This document describes how to manage trades identified with the Options Income Engine Trade Alert Software.

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1 This document describes how to manage trades identified with the Options Income Engine Trade Alert Software. General Risk Management For accounts < $10,000: Risk no more than 5% of your account size. For accounts > $10,000: Risk no more than 2% of your account size. For accounts > $100,000: Risk no more than1% of your account size. Risk means the probable maximum amount you can expect to lose for a losing trade. I. For Moderate Risk Tolerance: Assume the probable maximum amount to be 50% of what you paid for the option. II. For Conservative Risk Tolerance: Our Target Maximum Risk is 50% of what you paid for an option, however, due to unpredictable market forces an actual loss may be greater than or less than 50%. To determine your position size, simply divide the maximum dollar risk (based on the above calculation) by the option purchase price and then round down to the nearest whole number. That will give you the maximum number of contracts for that trade Do not have more than 10 open positions on at one time and do not expose your account to more than 10% risk at one time. So if you had 10 positions on, each position could not risk more than 1% (10%/10). Invest the balance of your account in accordance with your goals in money markets, dividend paying stocks, etc. Copyright Profits Run, Inc. Page 1 of 5

2 Profit Targets The goal of each trade is to scale out of the position in two steps profitably. The first step is to close out the position at a predetermined profit target specified by the software. And the second step is to let the remaining half position run as far as the market wants to go protected by a trailing stop. Non- Deliberate Markets The markets tend to cycle from deliberately trading to non- deliberately trading. Non- deliberately trading markets are more risky than deliberately trading markets. A deliberately trading market is one in which for the past 20+ candles there are no unusually wide range candles, a cluster of wide range candles, gaps in price (from close of one candle to the open of the next) or candles with unusually long candle shadows. A non- deliberately trading market is one in which for the past 20+ candles there ARE unusually wide range candles or a cluster of wide range candles or gaps in price (from close of one candle to the open of the next) or candles with unusually long candle shadows. The Options Income Engine master list of stocks are those that generally trade in a deliberate manner. This is our first line of defense in limiting risk. Copyright Profits Run, Inc. Page 2 of 5

3 Option Order and Position Management 1. When a buy entry alert occurs for a call or put option, on the open of the new candle place a good til cancelled limit order to buy at the entry price specified for that alert under the signals tab. The limit order specified by the software is based on the ask price as of the close of the setup day. With a buy limit order, you will only be filled if the market trades at or below the limit price. If not filled after one week, cancel the order. A more aggressive alternative would be to go in with a market order, in which case you will be assured of being filled, however, you may end up paying a higher price. 2. Once you are filled on the entry order it is time to place the profit target order for half of the position as specified for that alert under the signals tab and also set an Initial Stop A alert flag on your broker s trading platform as follows: a. Place the profit target order as a GTC (good til cancelled) order for 1 2 position at the profit target LIMIT order. b. Place a text message and/or alert on your broker s trading platform to alert you when the last price of the stock (or ETF) trades at or below the stop price. i. When alerted, that means your stop price has been hit and you want to go to your broker s platform and cancel the Profit Target Order and enter a STC (SellToClose) order for the entire position at the market which will be filled taking you out of the position. ii. If the profit target is hit for 1 2 position then cancel your broker s stop level alert and enter the Initial Stop A order or the last trailing stop order (as given on the OIE signals page) as a contingent order as follows: 1. For a call option, STC (SellToClose) the option at the market only if the stock trades at or below the stop price. 2. For a put option, STC (SellToClose) the option at the market only if the stock trades at or above the stop price. iii. When the OIE trade alert software sends you an alert to change the trailing stop, go to your broker s platform and change the contingent order stop price. Copyright Profits Run, Inc. Page 3 of 5

4 3. Initial Stop B: If this stop is hit before Initial Stop A then sell the entire position as follows: If the option price closes below 50% of the Entry price, then Sell To Close the option at the market the next day. 4. On close of each daily candle, go to the Signals Tab to check for any Change Trailing Stop alerts and adjust your stops for the entire position or half position if the profit target has already been hit. 5. On close of each daily candle, one of the following outcomes may occur: a. The entire position will be stopped out before reaching the profit target for 1 2 position, sometimes at a loss and sometimes at a profit. b. The profit target for 1 2 position is reached. c. After the profit target for 1 2 position is reached, we will let the remaining half position run as far as the market wants to protected by a trailing stop. Option Selection Once an entry setup occurs, the software will select the best option to trade from the hundreds available. The general selection criteria is days until expiration, 1-2 strikes in- the- money, and a minimum open interest of 100. Rolling Forward If a trade is still open at the 1 st of the expiration month, an alert will be given to roll out of the current month and forward into the new month specified by the software. - So you would place the following order as a debit spread order: Sell To Close the expiring month option and Buy To Open the new month option at the same strike price as the expiring month option at the debit price shown by the software. - For example, let s say you were long a June 40 call option from $3.00 and the current price was $5.00 on June 1 st and the next month out that meets the option selection criteria was a July 40 call with a current price of $5.50. You would place a spread order to STC June 40 Call and BTO July 40 call option at a net debit of $0.50 By doing this, you are maintaining your long position via the July call option that will avoid the theta or time value decay that the June option position would have suffered. Copyright Profits Run, Inc. Page 4 of 5

5 Disclaimer: Futures, forex, stock, 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 on this website will generate profits or ensure freedom from losses. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Copyright Profits Run, Inc. Page 5 of 5