The Options Income Multiplier System for Consistent Profits

Transcription

1 The Options Income Multiplier System for Consistent Profits 1

2 The Options Income Multiplier System for Consistent Profits Copyright 2017 by Trading Concepts All Rights Reserved This training program, or parts thereof, may not be reproduced in any form without the prior written permission of Trading Concepts, Inc. No claim is made by the Trading Concepts, Inc. that the (option) trading strategies shown here will result in profits and will not result in losses. Option trading may not be suitable for all recipients of this Training Program. All comments, trading strategies, techniques, concepts and methods shown within our Course are not and should not be construed as an offer to buy or sell stocks and options they are opinions based on market observation and years of experience. Therefore, the thoughts expressed are not guaranteed to produce profits in any way. All Opinions are subject to change without notice. Each option trader/investor is responsible for his/ her own actions, if any. Your download of this content constitutes your agreement to this disclaimer and exempts Trading Concepts from any liability or litigation. Important Notice - Risk Disclaimer: 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 order to invest in the options market. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy or sell options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in our training program. The past performance of any option trading strategy or methodology is not necessarily indicative of future results. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual option trading. Also, since the option trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, certain market factors, such as lack of liquidity. Simulated option trading programs 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 profits or losses similar to those that may be shown. 2

3 Table of Contents Information Recap 4 The Options Income Multiplier Income Pyramid 5 Trading in Three Dimensions 9 Trading the Quiet/Trending Market 10 Summary 13 3

4 Information Recap In the first report, we covered the top five changes that we re seeing in today s market: The Fed is walking from QE after printing for years. Trading volume is moving off the floor. Markets are becoming a global, follow-the-sun market. Options volatility is underestimating actual movement at today s prices. The same old tools don t work in today s environment. And in the second report, we discussed how the market generally oscillates between four distinct states, and normally moves from quiet to volatile and then back again, inside these four quadrants: Figure 1 But within each quadrant of the Matrix, we need to create one more level of depth to show WHAT and HOW to trade options during these periods. For this, we go to a tool that we ve used for a long time with the Options Income Mulplier, the Income Pyramid. 4

5 The Options Income Multiplier Income Pyramid Everyone comes to the market with varying degrees of knowledge and experience. Some of you have traded Stocks for decades, yet know nothing about Options. Some of you have traded Options extensively, but are looking for a different approach. Some of you have little experience with any form of trading, and others have experience with both Stocks and Options but might be looking to refine their edge by using our advanced techniques. Traditional Options Mentoring programs that have been taught for the past 20+ years, for the most part, all fail because they force the student to survive the gauntlet of learning the simplest yet riskiest trades first, with only a handful progressing to learn trades that put the odds in their favor. For example, most if not ALL programs teach the student how one option contract is the equivalent of buying 100 shares of stock, and how the financial leverage behind that call or put contract can make them rich beyond their wildest dreams after just a few explosive trades. The Options training company then gives example after example of how they took a few hundred dollars and turned it into thousands, again and again. The potential student cannot wait to sign up and duplicate their success. Hey, I know this first-hand! I was right there and I literally RAN to sign up! You ve seen the ads for these strategies % gains! Fifty Money Doublers in the next month! Surely you ve seen these companies, maybe even signed up for one or two of their programs. While the expert trader may have executed those trades, and through years of experience now possesses the skill to turn hundreds into thousands using long Options, I have never heard of one single beginning student ultimately succeeding after falling into this trap. The vast majority get a couple of wins if they re lucky enough to tap into a rising market, and then the next area of consolidation or pullback chews up their account to a fraction of its former value. They used the wrong strategy and were not prepared; they are dead in the water after just a few months, and the search for the Holy Grail of trading strategies continues. (Usually with a poor outcome) The trouble with this methodology is that students are taught the easiest trades to ENTER first, not the ones that give them the greatest probability of success out of the gate. Let s put some images to our discussion so you can begin to grasp this point; what we re proposing is not the easy way to profits, it s the more-difficult-yet-steady way. 5

