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Retirement Trader Video No. 3:
How to Get Started Making Money
with Options
By: Dr. David Eifrig Jr., MD, MBA

Hello. I'm Dr. David Eifrig... editor of Stansberry & Associates' Retirement Trader.

I hope you're enjoying this series of videos.

In our introductory video we walked through several examples of how selling a put option works.

In our second video, we studied several of the profitable, real life trades we've made in Retirement Trader... and we learned six important options terms.

In this video, I'm going to show you exactly how to set up your options account... how much money you need to get started, and how to enter your trades.

As you're about to learn, it's all much simpler than anyone thinks.

First, let's talk about money and how much you'll need to get started.

I recommend people have at least $15,000 in their margin account to start trading in Retirement Trader.

Once you have that amount of money you'll need to set up your account for both margin and option approval.

The government requires all options be held in what is called a "margin account."

Getting approved for a margin account isn't an easy process...

But don't panic.

You simply need to ask for "margin approval to sell put options."

Some brokers and advisors might even tell you that you can't or shouldn't be doing this.

Once the margin approval is in place and realistically both of these are done at the same time, you'll need to authorize your brokerage account for trading options.

Your broker can provide you with what is called a "standardized options agreement."

In the standardized options agreement, you'll need to ask for approval for both covered options as well as naked put selling (or "writing," as it's called).

In most cases, you can get the forms online, fill them out, and either fax them back or mail them to your broker. Your account should be approved shortly thereafter.

And if by chance your broker doesn't think you're capable of handling options, fire them on the spot.

I prefer Fidelity, TD Ameritrade, or Interactive Brokers... But most of the top-10 names in the business can open options accounts for you easily and quickly.

Going through these steps and seeing new terms might be new to you. But don't let it frighten or worry you.

Remember... most people think of INCREASED risk with margin accounts and options. We are using margin accounts and options to REDUCE risk.

My own mother has a margin account!

When you request broker approval to trade options, the broker will assign you a "level" of authorization, typically Level One to Five. The levels relate to your trading experience and the varying degrees of risk carried by different options trades.

For our put strategy, you should request "Level Four" – approval. But don't worry if they claim your experience only warrants a Level ONE. In each issue of Retirement Trader we modify the trades to accommodate all levels of option approval.

Let me repeat, you might not get the Level Four, don't worry... we can do the same sorts of things in most cases with a Level One approval.

The main difference is that they won't let you do the naked puts in the lower levels... but the return difference with interest rates so low is meaningless.

Once you've got the account open you'll need to learn how to enter the orders into your trading platform.

Your online broker's trading platform should offer you the option to "sell to open" a "put" or "covered call" trade within a draw down box or a click button.

If you're unsure, call the customer service desk and have someone walk you through the screens... Just don't ask them to do the trade for you as it's prohibitively expensive to transact with a live person.

I prefer to use discount brokers. You interact mainly with their websites. These brokers normally don't talk with you on the phone unless absolutely necessary (and they charge more if you transact with them over the phone).

In exchange for accepting less human contact and spoon-feeding, discount brokers lower your transaction costs considerably. The fees and charges are small, which means more money for you.

In your Special Reports section on the website we've created a report called, "How to Buy Securities and Set Up Your Option Account with One of These Brokers," that details the brokerages we recommend.

You should know that we don't have any financial relationship with any of these brokers. Although I like TD and Fidelity, I've heard wonderful things about Interactive Brokers and TradeKing. We've included the websites and phone numbers for you to get started with any of them.

In order to trade you'll need to know what the options look like and it's relatively simple. In Retirement Trader we like to include the option symbols from Yahoo finance's option pages.

The ticker symbols are easy to understand.

Here is an example of one issue.

In it I wrote:

"I recommend you sell, to open, the CVS August 38 puts for $1.20 or more, with the underlying stock selling for $39."

And we gave this ticker... (CVS110820P00038000)

The text in parenthesis is the "code."

Here is a sample of Yahoo Finance options page. I've highlighted the option parts for you with the stock Medtronic.

Each option "code" contains four elements. First is the stock's symbol – "CVS." Second is the expiration date and month – August 20, 2011 or "110820."

Third is either a "P" for put or "C" for call. Fourth, the option has a strike price – the price at which the buyer and seller of the option agree to transact. In this case, the strike price is $38, so it appears as "00038000."

One note of caution: Although the fundamental parts remain the same – your broker's trading platform may use a slightly different number of digits. So double check with your broker for the exact ticker to use.

In closing this video, I want to remind you that the simplest way to look at selling put options is to see yourself as an insurance company.

When someone insures their home, they are essentially buying the right to sell their house to the insurance company for a certain value, under certain conditions, for a limited period of time.

In return, they pay the insurance company to accept those terms – whether or not they ever exercise the terms of the policy.

Put options work the same way.

When you sell a put option, you're acting like the insurance company.

You're agreeing to buy someone else's shares of a particular stock for a set price, under certain conditions, for a limited period of time.

In the case of a house, they'd exercise their policy in a disaster... when a fire or catastrophic weather damage wrecks the value of their home.

In the case of a put option, the holder would exercise his right to sell us his stock if the market value of his shares falls below the price we agreed to pay.

Not quite a disaster, but you get the idea.

One key to selling puts safely and profitably is knowing the real risks in owning a company's shares.

Just like the insurance company needs to know the details of the home it's insuring (square footage, upgrades or renovations, what they paid for it, any valuables kept there, etc.). We need to assure ourselves the companies we sell puts on are fundamentally sound.

But we won't insure just any stock. We're going to identify stocks we like and would want to own. We sell puts on world-class businesses.

Then, we'll insure them at a price they are unlikely to fall below. No matter what happens, we win. If the stock falls, we buy a stock we wanted to own anyway at a better price.

We start collecting safe dividends... and even using other option strategies to make extra income from the position.

If the stock doesn't fall into our laps, we keep the insurance premium, free and clear.

Selling insurance and collecting premiums is a much safer and higher-percentage speculation than simply buying stocks outright.

In fact, in Retirement Trader, we don't actually buy many stocks – we simply collect premiums and earn about 15%-30% on the capital we're using.

And if we do end up buying one or two stocks, that's fine, too.

Our entry prices end up being low... and the businesses we buy are world class... so we don't have much risk at all.

Go ahead and read through rest of our online special reports... and try selling just one put contract as a Retirement Trader subscriber.

To find the special reports go to www.stansberryresearch.com and type in your username and password. Click the Retirement Trader tab on the left and click the Special Reports link.

I guarantee you'll get addicted to the safest, surest profits of your life.

Thanks for being a Retirement Trader subscriber.

Here's to our health wealth and a great retirement!

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