Published by: Profits Run, Inc Beck Rd Unit F1. Wixom, MI

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2 DISCLAIMER: Stock, forex, futures, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the information in this special report will generate profits or ensure freedom from losses. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a market. The impact of seasonal and geopolitical events is already factored into market prices. Under certain conditions you may find it impossible to liquidate a position. This can occur, for example, when a market becomes illiquid. The placement of contingent orders by you, such as stop-loss or stop-limit orders will not necessarily limit or prevent losses because market conditions may make it impossible to execute such orders. In no event should the content of this correspondence be construed as an express or implied promise or guarantee that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Copyright by Profits Run, Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic, or mechanical, including photocopying, recording, or by any information storage and retrieval system. Published by: Profits Run, Inc Beck Rd Unit F1 Wixom, MI

3 Hi everybody, this is Bill Poulos and I want to welcome you to the Options Income Engine. Now the Options Income Engine course is based on my over 40 years of trading in the markets. During that time, as you can imagine, I have made every mistake you could possibly make, and I have learned a great deal in the process. My goal here is to help you avoid making those same mistakes, dramatically shortening your learning curve, and allow you to have the possibility of becoming a successful trader right out of the chute. And if I have learned anything in the 40 years is that it does not take 40 years to become a successful trader. Now this is one of the best, most synergistic approaches to safely capturing the leverage that options trading has to offer. As you will soon see, if we are smart about the way we use the leverage, we put the odds dramatically in our favor. Unfortunately so many options traders today abuse the leverage, and that is when the options become highly risky with the traders suffering the consequences. Page 3

4 By the time we are done, you will see firsthand, by safely capturing the leverage that options have to offer, it is actually less risky trading options than it is trading stocks. Now that is really good news, because in today s financial world, the old buying old strategy is highly risky. Now yes, the markets have gone up significantly since early 2009, after they fell more than 50 percent, regaining previous highs. But the truth is most people are still under water from where they were prior to the crash. Those same people today have no exit strategy, should the market crash again. And it really is not should the market crash, it will. The question is when. We do not know the answer to that, but it will, and when it does, you do not want to be in it. And with the Options Income Engine approach, you will not. Now we are going to be using conservative tactics trading options, only in the markets at the right time. This avoids, and even can take advantage of devastating bare markets. Because there is nothing like owning put options in a falling market, where profits accumulate very rapidly. Now there is work involved here, but Options Income Engine trailer software does the analysis work for you. But it is important for you to understand the logic baked into the software, so when the software issues an alert, you understand why. Okay, are you ready to begin? Let us get started. Page 4

5 Objectives. Understand the background and the rationale behind the Options Income Engine. Learn what you can realistically expect swing trading the markets with a powerful, directional options strategy. That is what we are going to be using here. Get a broad overview of the Options Income Engine key elements and get a feel for what it is like to trade with the software by reviewing some typical trades. Page 5

6 Options and IRAs. While directionally trading options with the Options Income Engine is ideal for IRAs, because buying options is actually less risky than owning stock, if you know what you are doing. And you will know exactly what you are doing after completing this course. In addition, you have the ability to buy put options in a bear market, rather than suffer dramatic losses, or at best being safely in cash. But in order for all of this to manifest, you must always apply sound risk management principles. Again I am going to be hammering this, this is where options traders get into trouble. They abuse the leverage that options have to offer, and they turn them into very risky instruments. But by applying these sound risk management principles that we are going to teach you, that turns the whole thing on its head, and gives you a tremendous edge over those traders that do otherwise. Page 6

7 Background. Okay, let us review some background to set the context for the Options Income Engine approach to trading the markets. It is based on the culmination of years of experience. My experience, and those of the options markets themselves. It was not always easy to trade options. Only in the last decade or two have the options markets matured significantly to make a very low cost, easy thing to do for almost anybody. After all, I began trading options before personal computers were available. And while you could still make money back in those days, it was far more difficult than it is now. Let us talk about false keys. Traders want to win on every trade, especially newbies. As soon as they see a losing trade, they run for the hills. Or they stick with that losing trade, do not apply sound risk management principles, and let a small loser turn into a big loser. This is a well-traveled path, and it is a path that you do not want to travel on and we are going to show you how to avoid it. But the best method on the planet cannot win every Page 7

