Use of Options for Income and Growth

Ever since the introduction of stock options on the Chicago Option Exchange, options have been considered by investors as speculative and highly risky. This is true for the option buyer. Since a call option is the right to buy a specific security for a fixed time at a fixed price, an option buyer has to be correct in stock selection as well as the time selected. The odds are somewhat stacked against the buyer as evidenced by the majority of option premiums expiring worthless. However, for the skillful trader putting up a small premium (anywhere from 1% to 20% or more of the underlying security) there is an opportunity to double, triple or more the original investment in a very short time. Since the majority of option premiums expire worthless and the majority of option buyers lose money; then who keeps the money? Keepers are a class of yield conscious institutional and individual investors who are willing to sell the right (option) to someone who will buy thier stocks and receive the cash premiums. Portfolio selections should be approached with stocks that have appreciation potential but with the intention of giving up these securities once they are exercised. Depending on the objective of the investor and the strategy selected, annual returns of 15% to 30% or more can be achieved. An option writing program, in our opinion, should be designed to achieve annualized returns of 20% or more. After the record stock returns from 1995-1997, 20% may not seem so spectacular but keep in mind that historically the stock market has averaged approximately 10%. Furthermore, 30-year Treasury bonds have been averaging yields of about 6.00% and 3-year CDs about 5.25% in the last few years. Also, keep in mind that you must wait one full year to receive your return on CDs or Treasury bills, while option premiums are deposited in your account the day after trade date. Option Writing Example (assuming transaction held for 3 months between expiration dates.)

Buy 1000 shares of XYZ at 37 1/2	$37,500.00
+Comm:	378.00
Total:	37,878.00
Sell 10 Calls, APR 40 at $2.50	$2,500.00
-Comm:	114.00
Total:	2,386.00
Net Stock Cost: $35,492.00
+Dividend (Assumes $1.00 per share)	250.00
If stock unchanged	2,636.00
% of Return thru expiration	7.4%
% Annualized:	29.6%*
If stock sold at: $40 per share
Total:	$40,000.00
-Comm:	388.00
Net Proceeds:	$39,612.00
Profit:	$4,120.00
+Dividends:	250.00
Total Profit:	$4,370.00
%Return thru expiration:	12.3%
%Annualized:	49.2%

*Annualized return assumes duplicating the same investment for a full year. NOTE: The prices and returns will change subject to market conditions during implementation of this program. This illustration includes a 25% discount on purchase of stock shares. Option writing strategies are most effective when managed as an ongoing program using a diversified portfolio. Although market exposure always exists, this approach is less risky than owning the stock outright because of the premiums the investor receives. It's important to note that this program should be approached with a two or three year investment period in mind. Glen Rauch Securities can tailor a program for individual or institutional investors to help them achieve their goals, while taking into consideration their risk tolerance. A variety of option strategies can be used to hedge a portfolio, enhance yield, create tax strategies and leverage huge gain potentials. Additional information on these topics can be discussed with your Account Executive.