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DISCLAIMER: Stock, forex, futures, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the information in this special report will generate profits or ensure freedom from losses. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a market. The impact of seasonal and geopolitical events is already factored into market prices. Under certain conditions you may find it impossible to liquidate a position. This can occur, for example, when a market becomes illiquid. The placement of contingent orders by you, such as “stop-loss” or “stop-limit” orders will not necessarily limit or prevent losses because market conditions may make it impossible to execute such orders. In no event should the content of this correspondence be construed as an express or implied promise or guarantee that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.
Copyright © by Profits Run, Inc.
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic, or mechanical, including photocopying, recording, or
by any information storage and retrieval system.
Published by:
Profits Run, Inc.
28339 Beck Rd Unit F1
Wixom, MI 48393
www.profitsrun.com
Options Income Engine: Background, Overview, and Trading Examples
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Hi everybody, this is Bill Poulos and I want to welcome you to the Options Income
Engine. Now the Options Income Engine course is based on my over 40 years of trading
in the markets. During that time, as you can imagine, I have made every mistake you
could possibly make, and I have learned a great deal in the process. My goal here is to
help you avoid making those same mistakes, dramatically shortening your learning curve,
and allow you to have the possibility of becoming a successful trader right out of the
chute.
And if I have learned anything in the 40 years is that it does not take 40 years to become
a successful trader. Now this is one of the best, most synergistic approaches to safely
capturing the leverage that options trading has to offer. As you will soon see, if we are
smart about the way we use the leverage, we put the odds dramatically in our favor.
Unfortunately so many options traders today abuse the leverage, and that is when the
options become highly risky with the traders suffering the consequences.
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By the time we are done, you will see firsthand, by safely capturing the leverage that
options have to offer, it is actually less risky trading options than it is trading stocks. Now
that is really good news, because in today’s financial world, the old buying old strategy is
highly risky. Now yes, the markets have gone up significantly since early 2009, after they
fell more than 50 percent, regaining previous highs. But the truth is most people are still
under water from where they were prior to the 08-09 crash.
Those same people today have no exit strategy, should the market crash again. And it
really is not should the market crash, it will. The question is when. We do not know the
answer to that, but it will, and when it does, you do not want to be in it. And with the
Options Income Engine approach, you will not. Now we are going to be using
conservative tactics trading options, only in the markets at the right time.
This avoids, and even can take advantage of devastating bare markets. Because there is
nothing like owning put options in a falling market, where profits accumulate very
rapidly. Now there is work involved here, but Options Income Engine trailer software
does the analysis work for you. But it is important for you to understand the logic baked
into the software, so when the software issues an alert, you understand why. Okay, are
you ready to begin? Let us get started.
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Objectives. Understand the background and the rationale behind the Options Income
Engine. Learn what you can realistically expect swing trading the markets with a
powerful, directional options strategy. That is what we are going to be using here. Get a
broad overview of the Options Income Engine key elements and get a feel for what it is
like to trade with the software by reviewing some typical trades.
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Options and IRAs. While directionally trading options with the Options Income Engine is
ideal for IRAs, because buying options is actually less risky than owning stock, if you
know what you are doing. And you will know exactly what you are doing after
completing this course. In addition, you have the ability to buy put options in a bear
market, rather than suffer dramatic losses, or at best being safely in cash.
But in order for all of this to manifest, you must always apply sound risk management
principles. Again I am going to be hammering this, this is where options traders get into
trouble. They abuse the leverage that options have to offer, and they turn them into very
risky instruments. But by applying these sound risk management principles that we are
going to teach you, that turns the whole thing on its head, and gives you a tremendous
edge over those traders that do otherwise.
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Background. Okay, let us review some background to set the context for the Options
Income Engine approach to trading the markets. It is based on the culmination of years of
experience. My experience, and those of the options markets themselves. It was not
always easy to trade options. Only in the last decade or two have the options markets
matured significantly to make a very low cost, easy thing to do for almost anybody.
After all, I began trading options before personal computers were available. And while
you could still make money back in those days, it was far more difficult than it is now.
Let us talk about false keys. Traders want to win on every trade, especially newbies. As
soon as they see a losing trade, they run for the hills. Or they stick with that losing trade,
do not apply sound risk management principles, and let a small loser turn into a big loser.
This is a well-traveled path, and it is a path that you do not want to travel on and we are
going to show you how to avoid it. But the best method on the planet cannot win every
Options Income Engine: Background, Overview, and Trading Examples
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time. If that is what you are looking for, then go buy a CD at your local bank and they
will be happy to pay you a quarter percent interest for one year. I mean even that one is
not guaranteed, because the bank could go under, and the government may even
disappoint you with the FDIC insurance, depending on your account size.
