Options Small Account Trading

Risk Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future
returns. Tradingpub.com and all individuals affiliated with this site assume no responsibilities
for your trading and investment results. The indicators, strategies, columns, articles and all
other features are for educational purposes only and should not be construed as investment
advice. Information for futures trading observations are obtained from sources believed to
be reliable, but we do not warrant its completeness or accuracy, or warrant any results from
the use of the information. Your use of the trading observations is entirely at your own risk
and it is your sole responsibility to evaluate the accuracy, completeness and usefulness
of the information. By registering for this event your information may be shared with our
educational partners. You must assess the risk of any trade with your broker and make
your own independent decisions regarding any securities mentioned herein. Affiliates of
tradingpub.com may have a position or effect transactions in the securities described herein
(or options thereon) and/or otherwise employ trading strategies that may be consistent or
inconsistent with the provided strategies.
Privacy Policy
How to Get the Most Out of This Book
Thank you for downloading How to Trade a Small Account. This book is designed for beginning,
intermediate and advanced traders. The presenters in this book are leading experts in trading
Stocks, Options, and Nadex markets.
As you read this book, you will be exposed to multiple strategies that have high probabilities of
success and/or high profit. Most of the strategies in this book are divided into three sections:
The Game Plan An introduction to a charting technique. The strategy is then thoroughly
explained along with illustrations and examples.
The Movie Once you have read the chapter, you can view the complete webinar on
the strategy. You will gain a better understanding of the strategy along with multiple examples not
covered in the chapter. In some cases, the presenter switches in to live trading to demonstrate the
strategy in action. In many of the webinars, the presenter also fields questions from attendees.
Special Offers If you really like a strategy, you can follow the presenter and the strategy.
There are thousands of dollars worth of trading tools, indicators, training and mentoring services,
books and videos available at steeply discounted prices.
In short, you will have all of the information you need to trade your new favorite strategy tomorrow.
Some of the things you will learn in this book are:
Go-To Options Strategies for Defined, Low-Risk Trading
How to Minimize Risk and Maximize Gains with Options
Using Flight Combat Tactics to Trade Options
How to Trade the DAX and GBP/USD London Breakout with Nadex
Using the Ichimoku Cloud to Identify the Best Options
At TradingPub, it is our sincere hope that you take away actionable information that you can use
when you are done reading this book. You will also learn more about futures trading and will discover
strategies that are best suited for your trading personality.
Finally, make sure to subscribe to TradingPub. We provide free ebooks, webinars, on-demand
videos and many other publications for active traders in all of the markets. Our presenters are
world-renowned industry experts and our content is provided free of charge in a relaxed and friendly
setting. Cheers to your trading success!
Table of Contents
5 how to trade a small account
By Larry Gaines, Founder, CEO, Power Cycle Trading
16 Minimize Risk and Maximize Gains with Options

By Geoffrey A. Smith, Chief Trading Instructor, Diversified Trading Institute
31 Combat Trade Planning

By Matt Buckley, CEO Top Gun Options
55 How to Add Weekly Option to Your

Trading Arsenal
By Andrew Keene, Founder and CEO, Keene on The Market
69 Trading Earnings Straddles

By Kim Klaiman, Founder and CEO of Steady Options
83 Two High Probability Nadex Strategies You

Can Count On
By Cam White, Partner Relationship Manager, TradingPub
HOW TO TRADE A SMALL ACCOUNT
How to Trade a Small Account

By Larry Gaines, Founder
CEO, Power Cycle Trading
Introduction
My trading career started in 1980 in Houston, Texas as foreign crude oil
cargo trader. In 1990 I became the Executive Vice President for one of the
largest oil trading companies in the world and ran their international trading
desk for over 10 years. Today I run my own company, Powercycletrading.
com, where I offer comprehensive trading courses, coaching and trading
services.
My friends at TradingPub asked me to give a presentation on How to Trade
a Small Account and this is such an important topic to me. I started out
my trading career trading big accounts, of other peoples money (OPM),
but when I went out on my own and started trading for myself and it was
my own money the whole game really changed.
Now trading for yourself can be one of the most rewarding jobs on the
planet, if you are educated about what you are trading and if you stay
focused on managing your trading risk.
I tell my clients and members theres no perfect tradertheres no perfect
system its a journey of learning and I am on that journey tooconstantly
learning each and every day
And in my opinion the most important lesson in trading is that you should
5
not be just focused on making money but should really be focused on

managing your trading attitude and risk and then the profits will come
My real Aha trading moment came when I reset my trading mindset and
started to incorporate a variety of well defined, low risk Option Strategies
into my trading. To be a successful trader mindset, risk management and
consistency is what wins out and this is what Ill cover in this presentation.
Here are some important actions you can take that will get you started on
your trading journey to becoming a successful trader.
I. Actions & Attitudes of Successful Traders:
Mistakes sabotage every area of our lives, and trading is no exception.

