Clear and Simple Option Strategy PRESENTED BY: DENNIS W. WILBORN

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1 Clear and Simple Option Strategy PRESENTED BY: DENNIS W. WILBORN

2 Disclaimer U.S. GOVERNMENT REQUIRED DISCLAIMER COMMODITY FUTURES TRADING COMMISSION FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDE R TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON T TRADE WITH MONEY YOU CAN T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED IN THIS TRAINING. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOL OGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS H AVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESU LTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN E XECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF AN Y, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PRO GRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY. TRADER S SHOULD PAPER TRADE ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS.

3 Objectives Each Individual Trader Must decide for themselves if they want to trade options It is a strategy not a system! o Does one need to trade options to be a successful trader? No o Traders should first master the system then add strategies o Not all Alerts are viable option trade candidates Define a Clear and Simple Option Strategy that: o Provides Upside Potential o Measured Loss Protection

No o Traders should first master the system then add strategies o Not all Alerts are viable option

4 Background 1. Review Option Training Video from Nov 12, 2014 Basic Options Is it Worth the Hassle? - Trading Options Introduces Variables to the Trading Equation - These variables can significantly increase risk - Directional Options & Covered Call trades are the most basic - Complex option trades add more variables (spreads & exotics)

- Trading Options Introduces Variables to the Trading Equation - These variables can

5 Resources Chicago Board of Options Exchange Books: The Option Advisor, Author: Bernie Schaeffer Options as a Strategic Investment, Author: Lawrence G. McMillan The Option Course, Author: George A. Fontanills

6 What are Options? Option Basics o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Types: Puts & Calls, American, European, Mini s, Standard & more Time: Weekly, Monthly, Leaps Variables: Greeks (Delta, Gamma, Theta, Vega, Rho) Model Options Calculators: Black Scholes, Binomial, Brownian & Others

comes with Rights and Obligations Types: Puts & Calls, American, European, Mini s,

7 The Notification Andy and Larry are ATTS members from Austin & Kerrville, Texas respectively! They have both been sending me s about how well they ve been doing trading an option strategy based on the ATTS Alert Triggers. Here s Andy s Log:

They have both been sending me emails about how well they ve

8 The Strategy Andy & Larry wait for the ATTS Alerts and then evaluate if there is a potential options trade. The following include the How. What do we want the strategy to do 1. Provide Good Targeted Upside Potential while having Well Defined Risk 2. Minimize Management of Trade (Fire & Forget) 3. Objectively Define Entries and Exits and then wait 4. Accept the fact that Some Work and Some Don t!

Provide Good Targeted Upside Potential while having Well Defined Risk 2.

9 Prior to the Trading Alert: The Strategy 1. Define a specific amount of capital to trade options 5-15% of Trading Capital (Start on the lower side!) 2. Position Sizing Determined by amount set aside and number of individual entities trades Ex: $10K set aside for Option trades Trade 5 Entities Trade $2000 per Trade Number of Contract = $2000/Price of Option (Round Down)

10 After the Alert 4. Strike Month & Strike Price The Strategy Strike Month 3-6 weeks out One Strike Price ITM or ATM (in rare occasions 1 Strike OTM) Weekly Options may be used for selling premium 5. Estimate Value of Option to Enter Trade using Theoretical Value Calculator 6. Alert Entries Confirmed on 1 or 2 Hour Charts (this will be happening behind the scene and may not be apparent when alerts are issued) 7. Define Exit Targets and Place the order to close after entry 30% Stop Loss Target 30% Profit Target (T1) 50% Profit Target (T2) Break Even Stop Loss if first two Profit Targets are hit and plan to close prior to expiration 8. Use GTC Conditional Orders to Enter and Exit

premium 5. Estimate Value of Option to Enter Trade using Theoretical Value Calculator 6.

11 What to Expect from ATTS 1. Text Alert of Set Up (will include Alert for a Straight Trade also) 2. Follow on with definition of option and entry limit 3. Defined Stop Loss and Targets 4. Trade Management updates as appropriate The order will either be a directional order or a Naked Put Order Be aware that there may be trade where an entry and exit will happen in the same day. If your account is below $25K this may trigger a warning from your broker regarding pattern day trading. Accounts below $25K can do 3-One Day Round Trips without be restricted Check with your broker on this. Lastly Paper Trade this strategy at least times journal what you learn and apply the lessons!

