1. Geometric Option Gains Follow-up
By Ken Hodor
12/17/11

2. Preface

3. Trading Rules Jesse Livermore
Buy rising stocks and sell falling stocks.
Do not trade every day of every year.
Trade only when the market is clearly bullish or bearish.
Trade in the direction of the general market.
If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Enter trades after market action confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.

4. Useful Trading Guidance Jesse Livermore
Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
The highest profits are made in trades that show a profit right from the start.
No trading rules profit 100 percent of the time.
Markets are never wrong - opinions often are.

5. Main body of presentation
The Meat of the presentation…
or if Vegan
The Beans of presentation
Main body of presentation

6. The Expectancy FormulaW P E = - L R
Where
E = Expectancy
W = Winning Percentage
L = Losing Percentage
P = Average Profit (Win)
R = Average Risk (Loss)
If E > 0 you make money
If E < 0 you lose money

7. Biased Coin Toss Negative Expectancy
If Heads
If Tails
Win $1 per $1 bet
Expectancy < 0
Would you play such a game?
Lose $2 per $1 bet

8. Biased Coin Toss Positive Expectancy
If Heads
If Tails
Win $2 per each $1 bet
Expectancy > 0
Would you play such a game?
For advanced money mangers
What is the optimal percent of portfolio to bet?
Optimal f = 25%
Lose $1 for each $1 bet

9. Which way will market go?
We don’t know
Sell options
With 50/50 price movement up/down--bias is against you
Expectancy < 0
You have to predict direction to put probabilities in your favor
Expectancy > 0
Buy options
Biased in your favor using exit if touched
50/50 price movement—up or down
Expectancy > 0 by design
DO NOT wait for expiration—where Expectancy < 0

12. Exploit Non-linear Curve
A 3% move in my favor >100% gain—doubles!
Call move is up
Put move is down
A 3% move against position ~40% loss
Call with underlying moving down
Put with underlying moving up

13. AAPL 50/50 odds +- $10 Init Price New Price Init Option Price
New Opt Price
%Gain/loss
$390
$400
2.9
6.7
131%
$380
1.8
(38%)

14. Expectancy AAPL 50/50 odds +- $10
Init
Price
New
Option Price
Opt Price
%Gain/loss
Expectancy
$390
$400
2.9
6.7
131%
1.9
$380
1.8
(38%)
-0.55
1.35
Wow !

15. Bias Likelihood
50%
chance of a win
SPY
Init Price
New Price
Init Option price
New Option Price
Gain or loss
Expectancy
125
128
0.74
1.87
153%
0.565
122
0.35
-53%
-0.195
0.37
GLD
170
174
1.35
2.35
74%
0.5
166
0.77
-43%
-0.29
0.21
CSCO
18.6
19.6
0.25
0.8
220%
0.275
17.7
0.04
-84%
-0.105
0.17
SLV
31.85
32.85
0.36
1.02
183%
0.33
30.85
0.11
-69%
-0.125
0.205
AAPL
390
400
2.9
6.7
131%
1.9
380
1.8
-38%
-0.55

16. WOW! Bias Likelihood 80% chance of a win SPY Init Price New Price
Init Option price
New Option Price
Gain or loss
Expectancy
125
128
0.74
1.87
153%
0.904
122
0.35
-53%
20%
-0.078
0.826
GLD
170
174
1.35
2.35
74%
0.8
166
0.77
-43%
-0.116
0.684
CSCO
18.6
19.6
0.25
220%
0.44
17.7
0.04
-84%
-0.042
0.398
SLV
31.85
32.85
0.36
1.02
183%
0.528
30.85
0.11
-69%
-0.05
0.478
AAPL
390
400
2.9
6.7
131%
3.04
380
1.8
-38%
-0.22
2.82

17. What type of a Trader are you?
“Seat of the pants”—no plan
Conservative
Take money and run
Play with house’s money only--ASAP
Between Conservative and Aggressive
Aggressive
Gambler
Optimal f trader

19. Aggressive

20. Conservative Play with House’s money ASAP

21. Conservative Take money off table

22. Which Month to buy? Front month always provides best ROC
Projected price indicates exit before expiration
Last week of expiration
Start migrating positions to next cycle

23. Which Strike to Buy 30 delta gives biggest bang for buck
Good market size
Many Investools’ traders are trained sellers of options 

24. Possible Exit Rules Pick one and stick with it
Exit if lower low
Exit if breaks trendline—Gann, lows, support
Exit by indicator—stochastic, AMA, RSI, CCI…
Exit at end of Jenkins’ cycle
Exit if breaks support
Exit if hits stoploss
Exit if you made enough $ and don’t need any more
One is not necessarily better than another

25. Buy or Sell Options?
Long buying strategies return in excess of 100% per month ROC (Return On Capital)
No upside restrictions
Bias is with buyer
As long as get profit and exit
P&L Curve is concave up—like a smiley face
Selling options
Lucky to make 50% ROC
Returns are capped
Bias is against seller
P&L Curve is concave down—like a sad face

26. What type of a Trader are you? Money Management
Get back all $ and play only house’s $ ASAP
Use stop losses along the way
Trade till all $ back then no stops
Exit on pull backs–lower low on underlying
Set a exit target—2X, 4X, 8X, 16X…
Gambler—let it all ride…exit…what exit?

27. Conclusion Start with small initial position
Add onto position only if profitable
Exit based on your trading style

28. References http://www.jesse-livermore.com/trading-rules.html
Portfolio Management Formulas—by Ralph Vince
Utilize long option probabilities and non-linearities—Ch. 4