The good news is that we learn from our mistakes. In fact, seeing mistakes
as learning opportunities is the popular approach to viewing human error
and with good reason since they provide learning lessons aplenty, albeit
often excruciatingly painful ones both in the psyche and the bank account.
In over 3 decades of trading, I have probably seen every trading mistake
possible, and Ive even made most of them.
As in life, mistakes seem to recur until we own them and modify, at which
time we overcome that particular error and move on to the next. The good
news is that you can learn by observing and studying the behaviors and
habits of successful traders who have already been in the trenches and
learned from their mistakes. This practice can shave years off of a traders
learning curve. Its all about adopting the powerful actions and attitudes of
successful traders.
There is no perfect trader or perfect system but in order to become a
6
consistently good trader you must constantly be observing not only the
markets, but also other experienced traders to gain knowledge and
wisdom. Its a never ending journey, like most valuable pursuits, but it can
be an extremely rewarding one, both personally and financially.
When you model top traders actions, you make more money. Its that
simple. Theyve figured it out from years of experience, and you learn
from them how to make more money in much less time.
1. Consistently getting in or out of trades too soonor too late
The culprit behind this common error is trading from fear or greed instead
of following a chosen strategy. In trading its not always about trading the
right option, the best model, or the perfect entry; its way bigger than that.
If your attitude is not right, and your trading related actions aren't right,
then even the best technicals can't help generate profitable trading results
for the big or small trader its all the same.
Studies show that 60% to 80% of trading success comes from a traders
mental and emotional state. Great traders are always working to keep their
emotions out of their trading. By developing a state of detachment when
trading, you can neutralize those emotions that can otherwise control your
trading actions.
2. Being a lone ranger
Everyone knows that the nature of trading is to go it alone. Trading

attracts the introverted analytical thinker who generally thrives on hours
of uninterrupted time to completely focus on the next great trade or
7
indicator. The focus time can be beneficial, but the lack of accountability
and team camaraderie is not. Being someone who has spent decades in
the enthusiasm of a live trading room, complete with both shared cursing
and celebrations, I can say that camaraderie is real, and its an asset. The
value of camaraderie explains the proliferation of virtual trading rooms
over the past few years, and my drive to have created one of the first.
3. No plan for success or goals
Have you ever noticed how easy it is to jump into a trade that is outside of
your trading plan? A plan encourages self-discipline and accountability. A
good plan includes the following features.
Capital allocated to trading
Defined risk reward
Time frame for holding trades
Working hours
Parameters around paper vs. real trading
Structured time for accounting and review
Tested model or system
Start with a plan and stick to it. Review it often and adapt it as you learn
and improve.
8
4. Trading a model that doesn't work

Time and expense are usually the perpetrator with this costly saboteur.
The perfect analogy is buying something that doesnt work when youve
gone shopping just so you havent wasted your time. The trader thinks
about how long it took to learn the system, or the investment, often in
the thousands, that was made to purchase the model. The solution is to
buy a proven system from a demonstrated expert, and get the support to
correctly learn and implement the model swiftly.
5. Not thoroughly reviewing trades and accompanying charts
Lets face it; its much more enticing to trade than to review trades, but
the reality is that successful trading comes from reviewing what you did
that worked, and doing more of it. Its that simple. Without consistent time
dedicated for review, this cant be done.
Take time to review each trade; this is your money, and your business.
Write the answers to the following questions in a log:
What worked?
What didnt work?
What were the indicators doing?
What time of day was the trade made?
Why was the trade placed?
Why was the trade exited?
Could a slight tweak have made the trade more profitable?
9
6. Not accounting for trades

Have you ever known a trader that likes to do accounting? Traders love
the excitement of the trade, but hate the boredom of all the surrounding
responsibilities, such as accounting, taxation and documentation.
Boredom, avoidance of responsibility and denial are the backing behind
this common slip-up. Its a lot easier to think about that great winning trade
you made than to look at hard after commission numbers. Numbers dont
lie, but they are a strong teacher for how to improve results because they
allow you to see whats working and do more of it.
The solution is to schedule time for accounting. Its so easy now with
downloads from most brokers. With zero costs, youll then have the numbers
to reveal the most potent answers you can get to improve your trading results.
7. Lack of goal setting

As Peter Drucker said What gets measured gets done. This paradigm is
a step above accounting and review. Goal setting is about taking the big
picture view of your overall life and money. Take this a step further and
think about what your life will be like upon achieving those results.
Define what you want to make from your trading business. Review it
often. As Drucker said, measure your results, and then compare them to
your goals. This motivating habit drives you to do the mundane, like to
accounting. It drives you to show up to trade when you want to play golf
instead on that perfectly beautiful day.
10
8. Trading with the emotions of fear and greed

Trading emotions could be an entire book, and it often is; your beliefs
about money go all the way back to your childhood. What was happening
in your childhood home around money? Was there never enough? Were
you taught to manage money? Was there predominantly fear or greed? As
woo woo as this sounds, taking a few minutes to think about this unseen
force can quickly and easily help you spot those same patterns in your
trading.
The way successful traders overcome this powerful saboteur is by trading
from a plan, which allows complete detachment. A simple exercise to
discern whether emotions affect your trading is to paper trade for a few
days. Notice if the results are different from real trading. Of course, live
trading can provide slightly different results due to the actual fill; take
this into consideration, account for it and try to see how differently your
trading results are when real money is not changing hands vs. when it is.
This easy little application can reveal powerful insights about how your
emotions may be hurting your profits.
Another clue is to notice how you feel when you trade. Does your heart race
when you place a trade? Are you unable to leave your charts beyond the
time designated in your trading plan? These are signs of emotional trading.
Some of the best traders in my virtual trading room have consistently
exited the room promptly at 9:30 daily. They are done, based on their
trading plan. Its unemotional and detached.
Fear causes traders to miss out on winning trades, or close trades before
the optimum exit. Greed causes traders to stay in trades beyond their
planned exit, or to take trades outside of their plan. Emotions exhaust
traders.
11
First, recognize your money patterns and own them. Choose to not allow
someone elses past issues affect your trading results. Again, the crucial
key is to detach emotionally from your trading. The best way to detach is
to trade from a well thought out plan.
As you read this article, which points made you squirm the most? The
most uncomfortable points will be the first area to focus on to improve
your trading results. Discomfort signals denial or expansion. The great
thing is that most of the points above are absolutely free. Thats a risk
reward you dont see often in the trading world. Ill take it.
II. An Option strategy guide to get you started:
General Option Guidelines:
When Implied volatility is high it is better to sell options

