Ferenc D. Hegedus

AMERICAN STOCK OPTIONS INSTITUTE THE EDUCATIONAL DIVISION OF THE CHICAGO BOARD OPTIONS EXCHANGE

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Contact Info
American Stock Options Capital Gain Corporation
1527 1st Street NW Washington DC 20001
USA call (347)-394-3470
International call +36-20-622-3728
2014 Csobanka Szaloky Sandor street 1 Hungary Europe
Email: info@americanstockoptionscapitalgain.com

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WORLD BUSINESS CATEGORIES

Some type of investment are widely recognized and understood by most people. This is because there is a general acceptance or sense of  legitimacy about them. The American stock market and real estate, for example, are well understood by just about every one in the USA Even to a point that very real risks might be ignored or overlooked in some instances. Or, if these forms of investing are not truly familiar, there may at least be a belief that they are known, and that risks are small.
Understanding makes it much easier for new investors to enter specific markets. Real estate is known for its historical appreciation and safety. And the stock market is the most popular  way to invest, either through direct ownership of shares or through  purchases of shares in mutual funds. However bear equity and real estate markets disappoint the public because they have suffered major losses.  Nevertheless there are major signals for the beginning of a bear or bull markets. When option traders perceived these signals then was said to be big many ahead.
The lack of understanding about the option markets creates fear. Options may be highly speculative or highly conservative and moderately aggressive. Having combined techniques applied, giving the advantage to secure substantial profit. This is such an investment in which the net profit could continuously exceed the annual rate of return of one –five hundred percent.

Competitive Advantage

Options are derivative instruments. This means that an option’s value and its trading characteristics are tied to the asset that underlies the option. It is this essential defining characteristic that makes options valuable to the knowledgeable investor. A major advantage of options is their versatility. They can be used in accordance with a wide variety of investment strategies. As a result, any investor  who understands when and how to use options in pursuit of his or her individual financial objectives can enjoy a clear advantage over other investors. The investor will have an effective means of managing the risk inherent in any investment program.  In most investment situations, understanding options gives the investor a wider range of investment choices.
The asset on which the option is traded might be stock, an equity index, a future contract, a Treasury security, or another type of security.

Types of Stocks

Stock -Common Stock -Preferred Stock -Outstanding stock –Treasury stock

Trading theories

Dow Theory – Elliot Wave Theory – Fundamental analysis – Technical analysis
Mark Twain effect – January effect – Efficient market hypothesis

Stock pricing

Dividend yields – Gordon model – Income per share – Book value – Financial ratio
P/CF ratio – PE ratio – PEG ratio – Price/sales ratio – P/B ratio – Earning yield – Beta coefficient

Stock related terms

Dividend – Stock split – Growth stock –Under valued stock – Investment – Speculation – Trade – Day Trading

MARKET

The American style stock option market opportunity exists on the NASDAQ, New York, Pacific, American, Philadelphia and Chicago Stock Exchanges. By the advancement of electronic trading its market is extremely  liquid and has high turnover of capital. There aren’t any competitors on the stock option market that is due to the unequal number of contracts and in the constantly changing strategies in long and short positions.
Being more precise the trader compete against time and his/her own knowledge. The U.S capital markets’ market capitalization is the largest in the world hereby there aren’t any institutional investor who could control the security markets. Unlike other business sectors in which  have big market players with major market shares.
The U.S. capital market is such where the results can be obtained out of the economic and financial regularities. These factors are essential to function the capital and money markets. The consequences of these concepts is that there is always a room to succeed for a small investor or small investment (and start-up)companies.  
The premium (price) of a stock option contract has a wide variety of ranges, anywhere from  1/64x100=$1.5625  up to 50x100=$5000. Without the knowledge of option theories and experience, it is impossible to be successful. 

PROPOSED BUSINESS

It is recommended to establish a corporation in Delaware State which has tax and competitive advantage to direct it from Hungary or other part of the world. The corporation has been designed to trade no-load mutual funds, common stocks and stock options or index options at E-Trade or Charles Schwab Internet brokerage firm’s software on daily bases. The daily average most active number of contracts are 100 million by combining all stock exchanges. The remaining number of stock option contracts that are least active is around another 50 million. The business could also have other type of operations.

