Options Mastery Day 2 - Strategies

Transcription

1 Options Mastery Day 2 - Strategies

2 Day 2 Agenda 10:00-10:10 - Overview and Q&A from Day 1 10:10-11:00 - Morning Trade Walk Thru & Trade Plans 11:00 12:00 - Options 101 Review & Long Call/Put Criteria 12:00-12:15 - Break 12:15-1:00 Long Vertical Spreads 1:00-2:00 Short Vertical Spreads 2:00-2:15 - Break 2:15-3:00 Iron Condors 3:00-4:00 Afternoon Update/Which strategy should I use?

3 How do I setup a watch list? 1. Establish how many names you can trade at any given time. How big is your account? If all your stocks setup at the same time would you be able to take all of the trades? How much time do you have to monitor your positions? If you don t have a lot of time then don t trade 10 stocks. If trading with a small account size focus on more ETF s to start 2. Use a variety of tools to find the active stocks Tradestation: Hot Lists StockFetcher.com moneycentral.msn.com marketwatch.com

4 How do I setup a watch list? 3. Criteria to look for in a scan: Most active Highest volume New highs/new lows Most active call & put volume Price of stocks Make sure you can afford the expensive options 4. Once you have a decent number of names from your scan, start to narrow the list down to the number of names you are looking to trade.

5 How do I setup a watch list? 5. Backtest those stocks using your trading system Winning % Average trade profile Look for average holding time Document volatility levels 6. Go through and document different trade types (long calls/puts, vertical spreads) to see if you can afford these trades over time

6 Options 101 Review: What is an option?

7 Options 101 Review: What is an option?

8 Options 101 Review: Option Specs

9 Options 101 Review: Expiration

10 Implied Volatility IV Percentile

11 Options 101 Review: Greeks - Delta 1. Delta The delta of an option is a measurement that estimates how much an option premium will increase or decrease with every $1 move in the underlying stock or index. Also known as the % change. Calls will have a positive delta ranging from 0 to 1 Puts will have a negative delta ranging from 0 to -1 The delta of a call increases in value as a stock moves up and decreases as the stock moves down. The delta of a put decreases as a stock moves up and increases as the stock moves down. ATM options will have a delta close to +/-.50 ITM options will have a higher delta which means they react faster to the movement in the stock Delta will also increase and decrease faster as you get closer to expiration.

12 Greeks Delta cont. 1. Calls: Positive delta ITM delta >.50 ATM delta=.50 OTM delta < Puts: Negative delta ITM delta > -.50 ATM delta = -.50 OTM delta < -.50

13 Greeks - Gamma 2. Gamma An option s gamma is a measurement that estimates the rate of change in an option s delta for each dollar move in the underlying stock. The delta of the delta Buy an option = long gamma Sell an option = short gamma Gamma will reflect the volatility of the stock Higher volatility = lower gamma This reflects the fact that a larger move on a volatile stock isn t as significant as a larger move on a slower one.

14 Greeks - Gamma Example: XYZ $30 30 strike call option $1.50 Stock moves to $31 Call option moves from $1.50 to $2.00 (delta of the option was.50) Stock moves to $32 Call option moves from $2.00 to $2.75 Delta of the option during the move from $31 to $32 was.75 This means the gamma of the 30 option was.25 (taking the difference between the deltas of both $1 moves)

15 Greeks - Gamma Gamma cont. Gamma highest for the ATM options Gamma highest in the front month options Higher gamma is good for the option buyer as long as the stock moves fast enough The further ITM or OTM an option moves the more stable gamma becomes.

