Hughes PaidReport

8/12/2019 Hughes PaidReport

1/197

By Chuck Hughes


2/197

2

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 1976United 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 ofthe Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements thatexpress 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 andprojections at the time the statements are made that involve a number of risks and uncertainties which couldcause actual results or events to differ materially from those presently anticipated. Investing involves the riskof loss as well as the possibility of profit. All investments involve risk, and all investment decisions of anindividual remain the responsibility of that individual. Option and stock investing involves risk and is notsuitable for all investors. Past performance does not guarantee future results. No statement in this bookshould be construed as a recommendation to buy or sell a security. The author and publisher of this bookcannot guarantee that the strategies outlined in this book will be profitable and will not be held liable for anypossible trading losses related to these strategies.

All information provided within this publication pertaining to investing, options, stocks and securities iseducational information and not investment advice. Legacy Publishing advises all readers and subscribers toseek advice from a registered professional securities representative before deciding to invest in stocks andoptions featured within this publication. None of the material within this publication shall be construed as anykind of investment advice. Readers of this publication are cautioned not to place undue reliance on forward-looking statements, which are based on certain assumptions and expectations involving various risks anduncertainties that could cause results to differ materially from those set forth in the forward lookingstatements. Please be advised that nothing within this publication shall constitute a solicitation or aninvitation to buy or sell any security mentioned herein. The author of this publication is neither a registeredinvestment advisor nor affiliated with any broker or dealer.

Although every precaution has been taken in the preparation of this publication, the publisher and authorassume no liability for errors and omissions. This publication is published without warranty of any kind, eitherexpressed 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 toindemnify, release and hold harmless Legacy Publishing, its members, employees, agents, representatives,

affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and against any and allclaims, 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, courtcosts and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any ofThe Companies as a result of, or arising out of this agreement and/or your use of this publication. Thispublication is designed to provide accurate and authoritative information in regard to the subject mattercovered. 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 servicesof a competent professional person should be sought. Use of the material within this publication constitutesyour 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 SIMILARTO 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 WITHTHE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NOHYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUALTRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM INSPITE 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 ANYSPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICALPERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.


3/197

3

High Accuracy Option Trading

Welcome to the exciting world of High Accuracy Option Trading! In my experience Ihave 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 forme 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 firstespecially 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 APractical Guide to Option Trading that will help you quickly learn the basics of optiontrading.

Over 2.5 Million Dollars of Actual Profits with 94% AccuracyI have been trading options for more than 25 years and in this Report I am going tointroduce 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 CycleStrategyanywhere else except in my publications.

You will discover in this Report that it i spossible to trade options with up to 90%

accuracy as demonstrated by my actual option trading profits which are presented atthe end of this Report. Copies of my brokerage account confirmations starting on Page

21 show that the Option Cycle Strategycontributed to my $2,572,413.71 in optiontrading 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 selecta trade entry and exit point. Historical and actual profit results demonstrate that this

combination of indicators produces a powerful investing force that identifies tradeswith the greatest profit potential.

My Option Cycle Strategywhen 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 Strategyutilizes historical price data to help select anoptions time length (expiration date) and strike price with up to 90%+ accuracy.

Using Volume to Confirm Price TrendVolume 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 precedesprice and is the key to measuring the validity and sustainability of a price trend.


4/197

4

Confirmed Up TrendStock price is trending up with the 50-Day EMA above the 100-Day EMAVolume 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 EMAVolume is decreasing on days a stock closes upVolume 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 stockcloses down, volume is subtracted from the line. A cumulative total of the volumeadditions 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 OnBalance 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 isa good indication that the price up trend is valid and can be sustained.

OBV Line Trending Up

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


5/197

5

Option Time Length and Strike PriceSelection is Just As Important

as Stock Selection

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 calloption, 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!

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 haveless 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 Strategyis to enable you to become a successful options trader byhelping 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 Strategyto 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 bearishstrategies such as purchasing put options or put option spreads.