Corporate Income Tax

The tax rate is 8.7% on net income but certain investment companies are granted to have tax free. Taxes are not paid on interest from United States or State of Delaware obligations or subdivisions of either, nor on gains from the sale of United States or Delaware securities. Taxes are not paid on dividends of foreign corporations that qualify for, and claim, foreign tax credit on federal returns. Investment and holding companies maintaining and managing intangible investments, and collecting and distributing income from such investments or from tangible property outside Delaware, are exempt from State corporate income tax.
When a corporation is not qualified for foreign tax credit then the following being applied.
The size of the dividend exclusion actually depends on the degree of ownership. Corporations that own less than 20 percent of the stock of dividend-paying company can exclude 70 percent of the dividends received; firms that own over 20 percent but less than 80 percent can exclude 80 percent of dividends; and firms that own over 80 percent can exclude the entire dividend payment. Because this is a foreign investment corporation we apply 7.8% taxation. The other alternative is to establish a Limited Liability Company which has tax advantage over the corporation because is based on individual taxation while corporation has double taxation. Limited Liability Company issue business shares and not stocks

LOCATION

Option Investment corporation will have a designated office in Delaware State by a registered agent however it will be operated from Hungary or another  part of the world.

MANAGMENT

The business will be operated full-time by Ferenc D. Hegedus and the managing director(s) of  the company. Mr. Hegedus has had over 20 years of experience in trading mutual funds, stocks, index and stock options with proven track record for exceptional profit in the American capital markets

VENTURE CAPITAL REQUEST

Mr. Hegedus is requesting a minimum $200000 Venture Capital fund and start-up cost. The start-up cost $10000 will be required to establish the business in Delaware State and in Hungary thereafter open five different brokerage accounts at E-Trade or Charles Schwab
They are as follows; margin, stock option, money market fund, stocks and no-load mutual fund accounts. There are four alternatives to establish a business organization; C and S Corporations, general and limited partnerships. A S Corporation has a tax advantage over a C corporation however S corporation has less than 35 shareholders and can only be operated in  the States.
For none resident owners of an Limited Liability company has zero license fee, annual fee $100, incorporation fee $500
For non resident owners of a C Corporation license fee varies, annual fee $50, incorporation fee is $500. 
Interest  And Dividends Paid by a Corporation
A firm’s operations can be financed with either dept. or equity capital. If the firm uses dept., it must pay interest on this dept., whereas if it uses equity, it will pay dividends to the equity investors (stockholders). The interest paid by the corporation is deducted from its operating income to obtain its taxable income. (general tax law)
Mr. Hegedus is suggesting to receive 15-20% of  the shares (stake) in the company. It is essential to know that an average salary of a broker is $145000 annually in the United States.
Forecasting income for Option Investment Services
Issuing 42,000 par value common stocks for $5 per share or 200000stocks by $1
pretax monthly profit is 9.4%=$19,741           net monthly profit=8.7%=$18,201
pretax annual profit  is 112.8%=$236,892       net annual profit=104%=$218,416
Option Investment Corporation considered to be a fast growing corporation at the annual excepted constant rate of return of 64.1%.  The forecasted income statement has been broken down by month and year in which earning per share (EPS) =$5. 2 (100%)
The forcasted dividend payment is $1.86 (37.2%)
The expected common stock price after 1year is of $10.2 which is 104% increase from $5. Had the Price/Earning ratio P/E being applied at the rate of 2 then the price of the stock of the corporation would increase above $10.2 up to $17 per share which is easily the case with the accomplished revenue.

COLLATERAL

We must distinguish two kinds of venture  capital funds in which conditions are differ. Companies with large assets are capable of affording collateral’s regardless of the degree of risks but in return receive tax break and market share advantage.  Start-up companies are not in the condition to afford collateral requirements. Collateral’s are of many kinds, fixed assets, marketable securities, inventory etc. With regard  to security’s ownership there is no money back guarantee concerning the traded performance of securities.  None of the security exchanges in the world and investment or brokerage companies are being ensured by collateral in trading equities.  It is the degree of knowledge of professionals upon which the business operates and based on by having said that risk is reduced and the degree of success is increased. There is only one default free security on the US capital market that is US Treasury bills with low interest rate.
Have your venture within this Delaware Corporation and then you have the ownership rights and exposure to lucrative business