6 Most of you are used to thinking of trading in a Directional manner. You ve heard the mantra: buy low, sell high. You are betting on the issue moving in a forecasted direction, so you trade cash for shares and go long the stock hoping for appreciation in the share price. This is the same thing that you ve done since you were a kid, trading baseball cards. Some of you who have more advanced backgrounds also know that it s possible to make money trading the short side of the Market, where you borrow shares to sell to others, and then hope to buy them back at a lower price. This is known as shorting the stock. This, too, is a Directional trade where you are forecasting a specific direction to your trade. And we will certainly get into the possibilities of using Options instead of Stocks for a Directional trade...but did you know that we can also design a trade that takes advantage of the characteristics of Options, such that we make a profit if the underlying issue goes nowhere? This is something that s very difficult to do with Stocks, unless you are into Dividends and Pairs trading...but it s very easy to do with Options. This we ll call a Non-Directional trade, where we can make a profit if the underlying issue just trades within a range. At this point let s make two assumptions: 1. Directional trades are more difficult to win, and thus riskier, than Non-Directional trades. They carry more risk with the higher potential reward. 2. Individual Equity trades (i.e. Google, Apple, Netflix, etc.) carry more Event risk than Index Trades, where you see whipsaws after earnings announcements, management changes, etc. Index trades don t suffer from these extra risks. Make sense? After all, with a Directional trade, you have to be CORRECT to win. Not close, but 100% correct in your predicted direction. And you have to be a lot better than just CORRECT to win a Directional Options trade! And Index trades don t suffer the same event risks as individual stocks do...risks like Earnings reports, forward guidance, slips of the tongue during an analyst conference call, etc. Let s put these two assumptions to work in Figure 2; we ll graph the Directional Risk/ Reward of the trade on the vertical axis, and we ll graph the Event Risk of Index vs. Equity trades on the horizontal axis. 6

7 Figure 2 Based on what we can see from this graph, in what quadrant of this graph should Options traders begin to trade from? What quadrant carries the least Event risk, and the least Directional risk? In which quadrant does your directional forecast matter the least? The answer, as we can see, is Non-Directional Index strategies in the lower left quadrant! These trades have the lowest event risk (earnings, upgrades, warnings, etc.) while offering the student the unique opportunity of being wrong on their price forecast, and still being able to profit from the trade. Think about the power of that for a moment; when was the last time that you were DEAD WRONG in your chart forecast, yet were able to make a profit? Now where do most Options students begin their experience in the Markets? The Upper Right quadrant with directional Stock and Options trades, which is also the riskiest quadrant to trade in! How much of an edge do you carry in that quadrant, against the rest of the world? The answer is not much and I don t care how much of a whiz you are at reading a Stochastic crossover on your favorite chart. In the other quadrants you ll see different combinations of Event Risk vs. Directionality risk. Those combinations of risk and directionality will give us different combinations of risk/reward that we ll take advantage of when we ve earned the right to get to them, and when the proper conditions exist for those strategies. 7

8 Now don t get me wrong, I have nothing against Directional Stocks and Options trades. They are wonderful home run trades that have their place in your portfolio. But how many professional baseball teams win the World Series by swinging for the fences every time up at bat? You see, this is the image that you ve been fed all of these years by the mainstream media. The real focus of this is to build competency in different strategies so that we can use the right COMBINATION depending on what is happening in the market. (more on that in a minute) Figure 3 shows a visual representation of how we can combine these strategies into one plan: Figure 3 Notice how the Income Pyramid also shows a visual approximation to the amount of capital that they will dedicate towards their trades, so the entire program ties together visually in several dimensions. In other words, since a correctly-managed Non-Directional trade poses less risk, the trader will use a larger portion of their account. By the time that the trader has earned the right to trade Directional Equities, they will be using a very small portion of their account at risk. 8

9 Trading in Three Dimensions In the third video report, I show a graphic which shows how all of these elements come together to form more of a 3D approach to determining what the market character is, and then selecting the best set of strategies to play: Figure 4 We re adding the depth of the Income Pyramid on top of the Market Character Matrix. This allows us to use three dimensions to define our approach, which should allow us to be more responsive to current conditions AND it allows us to anticipate what should follow so that we can better manage risk during the transition between the states. This approach creates more consistent outcomes; even though we cannot predict with certainty what will come in the market tomorrow, next week, or even next month.anticipating a change in character is just another way of staying one step in front of the investing herd. Let s see an example of how we can put this 3D matrix to use. 9

