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PDS Trader Manual 1

PDS TRADER MANUAL Instructions for using the Payday Stocks Trader software

© 2013 Quantum Trading Technologies

PDS Trader Manual 2

CONTENTS

Getting Started…………………………………………………………………………………………………3

Log in to the PDS Trader…………………………………………………………………………3

Retrieving Market Data……………………………………………………………………………4

Strategy-Types……………………………………………………………………………………….5

Using the Tables……………………………………………………………………………………………….5

Column-Headers……………………………………………………………………………………..6

Sorting…………………………………………………………………………………………………….8

Filter Editor……………………………………………………………………………………………..9

Tracking Trades………………………………………………………………………………………………10

Live Trading……………………………………………..…………………………………………………….11

Placing an Order….…………………………………………………………………………….…11

Open Orders………………………………………………………………………………………….14

Open Positions………………………………………………………………………………………15

Orders……………………………………………………………………………………………………15

Menu Strip………………………………………………………………………………………………………16

Opportunities…………………………………………………………………………….……………………17

Covered Calls…………………………………………………………………………………………17

Synthetic Covered Calls (Naked Puts)…………………………………………………19

Debit Calendar Spreads………………………………………………………………………..21

Credit Calendar Spreads……………………………………………………………………….24

Credit Vertical Spreads…………………………………………………………………………26

Debit Vertical Spreads………………………………………………………………………….27

PDS Trader Manual 3

Getting Started- Log in to PDS Trader

When the PDS Trader software is launched, the first window to appear is the

"Login" Window.

The "Login" window allows the user to log into a live JunoTrade account,

enter Non-Live mode, or select "Cancel" to close the program.

JunoTrade

To log into a Live JunoTrade account, enter your JunoTrade User Name and

Password. Contact Junotrade for assistance with User Name and Password.

Enter the User Name and Password as shown below, then select "Login" to

access the PDS Trader

Non-Live Mode

To enter Non-Live mode, select, "I don't have a trading account with

JunoTrade" and select "Login."

PDS Trader Manual 4

Getting Started- Retrieve Market Data

After logging in, the PDS Trader will open to the "Update Data" tab by

default. Select the "Update" button to begin retrieving the market data.

Once the "Update" button is selected, the Progress Bar will begin to fill. The

amount of time the process takes to complete depends on the user's internet

connection speed. During the updating process, the PDS Trader collects data

for options within two Strike Price intervals of At-The-Money.

When the "Update" process is completed, the Progress Bar will be

completed. The PDS Trader displays how long it took for the "Update" to

complete-

By default, the PDS Trader will automatically update the data every 120

minutes. To change this, select "Configuration" in the Menu Strip, change

the "Auto update" field as shown below, then select "Save."

PDS Trader Manual 5

Getting Started- Strategy Types

Overview

The PDS Trader software displays opportunities for Covered Calls, selling

Puts, Debit Calendar spreads, Credit Calendar spreads, Vertical Credit

spreads, and Vertical Debit spreads.

Selecting one of these tabs will display opportunities for that strategy type.

Once a strategy-type is selected, a variety of Expiration Dates will appear. In

the example below, Covered Call opportunities for the options that expire on

03-08-13 are shown-

Selecting the "03-16-13 Call" tab displays opportunities for options that

expire on 03-16-13, etc. Expiration tabs will clarify if they are displaying Call

or Put opportunities. For Calendar Spreads, Expirations are listed and

compared to each other as shown below-

In this example, the PDS Trader is comparing the 03-08-13 Calls compared

to the 03-16-13 Calls.

PDS Trader Manual 6

Using The Tables- Column Headers

The PDS Trader shows opportunities in a table of rows and columns. Each

strategy type has unique column headers. Fields that all strategy-types

contain are listed below, followed by a complete listing and explanation of

the each strategy-

Symbol-The underlying stock the option is based on

Price- The price of the underlying stock

Change %- Movement percentage of the underlying stock since the previous day's Close

Earnings Events- Upcoming Earnings Events dates will appear here

* Earnings Events dates colored in dark-red mean that an Earnings Release is scheduled to occur

between the current day and the expiration date of the option. Dates colored otherwise represent a

Conference that will occur between the current date and the expiration date.