MISSION AND SRATEGY

Option Investment Corporation will establish an office from which equity and stock option trading be conducted over the Internet. The office will be equipped with two PC and TV with cable channels (CBNC). It is highly possible that ROI can be achieved in six month regardless of the market trends. This is all possible because there has constant volatility on large variety of stocks and indexes. On the other hand, American style options have advantage over European options by the simple fact that any positions can be closed before the expiration date. This rule gives protection and higher profitability.
As profit increases the capital increases as well to the point when investment strategies in portfolio shall change. It has two alternatives that is another trader must be employed or the profit will be invested in a more conservative manner.  For example 50% of asset will be invested in undervalued and growth stocks with different capitalization, small, medium and large. Option Investment Corporation annual revenues in the 2rd  year will be in the neighborhood of $700000 by assuming that the profit will be reinvested.

OPTION MARKET BACKROUND

Options trading began centuries ago. In fact many trace the use of options back to 3500 BC, when the ancient Greece, Phoenicians and Romans traded contracts with terms of similar to options on the delivery of goods transported on their ships.
Perhaps the most often cited example of the historical significance of options occurred in Holland during the tulip craze in the 17th century. During the tulip craze, contracts on tulip bulbs were actively traded by tulip dealers and tulip farmers. Dealers and farmers traded contracts for the option to buy or sell a particular type of tulip bulb at a specified price by some future date as a way to hedge against a poor tulip bulb harvest. A secondary market in tulip contracts evolved, and speculators began trading contracts based on price fluctuation, rather than manage the business risk of poor harvest. Tulip bulb prices skyrocketed, and many members of the public began using their saving to speculate.
Soon afterward the Dutch economy collapsed, partly because of speculators who refused to honor their obligations under the contracts, but many never did. Not surprisingly, options developed a terrible reputation throughout Holland and Europe.
Options rose again in popularity in England about 50 years later. At that time option trading was unregulated; such trading had allowed the public to speculate on stock prices by entering into contracts for the right to buy or sell.
As in Europe, options were traded by individuals in private transactions in the United States. However, after the creation of what would become the New York Stock Exchange in the 1790s, investors began thinking about forming an organized exchange on which to trade options. During this time Wall Street firms attempted to develop option trading, a business new to the United States. Seeking to avoid the option debacles faced in Europe, firms published suggestions for trading, such as the ideas listed below by Turnbridge and Company

  • If you think stocks are going down, secure a Put; or you can obtain a Call and sell the stocks against it.
  • If you think stocks are going up, secure a Call; or you can obtain a Put, and buy stock against it

-     No Liability-There is no liability, or risk, beyond the amount paid for the privilege.
Many of these suggestions recommended in 1875 are still applicable in today’s market. Their application is easier because options are now listed on exchanges and investors have access to more information, including historical and implied volatility data.
In the late 1800s put and call options began trading in an over-the-counter market. Despite the activities of Turnbridge and Sage, the options market remained very small through the early 1900s. Public perception of options declined further in the 1920s when brokers were granted options on certain securities in exchange for an agreement to recommend these stocks to their customers
Following the stock market crash in 1929, congressional hearings were held to determine how to regulate the securities industry and hopefully prevent market crashes in the future. These hearings resulted in the formation of the Securities and Exchange Commission (SEC).  In an attempt to save the options industry, Herbert Filer, a put/call dealer and author of Understanding Put and Call Options, was asked to testify before Congress about the positive uses of options. In this book, the bill stated that ‘ …not knowing the difference between good and bad options, for the matter of convenience, we [Congress] strike  them all out”
Until April 26, 1973, when the Chicago Board Options Exchange opened its doors, options were only traded over the counter. During this period a put/call dealer would advertise each morning in the Wall Street Journal. Options did not have standardized terms as they do today.

Standardization of Option Contracts
The proposal that created the CBOE also contained a suggestion for creating an intermediary organization to standardize and clear option contracts. This organization is known as the Options Clearing Corporation (OCC). The OCC is a corporation owned by the exchanges that trade listed stock options; it guarantees all option contracts. Also, option contracts now have standardized terms so investors can trade them in the market.

