2011-10-19 trading options for potential income in a volatile market slides

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Trading Options for Potential Income in a Volatile Market

Dan SheridanSheridan Mentoring

&

October 19 & 20, 2011TradeKing is a member of FINRA & SIPC

&Brian Overby

TradeKing

Options involve risks and are not suitable for all investors. Prior to buying or selling options, aninvestor must receive a copy of Characteristics and Risks of Standardized Options. Copies may beobtained by calling TRADEKING at 877-495-KING, visiting www.tradeking.com/ODD or by asking aTradeKing representative at this event.

System response and access times may vary due to market conditions system performance and

Disclaimer

System response and access times may vary due to market conditions, system performance, andother factors.

Market timing is a complex investment strategy which involves risk and may incur additionalcommission costs.

Multiple leg options strategies involve additional risks and multiple commissions, and may result incomplex tax treatments. Please consult a tax advisor.

Any strategies discussed and examples using actual securities and price data are strictly for illustrativeand educational purposes only and are not to be construed as an endorsement, recommendation, orsolicitation to buy or sell securities. Past performance is not a guarantee of future results. Considerthe following when making an investment decision: your financial situation your risk profile andthe following when making an investment decision: your financial situation, your risk profile andtransaction costs.

This event is provided for educational and informational purposes only. All investments involve risk,losses may exceed the principal invested, and the past performance of a security, industry, sector,market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offerinvestment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risksassociated with the use of TradeKing's systems, services or products.

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The projections or other information generated by TradeKing's tools regarding the likelihood of variousinvestment outcomes are hypothetical in nature, do not reflect actual investment results and are notguarantees of future results. The calculations do not take into consideration all costs, such ascommissions and margin interest which may impact the results shown. It is the user's soleresponsibility to select the criteria to enter in the TradeKing's tools, or to choose among the pre-defined screens, and to evaluate the merits and risks associated with the use of the tools before

Disclaimer

making any investment decisions. TradeKing is not responsible for any losses that occur from suchinvestment decisions.

The material presented by Dan Sheridan is a product of SheridanMentoring.com and as such, is solelyresponsible for its content. TradeKing maintains a business relationship with SheridanMentoring.com.

TradeKing charges $4.95 for equity and option trades, add 65 cents per option contract. Trade morethan 8 contracts, and we'll automatically lower your cost to 15 cents per contract plus $8.95 per trade.TradeKing charges an additional $0.35 per contract on certain index products where the exchangecharges fees. See our FAQ for details. TradeKing adds $0.01 per share on the entire order for stockspriced less than $1.00. See our Commissions + Fees page for commissions on low-priced stocks,option spreads, and other securities.

Implied volatility represents the consensus of the marketplace as to the future level of stock pricevolatility. Delta represents the consensus of the marketplace as to the theoretical price movement ofthe option relative to the underlying security. Gamma represents the consensus of the marketplace asto the theoretical rate of change of Delta relative to the underlying security. Theta represents theconsensus of the marketplace as to the amount a theoretical option's price will change for acorresponding one-unit (day) change in the days to expiration of the option contract. There is noguarantee that these forecasts will be correct.

Crash Course in the Greeks

TradeKing is a member of FINRA & SIPC

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t/ ]t/2)2(rln(S/E) [1d

)2N(drtEe)1SN(d

te)r,t,E,C(S,

++=

=

The Black-Scholes Formula

t1d2d

])(( )[1=

S = current price E = strike price r = continuously compounded risk-free interest rate = continuously compounded dividend yield t = time to expiration of the option = rate of return volatility on the stock N() cumulative normal density function

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N() = cumulative normal density function Example: Let S = 40; E = 40; r = 8%; = 30%; t = 91 days; = 0

The Black-Scholes price is 2.78

The Greeks

Delta: The amount a theoretical option's price will change for a corresponding one-unit (point) change in the price of the underlying security.

Gamma: The amount a theoretical option's delta will change for a corresponding one unit (point) change in the price of the underlying securitycorresponding one-unit (point) change in the price of the underlying security.

Theta: The amount a theoretical option's price will change for a corresponding one-unit (day) change in the days to expiration of the option contract.

Vega: The amount a theoretical option's price will change for a corresponding one-unit (percentage-point) change in the implied volatility of the option contract.

Rh

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Rho: The amount a theoretical option's price will change for a corresponding one-unit (percentage-point) change in the interest rate used to price the option contract.

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Delta Example I

Delta: The amount a theoretical option's price will change for a corresponding one-unit (point) change in the price of the underlying security.

Stock @ 50Strike is 503 Month Call$3

51

3.50

52

4.10

N T tb k D fi iti

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Non-Textbook Definition

The delta is the probability of the option being in the money on expiration.