*Extrinsic Values are shaded green if they are out-of-the-money, orange if they are in-the-money.

Display Calls/Display Puts:

Expiry- Expiration date of the option the opportunity is based on

Strike- Strike price of the option that the opportunity is based on

Strike Distance- The distance the underlying stock is away from being At-The-Money

Volume- The volume of the option the opportunity is based on

Ext Value- The extrinsic value of the option.

Max Flat Gain- The maximum profit/gain to expect

Protection- The amount the market can move against you while you remain break-even

Debit Calendar Spreads:



Sell Exp- Expiration date of the option to be sold

Buy Exp- Expiration date of the option to be purchased

Sell Price-Price of the option to be sold

Buy Price- Price of the option to be purchased

Debit- Difference between the Buy Price and the Sell Price, maximum risk

Spread Ratio- Sell Price divided by the Buy Price

Sell EV- Extrinsic value of the option being sold

Buy EV- Extrinsic value of the option being purchased

EV Ratio- Sell EV divided by the Buy EV

PDS Trader Manual 7

Credit Calendar Spreads:



Sell Exp- Expiration date of the option to be sold

Buy Exp- Expiration date of the option to be purchased

Sell Price-Price of the option to be sold


Credit- Difference between the Sell Price and the Buy Price, maximum reward

Spread Ratio- Buy Price divided by the Sell Price

Sell EV- Extrinsic value of the option being sold

Buy EV- Extrinsic value of the option being purchased

EV Ratio- Buy EV divided by the Sell EV

Vertical Credit Spreads:


Sell Strike- Strike Price of the option that is being sold

Buy Strike- Strike Price of the option that is being purchased

Sell Price- Price of the option to be sold


Credit- Difference between the Sell Price and the Buy Price, maximum reward

Max Risk- The maximum risk of the trade

Profit Risk Percent- The Credit divided by the Maximum Risk

BE Move- The percentage movement the market needs to make to be at Break-Even

BE Level- The price that the market needs to reach to be at Break-Even

Vertical Debit Spreads:


Sell Strike- Strike Price of the option that is being sold

Buy Strike- Strike Price of the option that is being purchased

Sell Price- Price of the option to be sold


Debit- Difference between the Sell Price and the Buy Price, maximum risk

Max Profit- The maximum reward of the trade

Profit Risk Percent- The Maximum Profit divided by the Debit (Maximum Risk)

BE Move- The percentage movement the market needs to make to be at Break-Even

BE Level- The price that the market needs to reach to be at Break-Even

PDS Trader Manual 8

Using The Tables- Hiding/Showing Columns

Hiding Columns

Due to the amount of information available, there will be times when it is

necessary to hide columns that are not needed. To hide a column, right-click

the column-header (Change %, for example) and then select "Remove This

Column." The column will then be removed from the table, but is only hidden

from view.

Adding Columns

To restore hidden columns, right-click any column-header and select

"Column Chooser." A window will appear in the bottom right of the PDS

Trader-

Right-click on any of the items listed here and select "Show This Column" to

be able to view the column in the table.

Using the Tables- Sorting

After running an update, the data needs to be sorted to find opportunities

more quickly. Sorting in the PDS Trader is very simple. Click any column-

header, such as "Change %" and the table will sort, click the column-header

again to sort the opposite direction.

For "Display Calls" and "Display Puts" the primary sorting method is Max Flat

Gain from highest to lowest.

For "Debit Calendar Spreads" the primary sorting method is EV Ratio from

highest to lowest.

For "Credit Calendar Spreads" the primary sorting method is Spread Ratio

from lowest to highest.

For both Debit and Credit Vertical Spreads, the primary sorting method is

Profit: Risk Percent from Highest to Lowest.

