By Chuck Hughes

Copyright 2010 by Legacy Publishing LLC. All Rights Reserved. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Information within this publication contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements that express or involve discussions with respect to predictions, goals, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Investing involves the risk of loss as well as the possibility of profit. All investments involve risk, and all investment decisions of an individual remain the responsibility of that individual. Option and stock investing involves risk and is not suitable for all investors. Past performance does not guarantee future results. No statement in this book should be construed as a recommendation to buy or sell a security. The author and publisher of this book cannot guarantee that the strategies outlined in this book will be profitable and will not be held liable for any possible trading losses related to these strategies. All information provided within this publication pertaining to investing, options, stocks and securities is educational information and not investment advice. Legacy Publishing advises all readers and subscribers to seek advice from a registered professional securities representative before deciding to invest in stocks and options featured within this publication. None of the material within this publication shall be construed as any kind of investment advice. Readers of this publication are cautioned not to place undue reliance on forwardlooking statements, which are based on certain assumptions and expectations involving various risks and uncertainties that could cause results to differ materially from those set forth in the forward looking statements. Please be advised that nothing within this publication shall constitute a solicitation or an invitation to buy or sell any security mentioned herein. The author of this publication is neither a registered investment advisor nor affiliated with any broker or dealer. Although every precaution has been taken in the preparation of this publication, the publisher and author assume no liability for errors and omissions. This publication is published without warranty of any kind, either expressed or implied. Furthermore, neither the author nor the publisher shall be liable for any damages, either directly or indirectly arising from the use or misuse of the book. Users of this publication agree to indemnify, release and hold harmless Legacy Publishing, its members, employees, agents, representatives, affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and against any and all claims, liabilities, losses, causes of actions, costs, lost profits, lost opportunities, indirect, special, incident, consequential, punitive, or any other damages whatsoever and expenses (including, without limitation, court costs and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of The Companies as a result of, or arising out of this agreement and/or your use of this publication. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and publisher are not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Use of the material within this publication constitutes your acceptance of these terms.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

High Accuracy Option Trading

Welcome to the exciting world of High Accuracy Option Trading! In my experience I have found option investing to be the most versatile and profitable way to invest in todays volatile markets. Option investing has been a very rewarding experience for me and I want to pass on my knowledge of options to you so that you too can experience the excitement and rewards of option investing. Learning the mechanics of option investing can be a little intimidating at first especially for novice investors but I can tell you from experience that it is well worth the effort. If you are new to option investing I recommend you read my free Report A Practical Guide to Option Trading that will help you quickly learn the basics of option trading.

Over 2.5 Million Dollars of Actual Profits with 94% Accuracy

I have been trading options for more than 25 years and in this Report I am going to introduce you to the methods I use on a daily basis to increase the accuracy of my option trading. You wont find these unique methods which I call the Option Cycle Strategy anywhere else except in my publications. You will discover in this Report that it is possible to trade options with up to 90% accuracy as demonstrated by my actual option trading profits which are presented at the end of this Report. Copies of my brokerage account confirmations starting on Page 21 show that the Option Cycle Strategy contributed to my $2,572,413.71 in option trading profits with 94% of the trades being profitable. When trading options I utilize my 50/100-Day Exponential Moving Average (EMA) trend following system to identify buy and sell signals. 50-Day EMA Above 100-Day EMA = Price Up Trend = Buy Call Options 50-Day EMA Below 100-Day EMA = Price Down Trend = Buy Put Options I also use trend confirmation indicators such as On Balance Volume and new 52-Week High or Low to confirm the price trend. I then use the Keltner Channels to help select a trade entry and exit point. Historical and actual profit results demonstrate that this combination of indicators produces a powerful investing force that identifies trades with the greatest profit potential. My Option Cycle Strategy when used in conjunction with trend following takes option trading to a whole new level by increasing the accuracy and profitability of option trading. The Option Cycle Strategy utilizes historical price data to help select an options time length (expiration date) and strike price with up to 90%+ accuracy.

Using Volume to Confirm Price Trend

Volume is a valuable trading tool that can be used to confirm the price trend of a stock or ETF. Prices do not move without buyers and sellers. Volume flow precedes price and is the key to measuring the validity and sustainability of a price trend.

Confirmed Up Trend

Stock price is trending up with the 50-Day EMA above the 100-Day EMA Volume is increasing on days a stock closes up Volume is decreasing on days a stock closes down

Confirmed Down Trend

Stock price is trending down with the 50-Day EMA below the 100-Day EMA Volume is decreasing on days a stock closes up Volume is increasing on days a stock closes down In my experience volume flow is a simple but reliable trend confirmation indicator. My favorite volume indicator is On Balance Volume. On Balance Volume measures volume flow. When a stock or ETF closes up, volume is added to the line and when a stock closes down, volume is subtracted from the line. A cumulative total of the volume additions and subtractions form the On Balance Volume line. The Apple price chart below shows that the 50-Day EMA (blue line) is above the 100-Day EMA (red line) indicating Apple is in a price up trend and call options should be purchased. At the bottom of the Apple price chart below we have an example of an up sloping On Balance Volume line. The numerical value of the on balance volume line is not important. We simply want to see an up sloping OBV line to confirm a price up trend. An up sloping line indicates that the volume is heavier on up days and lighter on down days and that buying pressure is exceeding selling pressure. An up sloping OBV line is a good indication that the price up trend is valid and can be sustained.

50-Day EMA (blue line) above 100-Day EMA (red line) = Price Up Trend

OBV Line Trending Up

Apple is in a Confirmed Up Trend:

Stock price is trending up with the 50-Day EMA above the 100-Day EMA On Balance Volume line is sloping up confirming the price up trend When I discover a stock that is in a confirmed up trend and decide to purchase a call option, I must then decide on an option time length (expiration date) and strike price. For many stocks there are literally hundreds of options to choose from with different expiration dates and strike prices. How does an investor effectively chose an option with the best profit potential from several hundred choices? While stock selection is important for successful option trading, in my experience selecting an options time length and strike price is just as important as selecting the stock itself!

Option Time Length and Strike Price Selection is Just As Important as Stock Selection
I like to use historical price data to help select the time length of the option. Historical price data allows me to know the percentage of times a stock increased in price between option expiration dates. This helps me select an option time length (expiration date) that has a high probability of success. I also select an option with an in-the-money strike price. In-the-money options have less time value and more intrinsic value than out-of-the-money options. As you will discover in this Report, purchasing an in-the-money option has a much higher probability of success than purchasing an out-of-the-money option. The goal of the Option Cycle Strategy is to enable you to become a successful options trader by helping you understand the time length and strike price selection process that results in high accuracy and more profitable option trading. I use the Option Cycle Strategy to select time length and strike prices for the following option strategies: 1. Call and put option purchases 2. Call and put option spreads 3. Buy Write trades If the price trend is up then I look at bullish strategies such as purchasing call options, call option spreads and buy writes. If the price trend is down I look at bearish strategies such as purchasing put options or put option spreads.

Path to High Accuracy Option Trading

Step 1 - Use 50/100-Day EMA Trend Following System to Select Call or Put Options Step 2 - Use Historical Price Data to Select Option Time Length with High Accuracy Step 3 - Purchase In-the-Money Options with Low Time Value

Using Option Cycles to Select Option Time Length

Lets look at an example of the historical price data I use for the Option Cycle Strategy. When I decide to purchase a call option, I first choose an option time length (expiration date). Lets examine how option cycles can help us select the time length of an option. The table below is an example of historical price data for Apple stock in 2007. This table lists the price change for Apple stock on option expiration day for one month, three month, six month and one year time periods.

Apple Option Expiration Stock Price Data 2007 1-Month, 3-Month, 6-Month & LEAPS
19-Jan 16-Feb 16-Mar 20-Apr 18-May 15-Jun 20-Jul 17-Aug 21-Sep 19-Oct 16-Nov 21-Dec

AAPL Monthly 3 Month 6 Month LEAPS

88.5 0.9% 10.6% 45.7% 16.3%

84.8 -4.2%

89.6 5.7%

91.0 1.6% 2.8%

110.0 20.9%

120.5 9.5%

143.7 19.3% 57.9% 62.4%

122.0 -15.1%

144.0 18.0%

170.4 18.3% 18.6%

166.4 -2.3%

193.9 16.5%

The second row of this table lists the monthly price change for Apple stock on option expiration day which is the 3rd Friday of the expiration month. For the one month time period between Jan and Feb option expiration in 2007, Apple stock price declined 4.2% (circled). Between Feb and Mar option expiration Apple stock increased 5.7% and between Mar and Apr option expiration Apple stock increased 1.6% and so on for each month. So this row lists the price change for Apple stock for the 1 month period between option expiration days which are the 3rd Friday of the month.

The 3rd row of the table lists the 3 month price change for Apple stock between option expiration days. For the 3 month time period between Jan and Apr option expiration Apple stock increased 2.8%. Between Apr and Jul option expiration Apple stock increased 57.9% and between Oct and Jan option expiration Apple stock increased 18.6% The table also lists the 6 month price change for Apple stock between Jan and Jul and Jul and Jan. The one year price change for Apple stock between Jan LEAPS option expiration is also listed. I use the historical price data to measure the percentage of times a stock increases in price in between option expiration dates. This gives me a good idea of the accuracy I can expect for purchasing a 1 month, 3 month 6 month and 1 year LEAPS options. I use over 6 years of price data and results assume a stock was on a buy signal using the 50/100-Day EMA trend following system. Lets look at an example of historical price data. The table below summarizes 6 years of historical price data for Apple stock. The table shows that if you purchase an Apple one month option on option expiration day historically there is a 70% chance Apple stock increased in price over the 1 month period between option expiration days. Purchasing a 3 month option resulted in an increase in Apple stock 76% of the time and purchasing the 6 month option resulted in an increase in Apple stock 91% of the time between option expiration dates. Purchasing the 1 year LEAPS option resulted in a stock price increase 100% of the time. Again, this data assumes that you purchase and sell an option on option expiration day.

Historical Price Data

Cycle Length
Monthly 3 Month 6 Month 1 Year

% of Times AAPL Increased in Price

70% 76% 91% 100%

Note: An increase in Apple stock price does not always correspond exactly to a similar price increase for an Apple call option due to the time decay characteristics of options. We will learn shortly how to minimize the effect of the time decay characteristics of options

The historical price data gives a good idea of the accuracy we can expect for the various time periods. Based on this data if Apple was in a price up trend and I wanted to purchase an Apple call option, I would trade the 3 or 6 month options for Apple which resulted in a stock price increase 76% of the time for the 3 month and 91% of the time for the 6 month. The 1 month option with 70% accuracy is too low. Longer term investors may consider purchasing Apple LEAPS options which historically is 100% accurate.

Selecting an Option Strike Price

Once we decide on the time length of an option the next important decision is to select a strike price. Selecting a strike price can be difficult as there are so many strike prices available. For example, currently the Apple July options have 78 different strike price choices. The value of an option consists of time value and intrinsic value. At option expiration options lose all time value and consist of only intrinsic value. An in-the-money call option is comprised of both time value and intrinsic value. The deeper an option is inthe-money the more intrinsic value it will have. Out-of-the-money and at-themoney options consist of only time value. The time value portion of an option is a decaying asset. You therefore want to maximize intrinsic value and minimize time value when you purchase an option.

Out-of-the-Money Call Purchase

Lets examine an example of an out-of-the-money call option purchase. Today is June 23rd. The option quote below shows that the Apple July 185-Strike call options are trading at 3.15 points. Apple stock is trading at 173.25 so purchasing the 185Strike call would be considered an out-of-the-money call purchase as the strike price is above the current price of the stock. The 3.15 point premium would consist of all time value and no intrinsic value. The breakeven price for this call option purchase would be a stock price of 188.15 at option expiration in about one month. Apple stock price would have to increase 14.9 points or 8.6% in order to break even on this trade.

Apple Stock Price Must Increase 8.6% in one Month to Break Even
Buy Apple 185-Strike call option at 3.15 points 185.00 Strike Price + 3.15 Premium 188.15 Break even price Lets take another look at the Apple option expiration price data table for 2007 below. This table lists the Apple stock price on option expiration day each month and the percentage gain/loss from the previous month. Lets assume we purchase a one month out-of-the-money call option each month on option expiration day similar to the Apple 185-Strike out-of-the-money call option just presented. This one month call option would be purchased on option expiration day each month, held for one month and then sold on option expiration day the following month. The Apple 185-Strike out-of-the-money call required an 8.6% increase in Apple stock price at option expiration in order to break even. The 2007 option expiration price data table below allows us to project how many months in 2007 would be profitable based on a 8.6% increase in Apple stock price to break even.

Apple Option Expiration Stock Price Data 2007

19-Jan 16-Feb 16-Mar 20-Apr 18-May 15-Jun 20-Jul 17-Aug 21-Sep 19-Oct 16-Nov 21-Dec

AAPL Monthly 3 Month 6 Month LEAPS

88.5 0.9% 10.6% 45.7% 16.3%

84.8 -4.2%

89.6 5.7%

91.0 1.6% 2.8%

110.0 20.9%

120.5 9.5%

143.7 19.3% 57.9% 62.4%

122.0 -15.1%

144.0 18.0%

170.4 18.3% 18.6%

166.4 -2.3%

193.9 16.5%

For example, on option expiration day on February 16th 2007 Apple stock was trading at 84.80 which was a 4.2% decrease in price from the previous month when Apple stock was trading at 88.50. Purchasing an out-of-the-money call on January 19th and selling on February 16th would result in a total loss of the premium with a 4.2% decrease in Apple stock price.

The table below shows that purchasing a monthly Apple out-of-the-money call option in 2007 (with a +8.6% break even) would have resulted in six profitable trades and six trades with a total loss of the premium. In May, June and July a call purchase would have produced substantial profits but in August a total loss would be incurred. It only takes one total loss to wipe out all of your accumulated profits and trading capital. In general I avoid strategies that can result in a total loss of your trading capital. No matter how good your stock selection is, there will be periods when you are wrong and cannot afford to risk the total loss of your trading capital. The table that follows shows the 2006 results.