Trade Management updates as appropriate The order will either be a directional order or a Naked Put Order Be aware that there may be trade where an entry and exit will

12 What To Expect Example Example: Bullish on ALK Current Price = $63.80 Interesting at the 50 day SMA = $62.44 Choose March Strike Month (3 weeks to expiration) Choose 60 for the Strike Price (ITM) --.ALK150320C60 Delta : Estimate Value around $62.44 approximately = $3.60 How Many Contracts = $2000/3.60/100 = 5.5 round to 5 Buy ALK Order Buy 5 Contracts of ALK March 60C limit 3.60 Type or Order: Conditional Trigger: Pullback to 50 day SMA Quantity: Buy 5 contracts of.alk150320c60 Limit 3.60 T1: 30% Profit Sell 3 contracts = $4.65 (equates to $315 total profit) T2: 50% Profit Sell 2 contracts= $5.40 (equates to $360 total profit) Hard Stop Loss: -30% = $2.50 (equates to $550 total loss) Stop Loss can also be placed below swing lows

60 How Many Contracts = $2000/3.60/100 = 5.5 round to 5 Buy ALK Order Buy 5 Contracts of ALK March 60C limit 3.

13 What To Expect Example When a Stock has good Option Open Interest both the Stock and Option set up will be sent out When it is only an option trade that will be sent to members on the Option Mailing List only. If you want on that list send me an at dww@activetrendtrading.com Not a claim of results guarantee or claim of similar returns! Test Trades: 48.8% & 78.5% on NOAH 27% & 45% on ALK

Mailing List only. If you want on that list send me an email at dww@activetrendtrading.

14 Option Basics What are Options? o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Why do people trade options? Perceived benefit of Leverage & Variable Strategies New Vocabulary More Variables that just trading stocks (can work for or against the trader)

with Rights and Obligations Why do people trade options?

15 Vocabulary Option Basics Contract: Typically controls 100 shares (Mini s Control 10 shares) Obligation: Typically the responsibility of the seller Rights: Typically the benefit to the buyer Premium: Price of the Option Greeks: Variables used in the Black Scholes Option Model Implied Volatility: Expiration Month: Month the Option will expire typically on the Friday after the 3 rd Thursday (Settles on Saturday for non-european Options) Strike Price: Contract Price of underlying stock/etf Open Interest: Contracts currently open Bid/Ask Spread: The price difference between the Bid & Ask Intrinsic Value: The positive price difference between Strike and Stock $ Extrinsic Value: Time Value (influenced by Vega & Gamma) Exercise: Put to me or Called away

the 3 rd Thursday (Settles on Saturday for non-european Options) Strike Price: Contract Price of underlying stock/etf Open Interest: Contracts currently open Bid/Ask Spread: The price

16 Vocabulary (Cont) Option Basics Theoretical Value: Theoretical Price of an Option determined by an option calculator Time Decay: Amount price goes everyday (Theta) At the Money (ATM): Price of option strike that is closest to the price of the stock/etf In the Money (ITM): Price of option strike that has Intrinsic Value Out of the Money (OTM): Price of option strike outside the parameters of the trade Volatility Inflation: Volatility is growing due to VIX or other events like earnings Volatility Crunch: Volatility deflation due to falling VIX or event passes Leaps: Options that expire in January each year and are more that 6 months in the future Option Chains: List of option strike prices and months presented in a table Directional: Option trades placed in the direction of the trend Spreads: Credit or Debit two option trade with limited upside and fixed downside Condors: Exotic type option trade selling premium with a very low Delta Butterflies: Exotic type option trade made up of three separate options of the same type

trade Volatility Inflation: Volatility is growing due to VIX or other events like earnings Volatility Crunch: Volatility deflation due to falling VIX or event passes Leaps: Options that expire in

Options: How About Wealth & Income? I Really Don t Care Which Way the Market Goes!

Options: How About Wealth & Income? I Really Don t Care Which Way the Market Goes! Disclaimer U.S. GOVERNMENT REQUIRED DISCLAIMER COMMODITY FUTURES TRADING COMMISSION FUTURES AND OPTIONS TRADING HAS LARGE