PDS Trader Manual 9

Using the Tables- Filter Editor

The Filter Editor feature allows users to only view opportunities that meet

the filter requirements. To access the Filter Editor, right-click any column-

header and select "Filter Editor…"

Due to the nature of option data, the Filter Editor comes with default filters

already in place to catch any data that may be incorrect. To remove a filter

condition, click the "X" to the right of the condition, as shown below-

Always select "Apply" to apply the filter requirements to the PDS Trader. To

add a condition, select the + symbol next to "And" in the upper-left corner of

the Filter Editor-

Select the value in the brackets [Max Flat Gain] in the image above, then

change it to the desired field. Select the "Is less than" string in the above

example, then all of the operators will appear (Is greater than, is less than,

is between, etc.). Enter all values in Textboxes as numbers, not

percentages. In this example, entering .05 and selecting "Apply" would

display all opportunities with a Max Flat Gain greater than 5%

For a detailed example of using the Filter Editor, use the following link-

http://www.paydaystocks.com/manuals/pds-trader-using-the-filter.pdf

PDS Trader Manual 10

Tracking Trades-

To access the tracking feature of the PDS Trader, enter Non-Live mode (see

page 3). Tracking is available for the "Display Calls" and "Display Puts"

sections. Once a desirable opportunity is found, select "Track" in the far-

right column. A new window will display, stating "Do you want to Track this

trade?" Select "Yes." To view the performance of the trades that are being

tracked, select the "Tracking Call" or "Tracking Put" tab next to the

Expiration tabs.

The "Tracking" page displays a large variety of numbers related to the trade

that is being tracked, look to the "Net PL" column to the far right to see the

performance of the trade so far.

To update the Tracking statistics, select "Configuration" and then adjust the

"Update Tracking Trades data at every…" field as show below-

With this configuration, the trades that are being tracked will update every

10 minutes. Once a trade that is being tracked expires, the trade is moved

into the "Tracking Closed" tab and can be viewed there.


Live Trading- Placing an Order

After signing into Live mode with a JunoTrade account (see Page 3), users

are able to place orders directly from the PDS Trader software. Once an

opportunity is found, select the "Trade" button on the far right of the PDS

Trader.Selecting the "Trade" button for any strategy will display an order

box already filled in with the necessary details.

Display Calls

Selecting "Trade" in the "Display Calls" section brings up a box with Covered

Call details already filled out.

"Convert order to" will allow the trade to be changed from a Covered Call to

selling a naked call, or only buying the underlying stock.

"Order Type" allows the user to enter the order as a Limit or At Market.

"Order Expiry" allows the user to select between a DAY order or GTC.

"Cost Basis" is the Stock price minus the Bid

"Position Effect" states whether this order is to open or close a position.

Select "Minimum Call Value" to require the Call to be above a certain value

before entering the trade.

Change the "Quantity" in each section to increase the lot size to be traded.

The "Strike" price is the Strike Price of the option being sold.

"Buy/Sell" states if the option or underlying is being bought or sold.


Display Puts

Selecting "Trade" in the "Display Puts" sections brings up a box with details

for selling a put already filled out.

"Buy/Sell" states if the option is opening or closing a position.

"Quantity" determines the amount of options being traded.

"Symbol" states the stock ticker of the option being traded.

"Strike" is the Strike Price of the Put being sold.

"Call/Put" states that it is a Put that is being sold.

"Expiry" shows the expiration date of the option being traded.

"Price" is the option price and is used with the Limit "Order Type."

"Order Type" controls whether the order a Limit order or At Market.

"Order Expiry" allows the user to select between a DAY order or GTC.


Calendar Spreads and Debit Spreads

Select "Trade" in the Calendar Spreads or the Vertical Spreads and the Order

Entry box will display-

"Position Effect" determines if it is a Debit or Credit trade and whether or not

it is opening a new position or closing an existing position.

"Order Expiry" determines whether or not the order is DAY or GTC.

"Amount" is for Limit orders and determines the necessary spread amount.

"Order Type" allows the user to enter the order as a Limit or At Market.

"Qty" determines the number of positions to trade for this order.


Live Trading- Open Orders

The Open Orders tab only shows orders that were placed, but have not been

filled. "Single Leg" orders are orders from the "Display Puts" section.

"Covered Call" contains orders from the "Display Calls" section.

