option income
strategy with limited risk:
Bullish Option Income Trades

Buy 100 shares of a stock
Sell a related call option also known as a buy write or covered call
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Bearish Option Income Trades
Purchase 100 shares of a bearish ETF and sell a related call option
also
known as a buy write or covered call or
Sell a related call option also known as a buy write or covered call
For bullish trades the short option is covered by owning the stock. And for bearish
trades the short option is covered by owning the bearish ETF. Because the short
option is covered this is a limited risk strategy. Selling covered option premium
incurs considerably less risk than investing in stocks. Selling option premium
enables me to profit if the market goes up, down or remains flat and has given me
the edge in producing consistent returns during any type of market condition.
Selling Covered Option Premium

Buy 100 Shares of a Stock and Sell a Call Option
Selling Covered Options is a Limited Risk Strategy
Lets look at an example of an option sale and the resulting amount of cash that
was credited to my brokerage account. The brokerage confirmation that follows
shows that I sold to open 10 of the National Oilwell Jan 25-strike call options
symbol YMPA25 at 12.72 points. Options cover one hundred shares of stock so a
12.72 point option is worth $1,272 ($12.72 x 100 = $1,272). Selling 10 options at
12.72 points resulted in $12,720 cash being credited to my brokerage account
($1,272 x 10 = $12,720). I get to keep this $12,720 cash payment ($12,708 after
commission) regardless of the price movement of National Oilwell stock.
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Sale of 10 Options at 12.72 Points Results in
$12,720 Cash Dividend Credited to Brokerage Account
$1,272 x 10 Contracts = $12,720
Lets look at an example of the first type of option income trade that is initiated by
purchasing stock and selling a related call option (we will look at the second type of
option income trade in Chapter 6). This is also known as a buy write or covered call
trade. My brokerage confirmation below shows that I bought 600 shares of Morgan
Stanley stock at 24.22 and sold to open 6 Morgan Stanley July 20-Strike call
options at 7.27. These options expire in 4 months.
Buy Morgan Stanley Stock at 24.22 and Sell 20-Strike Call at 7.27
Selling to open the 20-strike call option at 7.27 points resulted in $727 in cash per
contract being credited to my brokerage account or a total of $4,362 ($4,349 after
commission) for 6 contracts.
Purchasing the stock at 24.22 points and receiving 7.27 points in cash resulted in a
30% cash payment I received up front on the day I initiated the trade. I get to
keep this 30% cash payment regardless of the price movement of Morgan Stanley
stock.
Buy Stock at 24.22 Points and Sell Option at 7.27 Points
Equals 30% Cash Dividend Over a Four Month Period
7.27 Divided by 24.22 = 30%
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When this option expires in 4 months I can sell another option and collect another
cash payment. This is called a rollover. If I rollover this option a second time I
would receive a total of 3 cash payment over the course of one year. This has the
potential of producing up to a 90% cash payment over the course of one year which
could almost pay for the initial cost of the stock and dramatically lower risk.
Up to 90% Cash Dividend Potential
Over the Course of One Year
By Rolling Over Option
Buying Morgan Stanley stock at a 30% discount reduces risk considerably. This
trade will profit if Morgan Stanley stock increases, remains flat or even declines
20% to 25% resulting in a much higher probability that the trade will be profitable.
This can result in a high percentage of winning trades even if your market timing is
not very accurate. This gives the option income strategy a big advantage over a
stock purchase strategy which requires a stock price increase to be profitable.
The brokerage account Profit/Loss Report that follows shows my current option
income trades for one of my trading accounts. This account had a $311,800 starting
balance when I initiated the current trades. There are currently $118,546.86 in net
profits after commissions for this portfolio.
49% Cash Income by Rolling Over Trades