The call option
A call is the right to buy 100 shares of stock at a fixed price per share and within a limited period of time. As a call buyer , you acquire that right, and as a call seller, you grant the right to someone else.
The put option  A put is the opposite of a call. It is the right to sell 100 shares of stock at a fixed price per share and within a limited period of time. As a put buyer, you acquire that right, and as a seller, you grant the right to someone else.
Contract A single option, including the attributes of that option: identification of the stock on which it is written, the cost of the option, date the option will expire, and the fixed price (strike price) at which the stock  will be bought or sold if the option is exercised.
Premium: the current price of an option, which buyers pay and sellers receive at the time of the transaction.
At the money: a condition in which the market value of the underlying security is identical to the striking price of the option.
In the money: a condition in which the market value of the underlying stock is higher than the call’s striking price or lower than the put`s striking price.
Out of the money; the opposite of  “in the money”  a condition in which the market value of the underlying stock is lower than the call’s striking price or higher than the put`s striking price.
Intrinsic value: the amount the option is in the money  (An at-the-money or out -of-the-money option  has no intrinsic value)
Time value: the option’s premium above any intrinsic value
Leverage: the use of limited amount of money to control greater values (for example, a call buyer who spends $300 to control $5000 to buy 100 shares.)
Exercise: the act of buying or selling stock at the striking price
Expiration rules: Listed stock options in the United States technically expire on the Saturday following the third Friday of the expiration month.
Customers of brokerage firms must concern themselves with two procedures in regard to expiration. First, brokerage firm customers must be aware of their firm’s specific rules regarding the deadlines for notification for exercise. Second, brokerage firm customers must be aware of the rules for automatic exercise. (when the option is at or in the money)
Example: Two month ago, you bought a call at a price (premium) of $200, entitling you to buy 100 shares of  stock at a strike price of $55 per share. The option expires later this month. The stock is currently selling at $60 per share, and the options current price is $600.
You have two choices. First , you can exercise the option, buying 100 shares at the strike price (100x$55=$5500 and sell them for $60x100=$6000)
Or second, you can sell the call for $600, realizing a profit of $400
You could have increased your capital if you bought more contracts on the call. For example 10 contracts x $200 = $2000  and then the profit margin is 10 contracts x $400 = $4000

Example: You bought a put  last month and paid a $50 premium. Meanwhile, the stock’s market price has fallen to $7 per share below the strike price. The put is now valued at $750.
You have three choices in this situation. First, you can sell the option and realize a $700 profit on your $50 investment. Second, you can hold onto the put , hoping for further declines in the stock’s market price (and, as a result, more result in the put investment). However, you risk losing part or all of the profit in the event the stock’s market price rises. And third, you can exercise the option and sell 100 shares of stock at the strike price, $700 higher than the current market price (you had to have 100 shares of stocks of the same kind than it is in the option contract )

Role of  the U.S. Stock and Derivative Market in Building Capital

Capital can be increased in many ways. For example, you can use capital to start up a business or buying one (physical asset markets).  The risks are extremely high because there is always competition in any industry. It is more safe to invest into the real estate market however profit margin is very limited comparing to the stock market.

In the U.S economy most companies are publicly traded whether they are on Stock Exchanges or Over -the-Counter-Market.  Stocks and derivatives are one of the best methods of creating capital gains. They are liquid and under normal circumstances, buying and selling them takes only a few minutes, on via personal computer. Time is money! Therefore the length of time, liquidity and experience results in compounded capital gain.
You may heard an expression “ dollar cost averaging into mutual funds “  I quit doing it in 1990 and for three years the rate of return had 35% per year. Because I wasn’t satisfied with the limitations of mutual funds therefore I decided to invest directly into the U.S. Stock Market by stock options. This is where the real money is.

Principles Followed by Successful Investors

Many naive investors believe they are going to make a killing in the stock market because they have brilliant idea that is in theory. One of the first rule to learn as a stock and derivative investor is to avoid becoming a casualty. No panic, once someone knows the theory (profession) and has experience, there is no way that the person would not become successful. Presently and in the past as well we have to consider the international market’s indexes especially in Asia as the Chinese stock market is growing with fast space. Their activity has to be translated for the USA capital market. The American Stock market is still the largest in the world and primarily its economy and financial regularities has to be considered. 