16 Greeks - Theta 3. Theta A measure of time decay on an option with a one day change in time. Options have 2 values Intrinsic value does not decay Extrinsic value value over and above intrinsic value. Not the same for each option Not the same each day Decay at a non-linear fashion

17 Extrinsic (time) value of option Time Decay Number of days left before option expiration

18 Greeks Theta Cont. Theta cont. Highest with the ATM option Decreases the further ITM or OTM you go Highest in the front month options Decreases the further out in time that you go

19 Long Call & Long Put

20 Long Call Outlook: Bullish Duration: 1 day 3 weeks Max Profit: Unlimited Max Loss: The amount paid for the call P/L Graph Listed Below

21 Long Call Strategy Criteria 1. Wait for your system to produce a valid setup that fits your trade plan. 2. Make sure the options on your stock have an open interest of at least 30 times the number of contracts that you are looking to trade. 3. Make sure you have target points and exit points before entering the position. 4. You need to form an opinion on how long you feel the move in the stock is going to take. Backtest Get to know the stocks that you are trading

22 Long Call Strategy Criteria 5. Make sure you have 2x the amount of time that you expect to be in the position left before expiration 6. Length of trade: 1 week or less: delta of.50 (ATM) or (1 strike ITM) 1-3 weeks: delta of (1 strike ITM) More than a month: delta of (2 strikes ITM) 7. Manage the trade according to your trade plan.

23 Long Put Outlook: Bearish Duration: 1 day 3 weeks Max Profit: Unlimited Max Loss: The amount paid for the put P/L Graph Listed Below

24 Long Put Strategy Criteria 1. Wait for your system to produce a valid setup that fits your trade plan. 2. Make sure the options on your stock have an open interest of at least 30 times the number of contracts that you are looking to trade. 3. Make sure you have target points and exit points before entering the position. 4. You need to form an opinion on how long you feel the move in the stock is going to take. Backtest Get to know the stocks that you are trading

25 Long Put Strategy Criteria 5. Make sure you have 2x the amount of time that you expect to be in the position left before expiration 6. Length of trade: 1 week or less: delta of -.50 (ATM) or -.60/-.65(1 strike ITM) 1-3 weeks: delta of -.60/-.65 (1 strike ITM) More than a month: delta of -.70/-.75 (2 strikes ITM) 7. Manage the trade according to your trade plan.

26 Vertical Spreads

27 What is a vertical spread? The vertical spread is put on by purchasing one call (or put) within a given month and selling a different strike call (or put) with the same expiration. Benefits: Lower cost Define Risk (collect premium) Example: Buy 1 AAPL September 465 call Sell 1 AAPL September 470 call

28 Long Vertical Call Spread 1. What does it look like? 2. Max Profit: XYZ Stock $40 Buy 1 40 call for $3 Sell 1 45 call $1 Total Cost is $2.00 We have the right to buy 100 shares at $40 We are obligated to buy 100 shares at $45 Limited to the difference between long strike and short strike minus the debit paid. Short strike (45) Long Strike (40) = $2 debit = $3.00

29 Long Vertical Call Spread 4. Max Loss: Limited to the debit paid $ Break Even: Long Strike plus debit paid 40 + $2.00 = When do we use it? When you are bullish and want to lower cost Defined Risk position When you feel volatility is low (below the 50 th percentile is ideal) 7. Where do we want stock/etf to finish at expiration? You want the stock to be right at or above the short strike at expiration. 8. Volatility: You want volatility to rise or at least not go lower while in the trade. Once you hit the short strike then you want volatility to go down.

30 Long Vertical Call Spread P/L Graph

31 Long Vertical Put Spread 1. What does it look like? 2. Max Profit: XYZ Stock $40 Buy 1 40 put for $3 Sell 1 35 put $1 Total Cost is $2.00 We have the right to sell 100 shares at $40 We are obligated to sell 100 shares at $35 Limited to the difference between the short strike and the long strike minus the debit paid. Long strike (40) Short Strike (35) = $2 debit = $3.00

32 Long Vertical Put Spread 4. Max Loss: Limited to the debit paid $ Break Even: Long Strike minus debit paid 40 - $2.00 = When do we use it? When you are bearish and want to lower cost. Keep in mind you will limit your profit potential. Defined Risk position 7. Where do we want stock/etf to finish at expiration? You want the stock to be right at or below the short strike at expiration. 8. Volatility: You want volatility to rise or at least not go lower while in the trade. Once you hit the short strike then you want volatility to go down. 9. Tips When Implied volatility is high consider buying a put spread instead of just buying a put. The spread includes selling a put which will somewhat offset the effect of a decrease in implied volatility.