2007 Results: Six Profitable Trades and Six Total Losses

Month
January February March April May June July August September October November December

Stock % Change
0.9% -4.2% 5.7% 1.6% 20.9% 9.5% 19.3% -15.1% 18.0% 18.3% -2.3% 16.5%

Option Profit/Loss
-100% -100% -100% -100% Profitable Profitable Profitable -100% Profitable Profitable -100% Profitable

2006 Results: Two Profitable Trades and Ten Total Losses

Month
January February March April May June July August September October November December

Stock % Change
7.0% -7.6% -8.0% 3.6% -3.7% -10.8% 5.5% 11.8% 9.1% 8.0% 7.3% 2.2%

Option Profit/Loss
-100% -100% -100% -100% -100% -100% -100% Profitable Profitable -100% -100% -100%

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Twelve Consecutive Losing Trades

I have subscribed to more than a half dozen option advisory services over the years in my quest to learn profitable trading strategies. All of these services recommended the purchase of short term out-of-the-money calls or puts. Out-of-the-money options can produce big returns if the underlying stock makes a substantial price move in the right direction before expiration. Most of the time, however, stocks do not make the expected large move by option expiration and the out-of-the-money call expires worthless. With this type of strategy you risk the total loss of your trading capital. This is not an acceptable risk if you want to stay in the game. The table below lists the recent trade record for a popular option service. This service only makes recommendations to purchase out-of-the-money options hoping to make huge profits on lower cost options. But you can see from the actual track record below that the last 12 recommendations are all losers demonstrating how difficult it is to make money with out-of-the-money options. Profit/Loss
-100% -100% -100% -100% -68.8% -11.5% -3.9% -59.5% -77.8% -3.5% -95.0% -97.4%

In-the-Money Call Purchase Increases Accuracy

As a general rule I like to purchase options with a time value of less than 1% of the current stock price per month. For example, if you purchase an option on a stock that is trading at 100 you want to limit the time value of a one month option to one point and a six month option to six points etc. Limiting the time value to 1% of the stock price is normally possible with most stocks. There are some very volatile stocks, however, with very high time premiums that this may not be possible. If the time value of a call option is equal to one percent of the stock price, the stock must only increase 1% in price in order to break even on a trade. There is a much greater chance that an in-the-money option purchase with a 1% break even price will be profitable compared to an out-of-the-money option with an 8% to 15% break even price. Trading in-the-money options allows you to increase the accuracy of your options trading compared to out-of-the-money options.

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Limit Time Value to Less Than 1% of Stock Price per Month

My MVP Secrets book recommends a money management technique that exits option trades once you incur a 25% to 33% loss. Limiting your losses is a critical part of being a successful trader. If you incur a 50% loss on a trade your next trade must produce a 100% profit just to break even! Limiting losses can help prevent a game over 100% loss. Trading in-the-money options allows you to employ this 25% to 33% limit loss money management technique. This money management technique is not practical when trading out-ofthe-money options as a very small price move in the underlying stock can incur a 100% loss for an out-of-the-money option.

Lets examine an example of an in-the-money call option purchase. Today is June 23rd. The option quote below shows that the Apple July 150-Strike call options are trading at 24.60 points. Apple stock is trading at 173.25 so purchasing the 150-Strike call would be considered an in-the-money call purchase as the strike price is below the current price of the stock. The 24.60 point premium would consist of 23.25 points of intrinsic value. Intrinsic value is the difference between the option strike price and the current price of the underlying stock. The intrinsic value is calculated by subtracting the strike price of the option from the current stock price.

In-the-Money Call Purchase Example

Apple stock is currently trading at 173.25 so the intrinsic value of this option would be 23.25 points. Current Stock Price of 173.25 Minus Strike Price of 150.00 = 23.25 Intrinsic Value The time value of an option is calculated by subtracting the intrinsic value from the total value of the option. In this example the 150-Strike option priced at 24.60 would have 1.35 points of time value. Option Price of 24.60 Minus Intrinsic Value of 23.25 = Time Value of 1.35 The time value of this one month option is only 0.7% of the current stock price (1.35/173.25 = .7%) and would meet the criteria of limiting an options time value to less than 1% of the current stock price per month.

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Apple stock would only have to increase 1.35 points or 0.7% for this trade to break even. This in-the-money call option trade with a 0.7% break even would have a much higher probability of being profitable than the out-of-the-money trade example with an 8.6% break even. The in-the-money trade would also allow us to employ the money management technique of limiting losses to 25% to 33% and would help prevent the total loss of our trading capital.

0.7% Break Even = Higher Probability of Being Profitable

The Call Option Purchase Analysis table below displays the profit/loss potential for buying the Apple Jul 150-Strike call option at 24.60. The analysis displays the profit potential for this Call Option purchase assuming various price changes for Apple stock at option expiration from a 15% increase in price to a 2.5% price decrease. Notice that a substantial stock price move is not required to produce a large option profit. A 15% stock price increase would result in a 100% option return and a 10% stock price increase would result in a 64% option return (circled). We can see from this Call Option Purchase Analysis that the time value for this option is 1.35 points and the intrinsic value is 23.25. As noted previously Apple stock only has to increase 1.35 points or less than 1% for this trade to become profitable.

In-the-Money Options Allow us to Minimize Time Value and Maximize Intrinsic Value
Lets take another look at the Apple option expiration price data table for 2007 which follows. As noted previously this table lists the Apple stock price on option expiration day each month and the percentage gain/loss from the previous month.

13

Lets assume we purchase a one month in-the-money call option each month on option expiration day similar to the Apple 150-Strike in-the-money call option just presented. The Apple 150-Strike in-the-money call requires a 0.7% increase in Apple stock price at option expiration in order to break even. The 2007 option expiration price data table below allows us to project how many months in 2007 would be profitable based on a 0.7% increase in Apple stock price to break even.

Apple Option Expiration Stock Price Data 2007

19-Jan 16-Feb 16-Mar 20-Apr 18-May 15-Jun 20-Jul 17-Aug 21-Sep 19-Oct 16-Nov 21-Dec

AAPL Monthly 3 Month 6 Month LEAPS

88.5 0.9% 10.6% 45.7% 16.3%

84.8 -4.2%

89.6 5.7%

91.0 1.6% 2.8%

110.0 20.9%

120.5 9.5%

143.7 19.3% 57.9% 62.4%

122.0 -15.1%

144.0 18.0%

170.4 18.3% 18.6%

166.4 -2.3%

193.9 16.5%

The table below shows that purchasing a monthly Apple in-the-money call option in 2007 (with a 0.7% break even) would have resulted in nine profitable trades and three trades with a 25% loss. Five of these winning trades would result in a more than a 100% return. This compares favorably to the previous out-of-the-money example which had six trades with a total loss of premium. Unlike the out-of-the-money trade example, an in-the-money option does not require a large upward price move in the underlying stock to break even or to produce a profit. One of the big advantages of the in-the-money call purchase is that it normally enables us to employ the 25% loss limit preventing a total loss of our trading capital. These trade examples clearly demonstrate that trading in-the-money options results in higher accuracy trading and reduces risk considerably compared to trading out-ofthe-money options. This provides the best overall risk/reward profile for option trading.

2007 Results: Nine Profitable Trades and Three 25% Losses

Month
January February March April May June July August September October November December

Stock % Change
0.9% -4.2% 5.7% 1.6% 20.9% 9.5% 19.3% -15.1% 18.0% 18.3% -2.3% 16.5%

Option Profit/Loss
Profitable -25% Profitable Profitable Profitable Profitable Profitable -25% Profitable Profitable -25% Profitable

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Advantages of In-the-Money Call Purchases versus Out-ofthe-Money

In-the-Money calls allow us to employ money management to limit losses In-the-Money calls contain less time value and more intrinsic value Does not require large stock price increase to break even or profit Prevents total loss of investment Less overall risk Higher percentage of winning trades

Disadvantages of In-the-Money Call Purchases versus Outof-the-Money

In-the-Money calls have a higher premium cost which requires a bigger investment In-the-Money calls realize lower returns if the underlying stock experiences a substantial price increase

Increasing Option Cycle Accuracy with Option Spreads

In addition to option purchases I use the option cycle data to help select strike prices for option spreads. Trading in-the-money option spreads can increase the accuracy of option cycle trades as in-the-money spread trades can be profitable even if the underlying stock declines in price. Lets look at a recent example of a trade I took to illustrate the profit/loss potential for an in-the-money spread trade. Intuitive Surgical Inc symbol ISRG was in a confirmed price up trend and my brokerage confirmation below shows that on March 25th I purchased 10 of the ISRG April 250-Strike calls for 78.96 points and sold 10 of the ISRG April 280-Strike calls for 53.76 points. The April calls expire in less than one month.

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The cost of this spread was 25.20 points or $2,520 and is calculated by subtracting the premium received of 53.76 points for the sale of the 280Strike call from the premium cost of 78.96 to purchase the 250-Strike calls. Purchase Price of 78.96 Minus Sales Price of 53.76 = 25.20 Cost ISRG stock was trading at 327.22 so both the 250-Strike and 280-Strike calls were inthe-money. The spread order debit price of 25.20 I entered was midway between the bid and ask price for the 250-Strike option purchased and the 280-Strike sold. Option Spread Order: Buy to open 10 of the ISRG April 250-Strike calls and sell to open 10 of the ISRG April 280-Strike calls at a net debit of 25.20. I was filled on this order and the Spread Analysis table below displays the reward/risk profile for this trade. The first row of the table is labeled % Change and assumes various percent changes in ISRG stock at option expiration from a 15% increase in price to a -15% decline in price. The second row is labeled Stock Price and is the ISRG stock price that corresponds to the percentage change on the row above. The seventh row labeled Spread Profit displays the overall dollar net profit/loss for the spread that corresponds with the stock price in Row 2. And the last row displays the % return for the trade assuming the 25.20 cost for the spread.

ISRG In-the-Money Call Option Spread Analysis

The Spread Analysis shows that this ISRG in-the-money spread has a 19% monthly profit potential if ISRG stock increases in price, remains flat or decreases.

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I think the reward/risk profile for this in-the-money spread trade strikes a good balance between an excellent monthly return potential and substantial downside protection if ISRG stock declines in price. Notice the column to the right in the Spread Analysis table which is circled. This column displays the profit/loss associated with a -10% decline in ISRG stock at option expiration. This spread trade produces a 19% profit if ISRG stock price declines 10% at option expiration. A 15% decline in ISRG results in a 11.7% return. Lets take a look at the ISRG option expiration price data table below for 2007. This table lists the ISRG stock price on option expiration day each month and the percentage gain/loss from the previous month.

ISRG Option Expiration Price Data 2007

19-Jan 16-Feb 16-Mar 20-Apr 18-May 15-Jun 20-Jul 17-Aug 21-Sep 19-Oct 16-Nov 21-Dec

ISRG Monthly

93.41 -10.1%

114.41 22.5%

111.67 -2.4%

131.75 18.0%

132.64 0.7%

140.56 6.0%

198.59 41.3%

199.13 0.3%

221.91 11.4%

269.34 21.4%

280.65 4.2%

325.4 15.9%

Increased Accuracy

The largest monthly loss for ISRG stock in 2007 was a -10.1% loss on January 19th option expiration. Implementing a monthly ISRG spread trade in 2007 similar to the example trade just presented would result in all winning trades in 2007 as the monthly data does not show any ISRG stock losses greater than 15%. Implementing in-the-money option spreads allows us to increase the accuracy of monthly option cycle trading compared to an option purchase strategy as in-the-money spread trades can be profitable even if the underlying stock declines in price. In-the-money 3 month and 6 month option spreads can also be implemented to increase the accuracy of the 3 month and 6 month option cycle trading.

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Recent Profit Results

Lets take a look at some recent Option Cycle Strategy profit results. I use the Option Cycle Strategy to select time length and strike prices for call option purchase and option spread trade recommendations for my advisory service. The table below lists the current open trade profit results. The option purchase portfolio currently has a $104,315 profit before commissions and an average return of 95.5%. The option spread portfolio has $62,238 profit and an average return of 45.8%. All of the call purchases and option spread trades are profitable demonstrating the high accuracy rate of the Option Cycle Strategy.

Portfolio
Option Portfolio Option Spread Portfolio

Profit/Loss

Percent Return

Winning Trades
14 17

Losing Trades
0 0

$104,315.00 $62,238.00

95.5% 45.8%

Total Profits/ Avg Return

$166,553.00

70.6%

31

Inner Circle Advisory Service

My Inner Circle Advisory Service uses the Option Cycle Strategy to make option purchase and option spread trade recommendations. The Inner Circle Advisory provides research and makes recommendations for high accuracy option trading. Members receive email alerts whenever there is a new trading recommendation or a change to an existing recommendation. If you are interested in becoming a member of the Inner Circle Advisory please call our support staff at 856-325-6013 or log on to www.ChuckHughesIC.com for more information.

Membership Benefits:
Receive full support from our experienced staff to help you implement the high accuracy option trading strategies Receive clear and concise buy, sell or hold signals that eliminate guesswork Frees up your time spent on research Receive access to actual open trade and closed trade profit results that give you an instant picture of how a strategy is performing

18

High Accuracy Real Time Results $2,572,413.71 Profit with 94% Accuracy
I also use the Option Cycle Strategy in my own trading accounts for option purchases, option spread trades and buy write trades. Using the strategy contributed to my $2,572,413.71 profit as shown by the copies of my brokerage account Profit/Loss reports that follow. There were a total of 251 trades of which 237 were profitable resulting in 94.4% winning trades. Option purchase trades are listed first followed by option spread trades. Option spread trades reflect the net profit of the combined long and short option. For example, if a spread trade has a $2,000 profit for the long option and a $1,000 loss for the related short option the spread would have a net profit of $1,000.

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Option Spread Trades

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Extra Money Made Easy:

Introducing the Strategy that produced

5 Million Dollars
in premium income over the past 3 years
By Chuck Hughes

Copyright 2010 by Legacy Publishing LLC. All Rights Reserved. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Information within this publication contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements that express or involve discussions with respect to predictions, goals, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Investing involves the risk of loss as well as the possibility of profit. All investments involve risk, and all investment decisions of an individual remain the responsibility of that individual. Option and stock investing involves risk and is not suitable for all investors. Past performance does not guarantee future results. No statement in this book should be construed as a recommendation to buy or sell a security. The author and publisher of this book cannot guarantee that the strategies outlined in this book will be profitable and will not be held liable for any possible trading losses related to these strategies. All information provided within this publication pertaining to investing, options, stocks and securities is educational information and not investment advice. Legacy Publishing advises all readers and subscribers to seek advice from a registered professional securities representative before deciding to invest in stocks and options featured within this publication. None of the material within this publication shall be construed as any kind of investment advice. Readers of this publication are cautioned not to place undue reliance on forwardlooking statements, which are based on certain assumptions and expectations involving various risks and uncertainties that could cause results to differ materially from those set forth in the forward looking statements. Please be advised that nothing within this publication shall constitute a solicitation or an invitation to buy or sell any security mentioned herein. The author of this publication is neither a registered investment advisor nor affiliated with any broker or dealer. Although every precaution has been taken in the preparation of this publication, the publisher and author assume no liability for errors and omissions. This publication is published without warranty of any kind, either expressed or implied. Furthermore, neither the author nor the publisher shall be liable for any damages, either directly or indirectly arising from the use or misuse of the book. Users of this publication agree to indemnify, release and hold harmless Legacy Publishing, its members, employees, agents, representatives, affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and against any and all claims, liabilities, losses, causes of actions, costs, lost profits, lost opportunities, indirect, special, incident, consequential, punitive, or any other damages whatsoever and expenses (including, without limitation, court costs and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of The Companies as a result of, or arising out of this agreement and/or your use of this publication. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and publisher are not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Use of the material within this publication constitutes your acceptance of these terms.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

It was the best of times, it was the worst of times.