Delta Example II

Delta: Non-Textbook Definition The delta is the probability of the option being in the money on expiration.money on expiration.

Stock @ 50Call Strike is 50

1) One Day to Expiration

51

.50 .90

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2) Sixty Days to Expiration.50 .60

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Gamma

Gamma: The amount a theoretical option's delta will change for a corresponding one-unit (point) change in the price of the underlying security.

Gamma is highest for the near-term ATM strike, and slopes off toward the ITM and OTM strikes.

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Delta Example II

Delta: Non-Textbook Definition The delta is the probability of the option being in the money on expirationmoney on expiration.

Stock @ 50Call Strike is 50

1) One Day to Expiration

51

.50 .90

Gamma

10

2) Sixty Days to Expiration.50 .60

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Graph of Gamma ATM Calls

0.08

0.09

0.10

15-Day 85 Strike Call45-Day 85 Strike Call

0.02

0.03

0.04

0.05

0.06

0.07

Gam

ma

11

0.00

0.01

80 85 90 95Stock Price

Theta

Theta: The amount a theoretical option's price will change for a corresponding one-unit (day) change in the days to expiration of the option contract.

12

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Time Decay of ATM Call Option

1 73

2

1.41

1.73

1.00

1Option

Premium

13

090 60 30 0

Days to Expiration

Vega

Vega: The amount a theoretical option's price will change for a corresponding one-unit (percentage-point) change in the implied volatility of the option contract.

The more time premium, the higher the Vega is for an option. By that rational, longer term options will have a higher Vega number then shorter term options.

Option ATM $4 Vega .10 IV was 60 and went to 59

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1% move Option is now trading for $3.90 in theory.

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Position Greeks

Lets look at some position deltasXYZ at 103.27 Long 1 XYZ May 105 Call at 3.60

Position Delta Equals 46.00

Long 2 XYZ May 105 Call at 3.60 Position Delta Equals 92.00

Long 5 XYZ May 105 Call at 3.60 Position Delta Equals 230.00

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Dan SheridanDan Sheridan

Managing Potential Managing Potential Income TradesIncome Trades

Sheridan Options Mentoring, Inc.www.SheridanMentoring.com

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at www.theocc.com. The information in this presentation is provided solely for general education and information purposes. Any strategies di d i l di l i l i i d i d i l f

DisclaimerDisclaimer

discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions and other transaction costs have not been included in the examples used in this presentation. Such costs will impact the outcome of the stock and options transactions and should be considered. Multiple leg strategies involve multiple commission charges. Investors should consult their tax advisor about any potential tax consequences. No statement within the presentation should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims statistics or other technical data is available from

Page Page 1818@ Copyright 2010. All rights reserved.

documentation for any claims, statistics, or other technical data is available from Sheridan Options Mentoring at www.sheridanoptionsmentoring.com. Chicago Board Options Exchange, Incorporated (CBOE) is not affiliated with Sheridan Options Mentoring or OptionNet. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation.

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Running Running an Options Businessan Options Businessgg pp


Portfolio PlanPortfolio Plan

SpeculativeI SpeculativeStrategies

Long Term

IncomeStrategies


Strategies

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Portfolio PlanPortfolio Plan

Long Calls/Puts,Diagonal SpreadsCalendar Spreads Diagonal SpreadsOTM ButterfliesVertical Spreads Directional CalendarsLong Straddles

pDouble Calendar SpreadsDouble DiagonalsATM ButterfliesCondors

CollarsLEAPSCovered Writes/Straddles


Long StockLong Term Calendars

Credit SpreadsCredit Spreads


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How to Find Credit Spread How to Find Credit Spread VVehicles?ehicles?

z 1. Stocks you would buy in retirement account?

z 2. Stocks over $65

z 3. Stocks with option implied volatilities 20-40


May NFLX Credit SpreadMay NFLX Credit SpreadDate: 4/4/2011Date: 4/4/2011 NFLX Price: $244.72NFLX Price: $244.72


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May NFLX Credit SpreadMay NFLX Credit SpreadDate: 4/4/2011Date: 4/4/2011 NFLX Price: $244.72NFLX Price: $244.72


Plan for Credit SpreadPlan for Credit SpreadDate: 4/4/2011Date: 4/4/2011 NFLX Price: $244.72NFLX Price: $244.72


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Stock Drops from Stock Drops from Original Price of $244.72Original Price of $244.72

Date: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Stock Drops from Stock Drops from Original Price of $244.72Original Price of $244.72

