Learning Center

A Comprehensive Guide to Options Trading

Whether you’re new to options trading or a seasoned trader seeking more info about InvestorsObserver and its services, you’ll find what you’re looking for in this comprehensive guide.

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Options Basics
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  • Options Basics

    What are Options?Top▴

    An option can be simply defined as an agreement between two parties that allows the buyer to pay money up front for the right to take an agreed-upon action at a later date. The buyer does not have to use his option if he doesn’t want to. On the other hand, the seller has the obligation to hold up his end of the bargain if and only if the buyer wishes.

    There are only two kinds of options—calls and puts—and options trading can be as simple as buying or selling a call or a put. However, InvestorsObserver’s option strategies tend to embrace more sophisticated combinations of options trades that drive profits higher while limiting risk. To understand how these strategies work, start at the beginning, and we will build upon the fundamentals of options trading to show you how we use these basic building blocks to create sound investments.

    Unlike stocks, options expire. If you buy an option, you have until the options expiration date to exercise your option. Once the expiration date has passed, the option has no value.

    Options (calls and puts) and their prices are all tied to the price of the underlying asset, or stock. The cost of the option will depend on how much time left until the expiration date and also how the price of the underlying stock compares to the strike price of the option.

    Every standard option contract represents action that the holder can take on exactly 100 shares of the underlying stock.

    For simplicity, we will refer to the option buyer and seller throughout the Learning Center. Keep in mind that like many other trades, options trades are cleared on an exchange by a market maker, so if we buy an option we can close the position by selling it on the open market. We are not beholden to the wishes of the trader on the opposite side of our original trade.

  • CallsTop▴

    A call gives its holder the right, but not the obligation, to purchase an asset at the specified strike price, within a specified window of time. For our purposes, the underlying asset is a stock. The call seller, however, is obligated to sell the stock at the strike price if the buyer chooses to exercise the option at any point before its expiration.

    The strike price is the key element in any option. If you hold a call for stock XYZ with a strike price of $50, that means you have the right to purchase 100 shares of XYZ for $50 per share at any point between the time you purchased the call and its expiration date. Any time stock XYZ is above $50, your call is in-the-money, which means it has an actual value to the option holder. If stock XYZ is below $50, the call is out-of-the-money, as it would be imprudent to exercise a $50 call when you can buy the stock for less.

    Even if a call is out-of-the-money, it will still have a bid and ask price higher than zero based on the chance it may become valuable before the expiration date.

    When a call is exercised, the seller is obligated to sell 100 shares of the underlying stock at the strike price. If the seller does not have 100 shares to sell, he must purchase them at the current trading price in order to honor the contract.

  • PutsTop▴

    A put gives its holder the right, but not the obligation, to sell at the specified strike price, within a specified window of time. The put seller is obligated to buy the underlying asset at the strike price if the buyer chooses to exercise the option at any point before expiration.

    If you hold a put for stock XYZ with a strike price of $50, you have the right to sell 100 shares of XYZ for $50 at any point between the time you purchased the put and its expiration date. Any time XYZ’s stock is below $50, the put is in-the-money. When XYZ is above $50, the put does not have real value for the holder, and is out-of-the-money.

    When a put is exercised, the seller is obligated to purchase 100 shares of the underlying stock at the strike price.

  • Exercise &AssignmentTop▴

    Exercise
    The option buyer or holder may exercise his option at any time. Exercising a standard call will result in purchasing 100 shares of the underlying stock for the strike price. Exercising a standard put will result in selling 100 shares of the underlying stock for the strike price. In either case, it will also result in the option seller being assigned.

    Assignment
    If an option holder exercises his option, which can happen at any time, the seller will be assigned. Being assigned on a standard call will result in selling 100 shares of the underlying stock for the strike price. Being assigned on a standard put will result in buying 100 shares of the underlying stock for the strike price. The only time you will be assigned is if the buyer decides to exercise.

    Automatic Exercise/Assignment
    At expiration, your broker should have a system in place that will make sure you do not lose money due to an oversight. If you hold an option that can be exercised for any amount of money, they will automatically take that action at the close of trading on expiration day. This means that on the flip side, if you sold an option that is worth any money, you will be automatically assigned if you hold that position at expiration. Usually it is more profitable to close out all positions just before assignment or exercise at expiration, but in some cases it the options price indicates it will be better to let the automatic action happen.

  • Option BuyingTop▴

    When you buy an option, you will pay cash up front, and for your transaction to be profitable usually you will need the stock to move in your direction. Option buyers are purchasing the opportunity to take an action on a stock, but are never obligated to make any moves. Once an option is purchased, the holder is never on the hook for more money. Option buyers are not required to own the underlying stock in order to buy an option.

    If a stock moves up for the call holder, down for the put holder, the option should gain value, and will usually be able to be sold or exercised for a profit. To close this kind of position, simply sell the option you bought or exercise your option if you prefer.

    When the option expires, the holder no longer has the opportunity to exercise it. If the option never becomes profitable, the buyer may be able to minimize losses by closing the position before expiration, or the option will simply expire and the holder will have a loss of the original contract price.

  • Option SellingTop▴

    When you sell an option, you will get the money from the sale up front, and your transaction will be profitable as long as the underlying stock remains out-of-the-money for the duration of the option’s life. You are not required to own the underlying stock to sell options, but you may be required to have a minimum balance in your trading account to cover the cost if the option is exercised. Remember, as a seller, you have an obligation to the holder if they choose to exercise the option.

    If a stock moves down for the call seller, or up for the put seller, the option should lose value and will usually be able to be bought back for a profit. To close this kind of position, simply buy the option you originally sold. Otherwise, the only way to have this position close is if you are assigned or the option expires worthless.

    When the option expires, the seller’s obligations end. If the option is never in-the-money, then the buyer will not exercise it, and the seller does nothing. The seller has just profited by the amount of the original option sale, which he received at the beginning of the trade.

  • Multi-leg TradesTop▴

    Options trading can be so much more than buying and selling calls and puts, and it is our steadfast belief that the best options investments take advantage of multi-leg trade strategies. We use multi-leg trades to hedge our positions, and as a way to reduce the up-front investment necessary to make trades. These trades involve buying or selling multiple options on the same stock, in a specific combination depending on the strategy. Some strategies also combine stock trades with option trades. Learn all about the various multi-leg trading strategies we use by following along with one or more of our model portfolios.

  • Options Strategies

    Strategies &RiskTop▴

    You’ve probably heard the warnings that options are risky, and most investors choose to avoid the options market completely. It’s true, options can be extremely risky –but you can also trade options in such a way that actually limits your risk, while still offering large potential returns.

    Some options strategies open an investor up to unlimited potential losses, but we tend to steer clear of those. Occasionally, our analysts may point out an attractive trade on the far end of the risk spectrum, but we focus on hedged trading strategies at InvestorsObserver. Our trades will typically have built-in downside protection, limited risk, and outsized return potential. Below are some common options strategies you might find in our services.

  • Long CallTop▴

    One of the simplest options strategies is a long call, or simply the purchase of a call option. This is a trade that has unlimited profit potential, while the maximum loss is limited to the amount you pay for the option up front.

    The best time to buy a call is when you are bullish on a stock. A long call becomes profitable when the underlying stock rises enough that the option price becomes higher than the price paid to enter the position.

    The amount of premium will be higher for an option with an expiration date farther out in the future, and the amount of premium also increases as the strike price is closer to the stock’s current price.

    A long call holder can hold his position until expiration and cash in by exercising the option and then selling the stock at its higher price, but most investors will choose to exit the position before expiration. Once the stock rises to a point of satisfying profits, the long call holder can sell the call, cashing in on any additional premium remaining on the option.

    At expiration, if the underlying stock is below the call’s strike price, then the option will expire worthless and just disappear. The investor will lose the entire amount paid up front, but no more, even if the company behind the stock goes bankrupt.

    The break-even point for a long call at expiration is the strike price plus the amount of premium originally paid for the option. This is also sometimes known as the target price. The higher the stock price climbs above the target price, the more the option is worth, thus the unlimited potential returns.

    Even if the stock finishes at expiration below the target price, you can still get some of your capital back, as long as the stock is above the strike price.

  • Long PutTop▴

    A long put is the purchase of a put option and operates similarly to a long call, but with a bearish attitude. Like a long call, this trade has an almost unlimited upside, while the risk is limited to the amount paid for the option.

    The best time to buy a put is when you are bearish on a stock. A long put becomes profitable when the underlying stock falls enough that the option price is higher than the price paid to enter the position. The more the stock falls, the more profitable the put should become.

    Just as with the long call, the amount of premium will be higher for an option with an expiration date farther out in the future and the amount of premium also increases as the strike price is closer to the stock price.

    The long put holder can hang onto the position until expiration and cash in by exercising the put to sell it at his strike price, then buying the stock at market price, but the more common way to profit is to sell the put before expiration.

    At expiration, if the underlying stock is above the put’s strike price, then the option will expire worthless and just disappear. The investor will lose the entire amount paid up front, but no more, even if the stock shoots to the moon.