33 Long Vertical Put Spread P/L Graph

34 Long Vertical Spread Criteria 1. Make sure implied volatility is lower than the 50 th percentile (using TOS) 2. Use the front month if there is at least 20 days left to expiration. If not then go to the next month out. 3. We will buy the option one strike ITM. This will allow us to get in by paying as little extrinsic value as possible. We will then look to sell the strike that is closest to Target 2 (using the Active Swing Trader Charts). 3a. You have the option of selling a strike that is closer to the strike you bought which would give you a tighter spread. This will lower the cost of the trade which means lower risk. It also means a lower return which is the trade off. 4. We are targeting 40-60% returns on this trade. We will also look to exit the trade no later than Wednesday of expiration week if we are still in the trade.

35 Long Vertical Spread #2 1. Make sure implied volatility is lower than the 50 th percentile (using TOS) 2. Use the front month if there is at least 20 days left to expiration. If not then go to the next month out. 3. We will buy the option one strike ITM. This will allow us to get in by paying as little extrinsic value as possible. We will start by looking to sell the option one strike OTM. You can then look to go farther OTM depending on how much you can afford to pay. Trading a tighter vertical spread will lower cost but will also lead to a smaller return when compared to the wider verticals. 4. We are targeting smaller returns on this trade. We will also look to exit the trade no later than Wednesday of expiration week if we are still in the trade.

36 Long vs Short Vertical Spreads Long Vertical Spreads are great pure directional plays. They Profit when the market goes in your direction. They only profit in 1 of 3 possible market moves Short Vertical Spreads give you the potential to make money in 2 of 3 possible market directions. You are collecting premium so you make money if the market goes in your favor as well as when the market goes sideways Debit Spreads will give you a lower probability of success but a higher potential return Credit spreads will give you a higher probability of success but a lower potential return

37 Should I buy or sell the spread? Buy the spread: When volatility is low When you want to take a directional bet with lower risk Sell the spread: When volatility is high When you are looking for a higher probability of success with a lower profit potential

38 Short Vertical Call Spread 1. What does it look like? XYZ Stock $37 Sell 1 35 Call for $3 Buy 1 40 Call for put $1 Total Collected is $2.00 We have the obligation to sell 100 shares at $35 We have the right to buy 100 shares at $40 2. Max Profit: Limited to the premium collected from selling the spread $3 (short 35 call) - $1 (long 40 call) = $2.00

39 Short Vertical Call Spread 4. Max Loss: Difference between the strikes minus the credit received from selling the spread 40 strike 35 strike = $2 (credit received) = $3 Max potential loss 5. Break Even: Short Strike plus credit received for selling the spread 35 + $2 (credit received) = When do we use it? When you are bearish and want to lower cost. Keep in mind you will limit your profit potential. When you want to profit from 2 of 3 possible market directions Defined Risk position 7. Where do we want stock/etf to finish at expiration? You want the stock to be right at or below the short strike at expiration. 8. Volatility: You want volatility to rise or at least not go lower while in the trade. Once you hit the short strike then you want volatility to go down. 9. Tips We typically want to go out days to expiration Try and sell the option with a strike that is 1 Standard Deviation out of the money.

40 Short Vertical Call Spread P/L Graph

41 Short Vertical Put Spread 1. What does it look like? XYZ Stock $40 Sell 1 45 Put for $3 Buy 1 40 Put for put $1 Total Collected is $2.00 We have the obligation to buy 100 shares at $40 We have the right to sell 100 shares at $35 2. Max Profit: 1. Limited to the premium collected from selling the spread $3 (short 45 Put) - $1 (long 40 put) = $2.00

42 Short Vertical Put Spread 4. Max Loss: Difference between the strikes minus the credit received from selling the spread 45 strike 40 strike = $2 (credit received) = $3 Max potential loss 5. Break Even: Short Strike minus credit received for selling the spread 45 - $2 (credit received) = When do we use it? When you are bullish and want to lower cost. Keep in mind you will limit your profit potential. When you want to profit from 2 of 3 possible market directions Defined Risk position 7. Where do we want stock/etf to finish at expiration? You want the stock to be right at or above the short strike at expiration. 8. Volatility: You want volatility go lower while in the trade. 9. Tips We typically want to go out days to expiration Try and sell the option with a strike that is 1 Standard Deviation out of the money.

