International Securities Exchange

December 2006

Stable Market Opportunities

December 2006

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For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before enteringinto any options strategy.

Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS. Copies have been provided for you today and may be obtained from your broker, one of the exchanges or The Options Clearing Corporation. A prospectus, which discusses the role of The Options Clearing Corporation, is also available, without charge, upon request at 1-888-OPTIONS or www.888options.com.

Any strategies discussed, including examples using actual securitiesprice data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities.

Alex Jacobson Vice President

education@iseoptions.com

www.iseoptions.com

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Upcoming/Current Publications

• Option Traders Magazine May 2006Spread Trading Credit/Debit Spreads -

How Volatility Impacts The Trade Decision• SFO Magazine Current Issue

Importance Of Volatility To Option Traders• MASTER TRADERS

Wiley Investment Publishing Fari Hamzei Editor Volatility Chapter Preorders at www.amazon.com

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Strategies That Benefit From A Stable Price Environment

• Option strategies which are done at a debit to their expected valuation at expiration

• Option strategies that create a credit

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Some Thoughts On Risk

• “I’ve back tested 5 years of data .. That proves the strategy is good”

• “The strategy is approved for IRAs … therefore it must be safe”

• “The strategy has a statistical probability of making a profit of 90%”

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Income Strategies

• Covered Call Writing

• Put Selling

• Calendar Spreads

• Credit Spreads

• Debit Spreads

Which has the best return over time ?

Which has the biggest draw downs ?

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SPY @ 126.05 August 06 35 Day Options 14.5% Volatility

• Covered Call WritingBuy SPY @ 126.05Sell Aug 129 Call @ $.95C on C .753% Static

If called 3.09%BE 125.10

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Thoughts On Covered Writing

• Enhance income on existing position

• Small downside cushion

• Of all income ideas requires most $$

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SPY @ 126.05

• Sell 129 Put OptionSell Aug 129 Put @ 3.50C on C (.55/25.20) 2.18%SPY @ 129 (3.50/25.20) 13.90%BE 125.50

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Thoughts On Put Selling

• Same payoff characteristics as covered writing – cash secured put sale is just another form of a covered write

• Put seller gets more leverage - Puts sold against SMA

• Many brokerage houses restrict put selling

• Many allow IRA put selling

• Requirements vary from firm to firm

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Calendar Spread – Diagonal Spread

• SPY @ 126.05

• Buy Dec 110 Call @ $19.80Sell Aug 129 Call @ $.95C on C 4.80% SPY @ 129 or above HAVE AN EXERCISE PLAN

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Thoughts On Calendar Spreads

• A lot like covered call writing – except you don’t want to deliver by exercising the ITM call

• All time spreads benefit from the fact that option time erosion is different for different expirations

• Have an exercise plan in place – Buy back your short call – Roll your short call

• Leverage and limited risk

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Put Credit Spread

• SPY @ 126.05

Sell Aug 126 Put @ 1.85Buy Aug 120 Put @ .65

Net Credit 1.20 – 6.00 RequirementC on C 20%

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Thought On Credit Spreads

• Investor popularity

• For many of the option “Gurus” this is their core strategy

• June expiration was difficult – the previous 5 years was O.K.

• Trade can earn $1.20 – worst case(excluding early exercise) the trade could lose $4.80

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Call Debit Spread

• SPY @ 126.05

Buy Aug 120 Call @ 7.20Sell Aug 126 Call @ 2.40

Net Debit Is 4.80

Max Profit Is 1.20

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Thoughts On Debit Spreads

• Same economics as credit spread

• Less early exercise concern

• Investors crave credits – intraday debit spreads are commonly better (even if you earn interest on the credit balance)

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Thoughts On Spreads In General

• Good way to HARVEST premium income

• My bias is debit spreads for income – must investors have to taught to go for credits

• Price the parity trade of your spread to see which is better

• Be EXTRA cautious during expiration week

• Many brokers offer spread commissions

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Option Myths

• 90% Expire Worthless {10 - 30 -60 }

• Sellers Smarter Than Buyers

• Zero Sum Game Between Buyer/Seller

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ISE History• First fully electronic options exchange in the

U.S.

• First newly registered securities exchange since 1973

• Launched equity options trading on May 26, 2000

• Largest equity options exchange in the world

• ISE's stock began trading on The New York Stock Exchange on March 9, 2005

International Securities Exchange