Date: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #1 Roll Down Credit SpreadAdjustment #1 Roll Down Credit SpreadDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #1 Roll Down Credit SpreadAdjustment #1 Roll Down Credit SpreadDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #2 Buy a Long OptionAdjustment #2 Buy a Long OptionDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #2 Buy a Long OptionAdjustment #2 Buy a Long OptionDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #3 Debit SpreadAdjustment #3 Debit SpreadDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #3 Debit SpreadAdjustment #3 Debit SpreadDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #4 Turn Into ButterflyAdjustment #4 Turn Into ButterflyDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #4 Turn Into ButterflyAdjustment #4 Turn Into ButterflyDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #5 CondorizeAdjustment #5 CondorizeDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #5 CondorizeAdjustment #5 CondorizeDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #6 Diagonal AdjustmentAdjustment #6 Diagonal AdjustmentDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #6 Diagonal AdjustmentAdjustment #6 Diagonal AdjustmentDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment # 7 Condorize in PutsAdjustment # 7 Condorize in PutsDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment # 7 Condorize in PutsAdjustment # 7 Condorize in PutsDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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Adjustment #8 Reduce SizeAdjustment #8 Reduce SizeDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


Adjustment #8 Reduce SizeAdjustment #8 Reduce SizeDate: 4/8/2011Date: 4/8/2011 NFLX Price: $234.86NFLX Price: $234.86


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CalendarsCalendars


WhyWhy do calendarsdo calendars??Why Why do calendarsdo calendars??


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Why Do Calendars?Why Do Calendars?

z Time Decay

z Limited risk

z Easy to understand- same risk as long option

z Two legged spread versus 3 and 4 legged spreads, butterflies and calendars

Commissions are typically lower on two leg spreads than 3 or 4 leg strategies.


FindingFinding CalendarCalendar candidatescandidatesFinding Finding Calendar Calendar candidatescandidates


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Finding Calendar candidates Finding Calendar candidates

z Good stocks you would own in retirement

z Implied volatility between 14-30

z Stocks over $60


Finding Calendar CandidatesFinding Calendar Candidatesz NDX HPQ

z SPX XOM

z RUT NSC

z PG IBM

z WMT AAPL

z CL CVX

z GOOG QCOM


z GOOG QCOM

z CAT AMZN

z BA

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VIPES VIPES Process for filtering Process for filtering candidatescandidates


VIPES ( Calendar Filtering System )VIPES ( Calendar Filtering System )

z Volatility- Long option of calendar in lower end of IV range

z Industry- Is this a whacko industry?Industry Is this a whacko industry?

z Price- Channeling or Trending? Looking for speed!

z Earnings- Stay out of earnings month

z Skew- Positive skew greater than 3 investigate, Negative skew more than 2 back off


z News- keep up! Dont like words like buy back or takeover ( Beware of descending IV pattern)

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Consistency?Consistency?

z January $500 September $ -1000

z February $500 October $500

z March $300 November $300

z April - $800 December $500

z May $500 Net profits for 12

z June $500 months = $1500 (30%)


z July -700 capital $5000

z August $400 target 10% ($500)

What is a Calendar?What is a Calendar?Date: 6/15/2011Date: 6/15/2011 SPX Price: $1265.42SPX Price: $1265.42

O ti P i IV T d P i IV T dJUL(30) AUG(65)

Options Price IV Trade Price IV Trade1265 Calls $26.15 17.9% 1 $37.65 17.5% +1

Delta 0.5Gamma -0.2Theta 14.5

At July Expiration:Max Risk: 11.50Max Gain: Limited & Unknown


Theta 14.5Vega 68.1Debit 1,150

Max Gain: Limited & UnknownCommission: $6.95 at TradeKing

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What is a Calendar?What is a Calendar?Date: 6/15/2011Date: 6/15/2011 SPX Price: $1265.42SPX Price: $1265.42


Finding Calendar CandidatesFinding Calendar Candidates

z Stocks you would buy in retirement account

z Stocks over $60

z Implied Volatility levels between 17-31

z Betas less than the market

z Good solid candidates

z Indexes RUT, MNX, SPX


z Stocks like IBM, MCD, WMT, AAPL

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Executing CalendarsExecuting Calendars

z Depends on Vehicle, compare Index vs Stock

z Mid Prices

z Entering versus exiting

z Time of Day

z Contingent and market orders


Calendar AdjustmentsCalendar Adjustments


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AdjustmentsAdjustmentsDate: 6/3/2011Date: 6/3/2011 RUT Price: $808.13RUT Price: $808.13

O ti P i IV T d P i IV T dJUL(42) AUG(77)

Options Price IV Trade Price IV Trade810 Calls $21.80 20.7% 2 $31.30 21.6% +2

Delta 2.0Gamma -0.4Theta 12 2

At July Expiration:Max Loss: 9.50Max Gain: Limited & Unknown


Theta 12.2Vega 77.3Debit 1,900


AdjustmentsAdjustmentsDate: 6/3/2011Date: 6/3/2011 RUT Price: $808.13RUT Price: $808.13