43 Short Vertical Put Spread P/L Graph

44 Short Vertical Spread Criteria 1. Make sure implied volatility is higher than the 50 th percentile (using TOS) 2. Use the front month if there is at least 20 days left to expiration. If not then go to the next month out. 3. We will select the spread where we can collect around 35-40% of the width of the spread. $10 wide spread: Want to collect around $3.50 $1 wide spread: $ Once in the trade we will look to exit when we can keep 50-75% of the potential gain. Exit the trade no later than Wednesday of expiration week if still in the position at that time.

45 Iron Condors

46 What is a vertical spread? The vertical spread is put on by purchasing one call (or put) within a given month and selling a different strike call (or put) with the same expiration. Benefits: Lower cost Defined Risk (collect premium) Example: Buy 1 AAPL September 465 call Sell 1 AAPL September 460 call

47 Implied Volatility

48 Extrinsic (time) value of option Time Decay Number of days left before option expiration

49 Iron Condor Definition The simultaneous sale of an out of the money short put spread and an out of the money short call spread. We always sell iron condors to open. We always sell the spreads in the same expiration cycle. This strategy creates a Profit Window where we want to see the stock close in. You want the price to close in between the short strike prices. The distance between the strikes is the same for the put spread and the call spread. Example: XYZ $50 Sell the 40/35 Put spread for $1.00 Sell the 50/55 Call Spread for $1.00 Collect $2.00 to put the trade on.

50 Iron Condor Definition Max Profit Potential: The credit received for placing the trade. Max Loss: Difference between the strikes on the put side minus the credit received. Break Evens: 1. Short Put Strike minus the credit received 2. Short Call Strike plus the credit received Probability of Profit: Total premium received divided by the width of the strikes. Multiply by 100. Subtract from 100. Margin requirements: The short call spread or put spread requirement, whichever is greater. When to Trade: When you anticipate very little stocks movement. You want the stock/etf to close in between the short strikes. Implied Volatility: You want implied volatility to stay the same or decrease slightly as long as price is between the short strikes.

51 Iron Condor P/L Graph

52 Standard Deviation - Bell Curve

53 Entry Criteria 1. Make sure you are trading a product that you have a neutral outlook on. If you are very bullish or bearish there are better strategies to use. Index products or ETF s are great candidates because they don t tend to be as volatile. 2. Look to run these trades with days left to expiration. 3. We want to sell the strikes that are 1-2 Standard deviations away from current stock price. To do this you can use the expected move formula or you can use the thinkorswim platform. Using TOS you will look for the options that have 16% chance of closing ITM on both sides (1 standard deviation). Use standard deviation formula to identify the expected move 4. Sell the call spread and put spread with the short strikes that you feel will Lock In the price for the next days. 5. We want to collect around 40-50% of the width of the strikes. For example, if you are trading $1 wide strikes look to collect total on the trade. 6. Trading Iron Condors with IV above 50 will increase your odds of success.

54 Standard Deviation Formula

55 Entry Criteria Short Cut 1. Make sure you are trading a product that you have a neutral outlook on. If you are very bullish or bearish there are better strategies to use. Index products or ETF s are great candidates because they don t tend to be as volatile. 2. Look to run these trades with days left to expiration. 3. We want to collect around 40-50% of the width of the strikes. For example, if you are trading $1 wide strikes look to collect total on the trade. 4. In TOS, select pricing for Verticals. Select the two verticals that will allow you to get into the Iron Condor for 40-50% of the width of the strikes.

