1. Investools Basic Options Workshop December 12-13, 2008
Instructor
Darren Kimoto

2. Bullish Strategies long stock long call short put long call vertical
short put vertical

3. Bearish Strategies short stock long put short call long put vertical
short call vertical

4. You should know at least two strategies for each market posture
Neutral Strategies
covered calls
You should know at least two strategies for each market posture

5. Long Stock (Un)limited risk to the downside No time decay
Delta of 1.00
May receive dividends
Able to sell covered calls against

6. Short Stock Unlimited risk to the upside Dividend risk
Can be hard to borrow
Pay interest

7. Long Call The right to buy stock Stock substitute (less cost)
Limited risk (stop not required)
Pay time decay
Price must move beyond breakeven

8. Short Call The obligation to sell stock Unlimited risk
Collect time decay
Do not need price to move

9. Long Put The right to short stock
Short stock substitute (except debit)
Not affected by hard to borrow
Limited risk (stop not required)
Pay time decay
Price must move beyond breakeven

10. Short Put The obligation to buy stock Purchase stock for cheaper price
(Un)limited risk (almost as long stock)
Collect time decay
Do not need price to move

11. Credit Spreads OTM more conservative Collect time decay
Do not need price to move
Want to hold for less amount of time (to mitigate risk)
If wrong, you can convert to a long option
If possible, allow time to decay before exiting
NEVER take a max loss

12. Debit Spread OTM more aggressive More of a directional trade
Pay time decay
Price must move beyond breakeven
Want to purchase enough time for price to move
Exit - same as you would a long call

13. Debit / Credit Spreads
On TOS platform, to construct a custom spread in SINGLE mode
Click on first leg, then CTRL click on second leg
This will construct your custom strikes
Take profits at 80 to 90% of max profit
ETF's are best, if using stocks, beware of earnings, dividends and news
Exit bullish spreads if significant close below support, opposite for bearish
Want 25% rate of return in 3 to 4 weeks
( adjust for equivalent if more or less time )
This gives you a 75% probability of success

14. Covered Calls Same risks and benefits as long stock
(except premium on call and capped reward)
OK to sell ITM covered calls on ETF’s now that bear market has dropped so much
Want minimum 3% profit in one month
( adjust for equivalent if more or less time )
On call premium
If called out

15. Finding ETF's Investools > Investor Toolbox > Funds > ETF
Most liquid - SPDR, ProShares
Top down - Investools > Investor Toolbox > Industry Groups > Big Chart > By Rank
Choose SECTOR (not Industry Group) at the top with the most hits for bullish, bottom for bearish

16. Market Forecast & Market Sentiment
RED line is momentum
BLUE line is near term
GREEN line is intermediate term (8 to 13 weeks)
Follow the GREEN line to determine the trend
If GREEN line and Market Sentiment agree - could be a home run
Look for clusters - they work 70 to 80% of the time
Super Cluster - M.F. and M.S. in same zone (+80 or -20)
Look for Divergences on Market Forecast compared to underlying

17. Home Runs Use market forecast Monthly (very long term)
Weekly (long term)
Daily ( intermediate)
60min (current)
Home runs occur when the long and short term trends agree
ex) a short term uptrend which meets the longer term down trend
These occur at a trend line or major support or resistance
You can do directional trades - long puts/calls or futures

18. General Market Posture
Do this every weekend
Long, intermediate, and short term trends
M.F. and M.S.
Momentum indicator
Be aware of limitations, (MACD, moving average not reliable when sideways)
Re-check throughout the week
Keep a log

19. Build Bullish and Bearish Watchlists
Good or Bad fundamentals
Good volume
Good option liquidity
Good option prices

20. The Key Questions You Must Answer Before Investing
WHAT to invest in
WHEN to enter
HOW MUCH to invest
WHEN to exit

21. Transition Points
As the market transitions from one posture to the next, you need to adjust strategies
When you notice your strategies are not working, the market is probably transitioning
You need to be aware of these transition points
You need to reduce open positions and move to cash at these transition points
The market prices options incorrectly at transition points
Premium is mostly based on time and Implied Volatility (IV)
Need to understand direction, time and IV

22. #1 Goal - Consistency (monthly)
10% home runs
Long calls/puts
Futures
90% consistency
High probability strategies
High probability techniques
Fundamental analysis
Technical analysis
You can make money even if you forecasted wrong

23. #2 Goal - Monthly Income
1% a month to start, then 2%, then 3%

24. Three Required Aspects of Traders
Knowledge
Skills
Psychology
Three intersecting circles within one large circle labeled K, S AND P

25. Knowledge Six Strategies- bullish, bearish, neutral
Every strategy must have written rules with a checklist
If no rules, then paper trade only
Must know - what to trade, when in, how much, when out

26. Skills Practice does not make perfect but correct practice does
Smart people learn from their own mistakes wise people learn from others mistakes
Coaching
Trading Rooms (at least two per week)

27. Psychology Discipline Books Think and Grow Rich - Napoleon Hill
Secrets of the Millionaire Mind - T. Harv Eker

28. Top 10 Mistakes No trading plan - must have a written trading plan
Improper position sizing
Trading against the trend - both stock and market trends
Lack of diversification- asset diversification- strategy diversification
Poor risk management

29. Top 10 Mistakes (continued)
Cutting profits short, letting losers run
Setting unrealistic expectations
Focusing on being right
Timing tops and bottoms
Impatience - leading to overtrading

30. Portfolio Beta Weighting To Adjust for Max Risk
If your portfolio contains mostly S&P 500 stocks or options, can use SPY
Obtain SPY ATR (assume 5.5)
Calculate your max portfolio risk (assume 2%)
If portfolio = $50,000, then $50,000 * .02 = $1000 = Max Risk
Calculate SPY Delta equal to Max Risk
$1000 / 5.5 = 181 = 181 SPY Deltas
Now Beta Weight your portfolio on the Analyze tab using SPY
If portfolio Delta exceeds 181, then you have too much risk
You must decide whether you are bullish, bearish or neutral, based on conditions to determine whether the Delta should be bullish (+ positive) or bearish (- negative)

31. Misc Stuff Darren uses six month options on calendar spreads
Long options - buy enough time plus 30 days
Estimate price move and time to target
Candlestick patterns to trigger an entry
On long puts - exit fast at target, they bounce back quick
Total portfolio invested
Darren has had up to 100% during a bull market
Currently has a maximum of 40% during this bear market
The point of a wedge pattern is usually a support or resistance level

32. Bonus Thinkorswim with Scott Connor
Successful Traders
Use defined risk trades
Use high probability trading strategies
Always keep time decay their your side
When calculating probability of expiring, you must use breakeven price (this can be done on the Analyze tab)
Use THEO PRICE on Trade tab to forward test your trades
more valid than backtesting
Set first trigger OCO to set STOP and TARGET when entering trades