6/197

6

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 OptionTime Length with High Accuracy

Step 3 -Purchase In-the-Money Optionswith Low Time Value

Using Option Cycles to Select Option Time LengthLets look at an example of the historical price data I use for the Option CycleStrategy. 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 lengthof an option.

The table below is an example of historical price data for Apple stock in 2007. Thistable 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 20071-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 88.5 84.8 89.6 91.0 110.0 120.5 143.7 122.0 144.0 170.4 166.4 193.9

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

3 Month 10.6% 2.8% 57.9% 18.6%

6 Month 45.7% 62.4%

LEAPS 16.3%

The second row of this table lists the monthly price change for Apple stock on optionexpiration day which is the 3rdFriday of the expiration month. For the one month time

period between Jan and Feb option expiration in 2007, Apple stock price declined4.2% (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 3rdFriday of the month.


7/197

7

The 3rdrow 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 expirationApple stock increased 2.8%. Between Apr and Jul option expiration Apple stockincreased 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 andJul and Jan. The one year price change for Apple stock between Jan LEAPS optionexpiration 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 Ican 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 usingthe 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 dayhistorically there is a 70% chance Apple stock increased in price over the 1 monthperiod between option expiration days.

Purchasing a 3 month option resulted in an increase in Apple stock 76% of the timeand purchasing the 6 month option resulted in an increase in Apple stock 91% of thetime 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 % of Times AAPL

Length Increased in Price

Monthly 70%

3 Month 76%

6 Month 91%

1 Year 100%

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


8/197

8

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 wantedto purchase an Apple call option, I would trade the 3 or 6 month options for Applewhich 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 manystrike prices available. For example, currently the Apple July options have 78 differentstrike price choices.

The value of an option consists of time value and intrinsic value. At option expirationoptions 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 in-the-money the more intrinsic value it will have. Out-of-the-money and at-the-

money options consist of only time value. The time value portion of an option is adecaying asset. You therefore want to maximize intrinsic value and minimize time

value when you purchase an option.

Out-of-the-Money Call PurchaseLets 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 optionsare trading at 3.15 points. Apple stock is trading at 173.25 so purchasing the 185-Strike 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 alltime value and no intrinsic value. The breakeven price for this call option purchasewould 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.


9/197

9

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 Premium188.15 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 onoption 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 dayeach 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 stockprice 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 profitablebased on a 8.6% increase in Apple stock price to break even.

Apple Option Expiration Stock Price Data 2007


AAPL 88.5 84.8 89.6 91.0 110.0 120.5 143.7 122.0 144.0 170.4 166.4 193.9

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

3 Month 10.6% 2.8% 57.9% 18.6%

6 Month 45.7% 62.4%

LEAPS 16.3%

For example, on option expiration day on February 16 th2007 Apple stock was trading

at 84.80 which was a 4.2% decrease in price from the previous month when Applestock was trading at 88.50. Purchasing an out-of-the-money call on January 19thand

selling on February 16thwould result in a total loss of the premium with a 4.2%decrease in Apple stock price.


10/197

10

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 andsix trades with a total loss of the premium. In May, June and July a call purchasewould 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 tradingcapital. No matter how good your stock selection is, there will be periods when youare 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 Stock Option

% Change Profit/Loss

January 0.9% -100%

February -4.2% -100%

March 5.7% -100%

April 1.6% -100%

May 20.9% Profitable

June 9.5% Profitable

July 19.3% Profitable

August -15.1% -100%

September 18.0% Profitable

October 18.3% Profitable

November -2.3% -100%

December 16.5% Profitable

2006 Results: Two Profitable Trades and Ten Total Losses

Month Stock Option


January 7.0% -100%

February -7.6% -100%

March -8.0% -100%

April 3.6% -100%

May -3.7% -100%

June -10.8%-100%

July 5.5% -100%

August 11.8% Profitable


October 8.0% -100%

November 7.3% -100%

December 2.2% -100%


11/197

11

Twelve Consecutive Losing TradesI have subscribed to more than a half dozen option advisory services over the years inmy quest to learn profitable trading strategies. All of these services recommended thepurchase 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 thegame.