Do not expect to win on every trade, however do not expect to do great damage to your
account on any trade, and do not expect to be uncomfortable making trades when you do
it the way we do. What you should expect is, over a series of trades, to be a net winner
with relatively minor drawdowns on your equity curve. Now that is all very possible, it is
not guaranteed, nothing is guaranteed when it comes to trading, but that has been the case
as long as there have been mature options markets like we have now.
Human psychology, we are going to talk more about that in a later module, but this is all
about fear and greed. You have probably heard this before, but it is absolutely true. Fear
and greed are very powerful emotions, they get in the way of your ability to place and
manage your trades in a disciplined fashion. And as soon as you are driving by fear and
greed, like most traders are, and give up that discipline, you will also automatically give
up your trading edge.
It is very, very important to overcome that tendency. The best way I know how to do it is
to have a very specific set of rules that gives you the confidence to stay disciplined. That
is what you have with Options Income Engine. Successful traders, they all have one thing
in common, even though they use different approaches to trading. They all have an edge,
meaning they all have a way to put the odds in their favor. They all use sound risk
management principles, meaning they do not overtrade, or do not put position sizes on
that are not warranted by their account size. And are all disciplined. So it would behoove
you to do the same thing.
Now what we are going to be doing with Options Income Engine is swing trading,
capturing minor trends that occur over and over again. Now these trends will last from
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anywhere to a week or two to sometimes two months, usually somewhere in the middle.
This is a perfect time frame for trading monthly options. Because the option gives you
time to be right, whereas when you buy a stock outright, you have far less time to be
right.
With this approach, there is always opportunities in the markets, whether they are going
up, or down, or sideways. But we only want to trade the best setups, we do not want to
try to trade everything. You cannot trade every stock, and every ETF anyways, so we
only want to trade the best of the best, stocks and ETFs, and then only when we have the
best setups for those stocks and ETFs. So with Options Income Engine, you are going to
be able to cut through the clutter in a way where you will always know what to do, no
matter what the market is doing.
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That puts you in control, but only if you are disciplined. Now another key requirement in
order to stay disciplined is, your approach must be as simple as possible, because if it is
not, you are going to lose your discipline. It is that simple. And the Options Income
Engine approach is very powerful, but it is elegantly simple. You want to eliminate what
does not work, and of course I have learned the hard way what does not work.
These commonly held myths by traders, such as, well the only time you should put a
trade out is when you have a three or four to one reward to risk ratio. Well if you stick by
that, methods that can deliver that kind of reward to risk ratio usually win only 25 percent
of the time. That means that it is not unusual to have five, six, seven, eight, nine losing
trades in a row. So you see that approach really does not work.
Using too many indicators, or thinking that technical indicators are a silver bullet that
does not work. Thinking you know something about the market direction, because of a
gut feeling that you have, or what some so called experts said, that does not work. Now
you can disagree with one or all of those statements, but when you actually put it to the
test, you will find out that they are true.
Now again it helps stick with the discipline, the trade alerts software generates alerts for
the right stocks or the right ETFs at the right time, when setups occur in those markets
that put the odds in your favor. Then once you get an alert that is driven by an objective
set of rules, you enter the trade, and then manage the trade in accordance with objective
rules as well. That way you are not wishing and hoping, you are not cheerleading your
trade, you are just following the rules.
Sometimes you will be stomped out, but over a series of trades, you should expect to be a
net winner. And that should give you the confidence to go ahead and place the trade each
and every one. Now like I said earlier, with this material you have a great advantage over
me; it is not going to take you 40 years, thankfully. You are going to be able to learn this
in the shortest time possible, depending on your experience up until now, it could be a
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matter of a couple days, or at the most a couple weeks, maybe a month. Then you will
own this knowledge for life.
Okay, let us kind of summarize all of this under the heading of great expectations. You
have got to treat your investing and trading as a business. It is not a hobby. It is not
playing the market. It is not looking for picks. It is not chasing after the latest fad. It is
just a very serious approach, a business like disciplined approach to taking as much
money out of the markets as you can. The bad news, you cannot win on every trade. But
the good news is you do not have to if you apply sound, risk management principles, and
you have realistic expectations.
Do not expect to open a $5,000 account and turn it into one million dollars in a year; that
is absolute nonsense. On the other hand, you could grow that small account
systematically, so that over time as it compounds it can indeed turn into a very, very large
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account. As I said, you have to have an edge in the markets, and successful investors do
indeed have an edge. Meaning the odds are in their favor.