- Charles Dickens I would like to take this opportunity to introduce you to one of the most profitable and low-risk income strategies I have encountered in my 26 year investing career. This income strategy produced consistent returns during the recent financial crisis and the severe 2008 - 2009 bear market. Over the past year, US corporations have been slashing their dividends at the fastest pace in over 50 years. The table below lists a few examples of the painful dividend cuts imposed by major corporations. Company
JP Morgan Pfizer Wells Fargo Dow Chemical

Dividend Cut
87% 50% 85% 64%

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

Ideal Strategy for Todays Volatile Markets

Selling option premium to generate immediate cash income is the ideal strategy for todays volatile markets and uncertain economy. We will look at an actual trade example shortly that allowed me to purchase Morgan Stanley stock at a 30% discount to its current price. When you buy stock at a 30% discount you can profit if the stock price increases, remains flat or even declines 20% to 25% resulting in a much higher probability that the trade will be profitable. This gives the option income strategy a huge advantage over a stock purchase strategy and allows you to profit in any type of market condition. 3

Added Dimension
This gives the option income strategy a huge advantage over a stock purchase strategy and allows you to profit in any type of market. The option income strategy works just as well with bearish trades which allow you to profit in bear markets when stocks and ETFs are declining in price. Bearish income trades not only reduce portfolio risk but can dramatically increase profit opportunities and provide a whole new dimension to income investing.

Over 5 Million Dollars in Cash Income in the Past 3 Years

Due to the versatility of the option income strategy and its ability to profit in up, down or flat markets, I have been very active generating option premium income during the severe 2007 2009 bear market and recession. Copies of my brokerage account trade confirmations at the end of this Report show that I collected $5,776,807.63 in cash income selling option premium over the past three years. This averages out to more than $160,000 in cash income per month. Brokerage confirmations list the call and put options I sold and the amount of cash that was credited to my brokerage account for each option sale. I have been trading the option income strategy for many years. During the 1990s I generated over 11 million dollars of option income. Copies of my brokerage account statements documenting this option income are presented in my Guaranteed Real Income Program manual. The key to selling option premium to generate cash income is to make sure the option you sell is covered. There are two ways to implement the option income strategy with limited risk:

Bullish Option Income Trades

Purchase stock and sell a related call option also known as a buy write or covered call or Purchase a call option and sell a call option with a higher strike price to create an option debit spread

Bearish Option Income Trades

Purchase a bearish ETF and sell a related call option also known as a buy write or covered call or Purchase a put option and sell a put option with a lower strike price to create an option debit spread

For bullish trades the short option is covered by owning the stock or owning a call option. And for bearish trades the short option is covered by owning the bearish ETF or owning a put option. Because the short option is covered this is a limited risk strategy. Selling covered option premium incurs considerably less risk than investing in stocks. Selling option premium enables me to profit if the market goes up, down or remains flat and has given me the edge in producing consistent returns during any type of market condition.

Selling Covered Option Premium

Buy Stock and Sell Call Option or Buy Call Option and Sell Call Option with Higher Strike Price to Create a Debit Spread Selling Covered Options is a Limited Risk Strategy

Lets look at an example of an option sale and the resulting amount of cash that was credited to my brokerage account. The brokerage confirmation below shows that I sold to open 10 of the National Oilwell Jan 25-strike call options symbol YMPA25 at 12.72 points. Options cover one hundred shares of stock so a 12.72 point option is worth $1,272 ($12.72 x 100 = $1,272). Selling 10 options at 12.72 points resulted in $12,720 cash being credited to my brokerage account ($1,272 x 10 = $12,720). I get to keep this $12,720 cash payment ($12,708 after commission) regardless of the price movement of National Oilwell stock.

Sale of 10 Options at 12.72 Points Results in $12,720 Cash Dividend Credited to Brokerage Account $1,272 x 10 Contracts = $12,720

Lets look at an example of the first type of option income trade that is initiated by purchasing stock and selling a related call option. This is also known as a buy write or covered call trade. My brokerage confirmation below shows that I bought 600 shares of Morgan Stanley stock at 24.22 and sold to open 6 Morgan Stanley July 20-Strike call options at 7.27. These options expire in 4 months.

Buy Morgan Stanley Stock at 24.22 and Sell 20-Strike Call at 7.27

Selling to open the 20-strike call option at 7.27 points resulted in $727 in cash per contract being credited to my brokerage account or a total of $4,362 ($4,349 after commission) for 6 contracts. Purchasing the stock at 24.22 points and receiving 7.27 points in cash resulted in a 30% cash payment I received up front on the day I initiated the trade. I get to keep this 30% cash payment regardless of the price movement of Morgan Stanley stock.

Buy Stock at 24.22 Points Sell Option at 7.27 Points Equals 30% Cash Dividend Over a Four Month Period 7.27 Divided by 24.22 = 30%

When this option expires in 4 months I can sell another option and collect another cash payment. This is called a rollover. If I rollover this option a second time I would receive a total of 3 cash payment over the course of one year. This has the potential of producing up to a 90% cash payment over the course of one year which could almost pay for the initial cost of the stock and dramatically lower risk.

Up to 90% Cash Dividend Potential Over the Course of One Year By Rolling Over Option

Buying Morgan Stanley stock at a 30% discount reduces risk considerably. This trade will profit if Morgan Stanley stock increases, remains flat or even declines 20% to 25% resulting in a much higher probability that the trade will be profitable. This can result in a high percentage of winning trades even if your market timing is not very accurate. This gives the option income strategy a big advantage over a stock purchase strategy which requires a stock price increase to be profitable. The brokerage account Profit/Loss Report that follows shows my current option income trades for one of my trading accounts. This account had a $311,800 starting balance when I initiated the current trades. There are currently $118,546.86 in net profits after commissions for this portfolio.

49% Cash Income by Rolling Over Trades

I normally reinvest the cash income I receive from option income trades in additional option income trades allowing me to compound my trading results. I received a total of $152,900 in cash income for the current trades resulting in an average cash payment of 49% for the portfolio. This portfolio is widely diversified across different industry groups. All of the trades in this portfolio are currently showing a net profit for the spread demonstrating the ability of the option income strategy to produce a high percentage of winning trades. Even if the underlying stocks in this portfolio decline moderately I can still realize a good return for the portfolio. I normally take profits when an option income trade reaches 90% of its profit potential. This enabled me to take profits on trades well before option expiration and initiate new option income trades allowing me to compound the cash income I receive. Note: I trade a large number of option contracts in this account. Trading one option contract would require a smaller trading account. 7

Option Income Trades

Bearish Option Income Trade Example

Bearish option income trades can also established by purchasing a bearish ETF and selling the related call option. I traded bearish option income trades during the last bear market in the fall and winter of 2008. My brokerage confirmation below shows that I purchased 300 shares of the bearish Emerging Market ETF symbol EEV at 96.80 and sold to open 3 of the EEV December 120-Strike call options symbol EEVLD at 20.00 points. The bearish Emerging Market ETF increases in value as the price of the Emerging Market ETF declines. These options expire in about 3 months. Selling to open the 120-strike call option at 20.00 points resulted in $2,000 in cash per contract being credited to my brokerage account or a total of $6,000 (before commission) for 3 contracts.

Profiting in Down Markets

The Buy Write Analysis below displays the profit/loss potential for buying the bearish Emerging Market ETF symbol EEV at 96.80 and selling the EEV December 120-Strike call for 20.0 points. The Analysis displays potential profit results for various price changes for the EEV ETF at option expiration from a 25% increase to a 10% decrease in price. The cost of this buy write 76.80 points and is calculated by subtracting the 20.0 points I received from the sale of the 120-Strike call from the 96.80 cost of the EEV purchase.

The Buy Write Analysis reveals that if the EEV ETF price remains flat at 96.80 at option expiration a 26% return will be realized (circled). A 25% increase in price for the EEV ETF to 121.00 results in a 56.3% return and a 10% decrease in price to 87.12 results in a 13.4% return (circled). The return calculations for this bearish option income trade demonstrate the ability of the option income strategy to provide excellent profit opportunities during down markets.

10

$1633 Stock Loss = $3,553 Buy Write Profit

Lets take a look at an example of how a buy write trade can be profitable even if the underlying stock declines in price. My brokerage confirmation below shows that I purchased 1,500 shares of Mosaic stock at an average price of 42.0 and sold to open 15 of the Mosaic 40-strike call options at an average price of 7.90 points. I received $11,850 in cash income for this option sale which provides substantial downside protection if Mosaic stock declines in price.

Mosaic stock price declined after I initiated this trade. Below is a snapshot of my Mosaic buy write trade in my online brokerage account. Even though I currently have a $1,633 loss in Mosaic stock I have a $5,187 gain in the short Mosaic options giving me an overall net profit of $3,553 for the buy write spread.

$3,553 Net Profit Even Though Stock Declined in Price

Option Income Strategy Incurs Less Risk than Owning Stock

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Lets now look at an example of the second type of option income trade that is implemented using only options by purchasing a call option and selling a call option with a higher strike price. Because the short option is covered with the option purchase this would be a limited risk trade. The brokerage confirmation below shows that I bought 6 of the Goldman Sachs July 65-strike calls symbol GSG65 at 50.63 points and sold to open 6 Goldman Sachs July 95-Strike call options GSG95 at 27.93. These options expire in about 4 months.

Buy Goldman Sachs 65-Strike Call at 50.63 Sell Goldman Sachs 95-Strike Call at 27.93

Selling to open the 95-strike call at 27.93 points resulted in a $2,793 cash payment per contract being credited to my brokerage account or a total of $16,750 for 6 contracts. So purchasing the 65-strike call at 50.63 points and receiving 27.93 points in cash for the sale of the 95-strike call resulted in a 55% cash payment I received up front when I initiated the trade. I get to keep this 55% cash payment regardless of the price movement of Goldman Sachs stock. Goldman Sachs stock was trading at 112.10 when I initiated this trade.

Buy 65-Strike Call at 50.63 Points Sell 95-Strike Call at 27.93 Points Equals 55% Cash Dividend Over a Four Month Period 27.93 Divided by 50.63 = 55%
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When this option spread expires in 4 months I can create another option spread and collect another cash payment. This is called a rollover. If I rollover this option spread a second time I would receive a total of 3 cash payments over the course of one year. This has the potential of producing up to a 165% cash dividend over the course of one year.

Up to 165% Cash Dividend Potential Over the Course of One Year By Rolling Over Option Spread
Buying the GS 65-strike call option at a 55% discount reduces risk considerably and provides considerable downside protection in the event Goldman Sachs stock declines in price. Goldman Sachs stock moved up in price and is currently trading at 140.32. We can see from the Call Option Spread Analysis below that Goldman Sachs stock could drop 30% to 98.22 and I would still realize a 32.2% return for this spread trade (circled). This spread trade profits if Goldman Sachs stock increases in price, remains flat or decreases 30% in price demonstrating the versatility of the option income spread strategy in producing profits under various market conditions. This gives the option income spread strategy a big advantage over an option purchase strategy which requires a stock price increase in the underlying stock to be profitable.

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Bearish Option Income Spread Trade Example

Bearish option income spread trades can also be established by purchasing a put option and selling a put option with a lower strike price. Because the short put is covered with the put option purchase this would be a limited risk trade. My brokerage confirmation below shows that I bought 7 of the Intuitive Surgical April 400-strike puts symbol IJAP400 at 70.02 points and sold to open 7 Intuitive Surgical April 370-Strike put options at 45.02. These options expire in about 3 weeks.

Buy Intuitive Surgical 400-Strike Put at 70.02 Sell Intuitive Surgical 370-Strike Put at 45.02

Selling to open the 370-strike put at 45.02 points resulted in a $4,500 cash payment per contract being credited to my brokerage account or a total of $31,500 for 7 contracts. So purchasing the 400-strike put at 70.02 points and receiving 45.02 points in cash for the sale of the 370-strike put resulted in a 64% cash payment I received up front when I initiated the trade. I get to keep this 64% cash payment regardless of the price movement of Intuitive Surgical stock. This option spread trade can profit if ISRG stock increases in price, remains flat or decreases in price.

Buy 400-Strike Put at 70.02 Points Sell 370-Strike Put at 45.02 Points Equals 64% Cash Dividend 45.02 Divided by 70.02 = 64%
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Monthly Option Income Strategy

The Monthly Option Income Strategy is initiated by purchasing a stock and selling a monthly call option to generate monthly income. When the option expires it can be rolled over by selling another monthly option. The strategy does not require a large price move in the underlying stock to produce good returns and does well in flat or even down markets. Selling monthly options provides an excellent risk adjusted return and monthly income trades incur less risk than stock investing. The strategy is easy to implement and can be traded in most retirement accounts. Selling monthly options allows you to take full advantage of the time decay characteristics of options. You can see from the option Time Decay Characteristics graph below that options lose time value very quickly in the month prior to expiration. This allows monthly option sellers to profit from the rapid time decay in the month prior to expiration.

Rapid Time Decay in Final Month

Lets look at a few monthly income trade examples and the profit potential available from this strategy. My brokerage account confirmation below shows that I purchased 1,000 shares of US Steel and sold 10 Sep 45-Strike calls which expire in about 1 month at 2.32.

US Steel

Buy Stock @ 43.72/Sell Sep 45 Call @ 2.32

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Buying US Steel stock at 43.72 and selling the 45-Strike call option has a $360 and 8.7% profit potential over the next month if US Steel stock close at or above 45 at option expiration. If the option is rolled over at expiration with a similar premium (and US Steel closes at or above the strike price of the short call), this monthly income strategy has the potential to return approximately 109% over the next twelve months.

US Steel
Stock
X

Annualized Return Potential 109.4%

Stock Price
43.72

Entry Date
08/20/09

Option Expiration
09/18/09

Call Strike
45.0

Call Price
2.32

Cost
41.40

Net Profit Potential

$360

Percent Annualized Return

8.7%

Return
109.4%

Listed below are additional examples of monthly option income trades and profit potential. These examples demonstrate the ability of the low risk monthly income strategy to produce solid returns.

