3 SECRETS TO MAKING MONEY IN ANY MARKET

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1 A N M T M S P E C I A L R E P O R T Options Coaching - Online Options Education - Options Newsletters 3 SECRETS TO MAKING MONEY IN ANY MARKET MARKET TAKER MENTORING LLC Dan Passarelli MarketTaker.com W h i t e S t r e e t, U n i t B, F r a n k f o r t, I L telephone: h t t p : / / m a r k e t t a k e r. c o m

2 3 Secrets to Making Money in Any Market Market Taker Mentoring LLC Web: Copyright 2012 by Market Taker. All international and domestic rights reserved. No part of this publication may be reproduced in any form, printed or electronic, without prior written permission from the publisher, Market Taker. Notice: Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Option (ODD) which can be obtained from your broker; by calling (888) OPTIONS; or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL This content is intended to be educational and/or informative in nature. No statement is intended to be a recommendation or solicitation to buy or sell any security or to provide trading or investment advice. Traders and investors considering options should consult a professional tax advisor as to how taxes may affect the outcome of contemplated options transactions. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold and distributed with the understanding that the authors, publisher and sellers are not engaged in rendering legal, accounting or other professional advice or service. If legal or other expert assistance is required, the services of a competent professional adviser should be sought. The information and recommendations contained in this brochure have been compiled from sources considered reliable. Employees, officers, and directors of Market Taker do not receive fees or commissions for any recommendations of services or products in this brochure. Investment and other recommendations carry inherent risks. As no investment recommendation can be guaranteed, Market Taker takes no responsibility for any loss or inconvenience if one chooses to accept them. Any information or statements contained in this publication are not to be considered by the reader as personalized investment advice. The authors and any agents of Market Taker are not licensed under U.S. or other securities laws to address particular investment situations and nothing herein should be deemed as personalized investment advice. 1

3 3 Simple Ways to Make Money in Any Market By Dan Passarelli President & Founder, Market Taker Mentoring LLC There is no such thing as a bad day in the markets. If you know where to look, the stock market offers opportunities every day. Up days, down days, sideways days, and even wildly volatile days provide opportunity, especially when you re trading options. It doesn t take a debt-ceiling debacle or the ripple effects from an economic disaster in Europe to reduce any one portfolio to ruins. Nor does a thousand-point run-up in the Dow Industrials mean all your trades will become insanely profitable in just one afternoon. Most of the time, the markets don t really go anywhere, so you have to plan for boring times and be prepared for those exciting times that catch everyone else off-guard. In your own account, there will always be trades that turn out well and others that hit the skids on any given day in the markets. Whether or not you have more winners than losers, however, depends on how you play, when you play and how flexible you can be. Fortunes are made and lost all the time by traders in the market. Even the big guys make bad bets and on those days, it s nice to be a little guy investor who doesn t capsize when a squall overturns the markets. But most of the time they are moving the markets the right way. Because their moves affect us all, we need to be able to see them coming from a mile away. Fortunately, that s not hard to do at all. The Cat s Out of the Bag on How to Win More To be on the profitable side of the market, you must be educated. There s no need to go back to school and get a degree in economics. But when you dedicate yourself to learning more about what you trade, the time you invest shows up time and again in your results. It s possible to make money in any kind of market -- if you just learn how. And that s where I can help you, starting right now. Before we get started, let s be real. We all know there truly are no secrets to guaranteed success in the market. If that were the case, the person who uncovered these secrets would not want to share them with the rest of the trading community -- at any price. 2

4 And why would he or she, if making and keeping all the money were an option? But the basics behind making money in the options markets aren t necessarily a state secret. We re all armed with the same information -- it s how you apply it that determines whether you make a mess or a mint. The markets love beginners. Even if you ve been around the block for a while, each new day has the potential to bring something new that you haven t seen or succeeded with before. Pro traders, however, have a pretty good idea how to prepare or react. And they get ready to take everyone else s money who doesn t have experience or confidence on their side. You need to be aware of this so that you don t hand it over to them. One thing I can tell you from my 18-plus years in the markets is that, even though things turn out OK most of the time, the period of time that things can stay crazy varies. And there s a reason why the old saying that the market can remain irrational far longer than you can remain solvent never goes out of style. It s not just my goal but also my life s work to ensure that you are still in the markets, protecting your cash and generating more, when the glory days return whenever that may be. And there are three basic principles you can use to greatly enhance your success in any market. Read on for these introductory guidelines that can help make you a more profitable trader. Put the Technicals in Your Favor The first thing you must do is become proficient at reading charts. It s that simple and that challenging, all at the same time. It s easy enough to look at a chart, but what you see (or don t see) can make the difference between a winning trade and a losing one. It doesn t matter what type of chart you want to use -- just get good at reading them. Charts are one of the basic tools traders can use to put the odds in their favor. Many traders are overly concerned about being right on a trade or being consumed with a particular strategy that they neglect what s really important, which is to analyze price movements. Trading is personal. All traders are going to be different and use different price candles, technical indicators, time horizons and colors, etc. The key is to find a system that works consistently for you. 3