Note the "Cancel Order" button, which cancels the order so that it is not

filled. Once an order in the "Open Orders" tab is filled, it is moved to the

"Open Positions." tab. Any Exit limit orders that are not filled will appear in

the "Open Orders" tab until they are cancelled, expire, or filled.


Live Trading- Open Positions

The Open Positions tab shows order that have been filled and are currently

open. "Single Leg" orders are orders from the "Display Puts" section.

"Covered Call" contains orders from the "Display Calls" section.

The "Exit" button allows users to enter exit orders for either "At Market" or

with a "Limit" order. Limit orders will be placed in the "Open Orders" tab

until filled. Open positions that are completely closed will be removed from

the "Open Positions" tab. If an order is partially closed (for example, 5 out of

10 options were closed), the exit price of the 5 closed trades will be

displayed in the "Exit Price" column.

Live Trading- Orders

The "Orders" tab connects to JunoTrade and displays all orders that are

placed in the account. Check the "Info" column to the far-right for error

messages if an order is not being accepted.


Menu Items-

Selecting "File" displays the ability to Backup Data. This can be used to

transfer database files from one computer to another computer, so that

Open Orders and Open Positions will display on another computer's PDS

Trader. After backing up the data, transfer the data file to the other

computer, then click File-Restore Data on the other computer and restore

the data. Open Orders and Open Positions will now be available on the PDS

Trader of the new computer.

File-Exit closes the PDS Trader.

The "Configuration" feature is covered in page 4 (updating date) and page

10 (updating Tracking data).

Selecting "Calculator" opens the Windows Calculator program.

Selecting "Send Error Log" will produce a new box requesting the name and

email address of the user (for later contact), and steps to reproduce the bug

or error. This is useful in resolving any issues that may exist within the

software.


Opportunities-

The "Opportunities" section of this manual is only for information purposes

as to what Quantum Trading Technologies, Inc. looks for in opportunities.

Users must do independent research to find opportunities, this section

contains a few of our basic guidelines for what to look for in opportunities

initially. Some of the guidelines in here are circumstantial and are only

details for what we look for in trades. For column-header definitions, read

pages 6-7 of this manual.

Display Calls and Display Puts

The "Display Calls" section is applicable to trading Covered Calls, or selling

naked calls, while "Display Puts" is for selling naked puts. Selling naked puts

is essentially the same as a covered call, only it requires one less

transaction.

The primary sorting method for both sections is Max Flat Gain, sorted from

highest to lowest. "Display Calls" and "Display Puts" have a limited profit

potential, so this value shows whether or not this limited profit potential is

worth entering the trade. The "Protection" column shows how much the

market must move against the trade in order to bring the trade to break-

even. This value, coupled with Max Flat Gain, shows the potential reward of

the trade and the protection associated with that reward. Because many of

the best opportunities are driven by conferences and earnings, view the

"Earnings Events" column to be aware of any upcoming events that may

increase volatility during the trade. Using the Filter Editor (see page 9),

users may add a "Strike Distance" requirement for the opportunity to be

within, for example, 2% of At-The-Money. The Extrinsic Value column is

color-coded based on whether the option is In-The-Money or Out-of-the-

Money. Green represents In-The-Money options, orange represents Out-of-

the-Money options.

Covered Calls-

Covered Calls are simply having a long position in a stock and a short call

option that brings in premium. The effect of this is to lower your average

cost of the stock. For example,


If a person is long QCOR from 26.50 and short a QCOR 26.50 Call from 1.00,

the Cost Basis is $25.50. This means the person is essentially long the stock

at a “Discounted Price.”

Before viewing Covered Calls as an answer-all to trading, it is important to

know the largest drawback. This “Discounted Price” comes with a cost- the

profit potential of the long position. In the QCOR example, that person

cannot make more than 1.00 on this position, even if QCOR increases by

1000%. While the potential profit is capped, the potential risk is much

larger. The loss potential is equal to the cost basis. In the QCOR example,

the maximum risk is $25.50, assuming the stock goes bankrupt. This is

important to understand from the standpoint of trade-size and commitment

to the strategy. Large losses will come. You will lose money on the way

down, and you will not make it back as fast on the way up. The goal is a

long-term, consistent approach.