Western Digital

Annualized Return Potential 82.3%

Stock
WDC

Entry Date
08/21/09

Option Expiration
09/18/09

Stock Price
32.99

Call Strike
34.0

Call Price
1.01

Cost
31.98

Net Profit Potential

$202

Percent Annualized Return

6.3%

Return
82.3%

Hartford Insurance

Annualized Return Potential 172.7%

Stock
HIG

Entry Date
08/28/09

Option Expiration
09/18/09

Stock Price
24.14

Call Strike
25.0

Call Price
1.40

Cost
22.74

Net Profit Potential

$226

Percent Annualized Return

9.9%

Return
172.7%

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JP Morgan

Annualized Return Potential 70.2%

Stock
JPM

Entry Date
08/13/09

Option Expiration
09/18/09

Stock Price
42.70

Call Strike
34.0

Call Price
1.55

Cost
41.15

Net Profit Potential

$285

Percent Annualized Return

6.9%

Return
70.2%

McDermott

Annualized Return Potential 109.4%

Stock
MDR

Entry Date
08/20/09

Option Expiration
09/18/09

Stock Price
23.85

Call Strike
25.0

Call Price
.85

Cost
23.00

Net Profit Potential

$200

Percent Annualized Return

8.7%

Return
109.4%

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Advantages of Option Income Strategy

I think the actual trade examples just presented and the brokerage confirmations that follow showing over $5 million in option income demonstrate the ability of the option income strategies to produce consistent returns during very difficult market conditions over the past 3 years. Selling option premium to generate cash income is the ideal strategy for todays volatile markets and uncertain economy. When you sell an option, cash equal to the option price or premium is immediately credited to your brokerage account Unlike a traditional stock dividend you dont have to own the stock on the dividend date to receive the quarterly dividend and you dont have to wait a year to receive a 3% or 4% dividend yield When you sell option premium, you can get paid up to a 20% to 30% cash payment up front when the option is sold When you buy stock at a 30% discount you can profit if the stock price increases, remains flat or even declines 20% to 25% resulting in lower risk and a much higher probability that the trade will be profitable Option income strategy works just as well in down markets Bearish income trades not only reduce portfolio risk but can dramatically increase profit opportunities and provide a whole new dimension to income investing Rolling over option allows you to collect up to a 90% cash return over a one year period Selling option premium can result in a high percentage of winning trades even if your market timing is not very accurate

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Current Profit Results

Lets take a look at some current option income profit results. I make option income trade recommendations through my advisory service. The table below lists the current open trade profit results for the Buy Write and Option Spread Portfolios. The Buy Write Portfolio currently has a $150,739.77 profit before commissions and an average return of 63.8%. The Option Spread Portfolio has a $62,238 profit and an average return of 45.8%. All of the Buy Write and Option Spread trades are profitable demonstrating the high profit potential and low risk nature of these strategies.

Portfolio
Buy Write Portfolio Option Spread Portfolio

Profit/Loss

Percent Return

Winning Trades
25 17

Losing Trades
0 0

$150,739.77 $62,238.00

63.8% 45.8%

Total Profits/ Avg Return

$212,977.77

54.8%

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The Inner Circle Advisory Service

My Inner Circle Advisory provides research and makes option income trade recommendations. Members receive email alerts whenever there is a new trading recommendation or a change to an existing recommendation. If you are interested in becoming a member of the Inner Circle Advisory please call our support staff at 856325-6013 or log on to www.ChuckHughesIC.com for more information.

Membership Benefits:
Personal consultation with Chuck via Chucks personal email address Receive full support from our experienced staff to help you implement the stock, option and ETF trading strategies Receive clear and concise buy, sell or hold signals that eliminate guesswork Frees up your time spent on research Receive access to actual open trade and closed trade profit results that give you an instant picture of how a strategy is performing

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$5,776,807.63 in Cash Income Over the Past Three Years

Copies of my brokerage account trade confirmations that follow show that I collected $5,776,807.63 in cash payments over the past three years. This averages out to more than $160,000 in cash income per month. Brokerage confirmations list the call and put options I sold and the amount of cash that was credited to my brokerage account for each option sale.

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Astonishing $4.5 Million in Prots:

Chuck Hughes TrendFollowing Reports
By Chuck Hughes

Copyright 2010 by Legacy Publishing LLC. All Rights Reserved. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Information within this publication contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements that express or involve discussions with respect to predictions, goals, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Investing involves the risk of loss as well as the possibility of profit. All investments involve risk, and all investment decisions of an individual remain the responsibility of that individual. Option and stock investing involves risk and is not suitable for all investors. Past performance does not guarantee future results. No statement in this book should be construed as a recommendation to buy or sell a security. The author and publisher of this book cannot guarantee that the strategies outlined in this book will be profitable and will not be held liable for any possible trading losses related to these strategies. All information provided within this publication pertaining to investing, options, stocks and securities is educational information and not investment advice. Legacy Publishing advises all readers and subscribers to seek advice from a registered professional securities representative before deciding to invest in stocks and options featured within this publication. None of the material within this publication shall be construed as any kind of investment advice. Readers of this publication are cautioned not to place undue reliance on forwardlooking statements, which are based on certain assumptions and expectations involving various risks and uncertainties that could cause results to differ materially from those set forth in the forward looking statements. Please be advised that nothing within this publication shall constitute a solicitation or an invitation to buy or sell any security mentioned herein. The author of this publication is neither a registered investment advisor nor affiliated with any broker or dealer. Although every precaution has been taken in the preparation of this publication, the publisher and author assume no liability for errors and omissions. This publication is published without warranty of any kind, either expressed or implied. Furthermore, neither the author nor the publisher shall be liable for any damages, either directly or indirectly arising from the use or misuse of the book. Users of this publication agree to indemnify, release and hold harmless Legacy Publishing, its members, employees, agents, representatives, affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and against any and all claims, liabilities, losses, causes of actions, costs, lost profits, lost opportunities, indirect, special, incident, consequential, punitive, or any other damages whatsoever and expenses (including, without limitation, court costs and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of The Companies as a result of, or arising out of this agreement and/or your use of this publication. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and publisher are not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Use of the material within this publication constitutes your acceptance of these terms.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Trend Following Works!

My trading career started more than 26 years ago. At the time I was a junior airline pilot and my flight schedule allowed me about 15 days off a month. I decided to try trading stocks and options on my days off as a means to supplement my income. I went to a seminar that taught attendees how to trade stock and options using systems. I didnt know much about trading but I did realize system trading was something that I could learn at my own pace and the time involved was totally flexible. It was something I could do on my days off. Trading seemed to be the perfect means to supplement my income. I went to more seminars and read every book I could find concerning system trading. My goal was to develop a systematic, businesslike approach to trading stocks, options and futures. I started out paper trading and tried many different types of trading methods with great hypothetical profit results. I then graduated to real time trading but quickly discovered that I could never come close to achieving the advertised profit results. This led to the realization that just about anyone with a computer and historical price data could optimize the system parameters and massage the price data to the point that the profit results always looked fantastic. But these great trading programs never seemed to hold up in actual trading. I then developed my own trend following systems that gave me a rule-based systematic approach to trading. I also developed money management systems that allowed me to control risk and manage losses and profits. I quickly learned that following the trend was the simplest and most effective way to produce consistent profits. When the price trend is up I buy and when the price trend is down I sell short. This concept sounds simplistic but it really works. It is much better to follow the trend than trying to predict it. In my experience trading based on predicting the future is the biggest mistake beginning traders make. The truth is that no one can consistently predict the future. It is better to let the price trend of the market tell you when you should buy or sell. A trend following system is your road map to trading success. Trend following combined with money management discipline is a powerful, systematic approach that allows you to manage risk and produce consistent returns. It allowed me to turn my trading into a business. In the first years of my trading business I was a junior pilot on the seniority list with a modest salary. I had a wife and young daughter to support and a son on the way. I had a big mortgage payment and could only start my trading business with a $4,600 trading account. But within two years my trading business generated a $460,164 profit which was more than I earned over the previous six years as an airline pilot. Copies of my tax returns showing this $460,164 profit are included in the Appendix of this Book. Earning more from my trading business than my job gave me a great feeling of financial freedom. The knowledge that I could support my family if there were layoffs or unforeseen problems with the airlines was liberating!

Then the unthinkable happened. I started having vertigo spells for no apparent reason. I knew that if the vertigo spells continued it would mean an end to my flying career. With much trepidation, I took a computerized test for vertigo that was required by the flight surgeon at my airline and I failed the test miserably with vertigo and nausea that would not stop. The test results were sent to the FAA and I was grounded. I was diagnosed with Menieres disease which has no known cure. I prayed that the vertigo episodes would go away so I could return to flying. They did not end. My wings were clipped. I faced an uncertain future. As luck would have it during this period, my trading business started really taking off. The year my Menieres disease was diagnosed I won the prestigious International Trading Championship. I won with a 315% real time return in my trading account over the one year period of the contest. The International Trading Championship is a realmoney international trading contest in which the contestant with the highest percent return wins.

Over 5.9 Million Dollars of Actual Trading Profits

Fortunately for me my trend following systems produced $5,940,232.08 in actual trading profits over the past 26 years providing financial security for myself and family. My trend following systems are still performing well despite the volatile market conditions and uncertain economy with $1,370,434.20 in current and recent profits. Even though I am still grounded from flying I can say with all honesty, that with out my trading career I would not be where I am today. It was my saving grace in a time of need. Copies of my tax returns and brokerage account statements confirming the $5,940,232.08 profit are included throughout this Report. Lets next examine my 2 simple but effective trend following systems I have been using for many years.

Road Map to Trading Success

To the average investor the stock market can seem complicated and confusing. Stocks can go up or down for no apparent reason. Apple reports great earnings but the stock plummets. The price of oil drops and the inflation report is tame but the major stock market indexes dive. Pfizer reports terrible earnings but the stock rallies. The Friday Employment Report is dismal but the Dow Jones Industrial Average soars. When it comes right down to it, the reason why stock prices are going up or down seems to be anybodys guess. You might as well try to read tea leaves. Highly paid analysts would have us believe that a companys fundamentals drive stock prices. Yet how many times have you seen the stock of companies with good fundamentals crash while those with terrible fundamentals soar? But none of that matters for one simple reason. At the end of the day, if there are more buy orders than sell orders the price of the stock will go up. And if there are more sell orders than buy orders, then the price of the stock will go down. Its just that simple. Everything else is just noise. To make real money in the stock market you dont need to know why a stock price rises or falls, you just need to know two things: when to buy and when to sell. If you can quantitatively measure the buying and selling pressure of a stock then you will know in advance whether the price is likely to go up or decline in price. And you will then know if you should buy or if you should sell a stock. In other words, if you get a reading on the buying pressure and selling pressure for a stock you can successfully assess weather a stock will go up or down in price. There are numerous ways to get a reading on the direction of a stock. I want to teach you several methods.

Successful stock trading can be reduced to two simple rules:

1) Buy stocks if the buying pressure exceeds the selling pressure 2) Sell stocks if the selling pressure exceeds the buying pressure

The best way to measure buying and selling pressure is to track the daily price movement of a stock. If the daily price of a stock is increasing then the buying pressure is exceeding selling pressure and the stock should be bought. If the daily price of a stock is decreasing then the selling pressure is exceeding buying pressure and the stock should be sold. One of the most important rules I learned as a novice investor was that you want to purchase a stock only if the buying pressure exceeds selling pressure as indicated by the price of the stock trending up. Trying to profit by investing in a stock with a price that is trending down is very difficult as it requires that you correctly predict when the price of the stock will bottom out and resume a price up trend so that your stock purchase can be profitable. Buying a stock because it is cheap and then trying to predict when a stocks price will bottom out can be nearly impossible to forecast correctly on a regular basis. This crystal ball type of approach can leave the investor in a vulnerable position. A safer approach would be to wait until a stocks price is in an up trend before investing. A stocks price movement reflects all of the known information about a company so let the price movement of the stock tell you when you should buy and sell! One of the most effective ways to measure buying and selling pressure is to look at the daily price movement of a stock. There are numerous methods for tracking the daily price movement. I want to teach you one of my favorite and most effective ways. It is using a price chart. Price charts are a great way to get a visual look at the daily price changes and the price trend of a stock. It is the price trend that will allow us to make the buy or sell decision. For example, if the daily price trend of a stock is increasing then the buying pressure is exceeding selling pressure and the stock should be bought. If the daily price trend of a stock is decreasing then the selling pressure is exceeding buying pressure and the stock should be sold. Lets take a closer look at price charts and how this tool will lead us to the path of success. Daily Price Trend of a Stock Is Increasing = Buy Daily Price Trend of a Stock Is Deceasing = Sell

Price charts are a great tool that helps us determine a stocks price movement. The daily price chart below displays the daily price movement for Apple stock over the past month. The horizontal axis at the bottom of the chart references the time period of the chart which is one month in this example from March 8th through April 8th. The vertical axis on the right side of the chart represents the price of Apple stock and in this example ranges from 218 to 242. The vertical bars display the daily price movement of the stock. Each vertical bar has a horizontal line which represents the stocks closing price for the day. On March 22nd the daily bar shows that Apple stock traded in a range from about 220 to 226 (circled). The closing price on March 22nd which is represented by the horizontal bar was about 225.

Using Price Charts

Daily Price Movement

Determining the Price Trend

As noted previously we only want to buy a stock if the buying pressure is exceeding the selling pressure as indicated by the price of the stock trending up. The best time to buy a stock is after the stock is already in a price up trend. We want to avoid stocks that are in a price down trend. Daily price charts like the one just presented for Apple allow us to instantly see the price trend of a stock. I like to take this visual look at a stocks price movement one step further and actually measure the price movement. The easiest and simplest way to measure price movement is to use what are called moving average lines.

Knowing When to Buy or Sell

Moving Average lines are a great trading tool that tell us when to buy and when to sell a stock. I know the term Moving Average line may seem complicated but a moving average line is simply the average price of a stock over a specified time period. For example the 50-Day Moving Average line represents the average price of a stock over the past 50 days. Many times the real price trend of a stock can be obscured by the daily price fluctuations. The daily price chart below for Apple stock covers the 3 month period of November, December and January. As we learned in the previous price chart example for Apple, the vertical bars display the daily price movement of the stock. This price chart shows a rally for Apple stock until mid November and then a price decline into mid December. This price decline is followed by another rally into the beginning of January followed by another price decline in January. Despite the daily price fluctuations the stock price was little changed over the 3 month period.

Three Month Price Action Shows No Clear Trend

Daily Price Movement

Lets take another look at a price chart for Apple stock that covers a longer time period but includes the November, December and January period just mentioned. This price chart also includes the 50-Day Exponential Moving Average (EMA) line for Apple stock. I prefer to use Exponential Moving Averages over Simple Moving Averages as I have found Exponential Moving Averages to be more accurate in determining the price trend.

50-Day EMA Line is Sloping Up Clearly Indicating a Price Up Trend

Daily Price Movement

50-Day EMA Line Trending Up

The 50-Day Exponential Moving Average (EMA) line is sloping up clearly indicating Apple stock is in a price up trend. Moving average lines give us an instant visual reference of the current price trend of a stock. 1) If the moving average line is sloping up, the stock is in a price up trend and buying pressure is exceeding selling pressure. The stock should be bought. 2) If the moving average line is sloping down, the stock is in a price down trend and selling pressure is exceeding buying pressure. The stock should be sold. It is that simple! Moving averages tell us when to buy or sell instead of trying to predict the future price movement of a stock. You can easily and quickly obtain moving average lines from numerous websites such as StockCharts.com or Yahoo Finance.