    The break-even point for a long put at expiration is the strike price minus the amount of premium originally paid for the option. This is also sometimes known as the target price. The lower the stock price falls below the target price, the more the put is worth, thus the nearly unlimited potential returns. If you bought a put on a stock that goes bankrupt, then you have the right to sell it for the strike price then buy for just pennies to close the trade.

    Even if the stock finishes at expiration above the target price, you can still get some of your capital back, as long as the stock is below the strike price.

  • Covered CallTop▴

    Covered calls are one of the more conservative trades an investor can make yet these trades can still make returns that beat the broad market, usually when a stock is stagnant. This kind of trade should not be considered unless the underlying stock (or ETF) is one that the investor is willing to own.

    To place a covered call, an investor sells a call on a stock he already owns or buys stock and sells a call at the same time. Either way, the position consists of paired groups of 100 stock (or ETF) shares and one sold call option. The call is considered “covered”because you own the stock as well.

    Because you sold a call, your cost basis is lower than an investor who just bought the same stock at the same time. Your break-even price is the stock’s entry price minus the amount you received for selling the call.

    As long as you have a sold call in your account, you will need to keep 100 shares of the stock in your account to ensure you don’t take any losses if the stock rises above the strike price.

    A covered call has a limited upside and the downside potential includes all the cash required to open the trade, but that is true of any stock purchase. In reality, a covered call always has less risk than buying the same stock without selling a call. In return for that safety, you don’t get the same reward for a stock that makes a big move higher, so this kind of trade is not a great idea for stocks with high upsides. Instead, this is a good strategy for stable stocks that you are mildly bullish on.

    There are only two outcomes for a covered call trade. If the stock is higher than your sold call’s strike price at expiration, then you will be assigned. As the seller, this means you will be paid the strike price but have to deliver 100 shares of stock to the call holder at the agreed upon strike price. If you end up being assigned on your sold call, you will simply give up the shares that you own, but your trade should be structured in such a way that you still make a comfortable return if this happens.

    If the stock is below the sold call’s strike price at expiration, then the sold call will expire worthless and you will retain your stock position. Since you sold the call, you got cash up front that is yours to keep along with the stock. It is even possible for the stock to finish at expiration above your break-even point but below the strike price, which would mean you make gains on both sides of your trade. If the stock is below your break-even point at expiration, you will still have your stock, which means you are losing money. However, any losses will always be smaller than for an investor who only bought the stock at the same time.

    After expiration, if you still have your stock position, you will probably want to reevaluate your situation. If you no longer think the stock is worth owning, this is your opportunity to take profits or cut your losses.

    If you still like the stock, you can hold it indefinitely or perhaps sell another call to establish another covered call position. If you want to keep your stock but the sold option is in-the-money, you will want to act before expiration. One popular strategy at this juncture is rolling the sold call out to expire farther in the future or at a higher strike price or sometimes both.

    To roll out a covered call trade, buy back your original sold call then sell another call with later expiration or a higher strike. Rolling to the same strike price in a later month should result in a credit for the roll, while rolling to a higher strike may cost some cash up front but usually has a higher upside.

    As long as you hold the stock portion of a covered call, you will earn any dividends the stock pays and have full voting rights, just like a normal shareholder.

    Since you sold a call, you have the obligation to deliver the shares at any time before expiration if you are assigned and this could theoretically happen at any time. If it does, then you will be paid the strike price for your shares, just the same as at expiration. Often this happens the night before the underlying stock trades ex-dividend and may also happen in the days right before expiration.

    A conservative covered call will sell a call that is initially in-the-money and aim to get the lowest possible cost basis and break-even point. This conservative position will typically have a large amount of downside protection but not a tremendous profit opportunity. The goal of a conservative covered call is to have the sold call expire in-the-money and lock in a profit.

    More aggressive covered calls will sell a call that is out-of the money. With this more aggressive stance, the credit for selling the call will be less, so the break-even point will be higher and the trade will have less downside protection, but the upside is larger this way. Often the ideal result for an aggressive covered call trade is to have the sold option expire out-of-the-money, allowing the investor to pocket the cash and sell another aggressive call soon after.

    Three InvestorsObserverportfolios that utilize covered calls are the Dividends Plus Portfolio, the Conservative Covered Calls Plus Portfolio and the ETF Covered Calls Plus Portfolio. For example covered call trades, see the articles for those services. Other services that feature covered calls include the Morning Update, Option Reports, Income Maximizer, and Enhanced Covered Call Option Chains.

  • Bull-Call Debit SpreadTop▴

    Debit spreads are trades where options traders invest a net debit up front and then look to close the trade for a credit larger than the original debit. Bull-Call Debit Spreads use call options to create a position with an initial debit and bullish slant. The up-front cost is the most that will ever be at risk with this kind of trade, while the target profit is the difference between the bought and sold strikes minus the initial debit.

    To create a bull-call debit spread, purchase a call at one strike price and sell another call on the same stock and with the same expiration date at a higher price. The sold call will be less expensive, so it will offset some of the price of the bought call, leaving a net debit on the trade. Typically both of these options will be in-the-money at the trade’s inception.

    As long as the stock is above both strike prices at expiration, the investor will realize his maximum profit on a bull-call debit spread automatically when both calls are automatically exercised and assigned. He will buy the stock for the strike price of the lower call, then turn around and sell the same stock for the strike price of the higher call, creating a credit equal to the difference between strikes and achieving the target profit.

    In the worst case, the stock reaches expiration below both calls strike prices. In this case, both options will expire worthless and the investor will lose hos or her entire initial investment.

    If the stock reaches expiration between the strike prices of the two calls, the bought call will automatically exercise, but the sold call expires worthless. This results in a long stock position that will cost a large amount of cash and unless that cash is available, to clean up the trade it will need to be sold at  current market prices. Market price will be more than we pay by exercising the bought call, but probably not enough to also make up for the initial debit.

    Our analysts will usually exit trades that might be in trouble before expiration passes and make the decision for us. To exit a bull-call spread, buy back the sold call and sell the bought call for a net credit.

    InvestorsObserver analysts usually look for bull-call debit spread trades that have sold calls 10% or more in-the-money, so that our positions make a profit if the underlying stock rises, stays flat or even drops by a little. Trades with this amount of protection often target returns of 5-10% in just two months for annualized returns (for comparison purposes only) of 30-60%.

    A similar type of trade with a bearish bias is known as a bear-put debit spread.

  • Bear-Put Debit SpreadTop▴

    The flip side of a bull-call debit spread, bear-put debit spreads use put options to create a position with an initial debit and a bearish slant. To create a bear-put debit spread, purchase a put at one strike price and sell another put on the same stock at a lower price in the same month. The sold put will be less expensive, so it will offset the price of the bought put, but there will still be a net debit on the trade. Typically both of these options will be in-the-money at the trade’s inception.

    As long as the stock is below both strike prices at expiration, the investor will realize his maximum profit on a bear-put debit spread automatically when both puts are automatically exercised and assigned. He will sell the stock for the strike price of the higher put, then turn around and buy the same stock for the strike price of the lower put, creating a credit equal to the difference between strikes and achieving the target profit.

    In the worst case, the stock reaches expiration above both puts’strike prices. Then both options will expire worthless and the investor will lose his entire initial investment.

    If the stock reaches expiration between the strike prices of the two puts, then the bought put will automatically exercise, but the sold put expires worthless. This results in a short stock position that will need to be covered immediately. To do so, buy the underlying stock at market prices. Market price will be less than we were paid upon exercising our bought put, but probably not enough to also make up for the initial debit.

    Our analysts will usually exit trades that might be in trouble before expiration passes and makes the decision for us. To exit a bear-put spread, buy back the sold put and sell the bought put for a total credit.

    InvestorsObserver analysts usually look for bear-put debit spread trades that have sold puts 10% or more in-the-money, so that our positions make a profit if the underlying stock falls, stays flat or even rises by a little. Trades with this amount of protection often target returns of 5-10% in just two months for annualized returns (for comparison purposes only of 30-60%.

    A similar type of trade with a bullish bias is known as a bull-call debit spread.

  • Bull-Put Credit SpreadTop▴

    This is one of the more common multi-leg trades that InvestorsObserver analysts utilize. Spread trades are positions where we buy one option and then sell at least one other option. Credit spreads receive credit up front because the price of the sold option is greater than the price of the bought option. Bull-put means that this strategy should be used with a bullish opinion of the underlying stock and that this trade utilizes put options.

    In a bull-put credit spread, the investor sells a put at one strike price and purchases another put at a lower strike price in the same month on the same underlying issue for a net credit on the trade. Typically, both of these put options will be out-of-the-money when the position is established.

    The maximum amount at risk for a credit spread is defined by the difference between the two strike prices minus the original credit. Depending on your account type and trading level, your broker may require that these trades be cash-secured or they may allow you to put up an existing equity position or use margin as collateral. For more details about your situation, please contact your broker directly.

    If the stock is above the higher strike price at expiration, then both options will expire worthless, the investor takes no further action, and the credit from the trade becomes a bankable profit. That initial credit is the maximum profit on this type of trade.

    The worst case for a bull-put credit spread is if the underlying stock finishes at expiration below the lower put’s strike price. In this case,the sold put will automatically be assigned, forcing us to buy the underlying stock at that strike price even though the market price for the stock is lower. The bought put will also automatically exercise, letting us sell the stock for the lower strike price. The end result is that the investor will have a net debit equal to the difference between strike prices.