I normally reinvest the cash income I receive from option income trades in
additional option income trades allowing me to compound my trading results. I
received a total of $152,900 in cash income for the current trades resulting in an
average cash payment of 49% for the portfolio.
This portfolio is widely diversified across different industry groups. All of the trades
in this portfolio are currently showing a net profit for the spread demonstrating the
ability of the option income strategy to produce a high percentage of winning
trades. Even if the underlying stocks in this portfolio decline moderately I can still
realize a good return for the portfolio.
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I normally take profits when an option income trade reaches 90% of its profit
potential. This enabled me to take profits on trades well before option expiration
and initiate new option income trades allowing me to compound the cash income I
receive.
Note: I trade a large number of option contracts in this account. Trading one option
contract would require a smaller trading account.
Option Income Trades
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Bearish Option Income Trade Example
Bearish option income trades can also established by purchasing a bearish ETF and
selling the related call option. I trade bearish option income trades when a market
is on an EMA System sell signal. My brokerage confirmation below shows that I
purchased 300 shares of the bearish Emerging Market ETF symbol EEV at 96.80
and sold to open 3 of the EEV December 120-Strike call options symbol EEVLD at
20.00 points. The bearish Emerging Market ETF increases in value as the price of
the Emerging Market ETF declines. These options expire in about 3 months.
Selling to open the 120-strike call option at 20.00 points resulted in $2,000 in cash
per contract being credited to my brokerage account or a total of $6,000 (before
commission) for 3 contracts.
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Profiting in Down Markets
The Buy Write Analysis below displays the profit/loss potential for buying the
bearish Emerging Market ETF symbol EEV at 96.80 and selling the EEV December
120-Strike call for 20.0 points. The Analysis displays potential profit results for
various price changes for the EEV ETF at option expiration from a 25% increase to a
10% decrease in price. The cost of this buy write 76.80 points and is calculated by
subtracting the 20.0 points I received from the sale of the 120-Strike call from the
96.80 cost of the EEV purchase.
The Buy Write Analysis reveals that if the EEV ETF price remains flat at 96.80 at
option expiration a 26% return will be realized (circled). A 25% increase in price for
the EEV ETF to 121.00 results in a 56.3% return and a 10% decrease in price to
87.12 results in a 13.4% return (circled). The return calculations for this bearish
option income trade demonstrate the ability of the option income strategy to
provide excellent profit opportunities during down markets.
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$1633 Stock Loss = $3,553 Covered Call Profit
Lets take a look at an example of how a buy write trade can be profitable even if
the underlying stock declines in price. My brokerage confirmation below shows that
I purchased 1,500 shares of Mosaic stock at an average price of 42.0 and sold to
open 15 of the Mosaic 40-strike call options at an average price of 7.90 points. I
received $11,850 in cash income for this option sale which provides substantial
downside protection if Mosaic stock declines in price.
Mosaic stock price declined after I initiated this trade. Below is a snapshot of my
Mosaic buy write trade in my online brokerage account. Even though I currently
have a $1,633 loss in Mosaic stock I have a $5,187 gain in the short Mosaic options
giving me an overall net profit of $3,553 for this covered call trade.
$3,553 Net Profit Even Though Stock Declined in Price
Option Income Strategy Incurs
Less Risk than Owning Stock
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Generating Weekly Income with Covered Calls
I have been very active selling option premium with weekly covered calls. Weekly
covered calls are initiated by buying 100 shares of stock and selling 1 weekly call
option. Weekly options start trading on Thursday and expire the following Friday
and have a life of six trading days. As noted previously, when you sell an option
cash equal to the option premium sold is immediately credited to your brokerage
account. If you sell a weekly option with a 1.5 point premium, $150 in cash is
credited to your brokerage account. This cash credit reduces the cost basis of the
stock and reduces the overall risk of the trade.
The great advantage to selling weekly calls is that you get to sell 52 options
every year! This has allowed me to compound my returns very quickly. Options
consist of time value and intrinsic value. At-the-money and out-of-the-money calls
consist of only time value. At option expiration options lose all time value. If you
are short an option, the time value of that option becomes profit at expiration
regardless of the price movement of the underlying stock.
Time Value = Profit When You Are Short an Option

