Market Taker Mentoring, Inc.

Dan Passarelli
Market Taker Mentoring, Inc.

MarketTaker.com
twitter.com/Dan_Passarelli

Disclaimer
In order to simplify the computations, commissions and other costs have not been included in the examples
used in this presentation. These costs will impact the outcome of stock and options transactions and should be
considered. Investors considering options should consult their tax advisor as to how taxes may affect the
outcome of contemplated options transactions.
Options involve risks and are not suitable for all investors. Prior to buying or selling an option, a person must
receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available
from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corp., One North Wacker Drive,
Suite 500, Chicago, Illinois 60606. The information in this presentation is provided solely for general education
and information purposes and therefore should not be considered complete, precise or current. No statement
should be construed as a recommendation to buy or sell a security or to provide investment advice.

Copyright 2011 - 2014 Market Taker Mentoring, Inc. All rights reserved.

The MTM Trading

1. Observe/discover
opportunities
2. Analyze technicals
3. Analyze news
4. Analyze volatility
5. State forecast
6. Select strategy

Path

7. Plan exits
8. Execute
9. Monitor position
10.Adjust (if necessary)
11.Exit trade
12.Post mortem

The Big Four

1. Observe/discover
opportunities
2. Analyze technicals
3. Analyze news
4. Analyze volatility
5. State forecast
6. Select strategy

7. Plan exits
8. Execute
9. Monitor position
10.Adjust (if necessary)
11.Exit trade
12.Post mortem

Volatility Analysis
Volatility analysis normalizes option
values
Volatility is very important source of edge

Implied Volatility and Realized Volatility

Definition: Realized volatility is a measure of how
much the underlying stock has moved during the
recent past
Nothing (necessarily) to do with options
Stated in annualized SD

Definition: Implied volatility is a measure of how

cheap or expensive options are, all else held
constant
Markets estimation of future vol?
Stated in annualized SD
6

Implied Volatility and Option Prices

When options prices are rising, that means IV is
rising.
When option prices are falling, that means IV is
falling.
IV is derived from the market.
IV is sometimes more important than directional
movement.

Vega
! Translates IV changes to money

Inverse Relationship Between

Stock Prices and IV
Generally, as stocks go higher, IV goes
lower.
Likewise, as stocks go lower, IV goes
higher.

Volatility and Edge

Vol trader or not, vol is very important!
Affects your variable cost (or income) of
theta
MUST always analyze volatility on every
option trade
Vol analysis is part of traders holistic
forecast
10

Directional Option Trades and

Edge

Directional Option Trades

All the same analysis as trading stocks,
but more
Concerns:
Time decay
Volatility (Implied)
Magnitude of move (reaching strike or not)
Maximizing profit, minimizing loss

The edge advantage

Trading for Edge

Bettering your odds
Edge sources for option trades
Technicals
News
Volatility
Strategy selection

13

The Best Strategy for the Set Up

Maximizing opportunity (maximizing profit,
minimizing loss)
Optimizing: theta, vega, strike proximity
Unique option strategies
Match strategy to forecast
Criteria
Month

Breakout Scenarios
Long call (or put)
Different set ups, different options
Slow trend
Break out
Minor
Major

Strategies
Slow Trend Breakout

Slow Trend

Slow and steady trend

Capture small move
Need immediate participation
Confident in continuation

Slow Trend Play: ITM Strike

In-the-money call
High-delta (70 90)
Stock substitute play

Starts profiting right away

Profits well on small moves
Risk more than ATM or OTM call, but
significantly less than buying the stock
Low theta
Volatility is small, but relevant concern

Benefits and Detriments

Benefits
Starts making money right away with stock
appreciation.
Moves in step with stock well
Low theta (the cost of gamma)

Detriments
Starts losing money right away with stock
decline.
Moves in step with stock well

Strategies
Minor Breakout

Minor Breakout

Maybe a flag-pattern breakout

Directional breakout but not profound
Active traders

Minor Breakout: ATM Strike

At-the-money call
50-ish delta
Leveraged spec play

Profits well on small breakouts

Risk more than OTM but less than ITM call
Highest gamma
Volatility is big concern. Only buy if cheap.

