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Index Credit Spreads & Iron Condors + Directionals to

Hedge/Augment Our Monthly Income

DATE 2006

Brad W. Reinard – Editor in Chief


www. MonthlyCashThruOptions.com
Directionals vs. Non-Directionals

  Directional trades are more difficult, stressful & less consistent


  60% go the wrong way
  Takes a lot of time to:
•  Research the trades
•  Place the trade and stops, and manage the stops
•  Replenish the trades that stop out
•  Handle the anxiety of trades going the wrong way
•  Will lose 40% of investment if underlying goes the wrong way
  Far OTM index credit spreads & Iron Condors
  Take less time – 2 hours/week
  Fewer trades needed
  10 out of 12 months expire profitable
  Trades last 30 to 45 days
  Get results monthly
  50% to 65% ROI annually
  Adjust the trades 2 months/year

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Directional Trades For Macro Cycles

 Crash of 2008 has created opportunity


  Watching120 stocks
  Building Jan10 bullish trades

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Longer-Term Bullish Trades
Targeted to return 150% to 300% in 6 to 9 months

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Methodology to Find Jan10 Bullish Plays
  Scan Value Line database (650 stocks)
  Big-caps (>$10B)
  Timeliness rank 1- 4
  Financial health rank A++, A+, A, and B++
  >$15/share
  Trades >500k shares daily
  Scan for stocks that were beaten down by crash (150 stocks)
  100 day SMA below 200 day SMA and 50 day SMA below 100 day SMA
  Visually identify stocks that grew last 3 to 5 yrs and then crashed
  Eliminate stocks that don't offer January 2010 (120 stocks)
  Find out when earnings will be announced

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Methodology to Find Jan10 Bullish Plays

  We now have a list of 120 high quality, big-cap companies


that have:
  Solid balance sheets with a lot of cash
  Are fundamentally strong
  Have a lot of liquidity
  Have a following by mutual funds
  Value Line analyst believes the company will continue to grow
revenue and earnings
  Wall street liked the company and the stock grew nicely over the last
3 to 5 years
  Were sold off 40% to 50% during the Oct 2008 crash

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Jan10 Bullish Plays – Trigger Point

  Run a 10/30 bullish crossover scan weekly


  Fundamental analysis tells us if the company is good with growing
sales and earnings; technical analysis tells us when to get in and
when to get out
  Then look at additional indicators such as support/resistance,
ADX, MACD, Elliott Wave, 5/35 & 10/70 oscillators and
Accumulation/Distribution to make a determination if the stock is
truly breaking-out, or if it is still consolidating and building a base.
  Build a directional, bullish option trade that will take advantage of
an upward trending stock and one that can handle a gradual drop
in volatility.

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Honeywell – Weekly Chart

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Honeywell – Daily Chart

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Honeywell – Straight ATM Jan10 Call

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United Technologies Weekly Chart

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United Technologies Daily Chart

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United Technologies - ATM Jan10 55 Call

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Henry Schein Weekly Chart

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Henry Schein Daily Chart

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Henry Schein Straight Jan10 40 Call

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Index Credit Spreads & Iron Condors

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How to Make Consistent Money in Credit Spreads

  Focus on only a few underlying securities


  We like the RUT and SPY
  Become an expert on the underlying
  Become a good technician where you can put money behind
your analysis
  Be patient when opening trades and trust your technical
analysis

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DOW Weekly Chart

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SPY Weekly Chart

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RUT Weekly Chart

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SPY Daily Chart

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DOW Daily Chart

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IWM (ETF that tracks the RUT) Daily Chart

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Buy a Call on the RUT

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Sell a Call on the RUT

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Buy & Sell a Call - Bear Call Spread

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Far OTM Bear Call Spread

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Buy a Put on the RUT

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Sell a Put

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Sell & Buy a Put – Bull Put Spread

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Better Bull Put Spread

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Far OTM Bear Call Spread

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Bull Put + Bear Call Spreads = Iron Condor

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Trading Rules – Primarily for the RUT

  When 35 to 45 days out


  Enter Trade with 60+ point cushion for each spread
•  Delta for the short leg is around 9 to 11
•  Shoot for 50 to 70 cents for the Bear Call Spread
•  Shoot for 65 to 95 cents for the Bull Put Spread
•  Slowly collect your fills over a week or two
  Use 10 point spread between short and long positions
  Open Bear Call spread on an UP-day
  Open Bull Put spread on a DOWN-day
  Be patient on the fills; trust your instincts and technicals to get good
fills
  On the strong UP days or DOWN days you can feel the adrenalin….put on
your seat belt and collect some premium.
  Don’t get greedy….keep the safe zone wide
  Be careful placing the Bear Call Spreads to complete the iron condor
  Completing the iron condor is opening a maintenance-free trade

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Adjustments

  Watch the technicals, including candlesticks, Bollinger bands,


moving averages, volume, trend lines, 5/35 oscillator, past support
and resistance levels
  Watch the VIX and if it starts climbing, a storm might be coming
  Watch the Delta on your short legs. If they increase from 10 up to
17, we need to be careful
  Move additional cash into your secondary brokerage account if
these things are happening

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Example 1 – Iron Condor on the SPX

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7% Move on the SPX in May/June 2006

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Then Our Short Put is Under Pressure

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Big Picture of the SPX – Weekly Chart

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Adjusted Iron Condor

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Example 2: Oct08 Bull Put Spread

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After the Oct08 Crash

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One Adjustment Strategy

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Transform it into a Bear Put Spread

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Converting it to a Bear Put Spread Paid Off

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After Rolling Oct into Nov

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ROI – About 45% to 6% annually

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ROI Summary

   2008  2007  2006 


January  ‐11.0%  6.0%  6.0% 
February  13.0%  8.0%  7.0% 
March  8.5%  8.0%  12.0% 
April  10.5%  4.0%  5.0% 
May  10.0%  0.0%  3.0% 
June  9.5%  8.5%  ‐7.0% 
July  ‐10.5%  10.5%  5.0% 
August  3.5%  ‐5.0%  7.0% 
September  11.5%  9.5%  4.0% 
October  ‐35.0%  8.0%  7.0% 
November  13.0%  7.5%  0.0% 
December  15.0%  8.5%  5.0% 
Yearly Total  33.0%  63.0%  42.0% 

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Thank You

 www.MonthlyCashThruOptions.com
 brad@monthlycashthruoptions.com
 Sign-up for a 45 day free trial

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Appendix

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MACD Indicator

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ADX (DMI) Indicator

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Accumulation/Distribution Line

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