Moving averages are a simple method for tracking the current price trend of a stock and allow us to trade with the price trend instead of trying to predict the future price movement of a stock. I use two different moving average trend following systems depending on trade length. For short to intermediate term trades of one to six months I use the cross over of the 50-Day and 100-Day Exponential Moving Averages (EMA). For longer term trades of greater than six months I use the cross over of the 1-Month price and 20-Month Exponential Moving Average which I call the Major Trend System. The Major Trend System is particularly useful when taking short positions. I found through experience that short trades are more successful when the long term price trend is down. You can use 50/100-Day EMA trend system to enter short trades but you want to make sure the long term price trend is also down before you enter a short trade. This helps prevent whipsaw trades from short positions when the major price trend is up.

50/100-Day EMA System

The 50/100-Day EMA System uses the 50-Day (fast) and 100-Day (slow) Exponential Moving Average (EMA) cross overs to define a trend. The goal of the 50/100-Day EMA System is to determine if a stock is in a price up trend or price down trend. A price up trend exists when a stocks 50-Day Exponential Moving Average (EMA) line is above the 100-Day Exponential Moving Average line and the stock or related call option should be bought. A price down trend exists when the 50-Day EMA is below the 100-Day EMA and a stock should be sold or the related put option should be purchased. This is a simple but effective system for buying stocks (or call options) when they are in a price up trend and selling stocks (or buying put options) when they are in a price down trend. The system allows us to know in advance the most likely future price direction of a stock.

50/100-Day EMA Trend System Buy Signal

50-Day EMA is Above 100-Day EMA

50/100-Day EMA Trend System Sell Signal

50-Day EMA is Below 100-Day EMA

10

Buy Signal Example

Lets look at an example of a buy signal. The Apple stock daily price chart below displays the 50-Day EMA line and the 100-Day EMA line. The moving average lines indicate that Apple stock entered a price up trend in April (circled) as the 50-Day EMA crossed above the 100-Day EMA line. When the 50-Day EMA crossed above the 100-Day EMA it was a good indication that buying pressure was exceeding selling pressure and you want to buy Apple stock. As long as the 50-Day EMA line remains above the 100-Day EMA line Apple stock remains a buy. In this example the Apple 50-Day EMA line crossed above the 100-Day EMA line in April. I have been purchasing Apple stock after the April buy signal as long as the 50-Day EMA line remains above the 100-Day EMA. Apple stock remains in a price up trend as the 50-Day EMA line remains above the 100-Day EMA line indicating that buying pressure continues to exceed selling pressure. Monitoring the 50-Day and 100Day EMA lines is an easy and effective way to determine the current price trend which tells us if we should be buying or selling Apple stock. If the 50-Day EMA crosses below the 100-Day EMA it would indicate a reversal to a price down trend as the selling pressure is now exceeding the buying pressure. You should sell the stock when this occurs. We will look at an example of a sell signal next.

50-Day EMA line Above 100-Day EMA line = Buy

50-Day EMA Line

Buy

100-Day EMA Line

50-Day EMA Crosses Above 100-Day EMA = Buy

11

Sell Signal Example

Lets look at an example of a sell signal. The daily price chart below shows the daily price movement and the 50-Day and 100-Day EMA lines for Merck stock. This chart reveals that in February the Merck 50-Day EMA line crossed below the 100-Day EMA line (circled) resulting in an EMA System sell signal for Merck stock. When the 50-Day EMA crossed below the 100-Day EMA it was a good indication that selling pressure was exceeding buying pressure. If you owned Merck stock you would want to sell your shares as the price trend is down and at this point the length and severity of the price decline is still unknown. As long as the 50-Day EMA line remains below the 100-Day EMA line Merck stock remains a sell. Merck does not qualify as a buy until the 50-Day EMA line crosses above the 100-Day EMA line. Monitoring the 50-Day and 100-Day EMA lines is an easy and effective way to determine the current price trend which tells us if we should be buying or selling a stock.

50-Day EMA Below 100-Day EMA = Sell

50-Day EMA Crosses Below 100-Day EMA Indicating a Price Down Trend

Sell

100-Day EMA

50-Day EMA

The 50/100-Day EMA trend following system is your road map to trading success. Trend following combined with money management discipline is a powerful, systematic approach that allows you to manage risk and turn your trading into a business.

12

Bullish Trades

When the 50/100-Day EMA System indicates a price up trend, I utilize three types of bullish trades: Purchasing stocks and ETFs Purchasing Call Options Bullish Option Spreads

Bearish Trades

When the 50/100-Day EMA System indicates a price down trend, I utilize three types of bearish trades: Purchasing Put Options Bearish Option Spreads Purchasing Bearish ETFs

13

Investing with the Trend Limits Losses

The price chart below displays the daily price movement of Sirius Satellite Radio stock and its 50-Day EMA and 100-Day EMA. The horizontal axis at the bottom of the chart references the time period covered by the chart. The vertical axis on the right side of the chart represents the price of Sirius stock and in this example ranges from 4.00 to 7.50. The vertical bars represent the daily trading price range for Sirius. In January the EMA System issued a sell signal for Sirius stock when its 50-Day EMA crossed below the 100-Day EMA at the 6.40 price level. This EMA cross over is circled in the upper left corner. If you own Sirius stock you should sell your stock at this point as there is no way to predict how long this price down trend will last and how far the price of Sirius will drop. You would not want to buy Sirius stock until the price trend reverses as indicated by the 50-Day EMA line crossing above the 100-Day EMA line.
Chart courtesy of Yahoo Finance

Sirius Satellite Radio

Sell

Sirius is currently trading at 3.45 and is still on a sell signal as indicated by its 50Day EMA line remaining below the 100-Day EMA. Selling when the EMA system issued a sell signal prevented a 46% loss at current price levels. Investors who ignored this sell signal would now need an 85% price increase in Sirius stock from 3.45 to 6.40 just to get back to the price level that the sell signal was issued. This demonstrates the importance of investing with the trend and limiting your losses if you are a short to intermediate term investor. Investors who were tempted to buy Sirius stock at the 6.00 or 5.00 price level because its stock price was cheap would have incurred large losses at current price levels as a result of trying to predict when the price of Sirius stock would bottom out.

14

Historical Results of EMA System

The 50/100-Day EMA System is a rule based system with clearly defined buy and sell rules. This enabled me to do historical testing with the help of the Omega Research Trade Station program using the 50/100-Day EMA Cross Over System just presented. Historical profit results are based on buying a stock when its 50-Day EMA line crosses above the 100-Day EMA and selling a stock when its 50-Day EMA line crosses below the 100-Day EMA. The profit/loss for each trade is calculated and a cumulative total is maintained for each testing period. The EMA System is universal in nature and has been profitable for short term investing across a wide range of markets including: stocks, indexes, closed-end funds, zero coupon bonds, mutual funds, index funds and sector funds. The fact that the system is profitable in virtually every type of market confirms its credibility as a viable, robust approach to trading the financial markets. Included on the following page are profit results for a well diversified sampling of both growth and value stocks that represent a broad cross section of 26 different industry groups. This sampling includes small, mid and large cap stocks. Historical profit results were generated over a recent twenty four year period.

Profitable with Low Risk

Keep in mind that four bear markets occurred during this period including the severe 2000 - 2003 bear market during which the S&P 500 Index lost 50% of its value and the NASDAQ suffered a 76% decline. Results are based on trading one hundred shares of stock for each buy signal and do not include commissions. Lets review the tests conducted using the first stock tested Aetna Health Care (AET). The first time Aetnas 50-Day EMA crossed above the 100-Day EMA during the test period, one hundred shares of Aetna were purchased at 10.18. Two and one half months later Aetnas 50-Day EMA crossed below the 100-Day EMA at 9.15 and 100 shares of Aetna were sold. The profit/loss for each AET trade was calculated by the Trade Station software and the profits totaled $5,376 over the test period based on trading 100 shares for each buy signal. This $5,376 profit represents a 528% return on the initial investment of $1,018. The software divides the total profits by the total losses to calculate the Profit Factor. Aetna had a Reward to Risk Ratio of 3.9 as there were 3.9 dollars of profit for each 1 dollar of loss. There were 10 losing trades over the 24-year period and the average losing trade incurred a -$120 loss.

15

24-Years of Historical Results

Stock
Aetna Adobe Systems Altria Analog Devices Applied Materials Auto Data Process Bunge Centex Cisco Systems Corning CVS Drug Eaton Vance eBay EMC Corp Franklin Resources General Electric Golden West Finl Home Depot Illinois Tool Works Intel Johnson & Johnson KB Homes Legg Mason Microsoft M&T Bank NVR Inc PMC Sierra Procter & Gamble Sun Microsystems Texas Instruments Taro Pharma Unitedhealth Water Corp Yahoo!

Profit on 100 Shares

$5,376 $5,679 $4,602 $3,559 $2,419 $2,878 $3,282 $3,810 $5,474 $6,153 $4,237 $1,682 $2,453 $7,257 $5,264 $3,675 $3,700 $4,092 $5,924 $2,845 $4,877 $6,654 $4,212 $2,651 $6,445 $50,070 $15,603 $3,096 $3,342 $4,227 $4,551 $7,627 $4,898 $7,964

Profit Factor
3.9 4.4 3.2 2.0 3.0 3.5 100.0 4.3 10.1 12.4 2.7 6.7 3.7 80.0 3.2 5.2 4.4 4.0 4.8 3.5 4.5 3.4 7.1 2.8 5.5 5.0 41.5 3.1 7.5 3.7 4.7 9.5 4.5 63.0

Initial Cost 100 Shares

$1018 $5 $220 $92 $3 $182 $1,585 $216 $8 $178 $505 $10 $120 $5 $5 $130 $40 $4 $176 $39 $227 $840 $187 $10 $37 $1,080 $225 $223 $25 $184 $87 $32 $375 $132

% Return on Initial Cost

528% 126200% 2092% 3868% 96760% 1581% 207% 1764% 68425% 3457% 839% 16820% 2044% 145140% 112000% 2827% 9250% 102300% 3366% 7295% 2148% 792% 2252% 26510% 17419% 4636% 6935% 1388% 13368% 2297% 5231% 23834% 1306% 6033%

Avg Loss
-120 -173 -180 -251 -70 -98 0 -143 -100 -54 -250 -27 -156 -18 -18 -97 -78 -174 -225 -71 -181 -202 -78 -108 -95 -1050 -48 -108 -26 -111 -113 -91 -471 -129

Totals / Averages

$210,578

12.7

$8,204

2,567%

-150

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Average Yearly Return of 107%

The total initial investment required to buy 100 shares of each of the 34 stocks over the test period was $8,204. This $8,204 initial investment produced a total of $210,578 in profits over the test period which equates to a 2,567% return. The average yearly return was 107% which would enable us to double our initial investment every year on average. This average 107% annual return was achieved without the use of leverage or margin. The historical results demonstrate that the EMA System has the ability to produce handsome short term profits with very low risk. Of the trades that were losing trades, the average loss over the twenty four year period was $150 and when compared to the total profits of $210,578 demonstrates the ability of the system to keep losses to a minimum. The average Reward to Risk ratio was a very healthy 12.7 with over 12 dollars of profit for each 1 dollar of loss again demonstrating a very healthy riskadjusted return. The preceding investing results demonstrate the importance of investing with the trend if you are a short term investor. The 50/100-Day EMA System allows us to know in advance the most likely future price movement of a stock and reduces the entry and exit risk associated with short term investing. It is a versatile, effective method for profiting in any type of market Equally important is the ability of the system to avoid large losses which can quickly ruin an investment plan. The system keeps losses to a minimum and almost always exits a trade before a big loss occurs. Following a discipline that keeps losses to a minimum is one of the most important characteristics of a successful short term investing program. Keep in mind that the worst bear market since 1932 occurred during this test period.

The 50-Day and 100 Day-EMA Lines Are the Key to Developing a Profitable Strategy
The stock market is in a constant state of flux. The constant up and down price movement of a stock makes it difficult at times to see the real price trend of a stock. That is why it is important for an investor to become comfortable with the 50/100-Day EMA lines. The position of the 50-Day EMA in relation to the 100-Day EMA gives us a quick and accurate indication of a stocks current price trend. If the stock is in a price up trend it should be bought and if the stock is in a price down trend it should be sold. In order to be a successful investor we do not have to know what an analysts rating is for a stock or the current earnings projection. All of that information is reflected in a stocks price movement which can be quantitatively measured by the 50/100-Day EMA lines. This simple but effective trend following system is mechanical in nature and instantly tells you if you should be buying or selling. I prefer mechanical systems as they take the emotion out of trading. There is no judgment or interpretation involved. You dont have to rely on trying to predict future price movement.

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Downloading On the 50/100-Day EMA Lines

The 50/100-Day EMA Lines can be easily downloaded from www.StockCharts.com. On the home page type in the stock symbol and click Go. In this example I typed in the symbol for Apple stock AAPL.

Once you click Go the default chart for Apple will appear. Below the default chart for Apple select Daily under Periods and 1 Year under Range. Under Overlays select Exp Mov. Avg and Under Parameters select 50. Then select Exp Mov. Avg on the second row and Under Parameters select 100.

Click Update and the Apple price chart with the 50/100-Day EMA Lines will be displayed (see price chart on the following page).

18

Apple One Year Price Chart with 50/100-Day EMA Lines

19

Major Trend System

There are many variations of moving averages that can be used to determine the long term price trend. In my experience, the 1-Month Price of a stock in relation to its 20Month Exponential Moving Average (EMA) is an excellent way to identify the major or longer term price trend of a stock or ETF. Identifying the major trend allows us to determine the most likely future price movement of a stock. If the 1-Month Price (shorter-term) is above the 20-Month Exponential Moving Average (EMA) (longer-term) a bullish major trend is indicated. And if the 1-Month Price is below the 20-Month EMA a bearish major trend is indicated. This simple system has been very effective in correctly identifying major bullish and bearish price trends.

Major Trend System Buy Signal

1-Month Price is Above 20-Month EMA

WCA Major Trend System Sell Signal

1-Month Price is Below 20-Month EMA

The goal of the Major Trend System is to determine whether a stock or ETF is in a price up trend or down trend. This has to be established before you buy a stock or call option or take a short position in a stock. Investing with the trend is a basic principal that is essential for successful investing. If we can quantify the price movement of a stock we can determine the major price trend and the most likely future price movement of a stock. Many times the major price trend continues in the same direction and can persist much longer than you might expect.

20

For example, the monthly price chart below depicts the S&P 500 Index 1-Month Price and 20-Month EMA. In December 2007, the 1-Month price crossed below the 20Month EMA triggering a Major Trend System sell signal. This sell signal indicated that the most likely future price movement for the S&P 500 Index was down and short positions should be established.