5 If you already have some favorite indicators that work, then you re ahead of the game. Stick to them and keep the magic going. But if you re just starting out or the batch of indicators you currently use AREN T yielding the trade results you want, feel free to experiment with others. Some of my favorites include moving averages, trendlines, the Relative Strength Index (RSI), the Average Directional Index (ADX) and the Directional Movement Index (DMI). But with about 400 indicators available out there, it is good to stick with what works but to never discount something new working just as well or better. Once you have studied them enough, you ll figure out which ones help you make sense of the stock s movement and which ones are just cluttering up your screen. Some traders love a lot of indicators on their charts and some hardly like any at all, relying simply on trendlines and support and resistance. There is no absolute right and wrong. I know many successful traders who use indicators I don t find worthwhile. Again, trading is personal. Use this tool to find the information YOU need to understand what has been going on in a stock s price action. It is relatively simple. The key is looking to the left. That is, study as much as you can from previous price movements. This will enable you to truly get a better understanding of what can possibly happen next because history repeats itself. In essence, you are putting the odds on your side. Through trial and error and repetition, you ll be able to see recurring patterns. It boosts your confidence to successfully place a bullish, bearish or neutral trade. Of course there is no guarantee the pattern will repeat itself, but putting the percentages in your favor is a major component of becoming a successful trader. There are two really simple ways to put the odds in your favor by use of a chart. First, start looking for patterns in every time frame. Look at the daily chart then maybe a 60-minute chart and then a 5-minute chart. You will start to recognize patterns in every time frame. You can even print out the charts in different time frames and test yourself to see if you can predict what will happen next. Whatever method you choose, you ll benefit from having added chart-reading confidence to the arsenal. Have a Plan and Stick to It! The second secret is to have a trading plan. To develop a solid trading plan requires commitment and discipline. Most traders will not take the time to write and follow a plan. And then they 4

6 wonder why they are not successful. A trading plan creates rules for, and holds the trader to, his or her own accountability. If you can t be true to yourself and your trading, what realistic chance do you have to be successful? The trading plan should be written by hand or typed -- it needs to be tangible. The reason is that when you write down your plan and goals, your thoughts are transformed from the subconscious to the conscious -- they are real. If you never write them down, they never exist outside your thoughts. Few people actually take the time to write down their goals. Is it really shocking to know that most people never achieve what they want out of trading or, for that matter, what they want out of life? Not sure how to start your trading plan? Here are a few things to consider. Your Goals The first section of your trading plan should contain your goals. And yes, you want to make money. But put a dollar figure or a percentage or even a tangible outcome on it (i.e., paying off your mortgage, taking a nice vacation, telling your boss you re retiring) and think about great you ll feel when you ll get there. What do you plan to achieve by trading? Be sure to set long- and short-term goals. There is a reason (or reasons) we all want to be successful in trading; make sure you write it down. Refer back to it often. Money Management The next section that needs to be addressed is money management. This is the discipline that dooms most traders. Traders should set limits and targets per trade, per week and on a monthly basis. Limits are crucial because you need to be held accountable to yourself. How many trader stories are out there about having accounts blow up? Too many. No one is claiming there isn t a learning curve when it comes to trading. But a money management section in your trading plan will allow you a chance to survive and succeed and shorten that learning curve. Write Down Specific Strategies 5

7 Writing down specific trading strategies is next. This is your blueprint for successful trading. The key is to start out with one or two strategies and become proficient at them before moving on to more complex strategies. Create a Trading Journal. You will have to define in detail set-ups, entry points and time frames, etc. Be clear and concise. When you are done with this section, a new trader should be able to read it and know exactly what to do to spot the correct set-up. Let the trade come to you like a professional and don t chase a trade like a novice that s the puppy dog syndrome and, much like when a dog chases its tail, it really doesn t get you anywhere but all that running around in circles can make you dizzy. Trade Management Trade management is the next section of your trading plan. This is extremely important because most traders concentrate on the entry of the trade and pay little attention to where to exit for profit or loss. This is the section in which you will decide what you will do exactly to exit before you even enter the trade. This is important because this section removes the emotion from the trade. You will know exactly what to do no matter what happens. When you exit the trade determines whether it's a winner or loser. Trade management is more important than entry points. Post Mortem The last section is the follow-up and review -- a post-mortem study. Print out your charts and option chains when you enter and exit the trade. Mark up the charts with what you did and what your plan called for you to do. The question becomes, did you follow your written plan? Find your trading demons and eliminate them. Learn to love your losses and learn from them. Learn How to Use Options the Right Way The last secret to making money in any markets is to strategically use options. Options, unlike stocks, give you strategies to profit in any market situation. Once you have honed your skills at reading charts and have written a trading plan, it is time to implement the correct option strategy. 6