Ask yourself, do you know what your edge is, if you do not know your edge, then you do
not have one. And if you do not have one, do not trade. You are just gambling otherwise.
But if you do have an edge, and you are disciplined, and you follow your risk
management rules, you have the potential to enjoy great success.
Okay, let us talk about some key elements of success. You are going to need a good
online broker, and fortunately these days that is not a problem, there are several to choose
from. The Options Income Engine trade alerts software is an invaluable aid in simplifying
your trading activity. While it is not required to apply the Options Income Engine trading
methods, it will save you a lot of time that you would have to spend on your own
analyzing the markets, and it will help you avoid mistakes.
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Now you probably are also going to want some good charting software, as provided by
firms such as Trade Navigator, TC 2000, Meta stock, and there are many others. With
good charting software, you can plot the Options Income Engine indicators, you can
practice applying the trading methods that we teach you, and you can keep up to date on
your trades on an end of day basis. You do not really need intraday software, unless you
want it, but the end of day data is all that we need with Options Income Engine so that
you are not having to be glued to your computer all day long.
You will find that it is easy to manage, you will get periodic software alerts, where there
is a new setup, and you will get alerted to that after the market is closed. You will have
plenty of time to enter your order before they open the next day. You will also be alerted
of where to place your initial stop, you will be alerted to change that stop and apply
trailing stops, locking in more and more profit as the trade matures. And also where to set
your profit target.
Now as I said, we are going to be swing trading minor trends, which is ideal for
directionally trading options. We will be using a very powerful trading method for the
long side of the market where we are buying calls, and a very powerful trading method
for the short side of the market where we will be buying puts. We will be using a few
technical indicators together with uncommon trading tactics. As I said, the indicators are
not a magic bullet, but if we are smart about the way we use just a few indicators, using
them in an uncommon fashion, then we can put the odds in our favor.
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So we are going to be looking for a high probability, swing trading opportunities using
Option Income Engine’s specific option able stock and ETF selection criteria, setup
conditions, entry stop, and profitable exit strategy rules. Each trade will be guided by risk
management and position sizing rules, which is critical to harnessing the leverage that
options provide without abusing it. We are going to be following a simple, but powerful
directional swing trade options strategy. When you add it all up, you will always know
what to do in the markets for life.
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So what do we mean by directional swing trading options strategy? Well we are going to
be buying one or two strike, in the money, monthly options, both calls and puts; instead
of stocks or ETFs. Now this gives us the opportunity to dramatically limit risk by
dramatically reducing the maximum possible loss per trade. This is a huge advantage
over trading stocks. At the same time routinely enjoy double and triple digit percentage
gains.
We are going to do that by swing trading minor trends of one to eight weeks within a
major trend. Because this gives us the best opportunity to maximize profits with this
strategy. And it requires very little of your time to properly execute this strategy. Now for
those that are new to options, please review the bonus module in detail, entitled Trading
and Options Basics. It will get you up to speed in a matter of minutes, and you will be
good to go with the Options Income Engine.
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The indicators. With Options Income Engine, we are going to be using a simple 50 day
moving average. We are going to be using slow stochastic percent k with an 8-3-3
setting. We will be using the average true range based on the past 20 days, and an
indicator called on balance volume.
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Let’s take a look at a typical stop chart where we will plot the 50 day simple moving
average.
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Okay, here is a typical stock chart, daily stock chart, it could be any stock. And I have
plotted the 50 day simple moving average in red. You can see how the moving average
smooths out the daily price action, so as the market is trending up here, the moving
average turns from down to up in a nice smooth line. As simple as it is, it is a very good
indicator of the general trend of the market. Now like all moving averages, it is a lagging
indicator. In other words, it does not turn up until after the market turns up.
But nevertheless once it does, it usually indicates that the market has turned from a
bearish bias, to a bullish bias. Giving us the opportunity to get in on some of these swings
that occur along the way.
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Okay the next indicator is the Slostocastics Percent
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Okay, same stock chart and now we have applied the percent K, which is the blue line,
and it is plotted below the price chart. The percent k is helpful in identifying so called
overbought and oversold conditions in the market. When it is below a certain level that
would indicate the market is oversold and may be heading up. Not a guarantee that it will
be heading up, but maybe. Oversold, may be heading up.
But it is important to use the percent K in conjunction with a trend indicator, such as the
50 day moving average. The red line is the percent D, which is simply a three day
moving average of the blue line, the percent K. We will not be using the percent D, but
typically when you plot this indicator, you will see both the percent K and the percent D.
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Okay now let’s take a look at the average true range.