(Credit Spreads, Iron Condors)
When Implied Volatility is low its better to buy options

(Delta 50 to 70) & Vertical Option Debit Spreads
When a market is in a consolidation phase or a volatility

compression squeeze, look at this as a sign that a low volatility
environment is about to change into a high volatility environment.
And change your trading style accordingly.
12
Go-to-Option Strategies ~ for defined, low risk trading:
Long Calls or Puts ~ can be used for all day trading, swing
trade set-ups and long term trend trades. Best when implied
volatility is low, generally use a 60-70 delta for strike. A defined
risk with unlimited profit upside
Vertical Debit Spreads ~ can be used for all Swing Trade Set-
ups & long term trend trades. Best when implied volatility is low.
Defined risk, low capital cost, low time decay but profit upside is
capped
Long Butterfly ~ this spread is a neutral strategy that is a

combination of a bull call debit spread and a bear call credit
spread. It is a limited profit, limited risk options strategy. There
are 3 striking prices involved in a butterfly spread and it can
be constructed using calls or puts. Used when you think the
underlying stock will not rise or fall much by expiration. Trade
results in a net debit. Short volatility & price pinning strategy.
Credit Spreads ~ can be used for day trades, swing trade set-
ups & long term trades. Best used when implied volatility is high.
A defined risk, takes advantage of time decay & a sideways
price action but profit upside is capped. Three variations; OTM
(negative risk ratio), ATM (neutral risk ratio) & ITM (positive risk
ratio). Short volatility & time decay strategy.
13
CONCLUSION
Trading a small account offers the single trader a big advantage,
stealth. The single trader can easily execute trades that the big
hedge funds and institutional traders just cant without muddying the
waters. This becomes a great trading advantage and an opportunity
that can turn that small trading account into a large trading account.
Once you have the right trading mindset and learn to use some well-
defined, low risk Option Strategies your journey to successful trading
will become a short one and well worth the time and effort you put in.
THE MOVIE
Watch the Video Larry Gaines covers how to sell options using defined,
low risk option spreads to generate a consistent monthly income stream.
THE OFFER
Larrys option course, Trading Options For Income is a complete
step-by-step program on how to trade the option credit spreads for
consistent monthly income. Credit spreads are sort of like having
insurance on your home, but this insurance actually pays youand
pays you very well (unlike the miniscule returns from common annuity
contracts touted as income tools). This comprehensive option credit
spread course is over 5 hours of training that you can watch at your
own pace as often as you want. Plus, properly structured credit spreads
can grow your account from small to largeClick here to learn more!
14
ABOUT THE AUTHOR

Larry Gaines has become one of the leading
coaches for successful traders and investors.
He continues to develop and host, every month,
new trading educational programs to help traders
and investors generate greater income from their
investment capital with less risk exposure.He
founded PowerCycleTrading.com and the Power
Cycle Virtual Trading Room following over 30 years
of professional trading experience in the commodity
and equity markets.
During his tenure as head of an international trading company that often
traded a billion dollars worth of commodities in a single day, he learned
first-hand the necessary elements of a successful trading system and the
use of options.
Using this in-depth knowledge and experience, Larry developed the
Power Cycle Trading Model to allow for greater profits with a more
disciplined, systematic degree of trading success.

15
Minimize Risk and Maximize

Gains with Options
By Geoffrey A. Smith
Chief Trading Instructor, Diversified Trading Institute
There are many ways to trade options or use options in trading. Many
people trade options for the sole reason that they are much cheaper than
trading stock. It is kind of interesting that it is rare to find an options
trader that would ever buy a stock, or a stock trader that would ever buy
an option. I believe that both camps are wrong. You need to be able
to trade both, or at least take advantage of both. The reason for this is
that if you trade stock, you can minimize risk and maximize gain using
options. If you trade options, you do not get the full benefit of the stocks
move if you are right, and you run the risk of being assigned the stock,
which scares option traders, and it shouldnt. Im not going to get into the
fundamentals of options, but lets digress for a paragraph or two to get
some understanding before we talk about the strategy I want you to learn.
Buying is the opposite of selling. Long is the opposite of short. Bull is
the opposite of bear. There are only two things that matter in options; if
buying an option, it must go beyond strike (in the money) for you to be
paid on expiration day, and if selling an option short, you can end up long
or short the underlying stock at the strike price. If you keep these two
things in perspective, your option trading will go a little smoother.
If you buy a call option, you are buying a right, not an obligation, to purchase
a stock at a specific price (the strike price) on or before a specified date.
16
When buying a call option, you want the stock to go higher. If you buy a
put option, you are buying the right, not the obligation, to sell a stock at a
specified price on or before a specified date. When buying a put option,
you want the stock to move lower. Now the opposite side. If you sell a
call option (going short the option) then you are selling the right to buy to
another party, and if they exercise their right to buy, you must sell to them
(you are taking on an obligation) and you could end up short the stock
unless you already own at least 100 shares of it. Selling a call option
when you do not own the stock is called a naked call, but if you own the
stock it is a covered call. If you sell a put option, then you are selling the
right to sell to another party, and if they exercise their right to sell, you
must buy from them. If you are short the stock, you will buy it back (this
is a covered put), but if you are not short the stock, then you could end up
long the stock.
Now that we have that out of the way, lets use these concepts to try and
make a little money. Lets make the assumption that we want to buy a
stock. Lets pick an expensive stock to prove a point and then we will look
at a normal priced stock. Everyone has heard of Amazon, so we will
start with it. Below is a daily chart of Amazon (AMZN). You can see back
in April when their earnings came out. Notice since then that Amazon
moves down to the 420 area and then back up to the 430 area. So lets
say we want to buy AMZN when gets back down to 420. Now we can
put a buy limit, good till canceled, in and wait for AMZN to sell back off
and exercise our limit order. Then when it gets back up to 430, sell it and
make $1000 for every 100 shares we buy. If we buy the stock, we will
need to put a protective stop below 415 (notice that is the lowest it has
been since earnings), so we will risk about $500 to make $1000. Nice
trade, pat yourself on the back. Now lets do it using options.
17
Daily AMZN Chart