Benefits and Detriments

Benefits
Moves somewhat in step with stock
Highest gamma

Detriments
Moves somewhat in step with stock
Highest theta

Strategies
Major Breakout

Major Breakout

Earnings play, story stock

Spec-ing on a huge directional breakout
Active traders

Major Breakout: OTM Strike

Out-of-the-money call
Small delta (25 35)
Leveraged spec play

Profits best on big breakouts

Risk less than ATM or ITM call, lower
chance of success
Moves to (and through) high gamma
Volatility is small, but relevant concern

Benefits and Detriments

Benefits
Very inexpensive (low absolute risk)
Moves to and through highest gamma when
theres a big move

Detriments
Low probability trade
Far at-expiration breakeven

Trading Iron Condors for Edge

Iron Condor
Definition: one put credit spread and one
call credit spread on same underlying, in
same expiration. Both usually OTM.
Objective(s):
Short-Term: Profit from theta while losing little
to statistical volatility.
Long-Term: Watch stock close on between
both break even points at expiration.

Iron Condor P&(L) Diagram

+

Long
put

Short
put

Short
call

Long
call

Stock at
expiration

Iron Condor Candidates

Technical
Stock in channel
Bouncing off support and resistance that coincides with
strikes

Fundamental No news is good news!

Volatility Implied is moderately expensive
Prices
At least 0.30 nominal credit,
Or 15% of strike width of wings

Iron Condor Example

Technicals
Source: LiveVol

Iron Condor Example

Fundamentals

Earnings: just came out

Dividend: N/A
Story: None

Iron Condor Example

Source: LiveVol

Volatility

Prices not current

Iron Condor Example

Prices

Selecting Strikes
Fancy math
Standard deviation
Probability of expiring/touching
Fixed percent move
Delta

Support and resistance

Strike width Which long strikes to buy?

Iron Condor Example

Source: TradeMonster

Prices

Prices not current

Iron Condor Example

Buy 1 44 put at 0.51
Sell 1 45 put at 0.77
Sell 1 48 call at 0.58
Buy 1 49 call at 0.34
Credit 0.50
Max Gain =0.50
Max Loss =0.50
Break Evens = $44.50 and $48.50

Prices not current

P&(L) Diagrams
Iron condor example

$44

$45

$48

$49

Stock at Expiration

Iron Condor Example

Buy 1 44 put at 0.51
Sell 1 45 put at 0.77
Sell 1 48 call at 0.58
Buy 1 49 call at 0.34
Credit 0.50
Delta = -0.00
Theta = +0.01
Vega = -0.02

stock@ $46.29

Time Spreads and Edge

41

Time Spread Basics

Time spreads: aka calendar spreads, horizontal
spreads
Buy one option, sell another that is the same
type, same strike, but a different month.
Long time spread, means buying the option with
more time until expiration (i.e. greater value)

42

Typical Long Time Spread

Buying Feb-Mar 55 call time spread at 0.78
Courtesy of LiveVol

Absolute Risk Long Time Spread

P&(L) Diagram
Profit

Shared Strike Price

Loss

Underlying at
expiration of
short-term option

Incremental Risk Long Time Spread

(Measured by the Greeks)
Buying Feb-Mar 55 call time spread at 0.78
Delta
Gamma
Theta
Vega

Positive or negative
Negative
Positive
Positive

Example:
Long Time Spread

46

Stock Chart Analysis: MGM

Prices not current

47

Long Time Spread

Buy May17-May30 24.5 put time spread at 0.35

Absolute Risk:
Long Time Spread
Profit

24.5
(0.35)

Loss

Stock at May17
expiration

Incremental Risk:
Long Time Spread
Buy May17-May30 24.5 put time spread at 0.35
Delta
Gamma
Theta
Vega

0
- 16
+ 3
+ 1

Trade Criteria

51

Fine Tuning
Verify vols in option chain
Sanity check by reading news
Google finance
Yahoo! finance
Other

More Ways to Generate Income

with Options

Income Generating Master Sessions

Finding Great Income Trades

Secrets to Analyzing Income Trades
Legging and Execution Techniques
Complex Income Trades
Adjusting Income Trades
Adjusting Income Trades II

Video Series + Bonuses

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This has been a presentation of

Market Taker Mentoring, Inc.

MarketTaker.com

Dan Passarelli
Dan@MarketTaker.com
Twitter.com/Dan_Passarelli
(815) 922-3329