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Like the percent K, the average true range indicator is plotted at the bottom of the chart.
Showing the average true range for the past 20 days. So if you pick off a point on the
chart right here, that would be the average true range of the past 20 days.
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Okay our last indicator that we’re going to be using is On Balance Volume. Let’s take a
look.
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Okay, on balance volume is also plotted at the bottom of the chart. You can see that plot
right here. What that indicator is, is simply adding and subtracting the daily volume. If
the market price goes up from the prior day, then you add the volume for that day. And if
the close is lower than the prior day, then you subtract the volume for that day. It is very
simple.
The absolute value really does not have any meaning, it is the trend that we are looking
for here. So we are looking for an uptrend to confirm that the market wants to go up. If
the on balance volume is flat, like it is right in here, almost flat to downwards, now going
down. It is telling you that even though the market is going higher here, it may be
unsustainable and ready for a drop.
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Okay now let’s take a look at what the chart looks like applying all of the indicators at the
same time.
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Okay, so here we have the 50 day moving average. The percent case slow stochastic is
the blue line. The average true range. And the on balance volume. Those are the only
indicators we are going to need, and we are going to be using them in an uncommon
fashion, which will help give us an edge. Trading tactics based on price action, supported
by a few indicators is the way to go.
If you use any more than a handful of indicators, I believe you are kidding yourself, they
will not give you an edge. In fact, they will further confuse the issue, and you will never
have a consistent, simple, but powerful way to look at the markets, as we do with Options
Income Engine.
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Alright, now let us look at some Options Income Engine trade examples. Now at this
point, we are just looking at a high level overview of the type of trades identified by the
trade alerts software. And when there are no trade alerts to enter the market, it is time to
stand aside. A lot of new traders feel like they have got to trade every day. They are so
anxious to try it out they have got to trade every day. And you know you do not want to
do that.
You want to let the market come to you. Be patient. We are not playing here, we are very
serious, we are methodical, we are disciplined, we let the market come to us. There is
plenty of opportunity, there is no point in trying to force the markets. So at this point we
just want to get a feel for the method and see what the trades look like. We are going to
deep dive them a little bit later.
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Okay, first we have Netflix, NFLX. This is a daily chart, we have got our indicators
plotted, our 50 day moving average in red; our stochastic k in blue; our average true
range down here in green; and our on balance volume in orange. So you can see here, by
virtue of this blue arrow, we got an alert to buy to open a January 290 call at $14, with
Netflix trading around $300. Now notice, instead of buying Netflix for $300, 100 shares
of Netflix at $300 would be $30,000 required in your account to do so.
Whereas if you buy one option, one January 290 call option, you are controlling 100
shares for what? $1,400, 14 times 100, as opposed to $30,000. See right off the bat, you
have got risk severely limited. When you buy the stock, you are really exposed to the
tune of $30,000. When you buy the option, you are exposed to a maximum possible loss
of $1,400. Now that does not mean that you are going to lose $1,400, but in the worst
case, that is what you could lose. That is it.
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If you apply the right position size and risk management principles, you can never do
great damage to your account. Okay, so in this example, we are buying to open the
January 290 call at 14 right here. We always want to try to scale out of these trades in two
steps. One at a profit target, and the other using a trailing stop. So just in general terms
understand that now, we will get into the details later. So here is a profit target being hit
right in here, selling to close half position at $40.
Look at the gain on that. From 14 to 40 in just a few days. So you have very limited risk,
and very high percentage gains. Oftentimes triple digit gains has occurred here. Now the
second half position was closed out right here using a trailing stop at $27.20, still a nice
gain. Sometimes the profit target will outgain the trailing stop, and sometimes the trailing
stop will outgain the profit target.
You do not know what the market is going to do on any given trade. So using this
strategy to exit the trade by scaling out in two steps maximizes your profit potential over
the long haul. Okay, now the software said to get back in, get right back in a couple days
later, right there. Buy to open this time a January 320 call at $12.20, because what? The
stocks trading now are around $325.00. The trend apparently is not over.
Sure enough it keeps moving on up, selling to close half position at a profit target at
$53.70. What a gain. This one took about a month and a half, exiting right there, and then
trailing stop exited a few days later at $52.80, so just an outstanding trade for both half
positions.
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Okay, the next one is Cleveland Cliffs at CLF. Software said buy to open. August 23 call
at $2.40 with CLF trading around 24 and change. Profit targets selling to close half
position at 750, very nice gain. And then the trailing stop at 450. Still a nice gain. This all
happened in a matter of about three to four weeks.