    In between these two cases is a middle path that happens only when the underlying stock finishes at expiration between the strike prices of the two puts. In this case, the sold put is assigned, but the bought put expires worthless. This results in a stock position that requires a boatload of cash to keep or much more likely we will need to sell the stock at market prices as soon as possible. The market price will almost certainly be lower than what we bought it for.

    Our analysts strive to exit trades that might be in trouble before expiration passes and forces our hand. To exit a bull-put spread, buy back the sold put and sell the bought puts for a total debit.

    A similarly-structured trade for an underlying stock with a bearish outlook is a bear-call credit spread.

    InvestorsObserver analysts usually look for bull-put credit spread trades where the sold put is 10% or more out-of-the-money, so that our positions make a profit if the underlying stock rises, stays flat or even drops by a little. Trades with this amount of protection often target returns of 5-10% in just two months for annualized returns (for comparison purposes only of 30-60%.

    You can find examples of bull-put credit spread trades in the InvestorsObserver MarketSmart Perfect Trade portfolio as well as the InvestorsKeyhole service.

  • Bear-Call Credit SpreadTop▴

    Bear-call credit spreads are very similar to bull-put credit spreads, except that these trades are appropriate for an underlying stock with a bearish outlook. In a bear-call credit spread, you sell a call at one strike price, and purchase another call on the same stock with the same expiration at a higher strike price for a net credit on the trade. Usually, both of these put options will be out-of-the-money when the position is established.

    Depending on your account type and trading level, your broker may require that these trades be cash-secured or they may allow you to put up an existing equity position or margin as collateral. For more details about your situation, please contact your broker directly.

    If the stock is below the lower strike price at expiration, then both options will expire worthless, the investor takes no further action, and the credit from the trade becomes bankable profit. That initial credit is the maximum profit on this type of trade.

    The worst case for a bear-call credit spread is if the underlying stock finishes at expiration above the higher call’s strike price. In this case, the sold call will automatically be assigned, forcing us to sell the underlying stock at that strike price even though the market price for the stock is higher. The bought call will also automatically exercise, letting us buy the stock for the higher strike price. The end result is that the investor will have a net debit equal to the difference between strike prices.

    In between these two cases is a middle path that happens only when the underlying stock finishes at expiration between the strike prices of the two calls. In this case, the sold call is assigned, but the bought call expires worthless. This results in a short stock position that will need to be covered by purchasing the stock at market prices as soon as possible.

    Our analysts strive to exit trades that might be in trouble before expiration passes and forces our hand. To exit a bear-call spread, buy back the sold call and sell the bought call for a total debit.

    A similarly-structured trade for an underlying stock with a bullish outlook is a bull-put credit spread.

    InvestorsObserver analysts usually look for bear-call credit spread trades where the sold call is 10% or more out-of-the-money, so that our positions make a profit if the underlying stock falls, stays flat or even rises by a little. Trades with this amount of protection often target returns of 5-10% in just two months for annualized returns (for comparison purposes only of 30-60%.

    Our analysts do not typically use bear-call spreads, but you can find examples of these trades in the InvestorsKeyhole service and occasionally in our Analyst Insight weekly articles.

  • Diagonal Calendar Spread TradesTop▴

    A diagonal calendar spread trade has two option legs on the same underlying stock (or ETF) in different expiration months and at different strikes. Investors Observer analysts employ diagonal calendar spread trades in situations similar to those that are right for covered calls, that is when we are mildly bullish on the underlying stock. The way we set up our trades, they are very similar to covered calls, but require much less capital per share and therefore have the potential for higher profits. In fact, sometimes we call these trades simulated covered calls.

    Instead of buying the stock and selling a call, our analysts identify positions where we can purchase a long-term call in place of the stock holdings. Sometimes these long-term calls are known as LEAPS, which stands for Long-Term Equity AnticiPation Security. Just like the stock in a covered call, we buy these LEAPS to cover our sold call in case we are assigned and need to deliver stock. Because of that, we need to purchase one LEAPS contract for every call contract we sell.

    These trades are debit spreads because they cost money to establish the position. Our total risk is limited to the amount paid to open the trade. For a diagonal trade, our analysts identify positions where we pay less than the difference between the sold strike and bought strike prices. That way, if our sold calls are assigned, which is our final goal, then we can exercise our bought call and be assured of a profit.

    Diagonal trades are typically profitable any time the sold call is in-the-money. Remember that means if the underlying stock is above the strike price. If our sold calls expire in-the-money, we are assured of making a profit by exercising our bought calls. However, in many cases, there will be an opportunity for our analysts to close the trade early by buying back our sold call and selling our bought call at the same time. This will unwind the position completely and as long as we get a larger credit than our original debit, we will make a profit on the trade.

    If the sold option expires out-of-the-money, we will still hold our long-term bought calls. At this point, we may choose to sell another call to bring in additional credit against the bought LEAPS, or we may be able to exit the long-term position for a profit, by capitalizing on the remaining time value.

    Unlike a covered call, since our covering position is an option itself, that means it has an expiration date of its own. Because of this, there is a little extra inherent risk for diagonal trades compared to covered calls. With a covered call, if the stock hits a rough patch, we can hold it indefinitely and wait for a comeback. However, if our LEAPS expire worthless, that is the end of the diagonal position and we could take a total loss.

    One more dissimilarity between covered calls and diagonal spreads is the dividend situation. Since we do not hold the underlying stock, we are not entitled to a dividend. In some cases, we may even be assigned on our sold calls just before a stock’s ex-dividend date. In these cases, the potential exists for us to actually owe the dividend payment if we are short the stock when it goes ex-dividend. This is one of the things that our analysts watch carefully and work hard to avoid, usually by exiting the position before the ex-dividend date passes.

    InvestorsObserver analysts look for diagonal trades that have an initial debit of about $15 per share or less and will make a 5% return if assigned in two months. If the trade ends up open for a longer period, the target returns usually get larger.

    The 3-Way Managed Risk, Conservative Covered Call Plus, and ETF Covered Call Plus portfolios feature diagonal calendar spreads. For example calendar spread trades, see the articles for those portfolios. Other services that feature diagonal calendar spreads include Option Reports and Diagonal Calendar Spread Enhanced Option Chains.

  • InvestorsObserver Services

    The Best Service for YouTop▴

    InvestorsObserver has crafted three unique levels of service, each designed specificly for an individual investor at a different stage of development as an options trader.

    InvestorsObserver Elite is designed for the advanced options trader, who wants to take control of his or her financial future. Elite members get access to the very same options research tools our analysts use when trading. These tools will help guide expert investors to the trades that best meet their risk and reward requirements. Elite members are entitled to every service we publish for $149 per month.

  • Members have at their fingertips extensive resources that introduce covered call trading, which is usually the first hedged option strategy an investor will embrace. Several of our products at this level provide guidance on how to structure covered calls, some covered calls trade ideas that caught our analysts’eyes, and finally tools that show how to choose the ideal covered call for almost any major stock.

    Every morning, we produce a Morning Update, which has all the major news investors will need for the coming day. Over the weekend, we examine five stocks that have the potential to move in the upcoming week in our Stocks to Watch feature, and on Monday, we publish four Analyst Insight articles which investigate four angles on a common theme. Each of these features is available to anyone who visits InvestorsObserver—click on a service in the list below to learn more about each.

  • InvestorsObserver EliteTop▴

    InvestorsObserver Elite membership is designed for options experts who are looking for options research and tools that will allow them to trade to their full abilities. Once you’re familiar with our strategies, we want to empower you to trade options and be able to balance risk and reward to your individual needs.

    Several tools included with Elite membership take our strategies and provide expanded research and methods to find trades that match your preferred style. Many of these research tools are used by our analysts to select trade ideas each day. Also included for Elite members are the most advanced of our model portfolios and an expanded InvestorsKeyhole intraday service.

    For $149 a month, Elite members will have access to the following services. Click on a service to learn more.

  • Managing Your Account PageTop▴

    At the top right of any page, you will find the My Account link. On the My Account page, members can update their account profile, including email address, password, credit card billing information. From this page you can upgrade your service to a higher level and manage which email updates you receive in your inbox. If you need assistance with your account, feel free to call our support team at 1-800-698-9101 or send an email to support@investorsobserver.com.

  • Don't Miss Your TradesTop▴

    Sometimes, our email alerts are mistakenly marked as spam and end up in your junk email folder or your spam folder. To avoid this, be sure to add Support@InvestorsObserver.com to your email address book.

    View complete step-by-step instructions for all major email providers here.

  • In-Depth Analysis

    Morning UpdateTop▴

    Morning Update

    Each trading day before the market opens, our analysts take a look at what stocks are moving, what is making news overnight and overseas, and what investors should be keeping an eye on throughout the upcoming trading session. We assemble all this information together in our Morning Update, so members have one handy place to find what to expect and what to watch for that day.

    The Morning Update includes a list of companies expected to report earnings that day, upcoming major market events, and a market overview that included foreign markets and commodities coverage.