56 Closing Criteria 1. You have the option of legging out of the trade. If you get close to one of the short strikes you can close out the other side of the trade. For example, if you get close to the short call strike then you can exit the short put spread and keep the short call spread on. 2. You can also exit the trade when you have booked 50-75% of the potential profit.

57 Important Points By trading higher IV you can collect more premium. This means we can trade a bigger profit window. Closing out of these trades when you have 50% of the profit will also increase your odds of success You can trade these in lower IV but you won t have as wide of a profit window. You can put a bullish/bearish tint on these trades. If you want to put a bullish tint on a trade sell the put spread closer to the market. If you want to put a bearish tint on a trade sell a call spread closer to the market.

58 Example:

59 Butterfly

60 Long Butterfly Overview 1. You would use this strategy when you are expecting a stock/etf to move to a certain price and then sit there until expiration. You are making a bet on where the stock will expire. 2. What is a butterfly? A combination of a long spread and a short spread that share the short strike. Example: -Buy 1 45 Call + Sell 2 50 Call + Buy 1 55 Call 3. If you expect the stock to sit at a price then you would sell the ATM strike. You can put a bullish or bearish tint on the trade by going slightly ITM or OTM. 4. You can do these trades with calls or puts and they are the same. You still expect the stock to finish at the same price. Typically if you are bullish use the calls. If bearish use the puts. 5. The wider the strikes on the butterfly the more expensive the trades are.

61 Extrinsic (time) value of option Time Decay Number of days left before option expiration

62 Butterfly Trade Breakdown Max Profit Potential: Difference between the strikes minus the debit paid for the position. Max Loss: Limited to the debit paid for the trade. Break Evens: Calls: Lower strike Call plus debit paid Higher strike Call minus debit paid Puts: Lower Strike Put plus debit paid Higher strike Put minus the debit paid Probability of Profit: Max Loss / Width of the strikes Margin requirements: The debit paid for the trade plus commissions. When to Trade: When you anticipate very little stock movement. You want the stock/etf to close as close as possible to the short strike. Implied Volatility: You want implied volatility to stay the same or decrease slightly as long as price is between the short strikes.

63 Butterfly P/L Graph

64 Entry Criteria: 1. Pick the price of the stock/etf that you expect it to close at expiration. 2. Look for the expiration with days left to expiration 3. We would ideally like to see IV percentile close to Sell the strike that you expect the stock to close at 5. Buy the Wings or the strikes that are ITM and OTM

65 Example: 1. USO: $ Sep 39 put -2 Sep 38 puts $.18 debit or $18 per spread +1 Sep 37 put 3. Break Evens: = = 38.92

66 Calendar Spreads

67 Calendar Spread Overview 1. You would use this strategy when you are expecting a stock/etf to move to a certain price and then sit there until expiration. You are making a bet on where the stock will expire. You want to do these trades in a low volatility environment expecting a pop in volatility You are betting on a pop in volatility You benefit from time decay as well 2. What is a calendar? Selling the near term option and buying the farther out option Example: -Sell Sep 100 Put + Buy the Oct 100 Put 3. You want to do this with OTM options 4. You can do these trades with calls or puts but we prefer puts because they will typically benefit more from an increase in volatility. 5. You typically look for these trades when Implied Volatility percentile is below 30

68 Extrinsic (time) value of option Time Decay Number of days left before option expiration

69 Calendar Spread P/L Graph

70 Calendar Trade Breakdown Max Profit Potential: Limited to the premium received for the back month option minus the cost to buy back the front month option, minus the debit paid to establish the position. The farther away from your short strike that you go the less profit you make. Max Loss: Limited to the debit paid for the trade. Break Evens: Very difficult to calculate because implied volatility fluctuates. You want the stock to go to your short strike and stay there until expiration. You are typically ok if the stock moves 1 strike ITM or OTM from your strike. Probability of Profit: Max Loss / Width of the strikes Margin requirements: The debit paid for the trade plus commissions. When to Trade: When you expect a stock to move to a price and sit there. You want an increase in volatility as well. As a result you will do these in low volatility environments. TOS users will use IV Percentile tool for this. Implied Volatility: You want implied volatility to increase because this will effect the back month more than the front month. So your front month benefits from time decay and the back month benefits from a spike in volatility.