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 makehuge 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 tomake 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 AccuracyAs 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 thatis 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 thestock 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 a1% 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 increasethe accuracy of your options trading compared to out-of-the-money options.


12/197


13/197

13

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 muchhigher probability of being profitable than the out-of-the-money trade example withan 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 profitpotential for this Call Option purchase assuming various price changes for Apple stockat 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 optionprofit. 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 optionis 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 ValueLets 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 expirationday each month and the percentage gain/loss from the previous month.


14/197

14

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 justpresented. The Apple 150-Strike in-the-money call requires a 0.7% increase in Applestock 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


AAPL 88.5 84.8 89.6 91.0 110.0 120.5 143.7 122.0 144.0 170.4 166.4 193.9

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

3 Month 10.6% 2.8% 57.9% 18.6%

6 Month 45.7% 62.4%

LEAPS 16.3%

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 andthree trades with a 25% loss. Five of these winning trades would result in a more thana 100% return. This compares favorably to the previous out-of-the-money examplewhich 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 normallyenables 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 resultsin higher accuracy trading and reduces risk considerably compared to trading out-of-

the-money options. This provides the best overall risk/reward profile for optiontrading.

2007 Results: Nine Profitable Trades and Three 25% Losses

Month Stock Option


January 0.9% Profitable

February -4.2% -25%

March 5.7% Profitable

April 1.6% Profitable

May 20.9% Profitable

June 9.5% Profitable

July 19.3% Profitable

August -15.1% -25%


October 18.3% Profitable

November -2.3% -25%

December 16.5% Profitable


15/197

15

Advantages of In-the-Money Call Purchases versus Out-of-the-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 Out-of-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 SpreadsIn addition to option purchases I use the option cycle data to help select strike pricesfor 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 theunderlying 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 confirmationbelow shows that on March 25thI purchased 10 of the ISRG April 250-Strike calls for78.96 points and sold 10 of the ISRG April 280-Strike calls for 53.76 points. The April

calls expire in less than one month.


16/197

16

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 thepremium 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 in-

the-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 toopen 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 assumesvarious percent changes in ISRG stock at option expiration from a 15% increase inprice 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 thespread 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.


17/197

17

I think the reward/risk profile for this in-the-money spread trade strikes a goodbalance between an excellent monthly return potential and substantial downsideprotection 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 optionexpiration. 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 thepercentage gain/loss from the previous month.

ISRG Option Expiration Price Data 2007


ISRG 93.41 114.41 111.67 131.75 132.64 140.56 198.59 199.13 221.91 269.34 280.65 325.4

Monthly -10.1% 22.5% -2.4% 18.0% 0.7% 6.0% 41.3% 0.3% 11.4% 21.4% 4.2% 15.9%

Increased AccuracyThe 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 themonthly 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 optioncycle 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 the3 month and 6 month option cycle trading.


18/197

18

Recent Profit Results

Lets take a look at some recent Option Cycle Strategyprofit results. I use the Option

Cycle Strategyto 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 anaverage 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 Profit/Loss Percent Winning Losing

Return Trades Trades

Option Portfolio $104,315.00 95.5% 14 0

Option Spread Portfolio $62,238.00 45.8% 17 0

Total Profits/ Avg Return $166,553.00 70.6% 31 0

Inner Circle Advisory Service

My Inner Circle Advisory Serviceuses the Option Cycle Strategyto make option

purchase and option spread trade recommendations.

The Inner Circle Advisoryprovides research and makes recommendations for highaccuracy option trading. Members receive email alerts whenever there is a new

trading recommendation or a change to an existing recommendation. If you areinterested in becoming a member of the Inner Circle Advisoryplease 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


19/197

19

High Accuracy Real Time Results$2,572,413.71 Profit with 94% Accuracy

I also use the Option Cycle Strategyin 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/Lossreports that follow. There were a total of 251 trades of which 237 were profitableresulting 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 aspread 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.