Principle of Diversification

This is one of my golden rule to reduce exposure to risk. The other one is to utilize combination techniques.  The third one is to know  whether from what market direction the capital is flowing in and out. Nevertheless without stock analysis stock option trading becomes a lottery. Our trading business will subscribe for stock analyst newsletters which shall be double checked before investing

Competitive Analysis

Summary of Major Market Instruments, Market Participants and Security Characteristics
Quoted interest rate = k = k* + IP + DRP+ LP + MRP

K = the quoted, or nominal, rate of interest on a given security. There are many different  securities, hence many different quoted interest rates
K* = the real risk-free rate of interest (k* is pronounced “k star)
IP = inflation premium
DRP = default free premium
LP = liquidity, or marketability , premium
MRP = maturity risk premium

 

Instrument Market Major
Participants
Riskiness Maturity

Interest Rate
on 1/13/95

U.S. Treasury bills Money Sold to institutional investors by U.S.
Treasury to finance federal expend
Default-free 91 days to 1yr. 6.4%
Banker’s acceptance Money Firm’s promise to pay, guaranteed by bank Low  degree of risk if guaranteed a strong bank Up to 180 days 6.3%
Commercial paper Money Issued by financially secure firms to large investors Low  default risk Up to 270 days 6.2%
Negotiable certificates of deposit (CDs) Money Issued by major money-center commercial  banks to large investors Riskier  than Treasury bills Up to 1 yr. 6.5%
Money market mutual funds Money Invest in Treasury bills, CDs, and commercial paper; held by individuals and  businesses Low  degree of risk No specific  5.5%
Eurodollar market time deposit Money Issued by banks outside  U. S. Default risk is a function of issuing  bank Up to 1 yr. 6.3%
Consumer credit loans Money Issued by banks /credit unions/ finance companies to individuals Risk is variable Variable Variable
10-15%
 U.S. Treasury notes and bonds Capital Issued by U. S. government No default risk, but  price can decline if interest rates rises 1-30 years 7.8%
Mortgages Capital Borrowings from commercial banks and S&L by individuals and businesses Risk is variable Up to 30 yr. 9.1%
State  and local government bonds Capital Issued by state and local governments to individuals and institutional  investors Riskier than U.S. government securities, but exempt from most taxes Up to 30 yr. 6.6%
Corporate bonds Capital Issued by corporations  to individuals and institutional investors Riskier than U.S. government securities Up to 40 years 8.5%
Leases Capital Similar to dept. in that firms can lease assets rather than borrow and then buy the assets Risk similar to corporate bonds Generally 3 to 20 years Similar to bond yields
Preferred stocks Capital Issued by corporations to individuals and institutional investors Riskier than corporate bonds but less risky than common stock Unlimited 3-5%
Common stocks Capital Issued by corporations to individuals and institutional investors Risky Unlimited 2.5-6%
Stock option Capital Issued by corporations on the secondary market to individuals and institutional investors Risky and can be riskless Limited and unlimited See note

Notes
It is surprising to many option traders, is that  rising interest rates cause call prices to rise and put prices to decline. A call option buyer is entitled to dividends
Common Stocks are expected to provide a profit in the form of dividends and capital gains rather than interest.

It is essential to compare different  financial markets and financial instruments by their track records since they exists.

  Average annual rate of return
J. P. Morgan Government Bond Index  
U.S. 30 yr.  6-7%
U.S. 10 yr. 6-7%
New York Stock Exchange Composite Index  12-15%
Dow Jones Industrial (DJX) 12-14%
Dow Jones Transportation (DTX) 13%
Dow Jones Utilities (DUX) 11%
Standard & Poor 500 Index (SPX) 12 %
NASDAQ 14-17%
Best performing mutual funds
(market capitalization of all mutual funds is of 2 trillion dollars)
15-17%
AMEX 13-14%

 Risk and Rates of Returns

1994 and 2002 were the years most investors wish could erase. The performances of the major stock markets could only be classified as abysmal-stocks traded on the New York Stock Exchange (NYSE), on the American Stock Exchange (AMEX), and over the counter (OTC). In 1994 USAir stock, which trades on the NYSE, lost nearly two thirds of its value because the company had difficulty handling its high operating costs and the costs of air mishaps in the highly competitive airline industry. There were many stock option traders whom bought puts and made a killing on the declining stock price. The reason for that is the put option got deep in the money. There are always such stocks on the market which are going in and out of favor.
Other stocks provided very handsome, if not unbelievable, gains. United Inns, a hotel company traded on the NYSE, more than tripled its stock price in 1994; EXX, the toy manufacturer that holds the rights to the Mighty Morphin Power Ranger toys, saw the value of its stock increase by nearly 1,300 percent, from $1.63 to $22.25 on the AMEX. And the stock of Micro Touch Systems, which is an OTC company that manufactures screen for computers, jumped from $6.88 to $37.63, an increase of almost 450 percent.