71 Entry Criteria: 1. Pick the price of the stock/etf that you expect it to close at expiration. 2. We like to use the puts on these trades. The puts will benefit more from an increase in volatility. 3. Look for a low volatility. Using the IV Percentile in TOS you would want to see a reading below Sell the strike that you expect the stock to close at. Buy the same strike in a further out expiration cycle. Typically you will have better odds by going slightly OTM. We typically like to see days left on the front month options and 60 days on the back month options. 5. Try not to pay more for the spread than the value of the front month option.

72 Example:

73 Straddle

74 Implied Volatility

75 Extrinsic (time) value of option Time Decay Number of days left before option expiration

76 Straddle Overview 1. You would use this strategy when you want to take advantage of high volatility. You are expecting the volatility to drop and the stock to close within a tight window. We only sell straddles Have to be able to sell naked options to run this strategy. Ties up a lot of capital. 2. What is a straddle? Selling the call and the put with the same strike and the same expiration month. Example: -Sell Sep 100 Put + Sell the Sep 100 Call 3. I prefer to do strangles vs straddles because it gives me a bigger profit window. It will have less profit potential but a higher chance of success.

77 Straddle P/L Graph

78 Straddle Breakdown Max Profit Potential: Credit received for selling the call and the put. Break Evens: Add the credit to the strike of the options for one break even. Subtract the credit from the strike for the other break even Probability of Profit: We can use the probability ITM feature on TOS to determine our chance of success. Margin requirements: The margin requirement for the short call or short put (whichever is greater) plus the premium received. When to Trade: When you have volatility at a high level (greater than the 70% percentile). Ideally you want to see a stock near the end of a move. You would expect volatility to drop while the stock stays inside of your profit window (the break even prices). This way you profit from volatility dropping and time decay kicking in. Implied Volatility: You want implied volatility to decrease after putting the trade on.

79 Entry Criteria: 1. Pick the price of the stock/etf that you expect it to close at expiration. 2. We want to see high volatility. Ideally we would see the volatility percentile greater than 70 on the TOS platform. 3. Sell both the call and the put at the strike that you expect the stock to close at. 4. We will look to close out the position when we are able to book 50% of the premium received for selling the options.

80 Example:

81 Strangle

82 Implied Volatility

83 Strangle Overview 1. You would use this strategy when you want to take advantage of high volatility. You are expecting the volatility to drop and the stock to close within a tight window. We only sell strangles 2. What is a Strangle? Selling an OTM call and an OTM put at the same time in the same expiration cycle Example: -Sell Sep 95 Put + Sell the Sep 105 Call 3. I prefer to do strangles vs straddles because it gives me a bigger profit window. It will have less profit potential but a higher chance of success. 4. The margin requirement can be high on these because you are selling naked options. The alternative would be to trade the iron condor. 5. I like to sell options that are 1 standard deviation OTM. You can find this by using Expected Move formula or by using the Probability ITM feature in TOS.

84 Extrinsic (time) value of option Time Decay Number of days left before option expiration

85 Strangle Breakdown Max Profit Potential: Credit received for selling the call and the put. Break Evens: There are 2 break even points. 1. Take the put strike and subtract the credit received. 2. Take the call strike and add the credit received. Probability of Profit: We can use the TOS platform to determine the probability of being ITM for the break even points. Add these together and subtract the sum from 100. Margin requirements: The margin requirement for the short call or short put (whichever is greater) plus the premium received. When to Trade: When you have volatility at a high level (greater than the 70% percentile). Ideally you want the stock to close between the short strike prices. You are looking to play a drop in implied volatility. Implied Volatility: You want implied volatility to decrease after putting the trade on.

