Mastering the Markets

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Charlene Carpenter
7 years ago
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1 Presents Mastering the Markets Your Path to Financial Freedom

2 DISCLAIMER Neither or any of its personnel are registered broker-dealers or investment advisors. We may mention that we consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because we consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that we are telling you to trade these exact strategies or securities. Keep in mind that we are not providing you with any specific recommendations or personalized advice about your own trading activities. The information we are providing is not tailored to any particular individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security, or a suggestion that it is suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk of loss, even if we are discussing strategies that are intended to limit risk. Also personnel are not subject to trading restrictions. Myself and any others at could have a position in a security or initiate a position in a security at any time. 2

3 WHAT IS A SPREAD? A spread is created by selling one naked option and offsetting that obligation by buying a second option of the same type and expiration, but at a different strike price. Vertical Spreads are used to offset premium costs when buying options, or to hedge risks when selling options. The maximum gain and risk are known from the outset of the trade, and therefore allow for very specific risk management. EXAMPLE: When I sell the $45 Put on PFA, I am obligated to buy the stock at $45 should it fall below $45. If I also buy the $40 Put against the same stock (PFA), I have the right to make someone else buy the stock at $40 if I choose to. This makes my risk equal the spread amount of $5, minus any premium I received when I opened the position. ADVANTAGES Cash Flow! Money is placed into your account the day after the trade is executed. There is a 2 in 3 chance of a profit, and sometimes even a 3 in 3 chance if I am able to quickly close the naked leg of the trade. With a Bull Put Spread, the stock can stay flat or rise and I win. With a Bear Call Spread, the stock can stay flat or go down and I win. I get to take advantage of the power of lower cost naked options. These do require approval from a broker to trade options at this level. Losses are limited. You ll never lose more than the spread, minus the credit received when opened. VERTICAL SPREADS 3

4 EXAMPLE: Open a Bull Put Spread on PFA by selling 5 contracts of the January 50 Put for $1 and buying 5 contracts of the January Put for $.50, there is a net credit of $.50 applied to your account. The spread ($2.50) minus the credit ($.50) makes your risk in the trade $2.00. With 5 contracts, the maximum possible loss would be $1,000. Because this trade consists of two option trades it is considered a married position. The options market maker will most likely allow the spread because you are executing two transactions in the trade. This creates more opportunity for greater profits. DISADVANTAGES VERTICAL SPREADS Profits are limited. Since there are so many other advantages, it still makes it worth doing the trade this way. 4

5 MMT RULES for TRADING BULL PUT CREDIT SPREADS The Bull-Put Spread is used when there is an expected rise in the price of the stock. We purchase a Put Option, while simultaneously selling another Put Option, with a higher strike price. The Bull-Put Spread is also known as a credit spread because the amount received by selling the Put Option with a higher strike is more than enough to cover the cost of purchasing the put with the lower strike. We will be profitable if the stock goes, stays the or goes slightly. POSITIONING THE BULL PUT SPREAD: Being in a Bullish position, we use this for stocks that are at support and headed. SUPPORT UP Identify and for the stock. Sell the Put Option at the first strike below the. Buy the Put Option at the next strike price down. Place an alert right below support. What happens if the stock moves down and breaks through support? What happens if the stock moves up? RESISTANCE SAME SUPPORT DOWN UP 5

6 MMT RULES for TRADING BEAR CALL CREDIT SPREADS The Bear-Call Spread is like the Bull-Put Spread they are both credit spreads, but now we have a Bearish position, instead of a Bullish position. DOWN SAME We will be profitable if the stock goes, stays the or goes slightly. UP POSITIONING THE BEAR CALL SPREAD: Being in a Bearish position we use this for stocks that are at resistance and headed. RESISTANCE SUPPORT Identify and for the stock. Sell the Call Option at the first strike price above. Buy the Call Option at the next strike price up. Place an alert right above resistance. RESISTANCE DOWN What happens if the stock moves up and breaks through resistance? What happens if the stock moves down? 6

7 DISCLAIMER Neither or any of its personnel are registered broker-dealers or investment advisors. We may mention that we consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because we consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that we are telling you to trade these exact strategies or securities. Keep in mind that we are not providing you with any specific recommendations or personalized advice about your own trading activities. The information we are providing is not tailored to any particular individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security, or a suggestion that it is suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk of loss, even if we are discussing strategies that are intended to limit risk. Also personnel are not subject to trading restrictions. Myself and any others at could have a position in a security or initiate a position in a security at any time. 7

Mastering the Markets

www.mastermindtraders.com Presents Mastering the Markets Your Path to Financial Freedom DISCLAIMER Neither MasterMind Traders or any of its personnel are registered broker-dealers or investment advisors.