Same trade with a twist. Instead of putting in a buy limit, lets sell a 420
naked put option. Now this does two things; a) if AMZN gets to 420 or
lower at expiration, you will end up long the stock (that is what is desired in
this case), and b) by selling a put option, you will bring in money. In other
words, the market is going to pay you to place a buy limit on a stock (that
is pretty cool) Below is an option chain for AMZN. Based off the chart,
AMZN is trading at 430.92, so AMZN is going to have to drop 10 points to
exercise us. So it would probably be good to wait a while before selling
the put to get more premium, but since we cannot put extended time in
an article, we will use what we have (the concept is the same). Look at
the Jun 12 15 options. The 420 put is selling for around 3.00 (midpoint
between bid and offer). So if we put an order to sell at 3.00 and are filled,
we will bring in $300 of credit. If by June 12, AMZN does not get to 420,
18
we keep the $300 just for trying.

Note: if AMZN drops to 420 from 430, the put option will increase in value
and your account will show that you are losing money on the option. This
is not the case unless you buy it back at a loss. Remember the end game,
you want to be long the stock from 420. AMZN will have to be below 417
for you to start to lose money (420 3 (premium brought in from the sold
put) = 417.00). Let them exercise if they can, that is what we want.
If we get exercised, then we will put a stop below 415 and 414.89 (just
below 415 by a little bit), Risking $511. We will then sell a 430 covered
call and probably get another 3.00 or so.
So total premium brought in will be $600. If AMZN drops and stops us

out, we will need to buy back the covered call (that now has turned into a
naked call), but since AMZN has dropped, the call will decrease in value
and we will probably be able to buy it back around 1.00 or so. So we get
$500 in premium and lose $511 on the stock for a total of $11 loss. Now,
if AMZN goes up, and we get called away at 430, we get $1000 off the
stock and $600 off the options for a total of $1600. So in this case, we are
risking $11 to make $1600.
Which scenario do you like best, a 1:2 risk/reward or a 1:145 risk reward?
This is the luxury of options.
19
AMZN Option Chain

AMZN is a bit extreme since it is an expensive stock and is quite volatile.
Lets go to the blue chips and grab a stock like Caterpillar (CAT). Below
is a daily chart of CAT. Notice it has support around 85 and resistance
around 90. Next support is around 83, so we will use 82.89 for a stop if we
get filled. Using the same technique lets look at selling the 85 put. In the
option chain below, the 85 put is going for around 0.75. Again, if it does
not get there we get to keep the $75 and try again. If we get exercised,
we place the protective stop at 82.89 and sell a July covered call at 90
for around 1.50. There are weekly options on CAT, however, we want to
be able to finance the protective stop the best we can. By going out to
20
the monthly option, we can get there. If we add the two options together
(0.75+1.50=2.25) we will bring in about 2.25. If we are long from 85 and
need to risk to 82.89, we risk 2.11 on the stock. The premium we bring in
will cover the protective stop. If we get stopped out, we buy back the short
call and will probably lose around $25 or so depending on how much time
is left in the option. If CAT moves up and we get called away at 90, we
pick up $500 from the stock and $225 from the option premium for a total
of $725. Again we can have the standard 1:2 ratio, but the 1:29 ratio of
this trade seems much better.
21
Daily CAT Chart
CAT Option Chain
We do have to throw the glass half empty theory in here since there are
those who are pessimists and will ask, what if CAT is at 80 when you get
exercised, or what if AMZN is at 410 when you get exercised? What will
you do then? Youve got to love those people. First, panic never solved
anything so please get that out of you mind. But think about it very quickly.
We did bring in premium when we sold the put, so we have reduced the
risk somewhat. Next question is, if you just put a buy limit in and is sold
off to that level, what would you normally do? You could sell a covered
call at entry (85 on CAT or 420 on AMZN) and if you get called away, then
you will make nothing on the stock but get to keep the premium from the
22
options, still not losing anything. You could sell at the money calls and it
will reduce your loss considerably, especially on AMZN but not as much
on CAT.
Another thing, what if you end up long the stock, it does not stop you out,
but is not called away from you. Even better in my opinion. You brought
the money in from the naked put and the covered call, and now you get to
sell another covered call.
Before selling the same strike price, however, look at higher strikes, you
may be able to get the same premium as before if the stock has moved
higher.
There are many ways to scan for stocks. Many have their own favorite
stocks that change over time. You will find some stocks that do not have
options. I do not like stocks that dont have options for the simple reason
that I cannot minimize my risk and maximize my gain.
The key is to trade stocks that have some volatility so that the option
premium is higher. Coke (KO) has options but since the stock does not
move much the option premium is low and therefore you cannot finance
the protective stop. Below is a scan for stocks out of the DTI RoadMap
software. It scans for optionable securities that are between $50-$600,
and are recommended buys/sells between June 3 and July 31 (it is sorted
buy highest P&L).
23
Starting in the middle to the end of June, stocks begin to move again after
the when in May go away occurrence is over. Look at the Standard
Deviation (Std Dev) column. The higher the standard deviation, the more
volatile the stock. So I will look at these to see if they are trending with the
overall markets, and if so then they are prospects for trading.
Market direction is also important. You can do this same strategy on
the short side as well. When markets are bearish like we saw back in
2008-2009, selling calls many times did not get exercised, however, if
they did, then sell a covered put to use the premium to finance the stock.
But direction is important. First look at the year open, month open, and
week open, and compare it to the current price of the stock. If the stock
is above all three it is strong, if below all three it is weak. If it is between
24
some of them then look at the indexes (S&P, Dow 30, NASDAQ) and see
if they are doing the same. If they are, then wait until a clearer picture can
be seen. Below is a chart of the S&P and 3M. Notice on the right chart
that the S&P is above the year, month, and week open. However, 3M is
below the year open but above the month and week open. If the market
falls from here, 3M would be a good candidate to sell calls on and see it
drop. But the S&P will need to begin to drop and take out some support
levels before doing that.
25
S&P and 3M chart
The same can be done for futures contracts if you have experience with
them. I like using options on bonds to help pay for the utilities each month.
Utilities, no one likes to pay for them, but they are necessary. To help
pay for the utilities, trading bond futures options seem to work well. Lets
discuss bond futures and their options a bit before we get to trading them.
Bond futures are a commodity that trades in 1/32 increments and are
worth $1000 per point and $31.25 per tick (1000/32 = 31.25). It controls
a $100,000, 30 year US treasury bond.
It is traded by the bond price, not the interest rate of the bond, though, it
is interest rate sensitive. So if interest rates go higher, bond price goes
lower, and if interest rates go lower, bond prices go higher. Bonds open
at 17:00 and close at 16:00 CT. The price is displayed in decimal form or
with a dash; 147.23, or 147-23, and sometimes 14723. The 23 is in 32nd.
So the price is 147 and 23/32. If you multiply that by 1000, the bond is
worth $147,718.75. Par value is $100,000, so in this case you would be
paying a $47,718.75 premium. Economic new will affect bonds, as they
look for inflationary (rising interest rates) or deflationary (falling interest
rates) indications.
Options on bond futures trade in 64th increments. They trade as long
as the bond futures are open and trading, so you can actually get out of
your trade in the middle of the night, if need be. They are still $1000 per
point but since they are half of a bond future tick, then they trade $15.625
per tick. The option are no different than equity options except the price
per point/tick is different and you are only controlling one bond futures
contract, as opposed to 100 shares of stock. You will also notice that the
strike prices are every point.
26
This should give us enough background to discuss the Utility trade.