86 Strangle P/L Graph

87 Entry Criteria: 1. Pick the price of the stock/etf that you expect it to close at expiration. 2. We want to see high volatility. Ideally we would see the volatility percentile greater than 70 on the TOS platform. 3. We will look to see the call and the put that are 1 standard deviation OTM. To do this you can use the expected move formula or you can use the thinkorswim platform. Using TOS you will look for the options that have 16% chance of closing ITM on both sides. 4. We will look to close out the position when we are able to book 50% of the premium received for selling the options.

88 Standard Deviation - Bell Curve

89 Standard Deviation Formula

90 Example:

91 Rolling Positions

92 Strategy Playbook Rolling Positions When rolling a long call or long put out farther in time using the same strike use a calendar spread. 1. Right click on the strike price that you own and select buy Calendar spread. This will sell out of your long near term option and will buy a new option in a farther out option. This approach uses the same strikes. 2. You are left with a new long position in a new expiration cycle. When rolling a long call or long put out farther in time using different strikes use a diagonal spread. 1. Right click on the strike price that you own and select Diagonal spread. This will sell out of your long near term option and will buy a new option in a farther out option. This approach allows you to buy a new option with a different strike price 2. You are left with a new long position in a new expiration cycle.

93 Strategy Playbook Rolling Positions Look to roll positions 7-10 days before expiration Ask yourself do you still like your position? If so roll the position to give yourself more time to be right. If you don t like your position look to close out of the trade and wait for something new to develop. If you are in a short premium trade that is moving past your break even point and you are approaching expiration you need to either roll the position or sell more premium.

94 What Strategy Should I use?

95 Strategy Playbook Directional Trades Strongly Bullish 1. Individual Calls: You will get the most bang for your buck trading individual options. You should use this strategy if you are expecting a quick move to the upside. 2. Long Call Vertical Spread: This will allow you to lower your initial cost of taking the trade. It will also limit your worst case loss scenario. 3. Short Put Spread: If IV is over 50 th percentile then we can sell a spread. Moderately Bullish 1. Long Call Vertical Spread: This will allow you to lower your initial cost of taking the trade. It will also limit your worst case loss scenario. 2. Short Put Vertical Spread: If you expect to be in the trade for any length of time you can benefit from selling a spread. This will allow you to make money if the stock goes up like you expect but it also makes money if the market goes sideways. You win in 2 of 3 possible market moves.

96 Strategy Playbook Directional Trades Strongly Bearish 1. Individual Puts: You will get the most bang for your buck trading individual options. You should use this strategy if you are expecting a quick move to the downside. 2. Long Put Vertical Spread: This will allow you to lower your initial cost of taking the trade. It will also limit your worst case loss scenario. 3. Short Call Spread: If IV is above 50 th percentile then we can look to sell a call spread. Moderately Bearish 1. Long Put Vertical Spread: This will allow you to lower your initial cost of taking the trade. It will also limit your worst case loss scenario. 2. Short Call Vertical Spread: If you expect to be in the trade for any length of time you can benefit from selling a spread. This will allow you to make money if the stock goes up like you expect but it also makes money if the market goes sideways. You win in 2 of 3 possible market moves.

97 Strategy Playbook Volatility Plays These are listed in the order that I would use them: High Volatility 1. Sell Iron Condor: This will allow you to benefit from the stock staying inside of a range. This is a good position if you are looking at a high IV percentile on TOS. 2. Sell Strangle: This will also allow you to benefit from the stock staying somewhat quiet. You want to play a drop in volatility. This trade is more expensive because you are short options. If this is a concern use the Iron Condor. 3. Buy a butterfly: This strategy will benefit from an expected drop in volatility as long as price stays close to your short strike 4. Sell a straddle: You will benefit from a drop in volatility if the stock stays close to your short strikes. Low Volatility 1. Long Put Vertical Spread: This trade allows you to lower your cost and it will benefit from a spike in volatility. 2. Long Calendar Spread: This trade will benefit from the back month volatility expanding while collecting time premium in the front month options. 3. Sell an Iron Condor: We would rather sell these with a higher volatility but we can still trade them in a low volatility environment.