10 Trading the Quiet/Trending Market We re going to see quiet/trending markets 60-70% of the time. The majority of the time markets are supporting an uptrend, and there are very specific reasons for this, let alone the effects of monetary policy. Early on in the life of a Quiet/Trending market, there will be a ton of uncertainty about whether the market will roll over again; after all, just about all Quiet/Trending markets have their genesis in turmoil, or some form of Volatile market event. You can see this transition on the chart as the rally in early 2012 gets underway, launching from the correction of the latter half of 2011: Figure 5 For this reason, the early part of a Quiet/Trending market can feature just about all of the strategies available in the Income Pyramid. There will still be a relatively high level of implied volatility due to all of the uncertainty, so Iron Condors are feasible. In addition, due to the corrective price action, cash-secured puts are a great idea due to the discount that the correction has added, as well as the higher level of IV. Depending on the relative level of IV, we can also pursue the upper-level strategies in the Income Pyramid, such as directional debit spreads and expected move strategies. This transition INTO the Quiet/Trending market is actually a very targetrich trading environment. 10

11 As a Quiet/Trending market becomes more mature, we have to consider changing our approach. This is where markets tend to display runaway behavior with more and more individual investors and funds literally holding their nose and chasing performance. This is a very real phenomenon as some small corrections that start to occur near the top of a longer-term swing can set funds behind their peers, which causes this chase for performance. They have no choice but to double down and run after the market, much like a commute chasing a train that has left the station. You can see this frenetic action in this chart: Figure 7 During this period of the Quiet/Trending character, we ll typically see very low implied volatility. As a result of this, as well as the general directional nature of the market, Iron Condors become increasingly difficult to trade. This is where we will typically just enter the Put Credit Spreads on pullbacks so that they are a full 10% out of the money. The reason for this is that the NEXT character in the progression is more than likely to be a Sideways and Volatile character, usually announcing itself with a large drop that creates the initial correction. Since these corrections typically average 10%, then we re just managing our odds at that point. This period of the Quiet/Trending character can also be difficult to sell premium via cash-secured puts. After all, you have to WANT to own the stock at the level that you re selling it at, and after a significant rally it might not be that attractive of a price any more. The alternative approach is to go hunting for undervalued stocks, however there might be a good reason why they are undervalued to begin with. 11

12 The strategies that shine during THIS period are the truly directional ones that require lower volatility to begin with. (i.e. Long Vega) These are generally going to be the expected move debit spreads that we ll set up with great reward-to-risk, and one of the edges that we enjoy is that the options IV is typically underpricing/ underestimating the forward price volatility, especially in a consolidation zone. And this is also where we can use long call options as a valid trading strategy. In fact, this might be the ONLY time where it s appropriate. This is what we call a musical chairs market; as long as the music is playing, everyone is happy chasing the market higher. When the music stops, however, there will be no chairs to be found. And we change our mix of trading strategies to reflect this reality. The further up that this rally goes, the more that we ll shy away from selling premium and the more that we ll focus on BUYING premium; this does a much better job of controlling our overnight risk.which as we pointed out in the first report, is getting to be a challenge with these global, eternally on markets. And the deeper that the rally goes, the more that we ll start to prepare for and anticipate the character change into a form of volatile. With this change can come staggering, rapid profits as well as huge opportunities through movement. What we re preparing for and anticipating is nothing more than we see at work every day in nature. If we go to run up a hill, at first we ll make great progress, but the further up that we go, the slower that we ll progress (will we EVER get there?!). Suddenly, when we see the summit, we ll start to sprint again.until we run over the top and then go down the other side so quickly that we run all the way to the base of the hill. In an elementary fashion, this is what markets do over and over again. The cycle then repeats over and over again. I don t care what phase of QE we re in, what the Chinese are doing, what the HFT and Quants are doing, the same macro cycles occur over and over again and there is no mystery why this occurs, because at the root of all trading the emotions of Fear and Greed are still hard-coded into the algorithms. Range Expansion leads to Range Contraction, and vice-versa. 12

13 Summary This is just an example of how we d trade one quadrant of the four market characters. The video that accompanies this report does go through examples from the last three market characters that we ve seen, so I would recommend studying those examples while the videos are still available. Thanks for watching this video series and downloading this report! I hope to see you in video #4, and maybe after that as well. 13