20/197

20


21/197

21


22/197

22


23/197

23


24/197

24


25/197

25


26/197

26


27/197

27


28/197

28


29/197

29


30/197

30

Option Spread Trades


31/197

31


32/197

32


33/197

33


34/197

34


35/197

35


36/197

By Chuck Hughes

Extra MoneyMade Easy:Introducing the Strategy

that produced5 Million Dollarsin premium income overthe past 3 years

Introducing the Strategy

that produced5 Million Dollarsin premium income overthe past 3 years


37/197

2



Information within this publication contains "forward looking statements" within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements thatexpress 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 andprojections at the time the statements are made that involve a number of risks and uncertainties which couldcause actual results or events to differ materially from those presently anticipated. Investing involves the risk ofloss as well as the possibility of profit. All investments involve risk, and all investment decisions of an individualremain the responsibility of that individual. Option and stock investing involves risk and is not suitable for allinvestors. Past performance does not guarantee future results. No statement in this book should be construedas a recommendation to buy or sell a security. The author and publisher of this book cannot guarantee that thestrategies outlined in this book will be profitable and will not be held liable for any possible trading lossesrelated to these strategies.

All information provided within this publication pertaining to investing, options, stocks and securities iseducational information and not investment advice. Legacy Publishing advises all readers and subscribers toseek 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 anykind of investment advice. Readers of this publication are cautioned not to place undue reliance on forward-looking statements, which are based on certain assumptions and expectations involving various risks anduncertainties 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 sellany security mentioned herein. The author of this publication is neither a registered investment advisor noraffiliated with any broker or dealer.

Although every precaution has been taken in the preparation of this publication, the publisher and authorassume no liability for errors and omissions. This publication is published without warranty of any kind, eitherexpressed or implied. Furthermore, neither the author nor the publisher shall be liable for any damages, eitherdirectly 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, courtcosts and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of TheCompanies as a result of, or arising out of this agreement and/or your use of this publication. This publicationis designed to provide accurate and authoritative information in regard to the subject matter covered. It is soldwith the understanding that the author and publisher are not engaged in rendering legal, accounting, or otherprofessional services. If legal advice or other expert assistance is required, the services of a competentprofessional person should be sought. Use of the material within this publication constitutes your acceptanceof 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 SIMILARTO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCERESULTS 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 WITHTHE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NOHYPOTHETICAL 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 OFTRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARENUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFICTRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCERESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.


38/197

3

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. Thisincome 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 fastestpace in over 50 years. The table below lists a few examples of the painful dividend cuts

imposed by major corporations.

Company Dividend Cut

JP Morgan 87%

Pfizer 50%

Wells Fargo 85%

Dow Chemical 64%

These type of dividend cuts are rare for blue chip companies. For example, until this

year Pfizer increased its dividend regularly for more than 40 years. And Dow Chemicalwent 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 richoption 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 generatecash 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 donthave to wait a year to receive a 3% or 4% dividend yield. When you sell optionpremium, 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 MarketsSelling option premium to generate immediate cash income is the ideal strategy for

todays volatile markets and uncertain economy. We will look at an actual tradeexample 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 stockprice 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 ahuge advantage over a stock purchase strategy and allows you to profit in any type of

market condition.


39/197

4

Added DimensionThis gives the option income strategy a huge advantage over a stock purchase strategyand allows you to profit in any type of market. The option income strategy works justas 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 YearsDue to the versatility of the option income strategy and its ability to profit in up, downor 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 tradeconfirmations 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 morethan $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 foreach option sale.

I have been trading the option income strategy for many years. During the 1990s Igenerated over 11 million dollars of option income. Copies of my brokerage accountstatements documenting this option income are presented in my Guaranteed Real

Income Programmanual.

The key to selling option premium to generate cash income is to make sure the optionyou 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 abuy write or covered call or

Purchase a put option and sell a put option with a lower strike price tocreate an option debit spread


40/197

5

Selling Covered Option Premium

Buy Stock and Sell Call Option or

Buy Call Option and Sell Call Option withHigher Strike Price to Create a Debit Spread

Selling Covered Options is a Limited Risk Strategy

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 ETFor owning a put option. Because the short option is covered this is a limited riskstrategy. 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 typeof market condition.