The 2 keys to success with covered calls are 1) Risk management for long-

term commitment and 2) Finding the right opportunities. A unique strategy

that covered calls offer is the ability to sell calls week after week for months

while holding the underlying, which can eventually bring in the price of the

stock.

When searching for Covered Calls opportunities, we look for a 3%-5% Max

Flat Gain as the minimum standard. Rarely do we choose an option with less

than a 3% potential return if the market is flat. This is certainly not a

universal rule, as there are plenty of examples for when a small return is

worth it. For example, a stock could have only two days until expiration and

have a 2% Max Flat Gain. Another example for taking advantage of small

potential returns is trading a covered call in a very stable, non-volatile

market. Over the long run, you could do better with small potential returns

over non-volatile stocks than with trading larger potential returns in volatile

markets.

Another rule we use to filter out dangerous opportunities is to never get into

a position where the volatility is so high that the risk is not worth the

reward. Sometimes there is some subjectivity to that, but sometimes it is

obvious. One general way to look at this is if the daily average range for the

last several days exceeds the premium we can bring in, or it exceeds where

our breakeven level is, then we generally pass on the opportunity.


The last rule is that the stock must not be making an intermediate or long-

term high. This may factor in adding to volatility in many cases, from

anticipating a new high or a short-term retracement. There are times when

an impending earnings report or other major announcement will impact the

market. These sometimes drive the price of the options to significant levels.

In terms of money management, we look to allocate no more than about

20% of the total amount allocated toward covered calls toward each

individual trade. For example, if $10,000 is allocated toward covered calls,

we never have more than $2,000 to any given trade. The $2,000 allocation

in this example is based on the price of the stock. A strict adherence to this

rule would mean no stocks much over $20.00. It is unlikely that a stock will

go bankrupt and drop to zero during the short time you are playing the

stock, but you always have to prepare for the worst case scenario,

regardless of how unlikely. With this method, a 50% loss is only 10% of the

total account.

Synthetic Covered Calls (Naked Puts)-

In order to attain maximum profit on a sold put, the market must be at or

above the strike price at expiration. Selling a naked put is very similar to

trading a covered call, so please review the Covered Calls explanation to

have a firm understanding of the basic principles and statistics that we look

for.

With a Covered Call, the “Cost Basis” is the combined long stock price minus

the premium brought in on the call. A naked put can achieve the exact same

thing, only with one less transaction. The risk and profit potential with a

naked put and a covered call are the exact same, only with naked puts you

do not have to overcome to spreads to get the price. In fact, all things being

equal, we default to selling puts. Most of the time, puts are a better choice

from the standpoint that there is almost always a little extra premium built

into put options that comes from fear of a market crash. This is not always

the case and varies from stock to stock, depending on what is going on in

that stock. As a side note, many IRA or other unique accounts will often not

allow trading naked puts, in which case a Covered Call can usually be

utilized.

The best way to deal with losses is to let them run their course and simply

exit on expiration day, or allow a put to be assigned if the next expiration of


calls is worth placing another covered call. Our intention when entering a

trade is to always continue to play the covered calls while the calls provide

the proper profit potential vs. risk potential. Several times we have been

assigned a Put option, only to be able to turn around and sell a call at the

strike and turn a loser into a winner. Sometimes that is not available, and it

is just better to exit the trade, take the loss, and move on to the next

opportunity. This sometimes means accepting bigger losses.

An alternative to letting a loss run is to exit when the price of the underlying

stock reaches the breakeven point. This will still produce a loss, but the loss

will at least be mitigated. The problem with this exit strategy is when the

stock gaps past the breakeven level and you are still forced to take a larger

loss. Accordingly, at no time should you think that a larger loss is not going

to happen eventually. It will, which is why it is important to prepare to

commit long-term to this strategy to expect to profit from it.