8 That is the great thing about options: There is an endless amount of strategies and combinations that can be used. You can tailor-make your positions to fit the current trading environment, and you can adjust them to protect your returns and position you for more. You can t do that with stocks! The greatest asset of options is that they allow traders to hedge and reduce their risk and still profit from moves in any direction. Just by using calls and puts, we can create a strategy to profit in basically any scenario. How nice is that to have in your trading arsenal? The old trading adage applies here because a trader always wants to buy low or sell high and sell high and buy back at a lower cost. Here s a quick primer (or refresher) on calls and puts: Buying a call is generally bullish because the call s premium can increase if the underlying stock rises. Selling a call is generally considered a neutral to bearish strategy because the call s premium can decrease if the stock falls or trades sideways. Buying a put is generally bearish because the put s premium can increase if the underlying stock falls. Selling a put is generally considered a neutral to bullish strategy because the put s premium can decrease if the stock rises or trades sideways. Now here is the exciting part about options. We ve only touched upon four strategies, and it still covered every market direction. There are also spreads to trade and to learn and use for every trading situation a trader can possibly think of. They expand your strategy arsenal exponentially. Spreads involve the buying of one option and selling another option against it at the same time. Your broker should make it very easy to do this in one simple step on your trading platform. And even though you re adding an option to a trade with spreads, this gives you the ability to add a bit of an insurance policy to your trades. There are directional debit spreads that can reduce the cost of the trade and limit its losses. Credit spreads can be set up for a directional or neutral bias and can have a high probability of success. Many investors use covered calls on a neutral to slightly bullish stock to generate an additional return from their stock, and that is a sound strategy. But what if the shares of stock are more expensive than your portfolio can handle? That is where a calendar spread, or diagonal, can greatly reduce the cost of the trade by buying an option instead of stock. The investor can still enjoy most of the benefits of a covered call and pay significantly less by implementing a calendar spread. 7

9 There are also more-advanced strategies that can take advantage of volatility in the market. Condors and butterflies are spread trades that can be structured for both a neutral and directional bias. Not sure what the stock is going to do but you have a feeling it s going to go one way or the other? Straddles and strangles are option spreads that address this type of situation. How about that for versatility? Conclusion Whatever the outlook, there is an options strategy to coincide with it. But as long as you know how to read a stock chart, the goals you have as a trader, and how to use calls and puts, you have everything you need to become a successful trader. There are no great secrets or mysteries to be uncovered to profit in any market. It all boils down to treating your trading like a business and always continuing your education so you can become the most successful trader you deserve to be. Here s to your successful trading! Dan Passarelli Founder & President, Market Taker Mentoring LLC 8

10 Dan Passarelli is an author, options educator and the founder of Market Taker Mentoring LLC. He has more than 18 years experience in the options industry and has worked as both a floor trader and an options instructor. Dan was a market-maker on the floor of the Chicago Board Options Exchange, trading equity options. He has also traded agricultural options and futures at the Chicago Board of Trade. In 2005, he began teaching others what he learned from his years in the trading pits. Through the Options Institute at the CBOE and the Options Industry Council, Dan has educated thousands of professional and individual traders about options fundamentals, trading techniques and market strategies. Dan writes for TheStreet.com, Benzinga and several other investingoriented publications. Geld Press named Dan s 2008 book, Trading Option Greeks, Best Book for Understanding Option Greeks. Dan s latest book is The Market Taker's Edge: Insider Strategies from the Options Trading Floor, published by McGraw-Hill in

11 Disclaimer Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Option (ODD) which can be obtained from your broker; by calling (888) OPTIONS; or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL The content in this report is intended to be educational and/or informative in nature. No statement in this document is intended to be a recommendation or solicitation to buy or sell any security or to provide trading or investment advice. Traders and investors considering options should consult a professional tax advisor as to how taxes may affect the outcome of contemplated options transactions. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in this free options report will be supplied on request by Market Taker Mentoring LLC, 301 White Street, Unit B, Frankfort, IL Copyright Market Taker Mentoring LLC. All rights reserved. 10