There are weekly options on the bonds. Some platforms only offer the
monthly options, so beware of that. We are looking for income, so we
will be selling the options to bring in premium. We want the option to
deteriorate over the time of the option. So if we sell a bond option at 16
(16/64) we will bring in $250. If we buy back the option at 5 (5/64), we pay
$78.125 for it. The difference is the profit, 250-78.125 = $171.875. If we
do this 2 to 3 times per month, this will generate $400 - $500 per month,
per contract, to help pay the utilities.
To set up the trade, first we dont want to risk more than $300 per contract
in any trade. So if we sell an option at 16, then if it doubles or goes 19
ticks against us, then we will get out of the trade. If using weekly options,
we will not be bringing in much premium, so we will look for something
between 10 and 20 ticks on the options ($150 - $300), and look to get out
between 0-5. Next we need to look at the trend of bonds. Here is a daily
chart on the ZBU5 (September 2015, 30yr Treasury bond future):
27
Notice bonds are in a downtrend. So selling call options will be the safest
play since bonds will have a tendency to go down. We will try to sell
options at the resistance point (R1 or R2). Of course, the closer it is to the
resistance point the more premium that will be brought in and the further
away from that point brings the least premium unless we go out further in
time.
If your platform only does monthly options, then Id use resistance point
further back, but if using weekly options, use the closest. Another thing
to keep in mind, find out when the big economic news is coming out since
bonds will react to it.
Look at the option chain below. Our R1 is around the 154 strike. The June
12 call option is trading at 12/64. The 156 is at 4/64. The 156 is around
the R2 on the chart and a little less risky since bonds have to decline
another point to get to that strike.
So you have to make a decision on which option to sell. Lets be a little
more risky and do the 154 strike. The current bid and offer are 11/64
13/64. If we put an order to sell at 12/64 and get filled, we will bring in
about $187.50.
If today is June 3 and bonds are trading at 149-28, we will have to wait
8 days for the option to expire. As long as the bond futures stay below
154-00 then the option will lose value each day. If there is a big economic
news day next week, we will need to either get out and take the profit we
have, or be ready to exit if the bonds drop off the news.
28
Doing this trade a couple of times a month can cushion the blow of the
bills that come once a month. We cant win them all, but remember, we
will not risk anymore than $300 per contract. So one loss will scratch
one win and a half for the most part. If you have never traded options on
bonds, paper trade it for a couple of weeks to see how it goes. Once you
get the hang of it, start paying some bills.
We have walked through a couple of ways to bring in a little income and
reduce the risk by financing the stops. Buying equities is a good thing,
but being able to gain more on the position from using options can help
boot the account. If we expand to trading options on futures, we can help
pay those utilities a little and have more for the grandkids when they come
over. Remember that there is always risk in trading and we will not ever
be 100%. But taking a little loss is not so bad when the return is much
greater. Good luck trading!
29
THE MOVIE
Watch This Video discussing the trade in this article.
SPECIAL OFFER
Sign up here to get DTIs Trade of the Day video emailed to you each
day for FREE.
ABOUT THE AUTHOR

Geoffrey Smith is DTIs Chief Instructor. He
teaches Level 1, 2, and 3 Core Curriculum
Classes, regular educator and instructor on
the 24-hour Educational TradeRoom, GPS
Coaching, and one of Tom Busbys first
students.
An active trader and investor for 25+ years,
Geof focuses in futures, equities and option
trading including trading commodity option
futures. Geof took an instrumental role in
developing the DTI Method. The Platinum Experience core level classes
took first place in SFO Magazine and Trader Planets STAR awards in the
best trading courses category. Before coming to DTI, Geof was a pipeline
engineer working in Oklahoma and Texas.
30
Combat Trade Planning