Lets look at a weekly covered call trade I took this week so that you can
understand this important concept. I own 1,800 shares of the small cap ETF symbol
TNA. I have been selling weekly covered calls against my TNA ETF. My brokerage
account spread order below shows that I closed out 18 of the May 25 weekly calls
and sold to open 18 of the TNA Jun 1st 49-Strike calls. The TNA ETF was trading at
48.43.
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My brokerage account confirmation below shows that I sold the 18 TNA Jun 01 49-
Strike weekly calls at 1.47 points. After the commission, $2,628.31 in cash was
credited to my brokerage account for the sale of the 18 options.
With TNA trading at 48.43 the 49-Strike call is an out-of-the-money call consisting
of only time value. At option expiration in one week, the time value of these options
becomes profit regardless of the price movement of TNA.
162% Cash on Cash Return
Purchasing 100 shares of the TNA ETF at the current price of 48.43 and selling the
49-Strike call at 1.47 would cost $4,696 to initiate this covered call trade (48.43-
1.47 = 46.96 x 100 = $4,696 cost basis). If you were to rollover this trade weekly
and receive a similar premium you have the potential to collect $7,644 in cash over
the next year. Receiving $7,644 in cash over the next year would result in a 162%
cash on cash return ($7,644 cash income / by original $4,696 investment cost =
162%).
If you receive a 162% cash on cash return a lot can go wrong and you could still
profit from the trade. The underlying stock/ETF could decline substantially and you
could still profit. If you had bad timing on entering the trade you could still profit.
And there could be volatile price swings in the underlying stock/ETF and you could
still profit. This gives the weekly covered call strategy a huge advantage over stock
and option directional trades that require the stock or ETF price to move in the right
direction to profit. Also many times directional trades can get stopped out during
volatile price swings if you employ a portfolio money management system.
162% Cash on Cash Return Can Profit
If you have bad timing when entering a trade
During volatile price swings
Even if the underlying stock/ETF price declines substantially
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With the TNA ETF trading at 48.43, the 49-Strike call option consists of only time
value at option expiration. When you are short an option the time value portion of
an option becomes profit as the time value decays to zero at expiration.
If the TNA ETF remains flat at 48.43 at weekly option expiration the 1.47 points of
time value in the 49-Strike call becomes profit as the value of the option goes to
zero.
If the TNA ETF increases in price at option expiration I still collect a 1.47 point time
premium profit at expiration. The short option may show a loss if the TNA ETF
increases in price above the 49 strike price but this loss is offset by an increase in
the ETF price and I still wind up with a 1.47 point profit.
If the TNA ETF declines in price at expiration I collect a 1.47 point profit as the
value of the short option goes to zero. This 1.47 point profit could be offset by a
loss in the ETF price depending on how far the TNA ETF declines in price.
If TNA remains flat at option expiration = $147 time value profit
If TNA increases in price at option expiration = $147 time value profit
If TNA decreases in price at option expiration = $147 time value profit (profit
could be offset by loss in ETF value)
162% Return Potential Increases When I Rollover Options