From 1990 a new phenomena rose the beginning life of Internet companies where 1000 percent gains weren’t rare. In 1993, a record number of companies used the Initial Public Offering (IPO) market to “the public” - 707 IPOs raised more than $41 billion. The second and third most active years were 1994 and 1992, respectively. More than 600 IPOs worth nearly $29 billion were issued in 1994, while about $24 billion was raised through 517 IPOs in 1992. The IPO market slowed somewhat at the begging of 1995 than rose until 2000.
It is indispensable to use stock analysis software’s and on-line stock quotes, CNBC for quick decision making.

Competitive Advantage

Options are derivative instruments. This means that an option’s value and its trading characteristics are tied to the asset that underlies the option. It is this essential defining characteristic that makes options valuable to the knowledgeable investor. A major advantage of options is their versatility. They can be used in accordance with a wide variety of investment strategies. As a result, any investor  who understands when and how to use options in pursuit of his or her individual financial objectives can enjoy a clear advantage over other investors. The investor will have an effective means of managing the risk inherent in any investment program.  In most investment situations, understanding options gives the investor a wider range of investment choices.
The asset on which the option is traded might be stock, an equity index, a future contract, a Treasury security, or another type of security.

Combination Techniques for reducing risk and to increase profit potential

Spread: the simultaneous purchase and sale of options on the same underlying stock with different striking prices or expiration dates
There are vertical, diagonal, horizontal, bull, bear, box, calendar  and butterfly spreads
Straddle: is the simultaneous purchase and sale of the same number of calls and puts with identical striking prices and expiration dates
There are long, short straddles
Hedge: a strategy in which one position protects the other.
There are long, short, reverse and variable hedges.
Risk Management
The listed options business has evolved since it starts in April 1973. The collapse of the equity markets in October 1987 and 1989 and the shock waves sent through the currency markets with the ERM realignment in 1992 are dramatic examples of price risk that is ever present in the security business. In recent years, every major market has experienced similar volatility. From crude oil to Treasury bonds, and from agriculture commodities to currencies, every market in the world has attracted headlines to one time or another when price movements spell panic. The lesson for any participant is that risk management is crucial, and all investors and traders must be flexible enough to change with the evolving environment.
In addition to improve risk management, some challenges markets will face are the development of new trading techniques, applications of technology, trading structures, and extended trading hours.

DELTA  OF  CALL  OPTION


$50 Call Option
  Volatility: 35% Days to expiration: 90days

Stock price Theoretical Value Delta

$56 $7 1/4 0.78
55 6 1/2 0,75
54 5 3/4 0.71
53 5 1/8 0.68
52 4 ½  0.64
51 3 7/8 0.60
50 3 ¼ 0.54
49 2 ¾ 0.50
48 2 3/8 0.46
47 2 3/16 0.41
46 1 7/8 0.36
45 1 7/16 0.32
44 1 3/16 0.27

Delta the relationship of change in an option’s premium to changes in the price of the underlying stock (when the two move the same number of points, the delta is 1.00; a higher or lower delta can act as a signal to take advantage of adjustments in time value)
Beta a measurement of the relative volatility of a stock, made by comparing the degree of price movement to movement in an overall index. (For example; NASDAQ, AMEX,  New York Stock Exchange Composite Index )