Opportunities-

Debit Calendar Spreads

Debit Calendar Spreads involve selling a near expiration and buying a far

expiration. Since the price of the option purchased will always be greater

than the price of the option being sold, a Debit is created. This "Debit" value

is the maximum risk of the trade, while the Sell Price can be viewed as close

to the maximum reward. The primary sorting method is the EV Ratio

(Extrinsic Value Ratio), which is the Sell EV divided by the Buy EV. This

shows how closely related the extrinsic values of the options are- the close,

the better. For short-term opportunities, look for an EV Ratio around 70% or

greater. For long-term opportunities, the EV Ratio expectations can be

lowered. Debit Calendar spreads have a clearly defined maximum risk

because the spread cannot (theoretically) go below 0, and they require very

little capital. If trading multiple options, an exit strategy can be to exit half

of the positions at a 100% profit to ensure the trade will at least end at

break-even.

Debit Calendar Spreads are very enticing and rewarding for a few reasons.

They provide limited risk, bigger potential wins than losses, they work in bull

or bear markets, and they require very little capital. After entering a Debit

Calendar spread, if the spread increases you will profit, if the spread

decreases you will incur a loss. The maximum risk on the trade is the entry

spread. The maximum profit is the value of the short option. In order to

achieve the maximum profit potential, the underlying stock must be At-the-

Money at expiration. However, that profit potential will be diminished by

whatever amount the long option has decreased by. For calls, the further the

stock goes out of the money on expiration, the greater the loss will be on

the long call.

It is also important to watch out for earnings or news events that will cause

the stock to move out of the money. The news combined with market

movement causes the extrinsic value to quickly deflate. However, this could

work to your advantage as the spread will often widen during these large

moves. This occurs because the extrinsic value of the nearby option can

move more quickly than the further away option. While there are many

exiting strategies for these spreads, one that we frequently use is exiting

half of the position at a 100% profit. This will ensure that the trade will at

least close at break-even.


Debit Calendar spreads can be entered when the options are At-the-Money,

In-the-Money, or Out-of-the-Money. The following details are regarding

entering a spread while it is At-the-Money.

Entering At-the-Money Spreads

The reason to look for At-the-Money spreads is based on extrinsic value.

With Out-of-the-Money spreads, 100% of the option value is extrinsic value.

However, that does not mean that the extrinsic value is the greatest it can

possibly be. With At-the-Money spreads, 100% of the option value is

extrinsic value and the options usually cannot have any greater extrinsic

value. When it can have a greater extrinsic value, it is only by a very small

amount. At-The-Money spreads have no intrinsic value. Once an At-the-

Money spread is entered, it can stay neutral, go Out-of-the-Money, or go In-

the-Money.

Assume, for example, a call goes WAY out of the money causing the long

option to be almost worthless. You can hold onto the long option until

expiration to see if it moves back up a bit, giving a chance to breakeven or

par your loss. You do not have to exit the long option on the expiration day

of the short option.

If the stock goes In-The-Money, extrinsic value is replaced by intrinsic value.

If a spread goes into the money, there is a possibility of being assigned. As a

general rule, if there is more than $.05 of extrinsic value on the option, you

will not be assigned. IMPORTANT- being assigned does NOT increase the

risk. However, being assigned does increase the amount of capital required

to hold onto the spread. If there is not enough capital to hold onto the

spread and the broker exits the stock assignment, then the risk increases.

Whether or not your broker does this will vary from broker to broker. Do not

ever be assigned an amount of stock you cannot hold onto. If this situation

does occur, make sure to immediately exit the option side of the spread. If

you are assigned and can hold the position, you do not necessarily need to

exit that assignment because the market can then turn around, providing

unlimited profit potential (limited only by how much the stock can be in your

favor of the assigned position). You should be afraid of being assigned under

one of two conditions- 1) If you have too many option spreads so that if you

are assigned you do not have the capital in the account to hold onto the

assigned position, or 2) If you are assigned a short position from being short

calls and your account does not allow holding stock short. In either of these


cases, the broker will probably exit your assignment without warning,

leaving your long option position uncovered.

However, there are many Debit Calendar spread opportunities that do not

involve entering an at-the-money option. In/Out of-the-Money entry spreads

can sometimes have very low risk, really high profit potential, and, if you

choose the right ones, a high probability of success.