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 soldto 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 getto 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


41/197

6

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%

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 orcovered call trade. My brokerage confirmation below shows that I bought 600 shares ofMorgan 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 percontract 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 a30% 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.


42/197

7

Up to 90% Cash Dividend Potential

Over the Course of One Year

By Rolling Over Option

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 wouldreceive a total of 3 cash payment over the course of one year. This has the potential ofproducing 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.

Buying Morgan Stanley stock at a 30% discount reduces risk considerably. This tradewill 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 incometrades 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 aftercommissions for this portfolio.

49% Cash Income by Rolling Over TradesI normally reinvest the cash income I receive from option income trades in additionaloption 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 paymentof 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 abilityof 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 newoption 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.


43/197

8

Option Income Trades


44/197

9

Bearish Option Income Trade ExampleBearish option income trades can also established by purchasing a bearish ETF andselling 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 20.00points. 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 (beforecommission) for 3 contracts.


45/197

10

Profiting in Down MarketsThe Buy Write Analysis below displays the profit/loss potential for buying the bearishEmerging 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 20.0points 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 EEVETF to 121.00 results in a 56.3% return and a 10% decrease in price to 87.12 results ina 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.


46/197

11

Option Income Strategy Incurs

Less Risk than Owning Stock

$1633 Stock Loss = $3,553 Buy Write ProfitLets take a look at an example of how a buy write trade can be profitable even if theunderlying 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 downsideprotection 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 $1,633loss 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


47/197

12

Buy 65-Strike Call at 50.63 Points

Sell 95-Strike Call at 27.93 Points


Over a Four Month Period

27.93 Divided by 50.63 = 55%

Lets now look at an example of the second type of option income trade that isimplemented using only options by purchasing a call option and selling a call optionwith 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 50.63points 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 percontract 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 forthe 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 pricemovement of Goldman Sachs stock. Goldman Sachs stock was trading at 112.10 whenI initiated this trade.


48/197

13

Up to 165% Cash Dividend Potential

Over the Course of One Year

By Rolling Over Option Spread

When this option spread expires in 4 months I can create another option spread andcollect another cash payment. This is called a rollover. If I rollover this option spread asecond 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.

Buying the GS 65-strike call option at a 55% discount reduces risk considerably andprovides considerable downside protection in the event Goldman Sachs stock declinesin 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 spreadstrategy in producing profits under various market conditions. This gives the option

income spread strategy a big advantage over an option purchase strategy whichrequires a stock price increase in the underlying stock to be profitable.


49/197

14

Buy 400-Strike Put at 70.02 Points

Sell 370-Strike Put at 45.02 Points


45.02 Divided by 70.02 = 64%

Bearish Option Income Spread Trade ExampleBearish 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 symbolIJAP400 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 7contracts. 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 upfront 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 ISRGstock increases in price, remains flat or decreases in price.


50/197


51/197

16

Buying US Steel stock at 43.72 and selling the 45-Strike call option has a $360 and8.7% 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 incomestrategy has the potential to return approximately 109% over the next twelve months.

US Steel Annualized Return Potential 109.4%

Stock Entry Option Stock Call Call Cost Net Profit Percent Annualized

Date Expiration Price Strike Price Potential Return Return

X 08/20/09 09/18/09 43.72 45.0 2.32 41.40 $360 8.7% 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%



WDC 08/21/09 09/18/09 32.99 34.0 1.01 31.98 $202 6.3% 82.3%

Hartford Insurance Annualized Return Potential 172.7%



HIG 08/28/09 09/18/09 24.14 25.0 1.40 22.74 $226 9.9% 172.7%


52/197

17

JP Morgan Annualized Return Potential 70.2%



JPM 08/13/09 09/18/09 42.70 34.0 1.55 41.15 $285 6.9% 70.2%

McDermott Annualized Return Potential 109.4%



MDR 08/20/09 09/18/09 23.85 25.0 .85 23.00 $200 8.7% 109.4%


53/197

18

Advantages of Option Income StrategyI think the actual trade examples just presented and the brokerage confirmations thatfollow showing over $5 million in option income demonstrate the ability of the optionincome 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 thedividend 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% cashpayment up front when the option is sold

