Getting Paid System Part 2. Module 2 Review The Market Up, Down & Sideways 5 Key Principles Big Mistake To Avoid Action Items To Take

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Chad Dalton
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1 Disclaimer The VectorVest Program ( the System ) which we promote is not intended to provide you with specific or personalized advice. In all circumstances where you are looking to apply the System to your own personal needs you should consider whether you should first seek advice from a suitably qualified investment professional. Figures and information provided refer to the past and past performance and are not a reliable indicator of future results. Where stocks are quoted in foreign currencies, returns may increase or decrease as a result of currency fluctuations. In the event that you, as a recipient of this presentation, have any doubts as to the suitability of the investments or services promoted you should seek advice from a suitably qualified investment professional. You should be aware that the value of shares and other stocks may rise or fall. The rules on tax can change, and these changes may have an influence on the effectiveness of the System in the future. It is for you, as the tax payer, to assess the System s effectiveness throughout the process. Some assets are more readily realizable than others, and you should bear in mind that it may be difficult to deal in or obtain reliable information about their value. You should always take account of dealing charges. In addition to any initial charge quoted there may also be a bid/offer spread or dilution. Investments in options and other forms of derivatives may expose you to a higher degree of risk given market circumstances relative to other forms of quoted investments. The System even if used in its entirety, cannot be guaranteed to provide specific returns in the short, medium or long term and you should bear in mind that individual securities may and can fluctuate considerably in value from day to day. The System has been designed without any reference to the specific interests of a particular investor. We reiterate, when using the System, you must take into account your own specific needs and liabilities. This financial promotion has been approved by European Financial Publishing Ltd trading as VectorVest UK which is authorized and regulated by the Financial Services Authority under Register No European Financial Publishing Limited is a company incorporated in Scotland under Company Number SC with its registered address at Exchange Tower, 19 Canning Street, Edinburgh EH3 8EH. 1

2 Getting Paid System Part 2 Module 2 Review The Market Up, Down & Sideways 5 Key Principles Big Mistake To Avoid Action Items To Take 2

3 The Market Up, Down & Sideways 3

4 Key Principles of Getting Paid in Sideways Markets 4

5 1 The ADX is a helpful tool that can distinguish between trending and non-trending areas (neutral) When the ADX is greater than 20, the stock is considering trending. 5

6 A rising ADX simply lets you know the stock is trending. The ADX rises above 20 during both uptrends and downtrends. When the ADX drops below 20, this is where the market is more likely to stay in a range. 6

7 When The ADX the can ADX be drops used below both on 20, stocks this is where and market the market indices is such more as likely the to VVC stay and in a SPX range. Non-Trend When The ADX the can ADX be drops used below both on 20, stocks this is where and market the market indices is such more as likely the to VVC stay and in a SPX range. Up and Down Trend 7

8 In addition to the ADX we also add the ATR(14) to make sure Price is stable. The ATR or Average True Range takes the last 14 bars and averages the distance between the highs and lows. 8

9 There is no specific number to look for on the ATR but we visually verify that ATR is at its lower levels when compared to history. Neutral Trades are most effective when the ADX is less than 20, and the ATR is off its peak. 9

10 Combining both indicators will help identify stable range bound stocks. Fast price movement is the enemy of neutral trades. 2 10

11 On Feb. 24, LMT has an ADX value below 20. When the stock is range bound you can double the credit and sandwich two spreads 11

12 You learned about the two primary income spreads the Bull Put Sell 205 Put Buy 200 Put And the Bear Call Buy 230 Call Sell 225 Call 12

13 If you combine the spreads, you have the Iron Condor. Buy 230 Call Sell 225 Call Sell 205 Put Buy 200 Put The distance between the strikes needs to be the same on both sides of the Iron Condor. Buy 230 Call Sell 225 Call Sell 205 Put Buy 200 Put 13

14 The big advantage of the this trade is you are taking in credit on both sides without increasing your risk. Buy 230 Call Sell 225 Call Sell 205 Put Buy 200 Put Bear Call: 225 Call =.75 Credit 230 Call =.10 Debit Net Credit =.65 Buy 230 Call Sell 225 Call Bull Put: 205 Put = 1.25 Credit 200 Put =.70 Debit Net Credit =.55 Sell 205 Put Buy 200 Put 14

15 Trade Totals: Total Credit received = 1.20 Or $120 per contract Risk is = 3.80 Or $380 per contract Buy 230 Call Sell 225 Call Sell 205 Put Buy 200 Put When the market stays range bound, you collect both premiums. In this case up to $120 per contract. Buy 230 Call Sell 225 Call Sell 205 Put Buy 200 Put 15