 STRATEGY AND APPROACH TO THE MARKET

Mr. Hegedus has to be prepared for every trading day (Monday-Friday) at 16:00 hour Eastern European time when the New York Stock Exchange opens. He will begin to work 2 hours before the New York Stock Exchange opens. His duty is by collecting information from the word wide market activities and from the early hours trading in the U.S.
By having $210000 in capital then the portfolio consists of 9-11 different options of the underlying stocks. Daly trading volume is 15-20 contracts thus the monthly trading volume is 350 trades over the Internet. Twenty percent of cash will be in reserve. Charles Schwab Brokerage firm is insured for $100 million and allows to set up a margin account which means that an additional $100000 can be used to invest besides the venture capital. Its annual interest rate is around 7-8 percent. The market capitalization of Charles Schwab is $19,22 billion the largest brokerage firm worldwide
The average commission rate of Charles Schwab Brokerage is of two percent. For example when $ 80000 being invested its commission is $1600  which includes the opening and closing positions. Mr. Hegedus`s trading track record is very impressive that his gain and losing contract ratio is 14÷
There are 102 business sectors to keep track of in the U.S. Capital Market. Between trades it is important to search for new information and in the mean time keeping opened contracts under control.

PRICING, PROFITABILITY, AND BREAK EVEN

Pricing of option contracts

There isn’t any superior option contracts over the other because each underlying stocks have different characteristics in the economy and for the buyer and seller have different targets, obligations and rights in a stock option contract. However there are under valued option contacts to look for. The premium (price) of the option contract depends on its theoretical value and the supply-demand factor (volume, bids and asking price).  Another pressure is constrain whether it is profit taking or loss. Surely a position will be closed and it  is usually happens when a certain striking price will be reached.  There isn’t  much time left, only minutes, when the underlying stock price varies, for example by three-four  percent.
In delta of call option table (page 9-10) has shown the possible events when the price of the stock varies between $49-51 and the strike price is $ 50
The price of the stock rises $2 from $49 to $51 that is 4% gain and then the price of the option contract also rises from $2.75 up to $3.875 =40.9 percent profit. It is important to mention, 1 option contract = 100 shares thus $387,5 - $275= $112.5=40.9%
In this situation, our option trading strategy is approximately $1000 in capital that would be used to purchase this call options otherwise commission would be to high, 4contracts x $275 = $1100 and sell it for 4x $387,5= $1550
There is the next alternative,  Iet`s say I purchased 400 shares at $47/share = $18800  and I want to keep the stock for a longer period of time. The stock price slowly or rapidly moving up and reached $50 where the striking price is. At this point I would sell 4 call contracts for 4x$3.25 x100= $1300.  I will have no surprise even if the call buyer exercise the call option means he or she will buy my 400 shares for $50/share. It happened to me not at once.

Therefore I make profit twice

  1. Our broker firm will transfer the 400 shares to the call buyer who closed his/her position by exercising the option. My profit is 400 x $3 = $1200
  2. Secondly I already received $ 1300 for selling the call
  3. My gross profit  $2500 less commission, 13.2 percent gross profit.

This technique is called covered call writing.
Next alternative is to have a covered call writing under the same circumstances as it previously  was being mentioned but the call option would not be exercised. It could happen because the stock price would drop back to $49 and remains there.
The best thing is to wait assuming that the stock has a rapid growth potential and no one knows when there is a break through. The ellipse of  time works for the put and call writers because option is a finite instrument. So by the passes of time it losses its value when the option is out or at the money. If the option has expired then the entire premium is profit for the call writer (also for a put writer). The profit is $1300 unless I decide to sell the underlying stock later at $49/share.
It is important to notice that naked call option writing is impossible that means without collateral either without cash or the underlying stock on the brokerage account, because the brokerage firm wouldn’t cover any losses therefore do not allow to make a contract.
The reason is that the cause of the 1987 crash was due to the large amount of naked call/put option writings outstanding. Thus the brokerage firms had to cover the losses to the Options Clearing Corporation that the investors couldn’t cover either  with the underlying stocks or cash in hands to purchase the stocks at the striking or market price.
Have an other example. My proven track record proves that profit/ loss ratio is 14÷1
We have a stock option portfolio consists of 20contracts. The applied capital is $100000
The value of each contract $100000÷20= $5000
Thus for 20 contracts 14÷1=18.571 contracts ÷1.429 contracts =18contracts÷2contracts
The entire portfolio has 10%-10% capital gain and loss which means
Total return = 18x$5000x1.1+2x$5000x0.9=$99000+$9000=$108000
Capital gain = $8000 =8%

Black-Scholes  Option-Pricing Model

Present value of call option = P N (d1) - Exe -rft N (d2)
where;    
P = price of stock now
N(d) = cumulative normal probability density function
EX = exercise price of option
t = time to exercise date
rf = (continuously compounded) risk-free rate of interest
e = 2.71828