I normally rollover my weekly options using an option spread order similar to the
spread order just displayed for the TNA ETF. If you receive a cash income of $147
each week and a total income of $7.644 over the course of a year, this income will
allow you to purchase additional shares of the TNA ETF and make additional
covered call trades. This would allow you to compound your returns and increase
the 162% cash on cash return.
The weekly option covered call strategy offers very attractive returns and very low
risk making this one of the best overall strategies for the average investor.
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Selling Weekly Option Premium
My brokerage account Transaction History below shows that I have been active
selling weekly option premium. I sold $16,053.53 in option premium recently over a
one week period. The right hand column of the Report shows the amount of cash
that was credited to my account for each option sale. These covered call trades
were in my retirement accounts.
$16,053.53 Weekly Paycheck
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Selling Weekly Option Premium
And the brokerage account Transaction History below shows that I have been
increasing my weekly covered call trades. I sold $28,454.92 in weekly option
premium over this one week period. The right hand column of the Report shows
the amount of cash that was credited to my account for each option sale. These
covered call trades were in my retirement accounts.
$28,454.92 Weekly Paycheck
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Double Dipping
When trading covered calls, if the underlying stock/ETF declines in price I like to
close the short call if the value of the short call declines 75% to 85% from the sale
price. For example, If I sell a weekly call option at 1.00 points I will enter a GTC
(Good Until Cancelled) limit order to buy to close the call at .25 or .15. If the call
declines to .25 or .15 it will be closed out. I can then sell another call option and
collect two premiums in one week.
The first brokerage account Transaction History Report below shows short calls that
I closed out when the value of the call declined 75% to 85% from the sale price.
The second brokerage account Transaction History Report shows additional calls I
sold that allowed me to collect an additional $6,618.22 in premium within a one
week period.
Bought Back Short Calls
And Sold an Additional $6,618.22 in Premium
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Covered Call Trade Examples: Exceeding Our Goal
The weekly covered call trade examples that follow include my brokerage
confirmations that show the purchase price of the stock and the strike price and
option premium for the call option sold. The Covered Call Calculator shows the
annualized profit potential for the covered call trade.
Buy ISRG at 541.225, Sell Apr 21 550 call @ 12.43
Buy AIG at 33.25, Sell Apr 21 34 call @ .45
Covered Calls
Entry Option Stock Call Call Net Profit Percent Annualized
Stock Cost
Date Expiration Price Strike Price Potential Return Return
AIG 4/12/2012 4/21/2012 33.25 34.0 0.45 32.80 $120 3.7% 148.4%
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Rolling Over Expiring Options
I normally like to keep my stock/ETF when trading weekly covered calls. Each
Friday I close out the expiring weekly call and sell next Fridays option. I like to
rollover my weekly covered call trades using option spread orders. Option spread
orders help reduce commission costs and can help you to save on the bid/ask
spread costs associated with buying and selling options if you use a limit spread
order that is mid-way between the bid/ask prices. I normally can get filled on
spread orders at a limit price that is mid-way between the bid/ask prices.
Examples of option spread orders used to rollover my expiring weekly covered call
trades follow.
Actual Spread Orders Used to Rollover Weekly Covered Calls
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Actual Spread Orders Used to Rollover Weekly Covered Calls
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Weekly Options Provide Up to 6 Times More Premium Than Monthly Options
The option chain below displays option prices for the Mastercard May 04 weekly
options and the MA July monthly options. Mastercard stock is trading at 457.58 and
the at-the-money 460-Strike weekly call is trading at 11.90. The July 460-Strike
monthly option is trading at 23.50 and expires in about 12 weeks.
Selling 12 of the MA weekly calls at 11.90 can provide up to 142 points ($14,280)
of premium versus the 23.50 points of premium available for the July option over
the same period of time. This demonstrates the substantial additional premium
available from selling weekly options versus monthly options.
12 Weeklys Provide 142.8 Points of Premium

versus 23.5 Points of Premium for Monthly
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Below is another example of the substantial option premium available from selling
weekly options. The option chain below displays option prices for the AIG May 04
weekly options and the AIG Aug monthly options. AIG stock is trading at 34.46 and
the 35-Strike weekly call is trading at .71. The Aug 35-Strike monthly option is
trading at 2.39 and expires in about 16 weeks.
If you sold 16 weekly calls at .71 you would collect about 11.36 points of premium
versus the 2.39 points of premium available for the Aug option over the same
period of time. This again demonstrates the additional premium available from
selling weekly options versus monthly options.
16 Weeklys Provide 11.36 Points of Premium