8 time. If that is what you are looking for, then go buy a CD at your local bank and they will be happy to pay you a quarter percent interest for one year. I mean even that one is not guaranteed, because the bank could go under, and the government may even disappoint you with the FDIC insurance, depending on your account size. Do not expect to win on every trade, however do not expect to do great damage to your account on any trade, and do not expect to be uncomfortable making trades when you do it the way we do. What you should expect is, over a series of trades, to be a net winner with relatively minor drawdowns on your equity curve. Now that is all very possible, it is not guaranteed, nothing is guaranteed when it comes to trading, but that has been the case as long as there have been mature options markets like we have now. Human psychology, we are going to talk more about that in a later module, but this is all about fear and greed. You have probably heard this before, but it is absolutely true. Fear and greed are very powerful emotions, they get in the way of your ability to place and manage your trades in a disciplined fashion. And as soon as you are driving by fear and greed, like most traders are, and give up that discipline, you will also automatically give up your trading edge. It is very, very important to overcome that tendency. The best way I know how to do it is to have a very specific set of rules that gives you the confidence to stay disciplined. That is what you have with Options Income Engine. Successful traders, they all have one thing in common, even though they use different approaches to trading. They all have an edge, meaning they all have a way to put the odds in their favor. They all use sound risk management principles, meaning they do not overtrade, or do not put position sizes on that are not warranted by their account size. And are all disciplined. So it would behoove you to do the same thing. Now what we are going to be doing with Options Income Engine is swing trading, capturing minor trends that occur over and over again. Now these trends will last from Page 8

9 anywhere to a week or two to sometimes two months, usually somewhere in the middle. This is a perfect time frame for trading monthly options. Because the option gives you time to be right, whereas when you buy a stock outright, you have far less time to be right. With this approach, there is always opportunities in the markets, whether they are going up, or down, or sideways. But we only want to trade the best setups, we do not want to try to trade everything. You cannot trade every stock, and every ETF anyways, so we only want to trade the best of the best, stocks and ETFs, and then only when we have the best setups for those stocks and ETFs. So with Options Income Engine, you are going to be able to cut through the clutter in a way where you will always know what to do, no matter what the market is doing. Page 9

10 That puts you in control, but only if you are disciplined. Now another key requirement in order to stay disciplined is, your approach must be as simple as possible, because if it is not, you are going to lose your discipline. It is that simple. And the Options Income Engine approach is very powerful, but it is elegantly simple. You want to eliminate what does not work, and of course I have learned the hard way what does not work. These commonly held myths by traders, such as, well the only time you should put a trade out is when you have a three or four to one reward to risk ratio. Well if you stick by that, methods that can deliver that kind of reward to risk ratio usually win only 25 percent of the time. That means that it is not unusual to have five, six, seven, eight, nine losing trades in a row. So you see that approach really does not work. Using too many indicators, or thinking that technical indicators are a silver bullet that does not work. Thinking you know something about the market direction, because of a gut feeling that you have, or what some so called experts said, that does not work. Now you can disagree with one or all of those statements, but when you actually put it to the test, you will find out that they are true. Now again it helps stick with the discipline, the trade alerts software generates alerts for the right stocks or the right ETFs at the right time, when setups occur in those markets that put the odds in your favor. Then once you get an alert that is driven by an objective set of rules, you enter the trade, and then manage the trade in accordance with objective rules as well. That way you are not wishing and hoping, you are not cheerleading your trade, you are just following the rules. Sometimes you will be stomped out, but over a series of trades, you should expect to be a net winner. And that should give you the confidence to go ahead and place the trade each and every one. Now like I said earlier, with this material you have a great advantage over me; it is not going to take you 40 years, thankfully. You are going to be able to learn this in the shortest time possible, depending on your experience up until now, it could be a Page 10

11 matter of a couple days, or at the most a couple weeks, maybe a month. Then you will own this knowledge for life. Okay, let us kind of summarize all of this under the heading of great expectations. You have got to treat your investing and trading as a business. It is not a hobby. It is not playing the market. It is not looking for picks. It is not chasing after the latest fad. It is just a very serious approach, a business like disciplined approach to taking as much money out of the markets as you can. The bad news, you cannot win on every trade. But the good news is you do not have to if you apply sound, risk management principles, and you have realistic expectations. Do not expect to open a $5,000 account and turn it into one million dollars in a year; that is absolute nonsense. On the other hand, you could grow that small account systematically, so that over time as it compounds it can indeed turn into a very, very large Page 11