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Okay, next one is BAC. This is a put option, we want to buy to open the April 36 put at
270. Right in here, expecting the market to head lower. At that point BAC was trading
around 33.50. Now what happened here, it did not trade lower, it reversed and headed
higher, we got stopped out just a few days later at $1.90. Now as I said before, all trades
will not be winners, there will be losers. But look what happens here, this loser first of
all, when you put the trade on, your maximum risk for 100 shares is $270, as opposed to
buying BAC outright for 33.50, requiring $3,350.
Instead of having $3,350 at risk, the worst you could possibly do buying the option is lose
$270. Now as I said, that does not mean that you are going to lose $270, indeed in this
case here, you got out at $1.90, losing $80. Okay, so this is what I mean about proper
position size relative to your account size, if you lost $80 say on a $10,000 account, that
would not be a big deal, would it?
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On the other hand, if you abuse the leverage that options have to offer, let us say you put
on 40 of these options with a $10,000 account, well then you would wipe out the account,
and there is absolutely no reason to do that.
Okay, the next one is silver ETF SLV. Software said to buy it open at October 18 put at
220 right in here with SLV trading around 16.50. And profit target was hit very quickly,
sell to close half position at 340. And the trailing stop exited right here at $5.30, so very
nice gain on both half positions and you are on to the next opportunity.
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Okay, next is BBRY. We have got an alert to go in buy to open, January 7 call option at
$1.10 when BBRY was trading around $8. Very quickly the first half position alert was
issued to sell to close half position at $2. Right here in the matter of a couple of days. So
a very quick nice gain of about 80 percent. Then we let the second half position run,
protected by a trailing stop. It ran for several days, and got out right here, about a month
and a half later, for a fabulous gain up to $5.10. That is a 400 percent gain.
Again with very limited risk. In this case, buying one option at $1.10 would have
required $110. That would be the maximum you could possibly lose, not that you are
going to lose it. Because on many losing trades, we are going to lose less than that, versus
having to put up $800, had you bought the stock. And then after having minimized risk,
you have the potential for these terrific gains. Okay, now the market then held up, and the
software said that it is time to get back in right here.
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Buy to open, this time the March 11 call at $1.25 with BBRY trading around $12. For a
quick run up after stutter stepping sideways here for several days. Hit the first half profit
target right here at $3.25, terrific gain. And then the second half position stopped out with
the trailing stop right there, with an even larger gain at $5.30. Now not every trade is
going to be this good, but these are indeed typical. And I just want you to get a feel right
now for how these trades work.
Now one thing I want to point out, and you are going to see this in the deep dive trade
examples we do later on. That when you buy to open right here at $1.10 January call, this
is the month of October. November, December, January, this call does not expire until the
third Friday in January. Now what does that tell you? You have got minimum risk here.
You have got until, theoretically, the third Friday in January to be right on this trade.
Let us say it dropped after you get into the trade, let us say the market dropped. What if it
dropped in half, all the way down to $4. How much could you lose? $110. What if it
dropped to $7, how much could you lose? $110. What if it dropped to $6? What if it
dropped to $0? How much could you lose? $110. Now, we are not expecting it to drop,
but sometimes when we get into these trades, initially the market does drop, but that is
okay up to a point.
We are not going to wait for this to go to 0. But it is okay, because why? We have a lot of
time to be right. So even if it drops initially and then heads up and hits our profit targets,
we still have a very nice, profitable trade. Now if you are buying the stock instead, right
here, you cannot wait for the stock to drop to $6 or $4 before getting out; you have got to
get out right away.
And what happens? Your percentage of losing trades goes up when you buy the stock
directly. And your profitability goes down. This is a huge advantage of being able to buy
these monthly options, controlling the same number of shares with less money, and a lot
less risk. You will see this in more detail a little bit later on.
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Now those trades that you just saw were based on certain trading method basics. Any
good method should have these basic principles working for it. So the Options Income
Engine trading method includes four components. Specific setup conditions, specific
entry rules, specific initial stop rules, and specific exit strategy rules. And there is a set
for the long trades, or those where we buy call option; and there is a different set for the
short trades, or where we buy put options.
Because the characteristics of a market when it is going up are generally different than
when it is going down. So it calls for a different method, and you will see that in more
detail as we go through the course. Well right now I just want you to understand that
those trades we just reviewed were governed by these trading method basics.
Options Income Engine: Background, Overview, and Trading Examples
www.optionsincomeengine.com Page 36
Okay. Action steps: Make sure you understand the key points covered in this overview.
Email us with any questions that you have. And it is not too early to start using historical
charts, and practice plotting the price charts, and applying the indicators. This concludes
background, overview and trading examples.