1-Month Price

Sell
20-Month EMA

Rely on Price Trend Instead of Predictions

Very few market analysts predicted such a sharp and persistent decline in the index during the 2007 2009 bear market. The financial media was calling for a bottom all the way down but traders monitoring the 1-Month and 20-Month EMA price graph could clearly see the index was in a major price down trend and only short positions should be considered. This Major Trend System sell signal is a good example of how important it is to let the price trend of a stock determine when you should buy and sell instead of trying to predict future price movement.

21

Trading With the Major Trend

The Major Trend System has a long history of being very effective in identifying major price trends. The 20-Year price chart below for the S&P 500 Index shows that the Major Trend System indicated a bullish price trend for most of the 1990s and the 2003 through 2007 bull market with the 1-Month Price above the 20-Month EMA. And the system indicated a bearish price trend during the 2000 - 2003 and the 2008 2009 bear markets with the 1-Month Price below the 20-Month EMA.

1-Month Price 20-Month EMA

22

Steps for Downloading the 1-Month Price and 20-Month EMA

1) Log on to StockCharts.com 2) Type in the trading symbol under Symbol (in this example GLD for the Gold ETF) 3) Under Chart Attributes select Monthly under Periods and select the desired Range (2 Years in this example) 4) Under Overlays select Exp Mov. Avg and under Parameters select 20 5) Click Update to display chart (in this example the 2 year Gold ETF chart)

1-Month Price

20-Month EMA

23

Major Trend System Historical Results

The Major Trend System is a rule based system which allows us to eliminate investing decisions based on predictions, trying to guess future price movement and tips. Eliminating emotional decision making decreases risk and stress and gives us the discipline necessary to become successful investors. The Major Trend 1-Month/20Month EMA system has clearly defined buy and sell rules which allow for historical profit testing. Historical profit results are based on buying stocks when the 1-Month price crosses above the 20-Month EMA and shorting stocks when the 1-Month price crosses below the 20-Month EMA. I conducted 10 years of historical testing on a broadly diversified portfolio of eight stocks in a broad cross section of industries listed below:

Diversified Portfolio
Foster Wheeler (construction) Apple (electronics, computers) Monsanto (agriculture) Arcelor Mittal (steel) Petrobras (oil and gas) Cliffs Natural (iron ore & coal) Precision Cast (metal fabrication) Hudson City Bancorp (savings bank)

The historical profit results that follow are based on an initial investment of $10,000 divided equally among the eight stocks over a recent ten year period (or when stock first traded) and compounding the results and do not include commissions. The historical results do not reflect the use of leverage or margin.

Major Trend System Diversified Portfolio Historical Results

Initial Investment Number Years Profit Total Return Average Annual Return Percent Winning Trades Total Profits Total Losses Profit:Loss Ratio Largest Losing Trade $10,000 10 $608,337 6,083% 608.3% 94.5% $609,025 $688 885 to 1 -1.9%

24

Major Trend System Diversified Portfolio Profit Results Diversified Portfolio 10-Year Profit Results
$700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Historical results reveal that the Major Trend System produced impressive profits with very low risk. A $10,000 investment grew to $618,337 over the ten year period. After deducting the initial $10,000 investment, the total profits were $608,337 (before commissions) which equates to a 6,083% return on the initial $10,000 investment. Over the ten year test period this translates to a 608% average annual return. This is an excellent annual return for a system that does not use leverage or margin! Ninetyfour percent of trades were profitable and all years were profitable.

$885 of Profit for Each 1 Dollar of Loss

The system produced $609,025 in total profits and only $688 in total losses. Dividing the total profits by the total losses results in a Profit to Loss Ratio of 885 to 1. This translates to 885 dollars of profit for each 1 dollar of loss allowing me to easily achieve my overall goal of maintaining a 3 to 1 or greater profit to loss ratio. The Profit to Loss Ratio is a good measure of risk. A high Profit to Loss Ratio indicates that the Major Trend System keeps losses to a minimum by exiting losing trades before they develop into a large loss. The largest losing trade over the 10-Year test period was a -1.9%

25

The Major Trend System almost always exits a trade before a big loss occurs and provides you with the discipline necessary to become a successful trader. Keep in mind that two bear markets occurred during this period including the worst bear market since 1932 during which the S&P 500 Index lost 50% of its value and the NASDAQ suffered a 76% loss. These profit results demonstrate that the Major Trend System is a versatile, effective method for profiting from long or short trades in any type of market. Most investment programs recommend diversifying your portfolio across different industry groups. One of the great advantages of the Major Trend System is that it allows you to further diversify your portfolio by taking both long and short trades which increases the diversity and profit opportunities of the system.

26

Major Trend System Individual Market Profit Results

The historical profit results that follow are based on trading the Major Trend System with an initial investment of $10,000 in a stock and compounding the results thereafter and do not include commissions. The historical results do not reflect the use leverage or margin.

Precision Castparts Profit Results

Major Trend System PCP 10-Year Profit Results
$350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Initial Investment Number Years Profit Total Return Avg Annual Return % Winning Trades Profit/Loss Ratio

$10,000 10 $312,645 3,126% 312% 100% No Losses

27

Apple Profit Results

Major Trend System AAPL 10-Year Profit Results
$1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Initial Investment Number Years Profit Total Return Avg Annual Return % Winning Trades Profit/Loss Ratio

$10,000 10 $933,885 9,338% 933% 100% No Losses

28

Foster Wheeler Profit Results

Major Trend System FWLT 10-Year Profit Results
$450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Initial Investment Number Years Profit Total Return Avg Annual Return % Winning Trades Profit/Loss Ratio

$10,000 10 $391,544 3,915% 391% 100% No Losses

29

Cliffs Natural Profit Results

Major Trend System CLF 10-Year Profit Results
$900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Initial Investment Number Years Profit Total Return Avg Annual Return % Winning Trades Profit/Loss Ratio

$10,000 10 $829,430 8,294% 829% 100% No Losses

30

Follow the Trend Instead of Trying to Predict It

Prediction is very difficult, especially if its about the future. - Nils Bohr
The EMA and Major Trend Systems allow us to invest with the trend instead of trying to predict the price direction of a stock. The historical studies presented demonstrate that price trends tend to continue in the same direction and can continue on longer than one may initially expect. My investing experience confirms that these simple but effective systems allow us to reduce the timing risk of when to buy and sell stocks. The position of a stocks 50-Day EMA line in relation to its 100-Day EMA line and the 1-Month price in relation to the 20-Month EMA allow us to know in advance the most likely future price direction of a stock.

31

Multiplying Your Returns

My real time profits and the historical trading results just presented demonstrate that the 50/100 Day EMA and Major Trend Systems are a powerful investing force that identify stocks with the greatest profit potential. I also use these two trend following systems to select call options on stocks that are in a price up trend. Stocks that are in a price uptrend with the 50-Day EMA above the 100-Day EMA or the 1-Month price above the 20-Month EMA are also excellent candidates for call option purchases. Purchasing call options is a bullish strategy as the value of a call option increases as the price of the underlying stock increases. If you are new to option investing please refer to my Beginners Practical Guide to Option Investing Report which explains in detail the basics of option investing. When I compare investing with my two trend following systems to other traditional stock strategies, the trend following systems walk away as the clear winner! But trading call options using the trend following systems can be even more profitable. The greater return potential associated with options is due to the leverage that options provide. Lets take a look at some actual option examples so that you can understand the important concept of leverage and how leverage can provide a high rate of return. The option quote table below contains actual call option prices (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying call options is a bullish strategy as the value of a call option will increase as the price of the underlying stock increases. Hewlett Packard stock is currently trading at 32.78. Lets focus on the March 35-Strike call option (circled).

Hewlett-Packard Co. (HPQ)

CALL OPTIONS
Strike 25.00 27.50 30.00 32.50 35.00 Symbol HPQCE.X HPQCY.X HPQCF.X HPQCZ.X HPQCG.X Last 7.90 5.40 2.80 0.70 0.05

At 3:49PM ET: 32.78

0.18 (0.55%)

Expire at close Fri, Mar 17, 2006

Chg 0.00 1.00 0.15 0.15 0.05 Bid 7.60 5.10 2.65 0.65 0.05 Ask 7.80 5.30 2.75 0.70 0.10 Open Int 303 479 4,797 38,350 30,226

32

10% Stock Price Increase = 950% Option Return

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

9.5 to 1 Leverage = Profit Opportunity

Options Are Highly Leveraged and Can Provide a High Rate of Return
Stock Investor
Buys HPQ Stock at 32.78 Stock Increases 10% to 36.05

Results:
Big Investment $3,278 Small Profit 10%

Option Investor
Buys 35-Strike Call Option for $10 Stock Increases 10% to 36.05 Call Option is Worth $105 (Stock Price of 36.05 minus 35.0 Strike = 1.05 Option Value) $105 Option Value Minus $10 Cost = $95 Profit $95 Profit Divided by $10 Cost = 950% Return

Results:
Small Investment $10 Big Profit 950%

A 10% Price Increase in Stock = 950% Call Option Return Which Allows Us to Achieve a High Rate of Return

33

The Power of Leverage

The table below compares the profit potential of purchasing Hewlett Packard stock at todays price of 32.78 versus the HPQ March 35-strike call option at .10 points. If HPQ stock increases to 38.00 stock investors realize a 15.9% return but option investors realize a 2900% return. If HPQ stock increases to 40 stock investors realize a 22% return but option investors realize a 4900% return. Progress always involves risks. You cant steal second base and keep your foot on first. - Frederick B. Wilcox

15.9% Stock Return = 2,900% Option Return = 29 to 1 Leverage 22% Stock Return = 4,900% Option Return = 49 to 1 Leverage

Hewlett Packard Stock Price Stock Profit Stock % Return Value of 35-Strike Call Option Option Profit Option % Return

35.00

36.00

37.00

38.00

39.00

40.00

2.22 6.8% 0.00

3.22 9.8% 1.00

4.22 12.9% 2.00

5.22 15.9% 3.00

6.22 19.0% 4.00

7.22 22.0% 5.00

0.00 0.00

0.90 900%

1.90

2.90

3.90

4.90

1900% 2900% 3900% 4900%

34

Prudent Speculation
I would like to make one important distinction between the leveraged investment of purchasing call options versus high risk leveraged investments. Purchasing call options uses limited risk leverage. This means that the most you can lose is your initial investment. Regardless of adverse market moves you cant lose more than your initial investment. You wont receive a margin call from your broker or be asked to add funds to your brokerage account to avoid the forced liquidation of your positions.

Limited Risk Strategy

Strategy
Purchasing Options

High Risk Investments

The investments listed in the table below are what I categorize as high risk investments because you can lose more than your initial investment. An adverse market move could wipe out your initial investment and could trigger a margin call that would require you to add funds to your account. You would be legally liable to pay back any and all losses that are sustained in your brokerage account. It only takes one unexpected overnight world event to wipe out a highly leveraged trading account. Recently some hedge funds which are highly leveraged have been incurring massive losses due to unexpected adverse market moves.

High Risk Investments

Investment
Futures Trading Forex Trading Shorting Stocks Selling Uncovered or Naked Options

I have seen a lot of advertisements lately touting the 100 to 1 or even 200 to 1 leverage available from Forex and currency trading. While this kind of leverage can produce high returns it can be dangerous to your financial well-being. If you invest $10,000 in 100 to 1 leveraged contract a 10% adverse move can wipe out your $10,000 investment and trigger a $90,000 margin call that will force you to pay the brokerage firm an additional $90,000 to meet the margin call. The Amaranth hedge fund imploded as a result of margin calls the fund received on its energy futures contracts. These types of margin calls have occurred in the past and with the use of high risk leverage will probably occur again in the future. More often than not the use of this type of leverage eventually ends badly for investors.

35

Option Profits Are Derived From Stock Price Movement

Options are derivatives that derive their value from the price of the underlying stock. The intrinsic value of a call option will increase one point for each point its underlying stock increases above the strike price.

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

A lot has been published about option strategies that invest in options based on whether an option is under valued or over valued according to the Black-Scholes Pricing Model. These option strategies are very complex and require high-level mathematical calculations to compute an options Alpha, Beta, Delta, Gamma, Theta etc. I never understood the logic of investing in an option because it was slightly under valued at the time of purchase. Under valued options can become more under valued. The price movement of the underlying stock determines an options value and the resulting profit/loss. When you purchase a call option your profits are determined by the price movement of the underlying stock. Lets refer again to the example for the Hewlett Packard 35-Strike call purchased at .10 points so that you fully understand this important concept. The table below clearly demonstrates that the price of HPQ stock determines the profit/loss of the 35-Strike call option. If we can select a stock moving up in price, purchasing a call option on that stock can produce enormous profits and will allow us to harness the tremendous leverage provided from option investing. Option intrinsic value increases dollar for dollar once the stock price moves above the strike price of the option purchased HPQ Stock Price Value of 35-Strike Call Option Option Profit/Loss Option % Return 0.00 0.00 0.90 900% 1.90 2.90 3.90 4.90 35.00 0.00 36.00 1.00 37.00 2.00 38.00 3.00 39.00 4.00 40.00 5.00

1,900% 2,900% 3,900% 4,900%

If we can select a stock moving up in price, purchasing a call option on that stock can produce enormous profits and will allow us to harness the tremendous leverage provided from option investing.

36

Call Option Purchase Examples

My brokerage portfolio statement below contains examples of call options I purchased using the 50/100-Day EMA and Major Trend System combined with the Trend Confirmation indicators. This portfolio has an open trade profit of $254,006.83 and an average return of 114% with no losing trades. Note: In this portfolio, I traded multiple option contracts. Trading one contract would require considerably less trading capital.

37

Call Option Trade Examples

My brokerage confirmation below shows I purchased 15 Apple October 130-Strike call options symbol APVJF at 14.00 points. I used the 50/100-Day EMA and Major Trend System which were on a buy signal to select this option.

50-Day EMA Above 100-Day EMA

1-Month Price Above 20-Month EMA

38

In this trade example I purchased the FCX Jun 65-Strike call option using the 50/100Day EMA and Major Trend System which were on a buy signal combined with the 52-Week High Trend Confirmation Indicators to select this option.

50-Day EMA Above 100-Day EMA

1-Month Price Above 20-Month EMA

39

In this trade example on April 23rd I purchased the ESRX Jun 80-Strike call option symbol XTQFP (ESRX subsequently had a stock split) call option using the 50/100-Day EMA and Major Trend System which were on a buy signal combined with the 52Week High and OBV Line Trend Confirmation Indicator to select this option. ESRX was also making a series of new 52-Week highs.