12 account. As I said, you have to have an edge in the markets, and successful investors do indeed have an edge. Meaning the odds are in their favor. Ask yourself, do you know what your edge is, if you do not know your edge, then you do not have one. And if you do not have one, do not trade. You are just gambling otherwise. But if you do have an edge, and you are disciplined, and you follow your risk management rules, you have the potential to enjoy great success. Okay, let us talk about some key elements of success. You are going to need a good online broker, and fortunately these days that is not a problem, there are several to choose from. The Options Income Engine trade alerts software is an invaluable aid in simplifying your trading activity. While it is not required to apply the Options Income Engine trading methods, it will save you a lot of time that you would have to spend on your own analyzing the markets, and it will help you avoid mistakes. Page 12

13 Now you probably are also going to want some good charting software, as provided by firms such as Trade Navigator, TC 2000, Meta stock, and there are many others. With good charting software, you can plot the Options Income Engine indicators, you can practice applying the trading methods that we teach you, and you can keep up to date on your trades on an end of day basis. You do not really need intraday software, unless you want it, but the end of day data is all that we need with Options Income Engine so that you are not having to be glued to your computer all day long. You will find that it is easy to manage, you will get periodic software alerts, where there is a new setup, and you will get alerted to that after the market is closed. You will have plenty of time to enter your order before they open the next day. You will also be alerted of where to place your initial stop, you will be alerted to change that stop and apply trailing stops, locking in more and more profit as the trade matures. And also where to set your profit target. Now as I said, we are going to be swing trading minor trends, which is ideal for directionally trading options. We will be using a very powerful trading method for the long side of the market where we are buying calls, and a very powerful trading method for the short side of the market where we will be buying puts. We will be using a few technical indicators together with uncommon trading tactics. As I said, the indicators are not a magic bullet, but if we are smart about the way we use just a few indicators, using them in an uncommon fashion, then we can put the odds in our favor. Page 13

14 So we are going to be looking for a high probability, swing trading opportunities using Option Income Engine s specific option able stock and ETF selection criteria, setup conditions, entry stop, and profitable exit strategy rules. Each trade will be guided by risk management and position sizing rules, which is critical to harnessing the leverage that options provide without abusing it. We are going to be following a simple, but powerful directional swing trade options strategy. When you add it all up, you will always know what to do in the markets for life. Page 14

15 So what do we mean by directional swing trading options strategy? Well we are going to be buying one or two strike, in the money, monthly options, both calls and puts; instead of stocks or ETFs. Now this gives us the opportunity to dramatically limit risk by dramatically reducing the maximum possible loss per trade. This is a huge advantage over trading stocks. At the same time routinely enjoy double and triple digit percentage gains. We are going to do that by swing trading minor trends of one to eight weeks within a major trend. Because this gives us the best opportunity to maximize profits with this strategy. And it requires very little of your time to properly execute this strategy. Now for those that are new to options, please review the bonus module in detail, entitled Trading and Options Basics. It will get you up to speed in a matter of minutes, and you will be good to go with the Options Income Engine. Page 15

16 The indicators. With Options Income Engine, we are going to be using a simple 50 day moving average. We are going to be using slow stochastic percent k with an setting. We will be using the average true range based on the past 20 days, and an indicator called on balance volume. Page 16

17 Let s take a look at a typical stop chart where we will plot the 50 day simple moving average. Page 17

18 Okay, here is a typical stock chart, daily stock chart, it could be any stock. And I have plotted the 50 day simple moving average in red. You can see how the moving average smooths out the daily price action, so as the market is trending up here, the moving average turns from down to up in a nice smooth line. As simple as it is, it is a very good indicator of the general trend of the market. Now like all moving averages, it is a lagging indicator. In other words, it does not turn up until after the market turns up. But nevertheless once it does, it usually indicates that the market has turned from a bearish bias, to a bullish bias. Giving us the opportunity to get in on some of these swings that occur along the way. Page 18

19 Okay the next indicator is the Slostocastics Percent Page 19

20 Okay, same stock chart and now we have applied the percent K, which is the blue line, and it is plotted below the price chart. The percent k is helpful in identifying so called overbought and oversold conditions in the market. When it is below a certain level that would indicate the market is oversold and may be heading up. Not a guarantee that it will be heading up, but maybe. Oversold, may be heading up. But it is important to use the percent K in conjunction with a trend indicator, such as the 50 day moving average. The red line is the percent D, which is simply a three day moving average of the blue line, the percent K. We will not be using the percent D, but typically when you plot this indicator, you will see both the percent K and the percent D. Page 20