BREAK EVEN ANALYSIS

The monthly volume of trades that is 350  and the compounded capital of $160000 will determine profitability and cost of commission. Operating  capital is $160000 plus reinvested capital gain of which $40000 will be reserved in cash position. Thus;  
pretax monthly profit is 9.4%=$19,741                             net monthly profit=8.7%=$18,201
pretax annual profit  is 112.8%=$236,892                        net annual profit=104%=$218,416

Fixed costs and expenses are estimated on the annual basis as follows

Gross sales $532,587  
Net Sales (Gross sales-commission) 352,848  
EBIT  $236,892  
Net Income $218,416  
Contribution made by trade 295,695  
Tax 18,476  
Expenses  49,360  
Commission 66,596  

Contribution Margin = 295695÷210000=  140.8% 
Thus the brake even point for the end of first year = 134432÷1.408 = $95477
Hence the average monthly break even point  =$7956

There are lots of alternatives to trading, there is a second spreadsheet on projected revenues in which the monthly yields are varies however it averages 12% yield per month.

Key ratio indicators for Option Investment Services by forecast

Quick, or acid test ratio
=Current assets - Inventory ÷ Current liabilities = 532587-0÷210000= 2.5
Current Ratio
=Current Assets ÷ Current liabilities = 532587 ÷ 210000 = 2.5
Equity Turnover ratio
The time span it needed by opening and closing an option contract is the average of 3 days. The time span needed for the weighted average in all option contracts by opening and closing all positions is of 10 days.
Return on common equity (ROE)
=Net income available to common stockholders ÷ Common Equity =
=218416 ÷ 210000 = 1.04 = 104%

In projected revenue the monthly income consists of 65%  profit the other 35% profit goes towards cash reserve. It is necessary to build up cash reserve for safety.
Some experts believe, it is impossible to outperform the performance of the indexes. My answer is this. How can this experts being in business?! They have not learned about option trading.

OPERATIONS

Location

There are three alternatives for choosing a working location in Hungary

  1. An office close to Mr. Hegedus residency (for example Szentendre City)
  2. The home of Mr. Hegedus (Home office)
  3. A location close to the share holders if they are from Hungary

Fixed cost could increase if  location #1 and #3  will be chosen.

Start up costs for Option Investment Services (C corporation)

New personal computers (2) = $3000
UPS cable = 300
Extra telephone line  (2 needed) = 500
Minimum license fee = varies
Annual filing fee = 50
Incorporation fee = 500
Provision of registered office, as required (annual fee) = 975
Directors, Managers and Nominees Fees = 775
Establishment of a corporate bank account = 950
Arranging for a provision of Visa card = 750
Salary = 1000
Miscellaneous for first month bills = 1200

  $ 10000

 Business organization

The business will be organized as a C corporation.

Capital Structure

It is recommended to issue 42,000 common par value stocks for $5 per share = $210,000 in capital or par value stocks for $1
Number of shares needed to be issued = funds to be raised + stock offering price

MANAGMENT AND STAFFING

The office require a day trader Ferenc D. Hegedus and maybe a director.
Ferenc is a matured man of 51 years old who is an entrepreneur. Mr. Hegedus graduated from Minneapolis Technical College in 1989 where he received a Construction Electricity Diploma. From 1987 he began to take investment correspondent courses, Forbes Stock Market Study Course,  Dow Theory Forecast, The National Association of Investors Corporation Course (Investment Club) , Essentials of Managerial Finance (Metropolitan State University), Essential Concepts and Trading Strategies of Options (Chicago Board Options Exchange)
In 1996 he also received credits in Marketing at Metro State University (Minnesota). From 1991-1996  he conducted his own business under the name of GBS Investment Services in Minneapolis Minnesota. He managed four brokerage accounts (Charles Schwab, Scottsdale Securities, Janus Funds, Scudder Investment Services) for his company with success. and worked as a personal stock broker ,financial advisor-planer-day trader
Mr. Hegedus  specializing in  no-load mutual funds, common stocks and stock option trading.  

PROJECTED REVENUE BUILDUP AND FINANCIAL STATEMENTS

Ask for financial statements in e-mail.
See Microsoft Excel - Projected Revenue, Income Statement, Balance Sheet, Cash Flow.