    Since our focus is on options strategies, our analysts identify three covered call trade ideas that caught our eye for the upcoming day. These are written in simple language so that beginning options investors can understand the position and its risks. This service provides initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

    Lastly, each Morning Update includes an insightful or humorous or Quote of the Day, which might be about monetary policy, politics, corporate earnings or outlook, or finance in general.

    The Morning Update is full of useful information for all levels investors. InvestorsObserver members can expect to receive the Morning Update delivered to their email inbox each morning before 9:00 a.m. Eastern Time. If you’d prefer to opt out of this email, you can do so on the My Account page under Manage Email Subscriptions. The entire Morning Update will still be available in the Analysis section of our website.

  • Stocks to WatchTop▴

    Stocks to Watch

    Each Friday, our analysts scour the marketplace, looking for the most important stocks investors should be aware of in the upcoming week. The Stocks to Watch report highlights five stocks each week that should be in the spotlight. The company might be expected to report earnings, launch a new product, or it might have an FDA decision pending.

    After a brief outline of what’s happening with the company, we share our research and expectations, brief technical analysis, charts, analyst commentary, and a variety of trade ideas. For each of the five stocks each week, we provide four specific trade ideas for all kinds of investors. We detail stock-only entry and exit points, an aggressive hedged option trade, a more conservative covered call and a speculative options trade.

    Our trade suggestions should serve as initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

  • Analyst InsightTop▴

    Analyst Insight

    Once a week, four of our analysts focus on one central theme and share their analysis and commentary related to a specific market viewpoint. These articles serve as our chance to go a little deeper into one topic and provide a longer, in-depth opinion to go along with our usual options strategies. Each analyst will usually have a style of investing that they cover as follows:

    • Julian Close - Hedged Options Strategies
    • Bobby Raines - Aggressive Trading Strategies
    • Kevin Kersten - Conservative Strategies
    • Michael Fowlkes - ETF Option Trading Strategies

    Some of the topics we cover in our Analyst Insight articles include current events, market trends, and whispered rumors. When earnings season rolls around each quarter, we will usually look at companies expected to report results soon.

    Any trade ideas provided in the analyst insight articles should serve as initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to participate in any of these trades from our reports, you will need to monitor and exit the positions as you see fit.

  • Research Tools

    Stock ResearcherTop▴

    Stock Researcher

    The Stock Researcher is an area where our options experts have assembled links to the best resources from all around the Internet in one place. Our analysts specialize in options strategies and use the research already done by others for basic stock information.

    Everything in the Stock Researcher is freely available on the web and we can take no credit for the information, but we did put all those links in one place, so our members don’t have to bookmark so many different websites just to do their stock research. By the same token, we can’t vouch for the accuracy of the information on other websites, but we try to only include links to credible sources of information.

    Simply enter a ticker symbol, and the Stock Researcher will automatically create links that will take you to all the information you could possibly want, organized in easy-to-navigate categories. If you want to see research for a different company, choose a different ticker symbol and click the “Get Links”button again.

    The following chart outlines all the information you can find with the Stock Researcher:

    Company Details

    • Company Profile:Yahoo Finance
    • Current Price &Chart:Market Watch
    • News:Zacks
    • Industry Comparison:Yahoo Finance

    Ownership Information

    • Major Shareholders:Yahoo Finance
    • Insider Activity:MSN Money

    Financial Details

    • Income Statement:Zacks
    • Balance Sheet:Zacks
    • Cash Flow Statement:Zacks
    • Earnings &Dividends:Earnings.com

    Analyst Coverage

    • Analyst Estimates:Zacks
    • Broker Recommendations:AOL Money &Finance
  • Option ReportsTop▴

    Option Reports

    InvestorsObserver Option Reports are in-depth reports created every day to reflect the most up-to-date trading information for hundreds of large optionable stocks. These reports are provided as PDF files which open in a new browser window by default. If you have a pop-up blocker installed in your Internet browser, you will probably need to disable it temporarily or allow-pop-ups from InvestorsObserver in order to view a report.

    Our Options Reports are the place to look if you have a specific stock in mind but our analysts have not covered it in our portfolios or other products recently. Since the Option Reports are created every day, there will usually be a fresh report for any major stock, as long as a reasonable covered call trade exists for that stock.

    To see the Option Report for any individual stock, type the ticker symbol into the search box at the top of the page and click “Get Report”. This will launch up a pop-up window with the Options Report for your requested stock. We typically cover all mid- and large-cap stocks that have options available.

    If we do not have a report for the ticker you chose, it could be for one of a few reasons. First, check to make sure you entered the correct symbol. Otherwise it is possible that we could not find a trade that met our minimum requirements or the stock you chose is too small or thinly-traded for us to cover.

    Each Options Report features a covered call and will usually also include a diagonal calendar spread trade, as well as information about the stock and the potential risks and returns for those two specific trades. At the top of the Options Report, we recap relevant stock information, then we get straight to the meat of the report.

    There are typically two trades described: the first is what we have identified as the optimal covered call and the second is a diagonal spread that uses the same sold call as the covered call, but substitutes buying a call for holding the underlying stock. In some cases there is no diagonal spread that makes sense, and in that event, we will not provide a second trade. All the information for both trades is displayed in a table on the left side of the report, but also explained in the Options Strategy Summary.

    On the right side of the report is a description of the risks of each trade and our Key Rating, which is a simplified relative measure of how risky that particular trade is. Five Keys is the lowest relative risk, while one Key is the highest relative risk.

    There are two profit and loss charts that depict the expected profit or loss at expiration for holding the stock alone, or placing the covered call or diagonal calendar spread trades in the report. The left chart is the profit or loss in actual dollars, while the right chart is in terms of a percent return.

    Elite members have unlimited access to these reports, plus the use of the Option Report Screener tool to search our entire inventory of reports.

    Our Options Reports should serve as initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

  • Option Report Screener &Predefined ListsTop▴

    Option Reports Screener

    Elite members, who can read an unlimited number of Options Reports, also have two tools they can use to search or browse for Option Report trades. The Option Report Screener allows users to personalize a search by almost any criteria. In addition to screening by covered call or diagonal calendar trade and S&P STARS ranking, you can specify upper or lower limits for each of the following fields:

    • Net Debit
    • Downside Protection %
    • Assigned Return Rate
    • Annualized Return Rate
    • % In-the-money
    • Key Rating
    • Number of Days until Expiration
    • Dividend Rate

    After you enter your screener requirements, click the View Results button and a table of trades meeting your criteria will be displayed. This table has most of the relevant trade information. To see the entire Options Reportyou can click on any stock symbol, which will open the PDF report in a new window.

    To browse several sets of Options Reports, click on the Predefined Lists tab. We have provided several lists that we think investors might want to browse by, including S&P STARS ranking, Dow stocks, or high dividend-yield stocks. Choose any list and all the Option Reports in that list will appear in a table below. Again, the relevant trade information will be in the table but to see the entire Options Report you can click on any stock symbol.

    Elite members can also create their own watchlist of stocks that they want to keep an eye on. You can create and modify this list by using the My Watchlist tool on the Predefined Lists tab. That way if you have a group of stocks you follow, you can quickly see the Options Reporttrades for all of them in one table.

  • InvestorsKeyholeTop▴

    Our InvestorsKeyhole service provides more advanced and timely options trading ideas during each trading day to Elite Members based upon market news and our observations. In a typical day, there will be four trade ideas that are usually bull-put credit spread trades and occasionally bear-call credit spread trades.

    For these trades, our analysts look for credit spreads that will make at least a 4% assigned return and a 10% annualized return (for comparison purposes only). These trades are always hedged so that they can be profitable even if we don’t pick the stock’s outlook perfectly and aim for minimum profits of $200 if 10 contracts are executed.

    The InvestorsKeyhole page under the Analysis tab will always have the latest trades as soon as they are posted or you can set your email subscriptions in the My Account page to you receive the day’s InvestorsKeyholestories in an email as soon as they are posted.

    Around 8:30 a.m. Eastern Time, our writers post the day’s Morning News Leaders update. We identify stocks that are heading higher and lower in pre-market trading. We usually choose one of the positive leaders and suggest a bull-put credit spread for that stock. On a rare occasion, we will pick out a bear-call credit spread on a stock that is lower in the pre-market. The Morning News report is available to Elite members.

    Between 11:00 a.m. and Noon Eastern Time, our writers post the day’s Analyst Upgrades and Downgrades update. The analyst who writes this report keeps an eye on the day’s analyst coverage, then chooses a bull-put credit spread on a stock that was upgraded, reiterated, or initiated with positive coverage that morning. Rarely, we will pick out a bear-call credit spread on a stock that received negative coverage. The Upgrades and Downgrades report is available to all Elite members.

    Shortly after Noon Eastern, we assemble an Unusual Options Activity update. Options traders are in the more advanced segment of the markets, so when there is a spike in options activity for a specific stock, it can be used to identify investor sentiment. Our analysts look at stocks with unusual options activity and provide a credit spread trade idea for that stock which fits the market currents. This update often utilizes reporting and data from our partner Schaeffer’s Investment Research, but the trade ideas come from InvestorsObserver analysts. The Unusual Options Activity report is available to Elite members.