When you buy stock at a 30% discount you can profit if the stock priceincreases, remains flat or even declines 20% to 25% resulting in lower risk anda 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 incomeinvesting

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


54/197

19

Current Profit Results

Lets take a look at some current option income profit results. I make option incometrade 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 anaverage 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 profitabledemonstrating the high profit potential and low risk nature of these strategies.

Portfolio Profit/Loss Percent Winning Losing

Return Trades Trades

Buy Write Portfolio $150,739.77 63.8% 25 0

Option Spread Portfolio $62,238.00 45.8% 17 0

Total Profits/ Avg Return $212,977.77 54.8% 42 0

The Inner Circle Advisory Service

My Inner Circle Advisoryprovides research and makes option income traderecommendations. 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 Advisoryplease call our support staff at 856-325-6013 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


55/197

20

$5,776,807.63 in Cash IncomeOver 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 morethan $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 foreach option sale.


56/197

21


57/197

22


58/197

23


59/197

24


60/197

25


61/197

26


62/197

27


63/197

28


64/197

29


65/197

30


66/197

31


67/197

32


68/197

33


69/197

34


70/197

35


71/197

36


72/197

37


73/197

38


74/197

39


75/197

40


76/197

41


77/197

42


78/197

43


79/197

44


80/197

45


81/197

46


82/197

47


83/197

By Chuck Hughes

Astonishing $4.5Million in Profits:

ChuckHughesTrend-FollowingReports


84/197

2



Information within this publication contains "forward looking statements" within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements thatexpress 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 andprojections at the time the statements are made that involve a number of risks and uncertainties which couldcause actual results or events to differ materially from those presently anticipated. Investing involves the riskof loss as well as the possibility of profit. All investments involve risk, and all investment decisions of anindividual remain the responsibility of that individual. Option and stock investing involves risk and is notsuitable for all investors. Past performance does not guarantee future results. No statement in this bookshould be construed as a recommendation to buy or sell a security. The author and publisher of this bookcannot guarantee that the strategies outlined in this book will be profitable and will not be held liable for anypossible trading losses related to these strategies.

All information provided within this publication pertaining to investing, options, stocks and securities iseducational information and not investment advice. Legacy Publishing advises all readers and subscribers toseek advice from a registered professional securities representative before deciding to invest in stocks andoptions featured within this publication. None of the material within this publication shall be construed as anykind of investment advice. Readers of this publication are cautioned not to place undue reliance on forward-looking statements, which are based on certain assumptions and expectations involving various risks anduncertainties that could cause results to differ materially from those set forth in the forward lookingstatements. Please be advised that nothing within this publication shall constitute a solicitation or aninvitation to buy or sell any security mentioned herein. The author of this publication is neither a registeredinvestment advisor nor affiliated with any broker or dealer.

Although every precaution has been taken in the preparation of this publication, the publisher and authorassume no liability for errors and omissions. This publication is published without warranty of any kind, eitherexpressed 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 toindemnify, release and hold harmless Legacy Publishing, its members, employees, agents, representatives,

affiliates, subsidiaries, successors and assigns (collectively, "The Companies") from and against any and allclaims, 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, courtcosts and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any ofThe Companies as a result of, or arising out of this agreement and/or your use of this publication. Thispublication is designed to provide accurate and authoritative information in regard to the subject mattercovered. 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 servicesof a competent professional person should be sought. Use of the material within this publication constitutesyour 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 SIMILARTO 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 WITHTHE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NOHYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUALTRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM INSPITE 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 ANYSPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICALPERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.


85/197

3

Trend Following Works!