OBV Line Sloping Up

40

Lets take a look next at the details of the call option trade examples just presented so that you can understand the important concept of leverage and how leverage can provide a high rate of return. Remember that even though these call option trades use leverage, they are all limited risk trades and you cant lose more than your initial investment regardless of adverse market moves. My brokerage account confirmation below shows that on August 31st I purchased 15 Apple October 130-Strike call options symbol APVJF at 14.00 points. I used the 50/100-Day EMA and Major Trend which were on a buy signal to select this option. These options expire in about six weeks.

My brokerage account Profit/Loss Report below shows that on October 5th I sold the 15 APVJF call options at 30.30 points resulting in a $24,392.27 net profit after commissions and a 116% return for the option trade.

On August 31st when I purchased the AAPL options, Apple stock was trading at 139.20. When I sold the options on October 5th AAPL stock was trading at 158.40. Purchasing Apple stock at 139.20 on August 31st and selling on October 5th at 158.40 would result in a 13.8% return. Over the same period of time my option trade produced a 116% return which is 8.4 times greater than the stock trade demonstrating the leverage available from trading options.

Option Return 8.4 Times Greater Than Stock Return

Purchase Price
Stock Option 139.20 14.00

Sale Price
158.40 30.30

Point Profit
19.20 16.30

Percent Return
13.8% 116.4%

41

13.8% Stock Return = 116% Option Return

Option Return 840% Greater Than Stock Return
120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Aug 31st Oct 5th
Stock Return Option Return

8.4 to 1 Leverage = Profit Opportunity

Options Are Highly Leveraged and Can Provide a High Rate of Return Stock Investor

Buys Apple Stock at 139.20 Stock Increases 13.8% to 158.40

Results:

Big Investment $13,920 Small Profit 13.8%

Option Investor

Buys 130-Strike Call Option for $1,400 Stock Increases 13.8% to 158.40 Call Option Increases in Value to 30.30 Small Investment $1,400 Big Profit 116% Which Allows a High Rate of Return

Results:

42

FCX and ESRX Trade Examples

My brokerage account confirmations below display the FCX and ESRX call option purchase examples previously presented. I purchased 10 of the FCX Jun 65-Strike call options symbol FCX at 7.20 points and 10 of the ESRX Jun 80-Strike call options symbol XTQFP at 10.18 points.

My brokerage account Profit/Loss Report below shows that I sold the FCXFM calls at 16.35 points and the XTQFP calls at 22.40 points. This resulted in a $9,099.72 profit and a 126% return for FCXFM and a $12,199.65 profit and a 119% return for XTQFP.

Over the same time period purchasing FCX would have produced a 14.8% return compared to the 126% return for the option. The option purchase provided 8.5 to 1 leverage compared to the stock purchase. FCX Option Return 8.5 Times Greater Than Stock Return Purchase Price
Stock Option 71.15 7.20

Sale Price
81.75 16.35

Point Profit
10.60 9.15

Percent Return
14.8% 126%

43

And purchasing ESRX stock would have produced a 15.4% return over the same time period compared to the 119% return for the ESRX option. The option purchase provided 7.7 to 1 leverage compared to the stock purchase. ESRX Option Return 7.7 Times Greater Than Stock Return Purchase Price
Stock Option 88.30 10.18

Sale Price
101.90 22.40

Point Profit
13.60 12.22

Percent Return
15.4% 119%

The Power of Leverage

On average these three option trade examples provided 8.2 times more profit compared to the purchase of their underlying stocks over the same time period. The 8.2 to 1 leverage provided by options can dramatically increase profit results. Lets take a look at historical profit results for trading options instead of stocks using the Major Trend System. Historical results are based on purchasing call options for Major Trend System buy signals and purchasing put options for sell signals. Although the real time trade examples just presented provided 8.2 to 1 leverage, lets assume for this historical study that the option trades only provide a more conservative 4 to 1 leverage compared to stock trades. Results are theoretical as options were not available for some stocks at the beginning of the test period. I conducted historical option testing on the same diversified portfolio of eight stocks that were used for historical testing in Chapter 2. The eight stocks are listed below.

WCA Diversified Portfolio

Foster Wheeler (construction) Apple (electronics, computers) Monsanto (agriculture) Arcelor Mittal (steel) Petrobras (oil and gas) Cliffs Natural (iron ore & coal) Precision Cast (metal fabrication) Hudson City Bancorp (savings bank)

The historical profit results that follow are based on an initial investment of $4,600 divided equally among the eight stocks in 1998 (or from inception of trading) and compounding the results thereafter and do not include commissions. I chose the $4,600 initial investment because I started my options trading career in 1984 with a $4,600 trading account.

44

The Major Trend System option historical profit results for the Diversified Portfolio of eight stocks are displayed in the Profit Results Table and Profit Results Equity Graph below.

Diversified Portfolio Option Historical Results

Initial Investment Number Years Net Profit Total Return Average Annual Return Percent Winning Trades Total Profits Total Losses Profit:Loss Ratio $4,600 10 $17,625,951 383,172% 38,317% 94.5% $17,670,016 $44,065 401 to 1

Diversified Portfolio 10-Year Option Profit Results

$20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

45

$4,600 Grows to Over 17 Million Dollars!

Historical results reveal that the Major Trend System produced impressive profits trading options with very low risk. A $4,600 investment grew to $17,630,551 over a recent ten year period. After deducting the initial $4,600 investment, the net profits were $17,625,951 (before commissions) which equates to a 383,172% return on the initial $4,600 investment. Over the ten year test period this translates to a 38,317% average annual return. This is an excellent annual return for a system with very low risk. All years were profitable.

The system produced $17,670,016 in total profits and $44,065 in total losses. Dividing the total profits by the total losses results in a Profit to Loss Ratio of 401 to 1 which equates to more than 400 dollars of profit for each 1 dollar of loss. The Profit to Loss Ratio is a good measure of risk. A high Profit to Loss Ratio indicates that the Major Trend System keeps losses to a minimum by exiting losing trades before a big loss occurs. The Major Trend System almost always exits a trade before a big loss occurs and provides you with the discipline necessary to become a successful options trader. Keep in mind that two global bear markets occurred during this period including the worst bear market since 1932 during which the S&P 500 Index lost 50% of its value and the NASDAQ suffered a 76% loss. These profit results demonstrate that the Major Trend System is a versatile, effective method for trading options during any type of market condition. Most investment programs recommend diversifying your portfolio across different industry groups. One of the great advantages of the Major Trend System is that it allows you to further diversify your portfolio by taking both long and short trades which increases the diversity and profit opportunities of the system.

$401 of Profit for Each 1 Dollar of Loss

46

Options Work Just as Well in a Down Market

Options work just as well in a down market. The option quote table below contains actual put option prices (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying put options is a bearish strategy as the value of a put option increases as the price of the underlying stock decreases. Hewlett Packard stock is currently trading at 32.78. Lets assume that HPQ stock declines in price 10% from 32.78 to 29.50. Lets focus on the March 30-Strike put option (circled).

10% Stock Price Decrease = 900% Option Return

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

Hewlett-Packard Co. (HPQ)

PUT OPTIONS
Strike 27.50 30.00 32.50 35.00 37.50 Symbol HPQOY.X HPQOF.X HPQOZ.X HPQOG.X HPQOU.X Last 0.05 0.05 0.40 2.30 4.70

At 3:49PM ET: 32.78

0.18 (0.55%)

Expire at close Fri, Mar 17, 2006

Chg 0.00 0.00 0.05 0.10 0.00 Bid N/A N/A 0.45 2.40 4.80 Ask 0.05 0.05 0.55 2.45 5.00 Open Int 13,200 21,661 24,820 5,504 291

A 10% Increase in Stock Price = 950% Call Opt Return A 10% Decline in Stock Price = 900% Put Option Return Making Options the Most Profitable and Most Versatile Financial Investments Available Today

47

High Accuracy Option Trading

Once you select a stock and decide to purchase an option your next challenge is selecting an option time length and strike price. For many stocks there are literally hundreds of options to choose from. For example, there are over 750 options available for stocks such as Apple or Bidu. How does an investor effectively choose an option time length and strike price with so many choices? I like to use historical price data to select an option time length. I also purchase inthe-money options with minimal time value and ample intrinsic value. Options are a wasting asset as options lose all time value at expiration. When you purchase an option the goal is to minimize time value and maximize intrinsic value. In my Options Trading with High Accuracy Report I explain the selection process I use to select options with a high probability of success.

$2.5 Million in Profits with 94% Accuracy

This option selection process recently produced $2,572,413.71 in actual option trading profits with 94% of the trades being profitable. Copies of my brokerage account statements showing these profits are included in the Report.

48

Short Trades Reduce Risk and Increase Profit Opportunities

I use the EMA and Major Trend systems to enter short positions when a stock is in a price down trend. We dont often think of short trades as a way of reducing portfolio risk. Normally short trades are considered high risk but short trades not only reduce portfolio risk but can also dramatically increase the profit potential of your portfolio. In my Key to Profits in Tough Times Report I explore in detail the methods I use to profit from short positions.

Short positions profit when a stock or ETF declines in price. Most trading programs only trade from the long side because of the high risk associated with shorting a stock. In my Key to Profits in Tough Times Report, however, I demonstrate that it is possible to take short positions with limited risk which adds a whole new dimension to wealth creation. The historical and actual profit results presented in this Report demonstrate that trading from the short side dramatically increases your profit opportunities. Lets take a look at an example of how short trades can increase profit opportunities. The price graph below displays the daily price movement of the S&P 500 Index over the past ten years. The S&P 500 Index has declined in price 43% over the past 10 years. A $10,000 investment in the Index ten years ago would be worth $5,700 today (excluding dividends).

Added Dimension

S&P 500 Index Declined 43% Over the Past 10 Years

As we just learned, the Major Trend System buys when is a simple trend following system that buys when a stocks one month price is above its 20-Month Exponential Moving Average and sells short when a stocks one month price drops below its 20Month Exponential Moving Average. This rule based system allows me to do historical testing.

49

Now lets take a look at investing in the S&P 500 Index using the Major Trend System which takes both long and short trades. A $10,000 investment in the index using the Major Trend System grew to $29,311 over the past 10 years. Deducting the original $10,000 investment from the ending balance of $29,311, results in a 19,311 profit before commissions and a 193% return. So taking both long and short trades allowed investors to realize a 193% return and avoid the 43% loss incurred from a buy and hold approach. This demonstrates the ability of short trades to reduce risk and increase profits.

Short Trades Reduce Risk and Increase Profit Potential

193% Profit versus 43% Loss

Major Trend System S&P 500 Index 10-Year Profit Results

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

50

Surviving the Financial Armageddon

By John Weston
There are times in your life that you will never forget. Dates that you know exactly where you were and what you were doing. In our family we have this thing about remembering where you were on significant events in history. My Grandfather would always say that he was out looking for his kids the day Pearl Harbor was attacked. My Dad was collecting glass bottles for money on the beach the day that the stock market crashed in 1929. My Mom was home watching TV the day President Kennedy was assassinated. I was at the office during the terrorist attack on September 11th. I remember sitting there watching the TV with utter disbelief and terror. Unfortunately, I now have another unpleasant day to remember. I am thankful that no one has injured or killed. But the loss of peoples dreams and financial security has become palpable. That day would be September 15, 2008. This day will go down in history as the beginning of the worst financial crisis in the United States since the Great Depression. Due to the Lehman Brothers and Fannie Mae bankruptcy, the Merrill Lynch buyout and the AIG insurance company insolvency, today could be considered one of the worst global financial storms in history. Some call it a Financial Armageddon. Over thirty trillion dollars of highly leveraged mortgage securities that went bad have caused a financial meltdown that has frozen global credit. The day of September 15, 2008 started out no different than most. I was cruising into my desk that morning nursing my second cup of coffee, entertaining thoughts of when the market volatility is going to give us a decisive trend. Well, be careful what you wish for . . . the market was about to show us and the rest of the world a very decisive trend. The market began a precipitous sell off. Of course, Chuck Hughes was already on top of it . . . in the early AM hours he knew the Asian markets were selling off. He had a feeling already that things were going south and the ride was going to be a rough one. Fortunately, Chucks Major Trend System had already positioned us on the right side of the trend in the global currency, commodity and equity markets. In Chuck Hughes August blog he recommended that readers take short positions in the global markets just as he had done over the summer. The Major Trend System issued go short signals for most foreign currencies, commodities and equity markets in the June July time frame. By the end of the day the Dow Jones Industrial Average had lost over 500 points in ONE day. But Chucks ETF trading accounts had a positive return for the day. The copy of his brokerage account Profit/Loss Report that follows shows $14,987.22 in closed trade profits on September 15th and his open trades had a 14.5% return for the day. His other three global ETF trading accounts had similar returns. Chuck Hughes locked in solid profits today and also created spread trades that help preserve existing profits. Trade management and creating spread trades to help protect profits. Protecting profits is a very important requirement for profitable trading during volatile markets.

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14.5% Return in One Day While Dow Dropped 504 Points

Sept 15th Closed Trades

Open Trade Profit

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Trade Selection Process

On any given day there can be hundreds of stocks on an EMA System or Major Trend System buy signal. Over the years I developed a trade selection process that allows us to narrow down the list of buy candidates to those stocks with the best profit potential. There are three steps to finding stocks with the best profit opportunities: 1) Determine the price trend 2) Confirm the price trend 3) Select an entry point Lets review what we have learned thus far. We learned that the 50/100-Day EMA and Major Trend Systems are a simple but effective way to measure the price trend of a stock. If the price trend of a stock is up we buy the stock (or call option). If the price trend is down we sell the stock (or buy a put option).

Step 2: Confirming the Price Trend

The second Step in our three Step stock selection process is confirming the price trend. In this discussion we will focus on stocks in a price up trend but the trend confirmation indicators presented here can also be used to confirm price down trends. In my experience, one of the simplest but most effective methods for confirming the price trend is volume flow. Prices do not move without buyers and sellers. Volume flow precedes price and is the key to measuring the validity and sustainability of a price trend. My favorite volume indicator is the On Balance Volume line. On Balance Volume measures volume flow. When a stock closes up for the day, volume is added to the line and when a stock closes down volume is subtracted from the line. A cumulative total of the volume additions and subtractions form the On Balance Volume line.

On Balance Volume Indicator

When Close is Up Volume is Added When Close is Down Volume is Subtracted A Cumulative Total of Additions and Subtractions Form the OBV Line

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Lets look at an example of how we use the On Balance Volume indicator to confirm the price trend. The price chart below displays the daily price movement for Riverbed stock. Below the price chart is an example of the On Balance Volume line for Riverbed stock. The numerical value of the On Balance Volume line is not important. We simply want to see an up sloping line to confirm a price up trend. We can see from chart below that the On Balance Volume line is sloping up. An up sloping line indicates that the volume is heavier on up days and buying pressure is exceeding selling pressure. Buying pressure must continue to exceed selling pressure in order to sustain a price up trend. So On Balance Volume is a simple indicator to use that confirms the price up trend and the sustainability of the price up trend. We only want to purchase stocks with an up sloping On Balance Volume line. Limiting stock purchases to stocks with an up sloping On Balance Volume line helps us further narrow down our list of potential stocks for purchase.