    Between 2:00 - 3:00 p.m., our writers post the day’s Insider Activity update. This report will highlight recent (legal) insider activity for a stock, then choose a trade that fits with how insiders are behaving. If a company’s insiders are buying shares, it is usually a pretty positive sign for the stock, while if they are selling it often means they think the stock isn’t likely to shoot higher. Insiders get a bad rap because a few bad apples don’t follow the rules, but our report focuses on completely above-board insider buying or selling, which is duly reported to the SEC. The Insider Activity report is available to Elite members.

    The InvestorsKeyhole reports should serve as initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

  • Income MaximizerTop▴

    Option Reports

    The Income Maximizer is an elegant tool that can help Elite members squeeze more cash out of their existing holdings by selling out-of-the-money covered calls. The goal of the Income Maximizer is to sell calls that will expire worthless in a few months time. If that happens, then you just made some extra cash while giving up nothing. If the underlying stock rises too much, you could miss out on some of the upside, but the options identified by the Income Maximizer should be far enough above the current stock price that you are happy with a large return even if you are assigned. We keep this possibility in mind when picking an option to sell because even the best-laid plans sometimes don’t turn out the way you want. As with any other covered call, we do not suggest placing a covered call on a stock that you wouldn’t want to own.

    To use the Income Maximizer, first set up an account. Our software will remember your accounts when you return so that you don’t need to enter information over again. You may want to divide your stocks into separate accounts or keep everything in one long list. This is just to help you organize the symbols you are looking for information on. Choose an account then click “View.”This brings up a list of the stocks in that account. You can add or remove stocks, and when you’re ready to look at trades, click “Generate Report.”

    The report shows our choices for the best calls to sell for each stock with the goal of not being assigned (provided that options are available and there is a reasonable trade available). For every hundred shares of stock you own, you can sell one call contract to create a covered-call position.

    The best part about the Income Maximizer is that both outcomes are good. Either you get assigned and lose out on some upside but still make a handsome return or the option expires worthless and you picked up some free money compared to just holding the stock. Plus, if the options expire worthless, you are right back where you started, so you can come back to the Income Maximizer and begin the process over again with a new sold option.

    The Income Maximizer results should serve as initial trade ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

  • Covered Call Enhanced Options ChainTop▴

    Enhanced Options Chain

    The Covered Call Enhanced Options provides a lot of data all at once, but for an investor looking to trade covered calls, it can be an invaluable resource.

    Our Covered Call Enhanced Option Chains provide a complete overview of every available covered call trade for a particular stock. In addition, we select what we think is the ideal trade for each expiration month and the optimal trade out of all the months combined.

    All the information an options trader might need is at your fingertips and organized by trade expiration month –trade details, target returns, downside protection, and even our proprietary risk analysis.

    Enter any optionable stock or ETF ticker into the Search field to see the Covered Call Enhanced Option Chain for that issue. You will see all the possible covered call trades on that stock, organized by expiration month from the shortest to longest trades.

    All the important calculations are provided for each potential trade and while we highlight the trades we like best, that doesn’t mean they are the right ones for any individual investor. Dig through our enhanced chains until you find the combination of risk, return, downside protection, upside potential, and time until expiration that fits your profile best.

    The Key Rating indicates the risk level for each individual trade. A higher number of keys means a safer trade. If there are no keys, the trade is either very risky, or has a negative expected return.

    For each month, we have highlighted what we think are the best trades. Our very top pick is highlighted in dark green, while the middle shades of green indicates the best aggressive trade and the lightest green are our preferred conservative trades. We give our opinion on the trades in each expiring month, indicated in shades of blue similar to the green.

    In the above image, the Optimal Trade for Exxon Mobile (XOM) is the October $85 covered call, which returns 3.42% and carries 4.81% downside protection. More aggressive traders might prefer the $87.50 covered call, which returns 4.73% and has 3.23% downside protection. A more conservative option is the $82.50 covered call, which boosts the downside protection to 4.81%, and has an assigned return of 2.37%.

    The below image shows some preferred trades for Alcoa (AA). Our enhanced chains generally find preferred trades in most months, while optimal trades will be limited to only one month. In the example below, the October $9 covered call is the preferred trade, while more aggressive traders may prefer the $10 trade and a more conservative option in October would be at the $8 level.

    All the prices shown in the Enhanced Chains are from the close of the previous trading day, and all the calculations are based on opening an entirely new position today. Your potential returns and protection amounts will vary depending on your cost basis. The Enhanced Chain trades should serve as initial ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

    For a full explanation of the table columns in this service, see the Enhanced Options Chains Glossary

  • Diagonal Calendar Spread Enhanced Options ChainTop▴

    Enhanced Options Chain

    The Diagonal Calendar Spread Options Chain tool is similar to the Covered Call Enhanced Options Chain, except that the trade ideas are all diagonal calendar spreads instead of covered calls. What this ends up meaning in practice is that there are even more potential trades to choose from and even more data that you should be glad our computers are crunching so you don’t have to.

    The Diagonal Calendar Spread Enhanced Option Chains provide a complete overview of every available covered call trade for a particular stock. In addition, we select what we think is the ideal trade for each sold call’s expiration month and the optimal trade out of all the months combined.

    All the information an options trader might need is at your fingertips and organized into individual tables by the sold call’s expiration month. Trade details, target returns, downside protection, and even our proprietary risk analysis are right in front of you.

    Enter any optionable stock or ETF ticker into the Search field to see the Diagonal Calendar Spread Enhanced Option Chain for that equity. You will get a huge list of possible diagonal trades on that stock, organized by the expiration month of the sold call from the shortest to longest duration.

    All the important calculations are provided for each potential trade and while we highlight the trades we like best, that doesn’t mean they are the right ones for any individual investor. Dig through our enhanced chains until you find the combination of risk, return, downside protection, upside potential, and time until expiration that fits your profile best.

    The Key Rating indicates the risk level for each individual trade. A higher number of keys means a safer trade. If there are no keys, the trade is either very risky, or has a negative expected return.

    For each month, we have highlighted what we think are the best trades. Our very top pick is highlighted in dark green, while the middle shades of green indicates the best aggressive trade and the lightest green is our preferred conservative trades. We give our opinion on the trades in each expiring month, indicated in shades of blue similar to the green.

    All the prices shown in the Enhanced Chains are from the close of the previous trading day, and all the calculations are based on opening an entirely new position today. Your return and protection amounts will vary depending on your cost basis. The Enhanced Chain trades should serve as initial ideas only, which means there are no follow-up or closing instructions. If you choose to make the trades in our reports, you will need to monitor and exit the positions on your own.

    For a full explanation of the data in the tables, see the Enhanced Options Chains Glossary

  • Research and Commentary ArchiveTop▴

    To see all InvestorsObserver coverage of any stock or ETF, enter a ticker symbol into the Get Research box at the top of any page on our site. This page will provide the typical stock quote, a link to the Option Report for that stock, the Enhanced Chains, as well as any articles or trade ideas where our analysts covered that stock. You can also see if the stock has been covered in any of our model portfolios.

  • Portfolios

    IntroductionTop▴

    InvestorsObserver’s flagship content is our lineup of model portfolios. Portfolio trades are much more in-depth than some of the other content we produce or tools we provide. Not only do our analysts pick new positions every month, but they provide commentary and updates for the entire lifespan of these positions explaining every step we take along the way. Finally, we post closing trades if necessary and provide a final tally of how profitable each trade turned out.

    The five portfolio services allow members to follow along and learn how our analysts use different options strategies. If you like what you see, we also make it easy for members to trade alongside our experts in their own accounts. The various portfolios focus on different strategies and investing styles, so that our members can explore various options strategies and find the right approach for themselves. Some are more conservative, some use ETFs, some use time to our advantage, some are short-term, and some are more aggressive.

    Each month, InvestorsObserver analysts post a new set of trades in each of our portfolio services and create a new month’s page for that portfolio. Our portfolio trades are organized by when they are established. A position that opens in the January 2012 portfolio month will always remain in that month, no matter when it actually closes.

    Portfolio pages have three tabs: the trade summary, which is a plain English explanation of each trade order;the trade table, which has all the relevant numbers and calculations for each trade;and the analyst notes tab, where our experts will occasionally post updates to the portfolio positions. We will explain why we picked the trades, we will share our thoughts and observations on the positions, including any news that could affect the underlying stocks, and finally explain how we would close out the trade in the end.

    Each one of our portfolios has a history that shows every move we have ever made for every position in that service. We include our archive of trades so that an investor who is thinking about following along with a service can get a clear picture of what to expect. There are some months with losses and others with big gains, but everything is on the table because we believe in our services.

    Read about each InvestorsObserver portfolio below, and follow along with them in real time to learn how we achieve our returns.

  • Dividends Plus PortfolioTop▴

    The Dividends Plus portfolio is designed specifically to teach beginning options investors how to make simple options trades for steady profits, though it is a great model for options investors at all levels. Our strategy is to focus on stocks with strong fundamentals and healthy dividends, then select three strong stocks for near-the-money covered calls.

    Strategy Details
    We select three dividend-paying stocks and then sell four-to-six month calls against these stocks. Our aim is to generate a 10% to 20% annualized return (for comparison purposes only), including dividends. We also target downside protection of at least 3% and sometimes as high as 15-20%. Each trade in this portfolio assumes 100 shares of the underlying stock and one option contract.