By Matt Buckley
CEO Top Gun Options
The most important trading floor for any trader, individual or professional,
is the five-inch trading floor between his or her ears. Having the proper
mind-frame and controlling emotions is critical to making good decisions
under the pressure of the markets and, ultimately, to trading success. It all
comes down to Discipline. We need to know why we are getting in, when
to stay in and when to get out of a trade. At Top Gun Options a quality
trade plan is the foundation for our disciplined execution in every trade.
Flying fighters in the US Navy we planned everything, from a simple 30
minute maintenance flight to a 7 hour combat mission. Every mission had
an objective and we always had a plan to achieve our objectives. These
plans spelled out exactly how we intended to achieve each objective. The
team at Top Gun Options learned how to plan and plan well.
At Top Gun Options we were trading before we joined the Navy to fly
fighters, so we had built up some habits about how we went about our
business of trading. Some were good some were bad, but these habits
lacked Discipline and continuity.
31
Then one day, shooting the breeze at the Officers Club (which is where
we solve all the world problems over a cocktail) it just kind hit us; Why
dont we apply the same planning and execution disciplines that we use
flying fighters in combat to our trading?
After all, our combat plans defined many things, to include: our objective,
tactical mindset, targets, Commit Criteria (our go-no-go decision), the
Tactic we intend to use to achieve our objective, employment method to
achieve the Tactic, our course of action (steps we are going to follow
executing the plan), contingency plans in case things dont go exactly
as planned and we must also have a clear Exit Plan. So this tactical
planning we used every day out on the aircraft carrier, seemed a perfect
fit for the options trading world as well!
You have to plan for combat in this manner, because combat is dynamic,
its dangerous, the battlefield is in constant change and you dont know
where your enemy will strike from next. Sound familiar? Where did this
Greek debt crisis come from, how about Enron or WorldCom? Which
bubble is going to burst next? Whos cooking the books at our favorite
company? Well it seems to us, this definition of combat applies directly to
the financial markets.
Which is why at Top Gun Options, Trading is Combat, because it is!
In this lesson we are going to share with you our planning process. Is it
perfect and suited for everyone? We certainly like it and we believe that
you will benefit by applying the same Discipline to your trading.
32
Defining A Plan
So just what is a plan? You dont have to be a Rocket Surgeon to

understand this one!
A plan is a series of steps to achieve an objective.
This makes sense if youre going to hang some shelves in the garage or
cook a pot roast. A plan is just a recipe and when its complete you have
some more shelves in the garage or a pot roast for dinner.
But, how does this the definition work when you are playing in one of the
most dynamic arenas in the world, where things are constantly changing
and often appear to be directly against us? It still works, but the plan has
to suit the environment where it is going to be executed and we are
executing plans in one of the most complex environments in the world,
the financial markets. So, we need to account for a few more things than
cooking a pot roast.
When I am giving a presentation on planning, I always ask the crowd to

write down the components of a plan. Invariably they are always slightly
different and in many cases folks cant break a plan down into its important
components. This lesson will solve this issue.
33
Why Plan?
Discipline
A trade plan is the foundation for disciplined execution. It allows us to
keep our head on straight when all the talking heads are telling us the
world is falling apart. It memorializes our reason for being in the trade and
helps us make good disciplined business decisions under the pressure of
the markets. It is because we built a plan, before the heat was on, that
allows us to remove as much emotion as possible from our trading. In
short, a trade plan is our tool to keep us disciplined in a trade.
Risk Management
Risk management is built into the plan. We know exactly when to get out,
what our maximum acceptable loss is for the trade and how we are going
to get out or adjust the position to save profits or limit losses. We define
all of this before we get into a tight spot where emotions can take over
and lead us to bad decision making. Emotions: greed, fear, attachment
to a trade, whatever the issue, will influence your decision making. If you
think it doesnt, you are going to spend a lot of money realizing that youre
wrong. Laying out your risk parameters before being under the gun, will
greatly assist you in suppressing your emotions and help you make good
decisions.
In the Top Gun Options Pocket Checklist (OPCL), we layout planning
guidelines for several different option tactics. In each, we identify our
profit targets and maximum risk parameters for each trade to assist you in
building your plan.
34
Superior Execution
When we get down to the brass tacks of trading, its all about execution.
Being disciplined and mapping out our risk parameters before we are deep
in trades, leads to Superior Execution. The decisions we make in the heat
of battle are key to our success in trading. We have a saying flying fighters,
A bad plan executed well is better than a good plan executed poorly, but
a good plan with good execution Discipline is unbeatable! When you go
through our Top Gun Options program, we will go over several options
tactics and discuss optimum execution whether the market is trending
favorable or unfavorable.
Ultimately Discipline, Risk Management and Superior Execution

come down to the individual trader. As traders, we have to commit to
being disciplined. We have to commit to sound Risk Management.
We have to commit to achieving Superior Execution with our
trading. It takes practice and courage to execute your plan, but
the end result is consistent Superior Execution and more profits.
Components of a Plan
A plan has to be tailored to the environment we intend to execute.
The planning process needs to flow sensibly, be easily understood and
address as many potential scenarios as possible that can threaten the
achievement of our objective.
The very first component in any plan is The Objective. As
traders and investors it does not matter if you are trading options,
stocks, commodities, bonds, currencies or anything for that matter.
35
Our objective as traders and investors is universal:
Make Money, Dont Lose It!