versus 2.39 Points of Premium for Monthly
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Real Time Covered Call Results
$332,597.96 in Profits and 36.9% Average Return
Copies of my two brokerage account Profit/Loss statements that follow show I
currently have $332,597.96 in profits and an average return of 36.9%. Most of the
trades in these two portfolios are weekly Covered Calls. Both of these accounts are
retirement accounts.
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2011 Weekly Covered Calls Profits $323,069.44 Avg Return 54.8%
My brokerage account Profit/Loss Report below shows $323,069.44 in profits and

an average return of 54.8% from weekly covered call trades that I took about 13
months ago. These covered calls were traded in my retirement account.
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Snapshot of My 2009 Trading Contest Account
My brokerage account Profit/Loss Report below is a snapshot of my 2009 real

money trading contest account. I traded covered calls in this contest account. I
placed first in the competition with an Annual Return of 122%. The contest results
are audited and posted on the World Cup website so the results are an accurate
representation of your performance.
I traded monthly covered calls and rolled over the options which allowed me to
compound my returns. Covered calls produced a great annual return in this account
with low risk.
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Investment Required to Generate $50,000 of Yearly Income
$6,756,756 versus $150,000 Investment
Lets now compare income returns for bank CDs versus weekly covered calls. Lets
also assume you want to generate $50,000 a year in income.
According to the Bank Rate Monitor the average annual yield for 1 Year CDs is .34%
and the average annual yield for a 5 Year CD is 1.14%. If you split your funds
evenly between 1 and 5 Year CDs it would take an investment of $6,756,756 to
generate a yearly income of $50,000! Of course your return is guaranteed but who
has $6.7 million to invest?
My 2009 trading contest account had an annual return of 122% trading monthly
covered calls. My 2011 weekly covered call trading account had an 54.8% average
return and my 2012 weekly covered call trading account has an average return of
36.9% return so far this year.
Based on these real time results I think it is reasonable to assume a 33.3% annual
return for weekly covered calls. A 33.3% annual return would require a $150,000
investment to generate a $50,000 yearly income. And a 50% yearly return requires
a $100,000 investment to generate a $50,000 yearly income demonstrating the
ability of the covered call strategy to deliver excellent income returns compared to
fixed income investments.
Comparing Income Returns

It would take an investment of $6,756,756 in 1 and 5 Year CDs to generate a
yearly
income of $50,000
A 33.3% yearly return for selling weekly options would require a $150,000
investment to generate a $50,000 yearly income
And a 50% yearly return for selling weekly options requires a $100,000
investment
to generate a $50,000 yearly income
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Weekly Option Advisory
I make weekly option covered call trade recommendations through my Weekly
Option Advisory Service. If you would like updated profit results for the weekly
option covered call strategy, log on to www.WeeklyOptionAlert.com and click the
Trade Results link at the top.
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Covered Calls Produce $1,048,701.89 Real Time Profit
My retirement accounts Profit/Loss Reports that follow show $1,048,701.89 in real
time profits for covered call trades over the past three years ($847,744.65 of this
total were weekly covered calls). There were 77 winning trades and no losing
trades. These real time profit results demonstrate the ability of the covered call
strategy to deliver excellent returns with very low risk.
Covered Calls Profits $116,935.13
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Continued . . . Profits $62,431.83
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Covered Call Summary
Option Expiration
Once you establish a covered call trade, there are two possible outcomes at option
expiration:
1) If the call option sold is in-the-money at option expiration then the call option
will be assigned and the underlying stock will be sold at the strike price and
removed from your account. This is all done automatically by your broker. A call
option is in-the-money if the strike price of the call is lower than the price of the
stock at option expiration. For example, if you sell the ADI 30-strike call option
and ADI stock closes at 31 at option expiration, then you will be assigned and
your stock will be sold at 30. If you do not want to lose your stock, then at any
time prior to expiration you can close out your short option position by buying
back the short call option.
2) If the call option sold is out-of-the-money at option expiration, then the option
expires worthless and you keep your underlying stock. A call option is out-of-the-
money if the strike price of the call is higher than the price of the stock. For
example, if you sell the ADI 30-strike call option and ADI stock closes at 29 at
option expiration, then the option expires worthless and you keep your stock.
The covered call strategy offers investors attractive returns while providing downside
protection in the event of a decline in the price of the underlying stock. Value Line
defines the covered call strategy as the most attractive option strategy when returns
are considered in relation to risk and it is only half as risky as holding common stocks.
Stock selection is an important part of short-term covered call writing although it is