    Ideal Result
    In the best case-scenario, our calls expire in-the-money, then we are assigned and deliver the stock at expiration. There is no further action required to close the position and based on the way we set up the trades, we book our full target profit. Plus, all along the stock should be paying dividends, which also go right into our account.

    Other Potential Results
    If the stock is below the strike price of our sold call at expiration, then the call will expire worthless and disappear, but we will keep the stock. At this point, our analysts have a few choices. We could sell the stock at market price, fully closing the position. If the stock is above our break-even point, then we will make a profit. The other plan of action is to hold onto the stock, keep collecting the dividends and possibly sell another call, extending the trade, but also raising our target profit.

    Investors who use covered calls have the potential to miss out on some upside if the stock rises too far above the strike price of our sold call. Compared to simply buying a stock, the strategy we employ in the Dividends Plus portfolio has less risk but also less upside potential.

    Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The stock drops below our break-even price.
    • The company declares that it will reduce or eliminate its dividend. If this happens, we will probably exit our position, since it no longer fits our strategy.
    • The stock can be called away at any time, which may happen just before a dividend payment. You will still make the target return, but not receive the dividend.
    • The stock could drastically increase in price. Your return will be limited to the strike price on the sold option.

    The maximum loss for a covered call trade is the entire amount paid for the position when it was initially established. We will make every effort to manage losses if a stock seems to be going against our position, but there is always the risk of losing the entire investment in this type of trade.

    Dividends Plus Portfolio Pages
    Because there are usually many trades open at once, we have separated trades by month on the Dividends Plus portfolio page. This organizes the trades by when they were initiated and does not mean that the positions closed in that month. By choosing a month and year from the drop-down menu, you can look back at the entire history of the portfolio. In each month’s page, there are three sections. Trade Summaries, Trade Table, and Analyst Notes.

    Trade Summaries are a list of every action our analysts have taken for that month’s positions. If you wanted to trade along with our experts, this is the place to find just the facts about what actions we are taking.

    The Trade Table goes into more detail than the summary. Here you can see the price of the underlying stock at each step along the way, our target profits and returns, and annualized returns (for comparison purposes only). We will send an email alert to all members any time we take action and place a trade in the Dividends Plus trade table. If you wish to unsubscribe from these alerts, you can do so on the My Account page.

    The Analyst Notes section is where you will find all of our thoughts about the trades in that month’s portfolio. We will have an expanded explanation of why we chose each trade, how they are progressing, and what actions we might take in the near future. Check back regularly for updates, because we will not send an email alert if we update an Analyst Note but there is no action to take.

  • Conservative Covered Call Plus PortfolioTop▴

    The Conservative Covered Call Plus portfolio is a great step for options traders who might be comfortable with covered call trading but are interested in exploring other more complex options strategies. Our analysts try to stick to unexciting, solid companies that have been profitable for a long time and should continue to do so for the foreseeable future. Because of the conservative nature of the strategies we use, stocks with high upside are no help to us and often bring along the high risks we are attempting to avoid at the same time.

    This service identifies two conservative covered calls every month, then also picks a companion diagonal spread for those same two stocks. The diagonal calendar spreads buy one call and sell another instead of buying the stock and selling a call. These two strategies are very similar and sometimes we will refer to the diagonal spread as a “simulated covered call”. It has a little more risk, but will often produce bigger profits on an annualized basis (for comparison purposes). Our analysts post these trades side-by-side so that members can see the similarities, appreciate the differences, and follow along with whichever side suits them. It is generally not a good idea to double up and place both the covered call and the hedged diagonal trade on the same stock.

    Covered Call Strategy Details
    Our analysts select in-the-money covered calls that sell medium-term calls with a duration of 4-6 months. Our aim is to generate a 10% to 20% annualized return (for comparison purposes). Each trade in this portfolio assumes 100 shares of the underlying stock and one option contract. The strike price of these sold calls for the covered call trades is often lower than the strike price for corresponding sold call in the diagonal trade, which is one of the reasons this strategy has slightly less risk.

    Diagonal Spread Strategy Details
    Our analysts create simulated covered calls by selling a short-term call that will expire in roughly two months while simultaneously buying a long-term call at a lower strike price that will expire in 6-18 months. The goal for these trades is to generate a 20%+ annualized return (for comparison purposes). Each trade in this portfolio assumes 10 options contract on each side of the trade. The strike price of these sold calls for the diagonal trades is usually higher than the strike price for corresponding sold call in the covered call, which is one of the reasons this strategy has the slightly higher risk of the two.

    Covered Call Ideal Result
    In the best case-scenario, our calls expire in-the-money, then we are assigned and deliver the stock at expiration. There is no further action required to close the position and based on the way we set up the trades, there is no way we can lose. If the stock has a dividend, we will collect those as long as we hold the stock position.

    Diagonal Spread Ideal Result
    In the best case-scenario, our sold calls are in-the-money during the week before expiration. If that is true, then our analysts will often be able to exit the position for a larger profit than our original target. To do this, we will buy back our sold calls and sell our bought long-term call for a total credit. When we exit these trades early, the credit will almost always be larger than the difference between the two strike prices of our options.

    If there is no reasonable exit price, but the stock is still above our sold call’s strike price, then automatically we will be assigned on our sold call at expiration. If we then exercise the bought call, we are assured of a credit equal to the difference between strike prices.

    Covered Call Other Potential Results
    If the stock is below the strike price of our sold call at expiration, then the call will expire worthless and disappear, but we will keep the stock. At this point, our analysts have a few choices. Typically we will hold onto the stock, sell another call to lower our amount at risk (a follow-on trade), and keep collecting any dividends. Potentially, a covered call position could go on forever if the calls never expire in-the-money.

    The other plan of action would be to sell the stock at market price and close the position fully. If the stock is above our break-even point, we can still make a profit this way. If the stock has had some material bad news and we don’t think it is likely to recover, then we will probably sell the stock and take our losses.

    Diagonal Spread Other Potential Results
    If the underlying stock is below our sold call’s strike price at expiration, then that call will expire worthless. After expiration, just like with a covered call, our analysts will either sell a follow-on trade or sell the long-term call to close out the whole position. One of the benefits of a diagonal spread is that the cost basis per share is relatively low, which means that each follow-on trade earns back a larger percentage of our initial outlay. Some of the biggest returns in this portfolio have come when our analysts were able to sell several sets of following trades. However, there is one major downside, which is that our bought call will expire at some point.

    Investors who use covered calls have the potential to miss out on some upside if the stock rises too much above the strike price of our sold call. Compared to simply buying a stock, a covered call strategy has less risk but also has less upside potential. The diagonal spread has a similar capped upside, but because of the lower costs per share, the return percentage can be greater than with a covered call. However, the diagonal trade has a defined end date, which is not true of covered calls or just buying the stock.

    Covered Call Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The stock drops below our break-even price.
    • The stock could drastically increase in price. Our return will be limited to the strike price on the sold option.
    • The stock can be called away at any time and may happen just before a dividend payment. We will still make the target return, but not receive the dividend.

    Diagonal Spread Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The stock drops and does not recover before our bought option expires.
    • The stock could drastically increase in price. Our return will be limited to the target return listed in the trade table.
    • Liquidity –The options market is not always as liquid as the stock market in general. If the active buyers and sellers of a specific option “dry up”we may not be able to close a position at the price we think is correct.
    • Option pricing near expiration –All the calculations in the portfolio tables are based on the assumption that the options will be fairly priced. Due to supply and demand imbalances, there is no guarantee that these options will be priced at levels exactly related to the underlying stock price.

    The maximum loss for a covered call trade is the entire amount paid for the position when it was initially established. The maximum loss for the diagonal trades is limited to the amount you paid for the debit spread when it was initially established. We will make every effort to manage losses if a stock seems to be going against our position, but there is always the risk of losing the entire investment in this type of trade.

    Conservative Covered Call Plus Portfolio Pages
    Because there are usually many trades open at once, on the Conservative Covered Call Plus portfolio page we have seperated trades by month. This label is a way to organize the trades by when they were initiated and does not mean that the positions closed in that month. By choosing a month and year from the drop-down menu, you can look back at the entire history of the portfolio. In each month’s page, there are two tabs for covered calls or diagonal spreads then three sections for each type of trade: Trade Summaries, Trade Table, and Analyst Notes.

    Trade Summaries are a list of every action our analysts have taken for that month’s postiions. If you wanted to trade along with our experts, this is the place to find just the facts about what actions we are taking.

    The Trade Table goes into more detail than the summary. Here you can see the price of the underlying stock at each step along the way, our target profits and returns, and annualized returns (for comparison purposes only). We will send an email alert to all Elite members any time we take action and place a trade in the Conservative Coverd Call Plus trade table. If you wish to unsubscribe from these alerts, you can do so on the My Account page

    The Analyst Notes section is where you will find all of our thoughts about the trades in that month’s portfolio. We will have an expanded explansation of why we chose each trade, how they are progressing, and what actions we might take in the near future. Check back regularly for updates, because we will not send an email alert if we update an Analyst Note but there is no action to take.