Entering In-the-Money Spreads

In-the-Money debit calendar spreads are directional trades. They will only

work if the market moves in the right direction. The reason for wanting to

take advantage of these types of trades is Risk vs. Reward. The main 3

things to look for with In-the-Money Debit Calendar Spreads are a high

Spread Ratio, low Debit, and reasonably In-the-Money (as opposed to a

deep In-the-Money spread).

If you enter an In-the-Money Debit Call spread, you want the market to go

Down.

If you enter an In-the-Money Debit Put spread, you want the market to go

Up.

If you are in a call spread and the market does not move down before the

nearby expiration, assume that you will be assigned a short position.

However, once you are assigned, you still have the ability to make money.

The market has up until the expiration of the long option in order to do so.

If you are in a put spread and the market does not move up before the

nearby expiration, assume that you will be assigned a long position. The

profit potential is unlimited after you are assigned until the expiration of the

long put while the risk remains low.

As a general rule, the more time there is left on the long option, the further

In-the-Money we are willing to go. It is a balance between the Debit (risk),

the time available, and how much the option is in the money.


Credit Calendar Spreads

Credit Calendar Spreads involve selling a far expiration and buying a near

expiration. The price of the option being sold will be greater than the price of

the option being purchased, creating a Credit. This "Credit" value is the

maximum reward of the trade. The primary sorting method is the Spread

Ratio (lowest to highest), which is the Buy Price divided by the Sell Price.

This shows the relationship between the two prices, wider is better. After

sorting by Spread Ratio from lowest to highest, a good Spread Ratio is

anything below the 50% line, though this may vary. View the "Credit" to

make sure the reward of the trade is worth the risk.

Credit Spreads buy the nearby option and sell the further away option

expiration, creating a Net Credit. This means you are bringing money into

the account and this Credit is the maximum profit potential. After entering a

Credit spread, the spread decreasing from the entry spread will result in a

profit, while an increased spread results in a loss. If the spread is At-the-

Money, the risk is essentially the value of the Long option. We know this

because the value of the long option is all extrinsic value, and it is at the

highest it can be. If the long option goes Into the Money, the extrinsic value

decreases, and if it goes out of the money, the extrinsic value decreases.

With a Credit spread, we are looking for more extrinsic value to decrease out

of the longer term option than the shorter term option. For that to happen,

generally the market needs to make some sort of move, either up or down.

The first thing to know about Credit spreads is that you should never hold an

Out-of-the-Money Credit spread past the expiration day of the long option. If

you do not, you will be holding a naked short option and your risk will be

unlimited. Of course, you can certainly still profit on these trades, but no

longer have a limited risk amount. This is truer when dealing with calls than

with puts, since a stock’s value cannot go below zero.

Best practices would be to simply exit the entire spread before the expiration

of the long option. The only scenario we would consider holding onto a

spread (if assigned) for more profit if it is In-the-Money is to buy a call

option at around the Breakeven Level.

The three things to look for in entering Credit Calendar spreads is an At-the-

Money opportunity, low long value long option (this is the risk), and a big

credit to long option ratio (max profit compared to max risk). In the PDS


Trader, this means looking for a large credit and a small Buy Price. Since

most opportunities will not be entered exactly At-the-Money, the max risk

(buy price) is not exact, but is a good estimation. If you want to play a

directional credit spread, look at Out-of-the-Money opportunities because

that spread will lose value very quickly on larger market moves.

It is important to note that Credit Calendar spread opportunities do not

occur as frequently as Debit Calendar spreads. Additionally, Credit Spreads

require significantly more margin than Debit spreads, so do not overextend

yourself.

Credit spreads usually do not make money if the market has not moved. If

you are getting towards the end of the spread with only a few days left and

not making money, remember that your risk is still limited and as long as

the market makes any kind of move you will probably profit. If it does not,

you can take the loss and move on. Accordingly, the best thing you can do is

hold onto the position until the day of the expiration of the long option. Exit

both legs sometime before the market close.

If you are making money, you can exit half of the position at a 100% profit

and/or wait for a one or two day move in either direction to decrease the

spread value and then exit. It only takes a one day move in either direction

to create a significant profit.