This is why we play in this financial arena; there is
no other reason. We want to make money,
not lose it! Every trade plan we create supports
this objectivewe want to make money, not lose
it! If we are wrong in our trade, because we are
not going to get them all right, we want to get out
with minimal damage and keep our money to play
another day.
Since this is our universal objective, we dont need to write it down every
time. It is our guiding precept for trading.
After the objective, a Top Gun Options trade plan has seven components,
designed specifically for trading options. A Top Gun Options trade plan
Defines our Strategic Mindset

Identifies our Target...which is the underlying we want to engage.
Outlines our Commit CriteriaOur justification for the trade.
Identifies the Tactic we will use.
Sets up our Tactical Employment.
Outlines our Mid-Course Guidancewhich is our trade execution
plan.
36
And finally outlines our Exit Plan

Once the planning process is understood, a trader can complete the
plan in as little as 5-10 minutes. We will go through each one of these
components in this lesson.
Some of these terms may be new to you and thats because they have
their roots in air combat, but they dovetail very nicely into our planning
and, in our view, tighten our focus up another notch. We will explain
each as we come across them, if not; there is a Top Gun Options Terms
glossary in the back of the book for reference.
Strategic Mindset
Our Strategic Mindset is the stance we take regarding how we think our
underlying asset (our target) or the market will perform given current
financial climate. Strategic Mindset falls into one of four categories:
1. Bullish
2. Bearish
3. Neutral
4. Volatile
We can qualify our mindset if needed; we can be short-term bearish if we

think something is overbought and might correct. Or we can be neutral to
bearish or neutral to bullish. It just depends on our analysis of the current
37
situation and guides our Tactic selection to fit our Strategic Mindset.
When developing our Strategic Mindset we take a big to small approach.
We start with the global financial situation and drill down to specific sectors,
then to the stocks within a sector using both fundamental and technical
analysis. As options traders we always take a look at our main barometer,
the VIX, to tell us what the market is thinking and how the current market
is priced.
Our Strategic Mindset drives many our trading decisions. It helps us to

analyze potential positions with an appropriate bias for the current market.
It also gives us a baseline to challenge our own market assertions and
those assertions of all the information we absorb. We dont want to be
mindless sheep following the talking heads on CNBC or a tip we hear
at work. We want to be proactive in the development of our Strategic
Mindset and verify or disqualify the information we hear around us.
38
Target
Our target is simply the underlying asset with which we are looking to open
a position. We will focus on an asset because we have clearly defined our
Strategic Mindset on this target and we think we can profit from an options
position supporting this mindset.
There are literally thousands of optional targets: Stocks, ETFs, futures
commodities. We will focus on stocks while going through Top Gun
Options.
39
Commit Criteria
Commit criteria is our justification for entering in a trade. Commit criteria

should be easily understood and explained in 1 3 sentences. Commit
criteria is supported by our Strategic Mindset, our fundamental and
technical analysis, and the volatility of the target.
Here is an example of what Commit Criteria might sound like if we had a

bullish mindset on Freeport McMoRan (FCX).
The recent pullback in FCX is exaggerated. The stock has come off its
recent lows with heavy volume and appears to be at the beginning of
bullish trend with a short-term technical price target of 70. Fundamentals
remain strong and copper prices are rebounding.
This is a valid Commit Criteria for entering a entering a trade. Commit

criteria memorializes why we are in the trade. During the course of a
trade, if we can no longer justify our Commit Criteria then we get out,
immediately.
40
Tactic
At Top Gun Options, a Tactic is the option position we are opening, and
there are many different positions we can open using options: calls, puts,
condors, butterflies, credit spreads, etc. In the Top Gun Options Pocket
Checklist (OPCL) you will find 32 different option tactics.
In current options lingo this is referred to as a strategy, but to call this a

strategy is not true to the words meaning. A strategy is a bigger vision
that supports our objective and refers to a plan of actions to achieve
our objective, in this case, our investment objective. The actions taken
to achieve these goals are referred to as tactics. Example:
Objective: Make Money, Dont Lose It!

Strategy: Use options to achieve our objective.
Tactics: An option position to support our strategy.
For instance: If a trader wants to earn income from stocks in their portfolio
by selling covered calls. This supports our objective and the strategy is to
earn extra income with options. The Tactic to achieve this extra income is
to sell covered calls on stocks in their portfolio.
To us at Top Gun Options, this is a more correct way to add detail to our
intentions. In short, a strategy tells us what we want and a Tactic is how
we get what we want.
41
Tactical Employment
Tactical Employment is the set up for our option position. It includes:
Leg Set Up
Net Debit or Credit
Max Profit potential
Maximum Risk of the trade
Break Evens
Probabilities of success
Adjust and Eject Criteria
Greek Effects
Outlining Tactical Employment lets us know what we are getting into

when we enter a trade. Think of Tactical Employment as defining the
performance envelope for our trade. It defines the parameters, both good
and bad, where the trade can perform.
42
Mid-Course Guidance
Mid-Course Guidance encompasses our trade management plan. The