somewhat less important with longer-term covered calls. As with any stock investment
strategy it is important to be diversified among different industries and not to
concentrate all of your trading capital in just a few trades. Try to divide your trading
capital among six to ten different stocks so that a large loss in any one stock would not
devastate your portfolio as it would if you only had a two or three stock portfolio.
The preceding trade examples demonstrate that the price movement of the underlying
stocks really determines whether an option strategy is profitable. Trying to determine if
an option premium is overvalued or undervalued according to the Black Scholes model
really does not have much bearing on the profitability of most option strategies.
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Covered call writing should be a part of every investors trading program. There are
many advantages to the Fail Safe Covered Call Strategy when compared to other
trading strategies. Some of these include:
Risk-adjusted return is hard to beat
Profitable during the 2000 2002 and 2007 2009 bear markets
Reverses the conventional wisdom that higher investment returns require higher risk
Can be traded in most retirement accounts
Weekly covered calls can produce up to a 162% cash on cash return
LEAPS covered calls can provide substantial returns and downside protection
Helps you lock in profits on profitable positions
LEAPS covered calls can profitable even if the underlying stock moves down in price
as much as 50%
Can be used to protect existing profits in a stock
Can give you a cushion needed to exit a bad trade with a profit
Does not require you to monitor the markets
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Step Six
Use LEAPS Options to Reduce Timing Risk
We learned in Option Basics that LEAPS (Long-term Equity Anticipation Securities) are
long term options with expiration dates that are up to three years away. When you
purchase a short-term call option you have to be right about the short-term price
movement of a stock. You are anticipating that over the short-term the underlying stock
will increase in price. Therefore the timing of your entry can be very risky. If you buy a
short-term call option and the underlying stock subsequently declines in price there may
not be enough time for the stock price to recover prior to option expiration. This could
result in a loss.
The timing of when to enter a LEAPS option trade is not as critical as buying a call
option with a short-term option expiration. If you buy a LEAPS call option and the
underlying stock subsequently declines in price you have one to three years for the
stock price to recover prior to option expiration. This reduces your entry risk.
The table below lists actual LEAPS option trades recommended to my advisory service
members. These trades were closed out last week which was January option expiration.
The results are based on investing about $10,000 in each recommendation for a total
initial investment of $69,040. The $187,190 profit represents an average return of
271% for this LEAPS option portfolio which far exceeds our goal of a 50% return. As a
result our current subscribers are well on their way to achieving their financial freedom.
The total initial investment to trade one option contract per recommendation in smaller
accounts was $9,155.
LEAPS Call Option Recommendations

Average Return 271%
Trade Option B # Entry Exit Profit Cumulative Percent
Number S Shs Price Price Profit Return
Opt 41 VLO Jan 15C * B 20 5.35 45.30 $79,900.00 $79,900.00 746.7%
Opt 50 OXY Jan 45C B 12 9.20 46.00 44,160.00 124,060.00 400.0%
Opt 74 AET Jan 55C B 6 15.00 34.50 11,700.00 135,760.00 130.0%
Opt 80 UNH Jan 35C B 8 12.40 24.40 9,600.00 145,360.00 96.8%
Opt 82 EIX Jan 30C B 20 5.10 15.95 21,700.00 167,060.00 212.7%
Opt 90 BBH Jan 140C B 3 28.40 55.70 8,190.00 175,250.00 96.1%
Opt 120 AAPL Jan 40C B 6 16.10 36.00 $11,940.00 $187,190.00 123.6%
100
Using LEAPS Options for Covered Calls
Selling LEAPS call options to establish covered call trades provides substantially higher
profits and increased downside protection compared to short-term covered calls. In the
covered call section of this Report we examined my covered call trades for Apple,
Cameco and Allegheny Technologies. I sold LEAPS call options for all three of these
trades and the average return potential is 80% demonstrating the high profit potential
available from LEAPS options. LEAPS options can provide a better return with lower risk
than investing in stocks or mutual funds.
The long-term nature of LEAPS covered calls reduces the risk of having to be right
about the short-term price direction of a stock, which is required when initiating short-
term covered calls. Like the LEAPS call option purchase, the timing of when to enter a
LEAPS covered call trade is not as critical as writing a covered call with a short-term
option expiration.
Examples of LEAPS Covered Calls During a Bear Market