21 Okay now let s take a look at the average true range. Page 21

22 Like the percent K, the average true range indicator is plotted at the bottom of the chart. Showing the average true range for the past 20 days. So if you pick off a point on the chart right here, that would be the average true range of the past 20 days. Page 22

23 Okay our last indicator that we re going to be using is On Balance Volume. Let s take a look. Page 23

24 Okay, on balance volume is also plotted at the bottom of the chart. You can see that plot right here. What that indicator is, is simply adding and subtracting the daily volume. If the market price goes up from the prior day, then you add the volume for that day. And if the close is lower than the prior day, then you subtract the volume for that day. It is very simple. The absolute value really does not have any meaning, it is the trend that we are looking for here. So we are looking for an uptrend to confirm that the market wants to go up. If the on balance volume is flat, like it is right in here, almost flat to downwards, now going down. It is telling you that even though the market is going higher here, it may be unsustainable and ready for a drop. Page 24

25 Okay now let s take a look at what the chart looks like applying all of the indicators at the same time. Page 25

26 Okay, so here we have the 50 day moving average. The percent case slow stochastic is the blue line. The average true range. And the on balance volume. Those are the only indicators we are going to need, and we are going to be using them in an uncommon fashion, which will help give us an edge. Trading tactics based on price action, supported by a few indicators is the way to go. If you use any more than a handful of indicators, I believe you are kidding yourself, they will not give you an edge. In fact, they will further confuse the issue, and you will never have a consistent, simple, but powerful way to look at the markets, as we do with Options Income Engine. Page 26

27 Alright, now let us look at some Options Income Engine trade examples. Now at this point, we are just looking at a high level overview of the type of trades identified by the trade alerts software. And when there are no trade alerts to enter the market, it is time to stand aside. A lot of new traders feel like they have got to trade every day. They are so anxious to try it out they have got to trade every day. And you know you do not want to do that. You want to let the market come to you. Be patient. We are not playing here, we are very serious, we are methodical, we are disciplined, we let the market come to us. There is plenty of opportunity, there is no point in trying to force the markets. So at this point we just want to get a feel for the method and see what the trades look like. We are going to deep dive them a little bit later. Page 27

28 Okay, first we have Netflix, NFLX. This is a daily chart, we have got our indicators plotted, our 50 day moving average in red; our stochastic k in blue; our average true range down here in green; and our on balance volume in orange. So you can see here, by virtue of this blue arrow, we got an alert to buy to open a January 290 call at $14, with Netflix trading around $300. Now notice, instead of buying Netflix for $300, 100 shares of Netflix at $300 would be $30,000 required in your account to do so. Whereas if you buy one option, one January 290 call option, you are controlling 100 shares for what? $1,400, 14 times 100, as opposed to $30,000. See right off the bat, you have got risk severely limited. When you buy the stock, you are really exposed to the tune of $30,000. When you buy the option, you are exposed to a maximum possible loss of $1,400. Now that does not mean that you are going to lose $1,400, but in the worst case, that is what you could lose. That is it. Page 28

29 If you apply the right position size and risk management principles, you can never do great damage to your account. Okay, so in this example, we are buying to open the January 290 call at 14 right here. We always want to try to scale out of these trades in two steps. One at a profit target, and the other using a trailing stop. So just in general terms understand that now, we will get into the details later. So here is a profit target being hit right in here, selling to close half position at $40. Look at the gain on that. From 14 to 40 in just a few days. So you have very limited risk, and very high percentage gains. Oftentimes triple digit gains has occurred here. Now the second half position was closed out right here using a trailing stop at $27.20, still a nice gain. Sometimes the profit target will outgain the trailing stop, and sometimes the trailing stop will outgain the profit target. You do not know what the market is going to do on any given trade. So using this strategy to exit the trade by scaling out in two steps maximizes your profit potential over the long haul. Okay, now the software said to get back in, get right back in a couple days later, right there. Buy to open this time a January 320 call at $12.20, because what? The stocks trading now are around $ The trend apparently is not over. Sure enough it keeps moving on up, selling to close half position at a profit target at $ What a gain. This one took about a month and a half, exiting right there, and then trailing stop exited a few days later at $52.80, so just an outstanding trade for both half positions. Page 29

30 Okay, the next one is Cleveland Cliffs at CLF. Software said buy to open. August 23 call at $2.40 with CLF trading around 24 and change. Profit targets selling to close half position at 750, very nice gain. And then the trailing stop at 450. Still a nice gain. This all happened in a matter of about three to four weeks. Page 30