My trading career started more than 26 years ago. At the time I was a junior airlinepilot 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 usingsystems. I didnt know much about trading but I did realize system trading wassomething that I could learn at my own pace and the time involved was totallyflexible. 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, business-like 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 quicklydiscovered 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 pricedata 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 neverseemed 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 moneymanagement 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 trendis 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 thatno one can consistently predict the future. It is better to let the price trend of themarket tell you when you should buy or sell.

A trend following system is your road map to trading success. Trend followingcombined with money management discipline is a powerful, systematic approach that

allows you to manage risk and produce consistent returns. It allowed me to turn mytrading 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. Ihad 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 $460,164profit 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 ofthis 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 layoffsor unforeseen problems with the airlines was liberating!


86/197

4

Then the unthinkable happened. I started having vertigo spells for no apparentreason. I knew that if the vertigo spells continued it would mean an end to my flyingcareer. 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 prayedthat 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 InternationalTrading 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 real-money international trading contest in which the contestant with the highest percent

return wins.

Over 5.9 Million Dollars of Actual Trading ProfitsFortunately for me my trend following systems produced $5,940,232.08 in actualtrading profits over the past 26 years providing financial security for myself andfamily. 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 outmy trading career I would not be where I am today. It was my saving grace in a timeof 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.


87/197

5

Road Map to Trading Success

To the average investor the stock market can seem complicated and confusing. Stockscan go up or down for no apparent reason. Apple reports great earnings but the stockplummets. 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 FridayEmployment Report is dismal but the Dow Jones Industrial Average soars. When it

comes right down to it, the reason whystock 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 thatmatters 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 thanbuy 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 w h ya stock pricerises 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 willknow 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. Thereare numerous ways to get a reading on the direction of a stock. I want to teach youseveral 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


88/197

6

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 buyingpressure is exceeding selling pressure and the stock should be bought. If the dailyprice 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 topurchase a stock only if the buying pressure exceeds selling pressure as indicated bythe 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 willbottom 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 willbottom 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 s t o ck s p r i c e m o v e m e n t r e f l e c t s a l l o f t h e k n o w n i n f o r m a t i o n a b o u t a

c o m p a n y s o le t t h e p r i ce m o v e m e n t o f t h e s t o ck t e l l y o u w h e n y o u s h o u l d

b u y a n d s e l l !

One of the most effective ways to measure buying and selling pressure is to look atthe 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 effectiveways. It is using a price chart.

Price charts are a great way to get a visual look at the daily price changes and theprice trend of a stock. It is the price trend that will allow us to make the buy or selldecision.

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 thestock should be sold. Lets take a closer look at price charts and how this tool will leadus to the path of success.

Daily Price Trend of a Stock Is Increasing = Buy

Daily Price Trend of a Stock Is Deceasing = Sell


89/197

7

Using Price ChartsPrice charts are a great tool that helps us determine a stocks price movement. Thedaily 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 ofthe chart which is one month in this example from March 8ththrough 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 22ndthe daily bar shows that Apple stock traded in a range from about 220 to 226

(circled). The closing price on March 22ndwhich is represented by the horizontal barwas about 225.

Determining the Price TrendAs 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 stocksthat 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 onestep 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.

Daily Price Movement


90/197

8

Knowing When to Buy or SellMoving 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. Forexample 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 pricefluctuations. The daily price chart below for Apple stock covers the 3 month period ofNovember, 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 thebeginning of January followed by another price decline in January. Despite the dailyprice fluctuations the stock price was little changed over the 3 month period.

Three Month Price Action Shows No Clear Trend



91/197

9

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. Thisprice chart also includes the 50-Day Exponential Moving Average (EMA) line for Applestock. 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 UpClearly Indicating a Price Up Trend

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 astock.

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 trendand 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 obtainmoving average lines from numerous websites such as StockCharts.com or Yahoo

Finance.


50-Day EMA LineTrending Up


92/197

10

Moving averages are a simple method for tracking the current price trend of a stockand allow us to trade with the price trend instead of trying to predict the future pricemovement of a stock. I use two different m

Documents

Hughes PaidReport