779.79 843.43


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Why Adjust?Why Adjust?Date: 6/8/2011Date: 6/8/2011 RUT Price: $788.04RUT Price: $788.04

O ti P i E t P IV T d P i E t P IV T dJUL(37) AUG(72)

5 Days in Trade Original RUT Price: $808.13

Options Price Entry Pr IV Trade Price Entry Pr IV Trade810 Calls $11.20 $21.80 20.0% 2 $20.45 $31.30 21.2% +2

Delta 11.9Gamma -0.4Theta 9.9

At July Expiration:Max Loss: 9.50 Max Gain: Limited & Unknown


Vega 86.3Debit 1,900Loss 50


Why Adjust?Why Adjust?Date: 6/8/2011Date: 6/8/2011 RUT Price: $788.04RUT Price: $788.04

780.72 842.04


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Adjustment #1Adjustment #1-- Turn into Double Turn into Double CalendarCalendar

Date: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

JUL(37) AUG(72)


Options Price Trade Adjust New Price Trade Adjust New810 Calls $11.20 2 +1 1 $20.45 +2 1 +1790 Puts $24.95 1 1 $35.25 +1 +1

JUL(37) AUG(72)

Delta 11.9Gamma 0 4

Before AdjustingDelta 7.1Gamma 0 4

After Adjusting Commission to adjust $7.55 at TradeKing


Gamma -0.4Theta 9.9Vega 86.3Debit 1,900Loss 50


TradeKing

Adjustment #1Adjustment #1-- Turn into Double Turn into Double CalendarCalendar

Date: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

767.28 842.04

834.48780.72


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Adjustment #2 ReAdjustment #2 Re--PositionPositionDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

O ti P i T d Adj t N P i T d Adj t NJUL(37) AUG(72)


Options Price Trade Adjust New Price Trade Adjust New810 Calls $11.20 2 +2 $20.45 +2 2790 Puts $24.95 2 2 $35.25 +2 +2

Delta 11.9Gamma 0 4

Before AdjustingDelta 2.2Gamma 0 4





TradeKing

Adjustment #2 ReAdjustment #2 Re--PositionPositionDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

842.04

780.72

757.20

826.08


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Adjustment #3 Adjustment #3 DiagonalizeDiagonalizeDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

Options Price Trade Adjust New Price Trade Adjust NewJUL(37) AUG(72)


Options Price Trade Adjust New Price Trade Adjust New810 Calls $11.20 2 +2 $20.45 +2 +2795 Calls $17.80 2 2

Delta 11.9Gamma -0.4

Before AdjustingDelta -11.4Gamma -0.5

After AdjustingCommission to adjust $7.55 at TradeKing


Theta 9.9Vega 86.3Debit 1,900Margin 1,900Loss 50

Theta 16.4Vega 72.1Debit 580Margin 3,542Loss 50

TradeKing

Adjustment #3 Adjustment #3 DiagonalizeDiagonalizeDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

748.80

842.04

817.68

780.72


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Adjustment #4 Add Adjustment #4 Add MMore Calendarsore CalendarsDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04



Options Price Trade Adjust New Price Trade Adjust New810 Calls $11.20 2 2 $20.45 +2 +2790 Puts $24.95 2 2 $35.25 +2 +2


Before AdjustingDelta 14.1Gamma -0.8



Gamma 0.4Theta 9.9Vega 86.3Debit 1,900Loss 50

Gamma 0.8Theta 27.1Vega 165.2Debit 3,960Loss 50

TradeKing

Adjustment #4 Add Adjustment #4 Add MMore Calendarsore CalendarsDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

767.28

780.72


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Adjustment #5 Add Long OptionsAdjustment #5 Add Long OptionsDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04



Options Price Trade Adjust New Price Trade Adjust New810 Calls $11.20 2 2 $20.45 +2 +2680 Puts $1.85 +1 +1


Before AdjustingDelta 5.3Gamma 0.3



Theta 9.9Vega 86.3Debit 1,900Loss 50

Theta -1.9Vega 116.1Debit 2,085Loss 50

TradeKing

Adjustment #5 Add Long OptionsAdjustment #5 Add Long OptionsDate: 6/8/2011Date: 6/8/2011 RUT Price:$788.04RUT Price:$788.04

780 72780.72

781.56


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Dan SheridanDan Sheridan

+1-630-835-4691

[email protected]@SheridanMentoring.com


Sheridan Options Mentoring, Inc.http://www.SheridanMentoring.com/

2011-10-19 trading options for potential income in a volatile market slides

Documents

tradeking charges

actual investment results

guarantee of future

financial situation

financial product

additional risks

past performance

risks of standardized