31 Okay, next one is BAC. This is a put option, we want to buy to open the April 36 put at 270. Right in here, expecting the market to head lower. At that point BAC was trading around Now what happened here, it did not trade lower, it reversed and headed higher, we got stopped out just a few days later at $1.90. Now as I said before, all trades will not be winners, there will be losers. But look what happens here, this loser first of all, when you put the trade on, your maximum risk for 100 shares is $270, as opposed to buying BAC outright for 33.50, requiring $3,350. Instead of having $3,350 at risk, the worst you could possibly do buying the option is lose $270. Now as I said, that does not mean that you are going to lose $270, indeed in this case here, you got out at $1.90, losing $80. Okay, so this is what I mean about proper position size relative to your account size, if you lost $80 say on a $10,000 account, that would not be a big deal, would it? Page 31

32 On the other hand, if you abuse the leverage that options have to offer, let us say you put on 40 of these options with a $10,000 account, well then you would wipe out the account, and there is absolutely no reason to do that. Okay, the next one is silver ETF SLV. Software said to buy it open at October 18 put at 220 right in here with SLV trading around And profit target was hit very quickly, sell to close half position at 340. And the trailing stop exited right here at $5.30, so very nice gain on both half positions and you are on to the next opportunity. Page 32

33 Okay, next is BBRY. We have got an alert to go in buy to open, January 7 call option at $1.10 when BBRY was trading around $8. Very quickly the first half position alert was issued to sell to close half position at $2. Right here in the matter of a couple of days. So a very quick nice gain of about 80 percent. Then we let the second half position run, protected by a trailing stop. It ran for several days, and got out right here, about a month and a half later, for a fabulous gain up to $5.10. That is a 400 percent gain. Again with very limited risk. In this case, buying one option at $1.10 would have required $110. That would be the maximum you could possibly lose, not that you are going to lose it. Because on many losing trades, we are going to lose less than that, versus having to put up $800, had you bought the stock. And then after having minimized risk, you have the potential for these terrific gains. Okay, now the market then held up, and the software said that it is time to get back in right here. Page 33

34 Buy to open, this time the March 11 call at $1.25 with BBRY trading around $12. For a quick run up after stutter stepping sideways here for several days. Hit the first half profit target right here at $3.25, terrific gain. And then the second half position stopped out with the trailing stop right there, with an even larger gain at $5.30. Now not every trade is going to be this good, but these are indeed typical. And I just want you to get a feel right now for how these trades work. Now one thing I want to point out, and you are going to see this in the deep dive trade examples we do later on. That when you buy to open right here at $1.10 January call, this is the month of October. November, December, January, this call does not expire until the third Friday in January. Now what does that tell you? You have got minimum risk here. You have got until, theoretically, the third Friday in January to be right on this trade. Let us say it dropped after you get into the trade, let us say the market dropped. What if it dropped in half, all the way down to $4. How much could you lose? $110. What if it dropped to $7, how much could you lose? $110. What if it dropped to $6? What if it dropped to $0? How much could you lose? $110. Now, we are not expecting it to drop, but sometimes when we get into these trades, initially the market does drop, but that is okay up to a point. We are not going to wait for this to go to 0. But it is okay, because why? We have a lot of time to be right. So even if it drops initially and then heads up and hits our profit targets, we still have a very nice, profitable trade. Now if you are buying the stock instead, right here, you cannot wait for the stock to drop to $6 or $4 before getting out; you have got to get out right away. And what happens? Your percentage of losing trades goes up when you buy the stock directly. And your profitability goes down. This is a huge advantage of being able to buy these monthly options, controlling the same number of shares with less money, and a lot less risk. You will see this in more detail a little bit later on. Page 34

35 Now those trades that you just saw were based on certain trading method basics. Any good method should have these basic principles working for it. So the Options Income Engine trading method includes four components. Specific setup conditions, specific entry rules, specific initial stop rules, and specific exit strategy rules. And there is a set for the long trades, or those where we buy call option; and there is a different set for the short trades, or where we buy put options. Because the characteristics of a market when it is going up are generally different than when it is going down. So it calls for a different method, and you will see that in more detail as we go through the course. Well right now I just want you to understand that those trades we just reviewed were governed by these trading method basics. Page 35

36 Okay. Action steps: Make sure you understand the key points covered in this overview. us with any questions that you have. And it is not too early to start using historical charts, and practice plotting the price charts, and applying the indicators. This concludes background, overview and trading examples. Page 36