The table below lists the open trade results on November 30th 2002 for LEAPS covered
call trades recommended by my Advisory Service. The table lists the profit/loss for both
the stock purchase and the related call option sale. These trades were recommended in
July and August of 2001 and were approximately 18 months in duration. I picked this
time period because we were in the middle of a severe bear market which crushed
most stock portfolios. The recommendations produced an open trade profit of
$9,176.75 and an average return of 57.1% as of November 30th 2002. These LEAPS
covered call trades were eventually called and the full profit potential was realized.
Stock Symbol Entry Quantity Last Gain %Gain

Johnson & Johnson JNJ 48.91 100 59.99 $1,185.00 24.2%
JNJ (Call Jan 03 57.5) .JNJAY 6.70 -1 5.80 90.00 13.4%
Philip Morris MO 41.90 100 42.71 255.00 6.1%
Philip Morris (Call Jan 03 45) .MOAI 6.90 -1 1.85 505.00 73.2%
SLM Corporation SLM 63.06 100 105.92 4,365.75 69.2%
SLM Corp (Call Jan 03 75) .SLMAO 13.10 -1 23.00 -990.00 -75.6%
UnitedHealth Group UNH 48.10 100 100.23 5,216.00 108.4%
UnitedHealth (Call Jan 03 65) .UHBAM 14.50 -1 29.00 -1450.00 -100.0%
Total Profit / Loss $9,176.75 57.1%
101
Summary
I hope you were able to gather some useful information from this report and can follow
my path to financial freedom. The Fail Safe Systems are a simple and practical way to
conquer the financial markets. I think the 24 years of historical profit performance
presented in this Report and more importantly my actual profit results confirm the
effectiveness of these systems. I hope this gives you the confidence to implement the
systems and believe in them as I do.
Inner Circle Advisory Service

My Inner Circle Advisory Service gives trade recommendations for the Fail Safe
Systems. A profit/loss record is maintained for all closed trades and an open trade
performance record is updated daily in real time subscribers can evaluate the current
profitability of each strategy. Subscribers are notified by email when there is a new
recommendation or a change to an existing recommendation. Membership includes full
support from myself and my experienced staff on implementing the Fail Safe strategies.
My staff and I will be there to guide you every step of the way.
Our goal is to guide you through the 6 Steps to Financial Freedom just as we have with
our current subscribers who range from novice to very experienced investors. Lets now
make your financial freedom a reality! For more information on the advisory service
please log on to www.ChuckHughesIC.com.
99% Winning Trades Despite Difficult Markets

Despite the very volatile markets over the past four years, my Inner Circle Advisory
Service currently has $1,205,579.24 in open trade profits and an average return of
200.1%. There are currently 115 winning trades and 1 losing trade resulting in 99%
winning trades.
Portfolio Profit/Loss Percent Winning Losing

Return Trades Trades
Stock Portfolio $208,277.40 110.9% 21 0
Dividend Portfolio $190,126.00 132.6% 19 0
Option Portfolio $254,217.00 424.6% 13 0
Option Spread Portfolio $169,101.00 474.3% 13 0
Buy Write Portfolio $140,700.07 91.2% 19 0
Put Option Strategy $97,225.17 59.1% 15 0
Microcap Portfolio $145,932.60 107.7% 15 1
Total Profits/Avg $1,205,579.24 200.1% 115 1
102