On Balance Volume Line

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Up Sloping On Balance Volume Line

Volume is Heavier On Days Stock Closes Up Volume is Lighter On Days Stock Closes Down Buying Pressure is Exceeding Selling Pressure Helps Sustain Price Up Trend

The price chart below displays the daily price movement for Apple stock. Below the price chart is the On Balance Volume line for Apple stock. We can see from chart that the On Balance Volume line is sloping up indicating volume is heavier on up days and buying pressure is exceeding selling pressure. The up sloping On Balance Volume line confirms the price up trend and the sustainability of the price up trend.

Confirmed Up Trend

Stock price is trending up with 50-Day EMA line above 100-Day EMA line Volume is increasing on days a stock closes up Volume is decreasing on days a stock closes down

50-Day EMA

100-Day EMA

OBV Line Sloping Up

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On Balance Volume Is a Useful Tool to Confirm the Trend for Virtually Any Market

Downloading On Balance Volume

On Balance Volume can be easily downloaded from www.StockCharts.com. On the home page type in the stock symbol and click Go. In this example I typed in the symbol for Apple stock AAPL.

Once you click Go the default chart for Apple will appear. Below the default chart for Apple select Daily under Periods and 1 Year under Range. Under Indicators select On Balance Volume.

Click Update and the Apple price chart with the On Balance Line will be displayed (see price chart on the following page).

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Apple One Year Price Chart with On Balance Volume Line Below

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New 52-Week High List

Another simple but effective method for confirming a price up trend is the new 52Week high list. A stock is added to the new 52-Week high list when it trades at a higher price than its highest price over the past 52 weeks. For example, prior to today the highest price Apple stock has traded over the past 52 weeks is 249.03. Today Apple traded at 251.14 which is higher than the previous high of 249.03 so Apple was added to todays new 52-Week high list. The new 52-Week high list below lists the stocks that traded at a new 52-Week high today (due to space limitations only the top half of the list is included below). There is a new 52-Week High list published daily when the market is open for trading.

In my trading experience, I discovered that stocks that are making a new 52-Week high tend to continue their price up trend. A stock that makes a new 52-Week high confirms the price up trend and allows you to further narrow down your buy list to stocks with the greatest profit potential. Stocks that are included in the new 52-Week high list represent the very best profit opportunities available out of the universe of more than 6,000 stocks currently trading. Plain and simple . . . A stock does not make the new 52-Week high list unless it is in a very powerful price up trend. 58

Research tip: Even though trend confirmation is Step 2 in our stock selection process, downloading the new 52-Week high list is actually a good initial starting point for the 3 Step stock selection process. Most of the stocks on the new 52-Week high list are also in a price up trend with the 50 EMA line above the 100-Day EMA line. The number of stocks on the new 52-Week high list will vary according to market conditions. I literally check the new 52-week high list almost every trading day. Most of the time the list contains between 20 to 50 stocks which provides an ample number of profit opportunities. I normally will select one stock from an industry group and include 5 to 8 different industry groups in my stock portfolio for diversification. The price chart below shows the daily price action for Apple stock over the 12 months. We can see that Apple stock has been making a series of new 52-Week highs each month with the exception of November and February when new highs were not made. In this example, buying Apple stock when it was trading at a new high price has produced substantial profits.

One Year Price Chart for Apple Stock

Lets review the selection process so far for Apple stock. Apple stock is in a price up trend with its 50-Day EMA line above the 100-Day EMA line. The On Balance Volume line for Apple stock is sloping up indicating volume is heavier on up days and buying pressure is exceeding selling pressure. The up sloping On Balance Volume line confirms the price up trend and the sustainability of the price up trend. Apple stock is making a series of new 52-Week highs which also confirms the price up trend. Based on the confirmed price up trend, I have been purchasing Apple stock over the past year.

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Confirmed Up Trend for Apple

Stock price is trending up with 50-Day EMA line above 100-Day EMA line On Balance Volume Line is sloping up Apple stock is making a series of new 52-Week highs

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Down Loading the New 52-Week High List

The new 52-week high list can be easily downloaded from www.barchart.com. Step 1: Log on to www.barchart.com and click Stocks

Step2: Click 52 Week Highs to display the current new 52-Week High List

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Step 3: Selecting a Buy Point

Now that the Apple stock price up trend has been confirmed we want to select an entry point to purchase Apple stock which is Step 3 of our 3 Step selection process. One of the simplest but most effective entry timing indicators are the Keltner Channels which can quickly and easily be downloaded from investing websites such as www.StockCharts.com. Steps for down loading the Keltner Channels follow. The Keltner Channels function as an overbought/oversold indicator that can help us select a buy point for stocks that are in a confirmed up trend. Overbought is a term used to describe a stock that has been increasing in price over a period of weeks or months with very few price pullbacks. Oversold is a term used to describe a stock that has been decreasing in price over a period of weeks or months with very few prices increases. Stocks in a price up trend do not advance in a straight line. There are always price corrections or retrenchments along the way. Like the tide there is an ebb and flow in the price movements in stocks. This is the natural order of the markets . . . stocks advance and then the price declines inevitably as profit taking occurs. Stocks can remain in an overall price up trend as these price declines occur as long as the price decline is not severe enough to cause the 50-Day EMA line to cross below the 100-Day EMA line which signals a trend reversal from a price up trend to a price down trend. When this occurs a stock should be sold. The Keltner Channels are a valuable timing tool as the channels can help us prevent buying stocks when they are in an overbought condition. When stocks become overbought they are vulnerable to profit taking and minor price declines within the context of remaining in a price up trend. The Keltner Channels can help us avoid buying stocks when they become overbought and instead buy stocks when they become oversold. When you avoid buying stocks that are overbought and instead buy stocks when they are oversold (but still in a price up trend) you greatly increase your odds of selecting a profitable trade. Lets take a look at an example of the Keltner Channels and how they can help us select our entry point. The price chart that follows displays the daily price movement for Apple stock along with the three Keltner Channels. There is an upper channel, middle channel (which is the dotted line) and a lower channel. When a stock trades near the upper channel it is an indication the stock is becoming overbought and will most likely encounter selling pressure and then trade back down towards the middle or lower channel.

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When a stock trades near the lower channel it is an indication the stock is becoming oversold and will most likely encounter buying pressure and then trade back up towards the middle or upper channel. If you are considering buying Apple stock you dont want to buy if the stock is trading near the upper channel as there is a good chance the stock will encounter selling pressure near the upper channel and then decline in price. It is better to wait until the stock trades near the middle or lower channel before buying. This results in a better entry as the stock most likely will trade back up towards the upper channel.

Upper Channel

Apple Stock Price

Middle Channel (dotted line)

Lower Channel

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Circled below are examples of Apple stock trading above the upper channel. When a stock is trading above the upper channel it is better to wait for the stock to decline towards the middle or lower channel before buying. When a stock is trading near the middle or lower channel there is a good probability that it will rally back towards the upper channel. In each of these examples, after the stock traded above the upper channel it declined back towards the middle or lower channel within a week or two except for the example that occurred in mid July. In this example the retracement took a little longer as the stock traded near the upper channel in mid July and did not retrace back to the middle channel until mid August. This happens occasionally in bull markets. Currently Apple is trading above the upper channel and has stayed above the upper channel for several weeks not presenting any buying opportunities. In my experience this is very rare. Currently Apple stock would have to decline to about 236 before it touches the middle channel.

Dont Buy When a Stock Is Trading Near the Upper Channel

Dont Buy When a Stock Is Trading Near the Upper Channel

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Identifying the Keltner Channel Price Levels

Whenever you download a Keltner Channel price chart, the price chart will list the price levels for the Lower, Middle and Upper Channel. Currently the Lower Channel price level is 229.39 (circled below). The Middle Channel price level is 236.01 and the Upper Channel price level is 242.64 (circled below). Lower Channel Currently at 229.39 Price Level Middle Channel Currently at 236.01 Price Level Upper Channel Currently at 242.64 Price Level If you are considering buying Apple stock, you would want to wait until the price of the stock declines to the middle or lower channel price level which is the 236.01 to 229.39 price level in this example.

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Actual Trade Examples Using the Keltner Channels

My brokerage account trade confirmations below list recent purchases I made for Apple stock. The confirmations list the date of purchase and purchase price.

I used the Keltner Channels to help select my purchase entry point. I bought Apple stock when the stock was trading near the middle or lower channel which lowers my entry risk of buying stock when it is overbought and due for a price correction. These actual entry points are circled below. You can see from the price chart that Apple stock did not decline in price much below my entry points. Using the Keltner Channels to help time my entry points reduced the risk of my stock purchase. With Apple stock trading near 249 I now have a substantial profit for my stock purchases.

I Bought AAPL Stock When It Was Trading Near the Middle or Lower Channel

I Bought AAPL Stock When It Was Trading Near the Middle or Lower Channel

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Timing Our Stock Purchases

I have found the Keltner Channels to be a valuable timing tool that help me select a low risk entry point for my stock purchases. Buying a stock when it is trading near the lower or middle channel can help prevent buying stocks when they are in an overbought condition and are vulnerable to price declines. Buy Stocks When They Are Trading Near the Lower or Middle Channel I like to buy a stock when the stock is trading near the middle or lower channel and is oversold. When a stock is oversold there is a good probability that it will rally back towards the upper channel providing us with a lower risk buy point. I try to avoid buying a stock when it is trading near or above the upper channel and is overbought. When stocks become overbought they are vulnerable to profit taking and will most likely encounter selling pressure. The Keltner Channels can help us avoid buying stocks when they become overbought and instead buy stocks when they become oversold lowering the overall risk and increasing the profit potential of stock trading. Lets review the three Step selection process so far for Apple stock. Apple stock is in a price up trend with its 50-Day EMA line above the 100-Day EMA line. The On Balance Volume line for Apple stock is sloping up indicating volume is heavier on up days and buying pressure is exceeding selling pressure. The up sloping On Balance Volume line confirms the price up trend and the sustainability of the price up trend. Apple stock is making a series of new 52-Week highs which also confirms the price up trend. The last step is to purchase Apple stock using the Keltner Channels to help identify a lower risk entry point. Currently the middle Keltner Channel is at the 236 price level and the lower Keltner Channel is at the 229.40 level. If Apple stock declines to the 236 to 229.40 level then we want to enter our buy order to purchase the stock. Selection Process for Apple Stock Stock price is trending up with 50-Day EMA line above 100-Day EMA line On Balance Volume Line is sloping up Apple stock is making a series of new 52-Week highs Keltner Channels indicate a good buy point would be between 236 and 229.40

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Downloading Keltner Channels

The Keltner Channels can be easily downloaded from www.StockCharts.com. On the home page type in the stock symbol and click Go. In this example I typed in the symbol for Apple stock AAPL.

Once you click Go the default chart for Apple will appear. Below the default chart for Apple select Daily under Periods and 1 Year under Range. Under Overlays select Keltner Channels. The default Parameters are 20,2.0,10.

Click Update and the Apple price chart with the Keltner Channels will be displayed (see price chart on the following page).

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Apple One Year Price Chart with Keltner Channels

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Current and Recent Actual Profit Results $1,370,434.20 in Profits, No Losing Trades
My brokerage account Profit/Loss Reports that follow show $1,370,434.20 in current and recent open trade profits with no losing trades. I used the 3-Step trade selection process just presented to select these trades.

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Current Profit Performance

Trade Selection Process Produces Average Return of 86.3% with 99% Winning Trades
I use my 3-Step trade selection process to make stock, ETF and option trade recommendations for my Inner Circle Advisory Service. Currently the Inner Circle Advisory has $1,075,981.83 in open trade profits and an average return of 86.3%. There are currently 138 winning trades and one losing trade resulting in 99% winning trades.

Inner Circle Advisory Current Open Trade Profit Results 138 Winning Trades, 1 Losing Trade = 99% Accuracy Portfolio
Stock Portfolio Dividend Portfolio Option Portfolio Option Spread Portfolio Buy Write Portfolio MHC Strategy Micro Cap Portfolio

Profit/Loss

Percent Return

Winning Trades
24 24 14 17 25 17 17

Losing Trades
1 0 0 0 0 0 0

$191,397.40 $161,344.80 $104,315.00 $62,238.00 $150,739.27 $56,462.90 $349,484.46

78.6% 72.0% 95.5% 45.8% 63.8% 30.2% 218.0%

Total Profits/ Avg Return

$1,075,981.83

86.3%

138

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My trade selection process continues to produce excellent returns for my advisory service members. In January 2011 we closed out record monthly profits of $107,318.00 with an average closed trade return of 45.2%. Over the past 18 months the advisory service has produced $614,974.62 in closed trade profits with an average monthly return of 42.0%

Inner Circle Advisory Closed Trade Profit Results

Monthly Profits
January-2010 February-2010 March-2010 April-2010 May-2010 June-2010 July-2010 August-2010 September-2010 October-2010 November-2010 December-2010 January-2011 February-2011 March-2011 April-2011 May-2011 June-2011

Profit Loss
$54,080.00 $22,854.00 $24,875.00 $33,010.00 $7,750.00 $12,665.00 $7,970.30 $12,681.18 $12,540.00 $31,044.05 $53,983.36 $67,039.00 $107,318.00 $20,812.75 $40,238.25 $45,023.60 $26,603.61 $34,486.10

Percent Return
37.2% 32.9% 52.7% 45.7% 26.5% 67.2% 50.8% 29.4% 34.2% 39.6% 69.1% 51.4% 45.2% 19.8% 33.4% 77.2% 20.2% 22.8%

Total Profits/ Avg Return

$614,974.62

42.0%

If you would like more information on becoming a member of the Inner Circle Advisory Service please call Brad toll free at 866-661-5664 (310-647-5664) or log on to www.ChuckHughesIC.com
Option and stock investing involves risk and is not suitable for all investors. Only invest money you can afford to lose in stocks and options. Past performance does not guarantee future results. The trade entry and exit prices represent the price of the security at the time the recommendation was made. The Inner Circle Advisory trade record does not represent actual investment results. Trade examples are simulated and have certain limitations. Simulated results do not represent actual trading. Since the trades have not been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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There were two main reasons my advisory service was able to maintain a 42% average monthly return over the past 18 months: 1) The trend following systems were able to take full advantage of the price trends during recent volatile markets to deliver consistent profits 2) And due to the increased market volatility over the past year I favored spread and buy write trades, which have the potential to deliver high returns during any type of market condition

For Updated Profit Results Log On to ChuckHughesIC.com and Click Trade Results

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26 Years of Actual Trading Results

I have been trading using my trend following systems for more than 26 years. The systems have contributed to my more than four and one half million dollars of actual trading profits over the past 26 years. Copies of my tax returns and brokerage statements showing this $4,569,797.88 in actual profits follow.

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