  • ETF Covered Call Plus PortfolioTop▴

    The ETF Covered Call Plus portfolio is very similar to the Conservative Covered Call Plus portfolio, but instead of covering steady companies, our analysts pick covered calls and diagonal spreads on optionable ETFs. This portfolio is best for options traders who might be comfortable with covered call trading but are interested in exploring other more complex options strategies. ETFs are generally ideal for this steady strategy because of their diversified nature. It is less likely that an ETF will make a large swing than an individual stock.

    This service identifies two conservative covered calls every month, then also picks a companion diagonal spread for those same two ETFs. The diagonal calendar spreads buy one call and sell another instead of buying the stock and selling a call. These two strategies are very similar and sometimes we will refer to the diagonal spread as a “simulated covered call”. It has a little more risk, but will often produce bigger profits on an annualized basis (for comparison purposes). Our analysts post these trades side-by-side so that members can see the similarities, appreciate the differences, and follow along with whichever side suits them. It is generally not a good idea to double up and place both the covered call and the hedged diagonal trade on the same ETF.

    Covered Call Strategy Details
    Our analysts select in-the-money covered calls that sell medium-term calls with a duration of 4-6 months. Our aim is to generate a 10% to 20% annualized return (for comparison purposes). Each trade in this portfolio assumes 100 shares of the underlying ETF and one option contract. The strike price of these sold calls for the covered call trades is often lower than the strike price for corresponding sold call in the diagonal trade, which is one of the reasons this strategy has slightly less risk.

    Diagonal Spread Strategy Details
    Our analysts create simulated covered calls by selling a short-term call that will expire in roughly two months while simultaneously buying a long-term call at a lower strike price that will expire in 6-18 months. The goal for these trades is to generate a 20%+ annualized return (for comparison purposes). Each trade in this portfolio assumes 10 options contract on each side of the trade. The strike price of these sold calls for the diagonal trades is usually higher than the strike price for corresponding sold call in the covered call, which is one of the reasons this strategy has the slightly higher risk of the two.

    Covered Call Ideal Result
    In the best case-scenario, our calls expire in-the-money, then we are assigned and deliver the ETF at expiration. There is no further action required to close the position and based on the way we set up the trades, there is no way we can lose. If the fund has a distribution, we will collect those as long as we hold the shares.

    Diagonal Spread Ideal Result
    In the best case-scenario, our sold calls are in-the-money during the week before expiration. If that is true, then our analysts will often be able to exit the position for a larger profit than our original target. To do this, we will buy back our sold calls and sell our bought long-term call for a total credit. When we exit these trades early, the credit will almost always be larger than the difference between the two strike prices of our options.

    If there is no reasonable exit price, but the ETF is still above our sold call’s strike price, then automatically we will be assigned on our sold call at expiration. If we then exercise the bought call, we are assured of a credit equal to the difference between strike prices.

    Covered Call Other Potential Results
    If the ETF is priced below the strike price of our sold call at expiration, then the call will expire worthless and disappear, but we will keep the shares. At this point, our analysts have a few choices. Typically we will hold onto our position and sell another call to lower our amount at risk (a follow-on trade). Potentially, a covered call position could go on forever if the calls never expire in-the-money.

    The other plan of action would be to sell the shares at market price and close the position fully. If the ETF is above our break-even point, we can still make a profit this way. If we don’t think the ETF is likely to recover, then we will probably sell the shares and take our losses.

    Diagonal Spread Other Potential Results
    If the underlying ETF is below our sold call’s strike price at expiration, then that call will expire worthless. After expiration, just like with a covered call, our analysts will either sell a follow-on trade or sell the long-term call to close out the whole position. One of the benefits of a diagonal spread is that the cost basis per share is relatively low, which means that each follow-on trade earns back a larger percentage of our initial outlay. Some of the biggest returns in this portfolio have come when our analysts were able to sell several sets of following trades. However, there is one major downside, which is that our bought call will expire at some point.

    Investors who use covered calls have the potential to miss out on some upside if the ETF rises too much above the strike price of our sold call. Compared to simply buying shares, a covered call strategy has less risk but also has less upside potential. The diagonal spread has a similar capped upside, but because of the lower costs per share, the return percentage can be greater than with a covered call. However, the diagonal trade has a defined end date, which is not true of coered calls or just buying the fund.

    Covered Call Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The ETF drops below our break-even price.
    • The ETF could drastically increase in price. Our return will be limited to the strike price on the sold option.
    • The ETF can be called away at any time and may happen just before a dividend payment. We will still make the target return, but not receive that dividend.

    Diagonal Spread Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The ETF drops and does not recover before our bought option expires.
    • The ETF could drastically increase in price. Our return will be limited to the target return listed in the trade table.
    • Liquidity –The options market is not always as liquid as the stock market in general. If the active buyers and sellers of a specific option “dry up”we may not be able to close a position at the price we think is correct.
    • Option pricing near expiration –All the calculations in the portfolio tables are based on the assumption that the options will be fairly priced. Due to supply and demand imbalances, there is no guarantee that these options will be priced at levels exactly related to the underlying equity’s price.

    The maximum loss for a covered call trade is the entire amount paid for the position when it was initially established. The maximum loss for the diagonal trades is limited to the amount you paid for the debit spread when it was initially established. We will make every effort to manage losses if a stock seems to be going against our position, but there is always the risk of losing the entire investment in this type of trade.

    ETF Covered Call Plus Portfolio Pages
    Because there are usually many trades open at once, on the ETF Covered Call Plus portfolio page we have seperated trades by month. This label is a way to organize the trades by when they were initiated and does not mean that the positions closed in that month. By choosing a month and year from the drop-down menu, you can look back at the entire history of the portfolio. In each month’s page, there are two tabs for covered calls or diagonal spreads then three sections for each type of trade: Trade Summaries, Trade Table, and Analyst Notes.

    Trade Summaries are a list of every action our analysts have taken for that month’s postiions. If you wanted to trade along with our experts, this is the place to find just the facts about what actions we are taking.

    The Trade Table goes into more detail than the summary. Here you can see the price of the underlying stock at each step along the way, our target profits and returns, and annualized returns (for comparison purposes only). We will send an email alert to all Elite members any time we take action and place a trade in the ETF Covered Call Plus trade table. If you wish to unsubscribe from these alerts, you can do so on the My Account page.

    The Analyst Notes section is where you will find all of our thoughts about the trades in that month’s portfolio. We will have an expanded explansation of why we chose each trade, how they are progressing, and what actions we might take in the near future. Check back regularly for updates, because we will not send an email alert if we update an Analyst Note but there is no action to take.

  • 3-Way Managed Risk PortfolioTop▴

    Trades in the 3-Way Managed Risk portfolio are designed to manage capital risk, stock price risk, and time risk, all while aiming for annualized returns (for comparison purposes only) of 20-50%. Our analysts pick diagonal calendar trades where we sell a short-term call and buy a Long-term Equity Appreciation Security (LEAPS) option between 6-18 months in the future.

    These trades manage risk three ways, as it says right in the name.

    1. We reduce capital risk when we LEAPS calls rather than stock shares to cover our sold call. This way, we pay significantly less per share that we control. If the stock collapses catastrophically, our losses are limited to this smaller amount.
    2. We limit stock price risk by selling call options to reduce our cost basis. Every time a sold call expires out-of-the-money, we get another chance to sell another call and protect ourselves further. The underlying stock can fall and we could still make a sizable profit.
    3. We limit our time risk by selling calls in shorter time frame than the LEAPS we buy. This way, if the stock drops after we establish our position we still have several months for it to recover before our trade closes.

    This service identifies three diagonal calendar spread trades every month, usually on stocks that have a history of solid earnings and steady performance. Since our upside is capped, we don’t necessarily want the high-flying, volatile growth stocks. High-dividend stocks are also not always a good idea because our strategy involves selling calls, which opens us up to sometimes being assigned just before the ex-dividend date.

    Strategy Details
    Our analysts create simulated covered calls by selling a short-term call that will expire in roughly two months while simultaneously buying a long-term call at a lower strike price that will expire in 6-18 months. The goal for these trades is to generate a 20%+ annualized return (for comparison purposes). Each trade in this portfolio assumes 10 options contract on each side of the trade.

    Ideal Result
    In the best case-scenario, our sold calls are in-the-money during the week before expiration. If that is true, then our analysts will often be able to exit the position for a larger profit than our original target. To do this, we will buy back our sold calls and sell our bought long-term call for a total credit. When we exit these trades early, the credit will almost always be larger than the difference between the two strike prices of our options.

    If there is no reasonable exit price, but the stock is still above our sold call’s strike price, then automatically we will be assigned on our sold call at expiration. If we then exercise the bought call, we are assured of a credit equal to the difference between strike prices.

    Other Potential Results
    If the underlying stock is below our sold call’s strike price at expiration, then that call will expire worthless. After expiration, just like with a covered call, our analysts will either sell a follow-on trade or sell the long-term call to close out the whole position. One of the benefits of a diagonal spread is that the cost basis per share is relatively low, which means that each follow-on trade earns back a larger percentage of our initial outlay. Some of the biggest returns in this portfolio have come when our analysts were able to sell several sets of following trades. However, there is one major downside, which is that our bought call will expire at some point.