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6 Easy-To-Follow Steps

Our Goal: Turn $20,000 into One Million Dollars

Year Starting Percent Yearly Ending

Year Starting Percent Yearly Ending

Leverage Is the Key to a High Return

10% Stock Price Increase = 950% Option Return

Hewlett-Packard Co. (HPQ) At 3:49PM ET: 32.78 0.18 (0.55%)

CALL OPTIONS Expire at close Fri, Mar 17, 2006

$105 Option Value Minus $10 Cost = $95 Profit

A 10% Price Increase in Stock = 950% Call Option Return

15.9% Stock Return = 2,900% Option Return = 29 to 1 Leverage

22% Stock Return = 4,900% Option Return = 49 to 1 Leverage

Hewlett Packard 35.00 36.00 37.00 38.00 39.00 40.00

Stock Profit 2.22 3.22 4.22 5.22 6.22 7.22

Stock % Return 6.8% 9.8% 12.9% 15.9% 19.0% 22.0%

Value of 35-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Option Profit 0.00 0.90 1.90 2.90 3.90 4.90

Option % Return 0.00 900% 1900% 2900% 3900% 4900%

10% Stock Price Decrease = 900% Option Return

Hewlett-Packard Co. (HPQ) At 3:49PM ET: 32.78 0.18 (0.55%)

PUT OPTIONS Expire at close Fri, Mar 17, 2006

A 10% Increase in Stock Price = 950% Call Opt Return

Making Options the Most Profitable and Most

There Are Two Ways to Invest in Options

1. Buy Options 2. Sell Options

Buy at 6.00 and Sell at 9.00 = 3.00 Profit

Buy at 6.00 and Sell at 4.00 = 2.00 Loss

Buying Calls Is a Bullish Strategy

Value of HPQ 35-Strike Call Option Increases

Hewlett Packard 35.00 36.00 37.00 38.00 39.00 40.00

Value of 35-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Buy at 6.00 and Sell at 9.00 = 3.00 Profit

Buy at 6.00 and Sell at 4.00 = 2.00 Loss

Buying Puts Is a Bearish Strategy

Value of HPQ 30-Strike Put Option Increases

Hewlett Packard 30.00 29.00 28.00 27.00 26.00 25.00

Value of 30-Strike 0.00 1.00 2.00 3.00 4.00 5.00

Profits Not Limited

Sell at 9.00 and Then Buy at 6.00 = 3.00 Profit

Sell at 7.00 and Then Buy at 9.00 = 2.00 Loss

Hewlett-Packard Co. (HPQ) At 3:49PM ET: 32.78 0.18 (0.55%)

CALL OPTIONS Expire at close Fri, Mar 17, 2006

Selling Calls Is a Bearish Strategy

Short 30-Strike Call Option Profits

Hewlett Packard 34.00 33.00 32.00 31.00 30.00 29.00 28.00

Value of 30-Strike 4.00 3.00 2.00 1.00 0.00 0.00 0.00

Selling Put Options

Hewlett-Packard Co. (HPQ) At 3:49PM ET: 32.78 0.18 (0.55%)

PUT OPTIONS Expire at close Fri, Mar 17, 2006

Value of HPQ Put Option Decreases

Selling Puts Is a Bullish Strategy

Short 35-Strike Put Option Profits as the

Hewlett Packard 32.00 33.00 34.00 35.00 36.00 37.00 38.00

Value of 35-Strike 3.00 2.00 1.00 0.00 0.00 0.00 0.00

Risk Not Limited

Risk Not Limited

Short 30-Strike Call Option Incurs Losses

Value of 30-Strike 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Calculating Intrinsic and Time Value

Option Price of 4.10 - Intrinsic Value of 2.50 = Time Value of 1.60

How to Read Option Symbols

GE, 15, 01, 17, C, 00020000

GE is the trading symbol for General Electric