Opportunities-

Vertical Credit Spreads

Vertical Credit Spreads involve buying a higher Strike and selling a lower

Strike for the same expiration. Since the Sell Price will be higher than the

Buy Price, a Credit is created. This "Credit" value is the maximum reward of

the trade. The primary sorting method for this strategy-type is the "Profit

Risk Percent," which shows the Max Profit compared to the Max Risk. The

higher this value is, the better. Ensure that the Max Profit is worth the risk of

the trade, and look for a moderate BE (Break-Even) Move. Opportune trades

have a Profit Risk Percent of 75% and a 2% BE Move, though each trade is

unique. For example, often times trades with a 50% Profit Risk Percent and

a 1% BE Move are worthwhile trades.

A vertical spread is simply a spread between two options with the same

expiration date, but different strike prices. When the premium from the sell

side exceeds the premium from the buy side (sell the near strike, buy the

far), it is a Vertical Credit spread. With vertical spreads, whether debit or

credit, the risks are 100% limited as long as the spread is exited by the

expiration. Assignment of one leg potentially changes this if held after the

expiration.

Vertical spreads are either In-the-Money or Out-of-the-Money. Depending on

the breakeven levels, whether it is a credit or a debit spread determines

whether the spread is a directional trade (meaning the market has to move

in a certain direction for the spread to profit), or non-directional. To make

the maximum credit on a Credit Call vertical spread, the market must be at

or below the lower strike on expiration. Conversely, the market closing

above the higher strike will result in the maximum loss potential.

In the PDS Trader, a negative BE Move (Breakeven Move) in the Credit Calls

means that the trade is a directional trade. This is usually an In-the-Money

opportunity. If the market stays the same when the entry BE Move is

negative, the trade will lose. This type of trade has a bearish outlook. In

vertical credit spreads, most directional trades happen when one or both of

the options in the credit spread are In-the-Money.

In Out-of-the-Money Credit Call spreads, a positive BE Move means that the

market does not have to move in order to profit. In fact, it means the


market has to move that amount in order to not profit. This means that the

trade is a non-directional trade. For these opportunities, we look for a Profit

Risk Percent of 100% or greater (ideally) while the BE Move is positive (the

bigger, the better). Max loss occurs at the buy strike or higher for calls, or at

the buy strike or lower for puts. Either way, the risk is capped.

Vertical Debit Spreads

Vertical Debit Spreads involve selling a higher Strike and buying a lower

Strike for the same expiration. Since the Buy Price will be higher than the

Sell Price, a Debit is created. This "Debit" value is the maximum risk. The

primary sorting method for this strategy-type is the "Profit Risk Percent,"

which shows the Max Profit compared to the Max Risk. The higher this value

is, the better. Ensure that the Max Profit is worth the risk of the trade, and

look for a moderate BE (Break-Even) Move.

Many of the principles for Vertical Credit spreads can be applied to Vertical

Debit spreads. A vertical spread is simply a spread between two options with

the same expiration date, but different strike prices. When the premium

from the buy side exceeds the premium from the sell side (buy the near

strike, sell the far), it is a Vertical Debit spread. With vertical spreads,

whether debit or credit, the risks are 100% limited as long as the spread is

exited by the expiration. Assignment of one leg potentially changes this if

held after the expiration. There are directional debit spreads and non-

directional debit spreads.

For Debit Spreads, most of the non-directional trades are going to be In-the-

Money. When you find a solid vertical debit spread on the call side, look for a

vertical debit spread on the put side with similar probabilities. Add a put

spread onto a call spread can widen you BE Range to increase your

probabilities of profit. If you enter both a call and a put spread of this type,

always keep in mind that you could get assigned. In general, the risk of

getting assigned is not so much in the assignment itself, but it’s what could

happen after the assignment. Once you are assigned, there is a potential

that the market gaps. When you are assigned, you usually lose the previous

risk cap, to the point of the risk no longer being limited in certain

circumstances. When combining a call & put vertical debit spread at the

same time, be sure to limit your trade size for margin in case of assignment.

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