    Investors who use diagonal spreads can miss out on a stock’s upside if that stock soars unexpectedly, but when our trades are established, we only choose positions where we will make an acceptable return even if we lose out on some upside.

    Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios.

    • The stock drops and does not recover before our bought option expires.
    • The stock could drastically increase in price. Our return will be limited to the target return listed in the trade table.
    • Liquidity –The options market is not always as liquid as the stock market in general. If the active buyers and sellers of a specific option “dry up”we may not be able to close a position at the price we think is correct.
    • Option pricing near expiration –All the calculations in the portfolio tables are based on the assumption that the options will be fairly priced. Due to supply and demand imbalances, there is no guarantee that these options will be priced at levels exactly related to the underlying stock price.

    The maximum loss for trades in this portfolio is limited to the amount you paid for each debit spread when it was initially established. We will make every effort to manage losses if a stock seems to be going against our position, but there is always the risk of losing the entire investment in this type of trade.

    3-Way Managed Risk Portfolio Pages
    Because there are usually many trades open at once, on the 3-Way Managed Risk portfolio page we have seperated trades by month. This label is a way to organize the trades by when they were initiated and does not mean that the positions closed in that month. By choosing a month and year from the drop-down menu, you can look back at the entire history of the portfolio. In each month’s page, there are two tabs for covered calls or diagonal spreads and three sections. Trade Summaries, Trade Table, and Analyst Notes.

    Trade Summaries are a list of every action our analysts have taken for that month’s postiions. If you wanted to trade along with our experts, this is the place to find just the facts about what actions we are taking.

    The Trade Table goes into more detail than the summary. Here you can see the price of the underlying stock at each step along the way, our target profits and returns, and annualized returns (for comparison purposes only). We will send an email alert to all Elite members any time we take action and place a trade in the 3-Way Managed Risk trade table. If you wish to unsubscribe from these alerts, you can do so on the My Account page.

    The Analyst Notes section is where you will find all of our thoughts about the trades in that month’s portfolio. We will have an expanded explansation of why we chose each trade, how they are progressing, and what actions we might take in the near future. Check back regularly for updates, because we will not send an email alert if we update an Analyst Note but there is no action to take.

  • MarketSmart Perfect Trade PortfolioTop▴

    The MarketSmart Perfect Trade portfolio was created to showcase what our analysts think is the perfect style of trading. This portfolio uses short-term bull-put credit spreads that expire roughly two months from the date we establish new positions. The four trades in the Perfect Trade Portfolio are always credit spreads designed to earn at least a 10% or better return more than 5% downside protection. Combined, the four trades in any given month’s portfolio aim for profits of $1,500 - $2,000.

    This portfolio tends to be one of our more aggressive services, with trades open for a shorter period than in most of our other portfolios. The short holding periods can translate to more action in the portfolio and higher returns over the course of a year. The way we structure the trades in the MarketSmart Perfect Trade portfolio allows us to make outsized returns whether the underlying stock rises, stays flat, or even falls a small amount.

    On the rare occasion that we think the market is overwhelmingly bearish, we may switch to bear-call credit spreads at our discretion, which behave in the same manner but in the opposite direction and utilizing call options.

    Strategy Details
    Our analysts establish bull-put credit spreads by selling one put that is well out-of-the-money while buying another put on the same stock that expires in the same month at a lower strike price. In this portfolio, both puts will be usually be 10% or more out-of-the-money. The unique thing about credit spread trades is that the investor earns cash from the trade up front, since the sold option was more expensive than the option that is bought.

    As long as nothing goes wrong, that cash will be our profit when the options expire worthless. However, your broker will require this position to be secured in some manner so that you can pay if the trade goes bad. In most cases this will be cash that is held until expiration, but depending on your margin agreement and settings, you may be able to place credit spread trades using existing stock holdings as collateral. Just be prepared to sell them if things don’t turn out as planned.

    Ideal Result
    At expiration of our puts, as long as the underlying stock is above our sold put’s strike price, we don’t need to take any action and we will make our full return when both of the options expire worthless automatically. Since we got a credit on the first day of the trade, that cash is ours to keep and any capital that was being used to secure the position is freed.

    Other Potential Results
    If the underlying stock drops a large amount and finishes at expiration below our bought put’s strike price, then both options will be in-the-money and we will lose our full investment on that trade. First, we will be assigned on our sold put and forced to buy the stock at that strike price, which is above market value. However, we bought the second put to provide protection in this very case so we will automatically exercise that put and sell the same stock at that lower strike price. We will lose an amount per share equal to the difference between the strike prices of the options minus the initial credit we received.

    If the underlying stock for one of our positions looks to be headed against us, our analysts will consider exiting a trade before expiration. To do this, we will buy back our sold put and sell the put we originally bought. We will take this course of action if we think we can preserve some capital.

    The most complicated result of a bull-put crediit spread trade is when the underlying stock finishes at expiration above the strike price of our bought put but below the strike price of our sold put. Usually we will try to exit the trade before expiration if this looks likely, but from time to time that is not possible. Our bought put will expire worthless, but our sold put will be automatically assigned, causing us to buy 1,000 shares of the stock for the strike price of our sold option, which is more than the current market price. After expiration, we will sell that stock at market prices to close the position because it would take a lot of cash to be able to carry 1,000 shares unexpectedly.

    Vertical credit spreads offer large profits with a minimal amount at risk and a significant amount of downside protection. That being said, these trades have a bit more risk and from time to time will go completely bad, losing the entire amount invested. Since both options expire in the same month, once they are gone the position is closed, with no chance for the stock to come back like we have with covered calls or diagonal spreads.

    Risk Factors
    Trades in this portfolio may lose money or miss out on potential upside in the following scenarios:

    • The stock drops and does not recover before our bought option expires.
    • The stock could drastically increase in price. Our return will be limited to the target return listed in the trade table.
    • Liquidity –The options market is not always as liquid as the stock market in general. If the active buyers and sellers of a specific option “dry up”we may not be able to close a position at the price we think is correct.
    • Option pricing near expiration –All the calculations in the portfolio tables are based on the assumption that the options will be fairly priced. Due to supply and demand imbalances, there is no guarantee that these options will be priced at levels exactly related to the underlying stock price.

    The maximum loss for a vertical credit spread trade is limited to the difference between the strike prices of our trade minus the initial credit. We will make every effort to manage losses if a stock seems to be going against our position, but there is always the risk of losing the entire investment in this type of trade.

    MarketSmart Perfect Trade Portfolio Pages
    Because there are usually many trades open at once, on the MarketSmart Perfect Trade portfolio page we have seperated trades by month. This label is a way to organize the trades by when they were initiated and does not mean that the positions closed in that month. By choosing a month and year from the drop-down menu, you can look back at the entire history of the portfolio. In each month’s page, there are two tabs for covered calls or diagonal spreads and three sections. Trade Summaries, Trade Table, and Analyst Notes.

    Trade Summaries are a list of every action our analysts have taken for that month’s postiions. If you wanted to trade along with our experts, this is the place to find just the facts about what actions we are taking.

    The Trade Table goes into more detail than the summary. Here you can see the price of the underlying stock at each step along the way, our target profits and returns, and annualized returns (for comparison purposes only). We will send an email alert to all Elite members any time we take action and place a trade in the MarketSmart Perfect Trade trade table. If you wish to unsubscribe from these alerts, you can do so on the My Account page.

    The Analyst Notes section is where you will find all of our thoughts about the trades in that month’s portfolio. We will have an expanded explansation of why we chose each trade, how they are progressing, and what actions we might take in the near future. Check back regularly for updates, because we will not send an email alert if we update an Analyst Note but there is no action to take.

  • Portfolio Performance TablesTop▴

    InvestorsObserver’s model options portfolios are our bread-and-butter services, where our experts can demonstrate various option strategies we have found to be profitable on a consistent basis. We want our members to have the full background of each of our services, so we post the entire portfolio’s performance history in great detail as well as a summarized form.

    Some of our services date back to 2003 and all of them have been through a variety of market conditions ranging from the financial meltdown in 2008 to the slow recovery since. While past performance does not guarantee or imply future success, the portfolio archives can give members an idea of how our analysts react to virtually any market event.

    If the full detailed history is information overload, we also provide summarized performance tables for each of our services that indicates the capital at risk, amount of profit or loss, and the percent return for each month. These tables will indicate if there are still positions open in any given month and if there are, the profit and returns should be considered target amounts.

    The maximum capital at risk amount at the bottom of the tables is calculated based on the highest amount of capital ever required to follow the portfolio exactly as is it published on our pages from the date of inception. The average amount at risk is the average amount at risk for the lifetime of each portfolio, again assuming following the trade tables exactly. Both of these numbers are for guidance only, but do provide some context to portfolio performance, since there are often more than one month’s positions open at once.

  • Further Reading

    OIC Educational MaterialsTop▴

    If our Learning Center’s educational material wasn’t enough to satisfy your need for options education, we’d like to point you to the Options Industry Council, which has very thorough educational material available on its website for free, but we have to warn you, the material is comprehensive but a bit dry.

    www.optionseducation.org