16 Another example, NOC. ADX < 20 Combine Bear Call & Bull Put Spreads Buy 210 Call Sell 200 Call Sell 180 Put Buy 170 Put 16

17 Bear Call: 200 Call =.88 Credit 210 Call =.08 Debit Net Credit =.80 Buy 210 Call Sell 200 Call Sell 180 Put Buy 170 Put Bull Put: 180 Put = 1.20 Credit 170 Put =.43 Debit Net Credit =.77 Trade Totals: Total Credit received = 1.57 Or $157 per contract Risk is = 8.43 Or $843 per contract Buy 210 Call Sell 200 Call Sell 180 Put Buy 170 Put 17

18 Collect Credit Buy 210 Call Sell 200 Call Sell 180 Put Buy 170 Put 18

19 3 ROST Daily Graph ADX < 20 and Overpriced Options 19

20 For the Iron Condor you want to identify Delta less than 20 with High Open Interest Options On the Call side you will use the and the Now try and match the Delta s on the Puts 20

On the Put side use 52.50 and 50.00 The short call has a Delta of.135 and the Put.143.

The Iron Condor also needs the strikes the same distance. In this case 2.50 apart.

21 On the Put side use and The short call has a Delta of.135 and the Put.143. This is the closest match you could get. The Iron Condor also needs the strikes the same distance. In this case 2.50 apart. The Reason this is called a Delta Neutral Trade is because when all 4 Legs are combined the Delta should be very close to zero. 21

22 You make money based on Time Decay. As each day passes and price stays in the wings you make money. SPY Overpriced & ADX < 20. Let s pick some options 22

23 Delta Less than 20 We ll move to the 216 for insurance. 23

Be more conservative on stocks (less distance) & more aggressive (more

24 Pro Tip No rule for how far apart. Remember increased distance = more credit but more monetary risk. Be more conservative on stocks (less distance) & more aggressive (more distance) on indexes. The Short Call had a Delta of.17. Let s find a matching Put The is a perfect match. 24

25 Since we bought insurance on the Call $2.00 above the short call. Move $2.00 below the Put. Remember the distance between the strikes must match on both sides. Buy 216 Call Sell 214 Call Sell Put Buy Put 25

26 Delta Neutral Keep the Delta in mind. We re going to build on this in later modules for adjustments. 26

27 4 In the case of the SPY Iron Condor you are selling this spread for.50 & receiving a $50 Credit per unit. 27

28 Since you are selling this for.50 to take profits at 25% you would enter an order to buy the spread back at.38. This gives you a.12 profit per unit. Math Tip: Either do.50 / 4 =.125 and then subtract the.125 from.50 to get.375 which rounds to.38. OR Type.50 25% in your calculator. Remember You sold it for $50. To make money you have to buy it back cheaper. In this case at $38. Your Profit Target would be $12. (25% of $50) This example shows 1 unit or 1 contract for each leg of the trade. Profit Target for 10 contracts = $120 28

29 Similar to the individual spreads you never want the short strikes to go ITM. The SPX is 10X the size of the SPY. This trade on the SPX with 10 contracts would generate $4,600 in credit. 29

30 Using the 25% Profit Target you would take profits at $1,150. In trading terms, you would sell this spread for $4.60 ($460 per contract) You would then try and buy it back for $3.45 ($345 per contract) That gives you $115 in profit per contract. 30

31 SPX 25 % of Max 50% of Max 75% of Max Expiration Add slide Showing, Profit the Tasty Profit Trade stats Profit P/L $1,388 $1,323 $1,286 $585 % of Wins 96% 86% 79% 68% Avg. Days Held Avg. P/L per Day $3.14 $1.65 $1.29 $0.44 Biggest Loss -$335 -$335 -$335 -$355 31

32 5 Monthly Options Expire the third Friday of the month. 32

33 Condor Week is the week after this Sell an Iron Condor that expires the following Month 33

34 On April 19 th, ADX is less than 20 on the SPY. Let s sell some options with Delta s less than.20 34

35 Here are the short strikes 215 Call and Put. Both have Deltas ~ 19. We ll buy insurance $5.00 away lots of Open Interest. 35

36 8 Days later Almost there. A similar trade on the SPX $1,300 in 8 days Trade has met profits. 36

37 37

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Trade Management Game Plan. Module 5 Review 5 Key Principles Trade Management Techniques Big Mistake To Avoid Action Items To Take

Trade Management Game Plan. Module 5 Review 5 Key Principles Trade Management Techniques Big Mistake To Avoid Action Items To Take Disclaimer The VectorVest Program ( the System ) which we promote is not intended to provide you with specific or personalized advice. In all circumstances where you are looking to apply the System to