term comes from an air-to-air missile and refers to the control of the missile
until just before it reaches its target. At Top Gun Options, Mid-Course
Guidance encompasses our Risk Management parameters in terms of
profit goal and max allowable loss, threats to success, contingency plans
and Eject Criteria.
Max profit goals and max allowable loss are independent trader decisions
based on individual investment goals and risk tolerance. At Top Gun
Options we are not trying to hit the ball out of the park on every trade, base
hits can add up fast. When setting our max allowable loss, we determine
the maximum we are willing to lose to see if this trade will work. This
does not mean we have to wait to reach this point to get out, it is simply
defining the most we are willing to let this trade work against us. This
keeps us from saying to ourselves, I just need a few more days for this
to work! or I love this trade, it will come around, and staying in a losing
trade. If we hit our max allowable loss, we get out; lick our wounds and
move on to the next trade.
Threats to success are occurrences that can negatively affect our position
during the life of the trade. An example of a threat to our success: We
were bullish and then implied volatility increased unexpectedly due to a
negative economic report.
Contingency planning is simply having a basic game plan if our trade is
not going per design: do we roll up, roll down or get out?
Our Eject criteria are our no questions asked, just get out of this trade,
examples include: our max allowable loss limit is reached or our Commit
Criteria is no longer valid.
43
Embedded in your options PCL tactics section is guidance for setting many
of these parameters and can serve as great starting point for determining
your own risk parameters.
Exit Plan
The Exit Plan is how we are going to get out of a trade. We never get
into a fight unless we know exactly how we intend to exit. Factors for
planning an exit include: a sound reason for exit, layout our closing trade
set up, whether we are exiting prior to expiration or taking it all the way to
expiration.
It is important to know exactly how you are going to exit a trade before the
volatility of the markets gets the better of you.
Planning Complete
Thats the plan! Its just a logical sequence of steps that encapsulates and
memorializes our research, lays out the playing field for the trade, sets
risk tolerance tripwires for action while in the trade and lines out how we
will exit. Dont trade without one!
Once you have the system down it will take 5 -10 Minutes max to complete
and will keep you aligned very closely with our universal objective.
44
Make Money, Dont Lose It!

Example Trade Plan
Back in January 2010 we were beginning to think that Google (GOOG)

was getting a little lofty in price. Even though the talking heads could not
stop talking about how great GOOG was and it was going to the moon
non-stop. At this point we took a short-term contrarians view. So we took
a short term bearish Strategic Mindset on GOOG, 7 days, and decided to
target GOOG with a bearish trade.
Our commit criterion was simple:
45
Commit Criteria:
Thinking GOOG is going to give some back in the short term with some
of the uncertainty surrounding the release of various mobile devices and
some profit taking. On the technical side, the 20 day MACD is diverging to
the down side and RSI is indicating an overbought condition.
We had some technical indicators and some fundamental uncertainty we

thought would lead skittish traders to take some profits off the table. The
Commit Criteria is short, sweet and it made sense. Little did we know at
the time but this was a turning point for GOOG and it is off about 20%
since this call.
Our Tactic was a Bear Call spread two strikes above where GOOG was
trading. One of our intermediate tactics and in this instance it had a high
probability of success.
Tactic: Bear Call Spread

on GOOG, 610/620
46
Tactical Employment is petty straight forward and requires just a little math:
Tactical Employment:
Leg Set up: Sell JAN 610 Call at 3.90

Buy JAN 620 Call at 2.10
Net Credit: 1.80

Max Profit: 1.80, 22% return on risk.
Max Risk: 8.20
Breakeven: 611.80
Probabilities: 72% probability of max profit.
The Greeks:
Theta (Time Value): Time is our Friend, the longer that GOOG stays
below our breakeven of 611.80 the stronger our chance of a profit.

Vega (Volatility): For this trade we want volatility to decrease for
the duration of the position. An increase in volatility with GOOG can easily
threaten our Breakeven (B/E) on the down side.
47
The last part of our Tactical Employment is an understanding of the Greek

effects. In this case Vega and Theta is what we were concerned with
and in a bear call spread. Theta is our friend because the longer that
we stayed below our breakeven, the better our chance of profit. We also
wanted to keep volatility in our scan because an increase in volatility could
decrease our chances of success.
Midcourse guidance, which is our trade management plan, is relatively

simple:
Mid-Course Guidance:
Profit Target: Profit Target is 1.80, 22% return on risk. 100% return
on premium.
Threats to Success:
Jobs Data is being reported Friday, a positive report could
cause a move to the upside.
We are going against the longer-term trend of GOOG and
buyers could step in if they dont see any more down side.
Eject Criteria/Contingency Plan:

Commit Criteria becomes invalid
We will set our stop loss 25%...Eject if the premium gets to
2.25
48
Our threats to success over the trade are researched and listed so we
dont drop them out of our scan.
Our Eject Criteria is set; in this case we had a tight stop for two reasons.
First, the short term on the trade did not give us too much time for it to
reverse if it went strongly against us. Secondly, we were going against
the long term trend and did not want to get caught in a minor downdraft.
Our only contingency plan was to get out if the trade went against us, we
did not want to roll this trade.
Finally, our Exit Plan was simple:
Exit Plan
Profit Target or Eject Criteria Reached.

To close position, simultaneously,
Buy JAN10 610 Call
Sell JAN10 620 Call
49
This is all there is to putting a plan together. Once complete it should fit
nicely onto one or two pages. The actual trade plan is depicted below:
Trade Plan
January 7, 2010
Strategic Mindset: BEARISH, Short term (7 days) on GOOG

Target: GOOG currently trading at 593.52
Commit Criteria:
Thinking GOOG is going to give some back in the short term with some
of the uncertainty surrounding the release of various mobile devices and
some profit taking. On the technical side, the 20 day MACD is diverging to
the down side and RSI is indicating an overbought condition.
Tactic: Bear Call Spread on GOOG,

610/620
50
Tactical Employment:
Leg Set up: Sell JAN 610 Call at 3.90
Buy JAN 620 Call at 2.10
Net Credit: 1.80

Max Profit: 1.80, 22% return on risk.
Max Risk: 8.20
Breakeven: 611.80
Probabilities: 72% probability of max profit.
The Greeks:
Theta (Time Value): Time is our Friend, the longer that GOOG stays
below our breakeven of 611.80 the stronger our chance of a profit.

Vega (Volatility): For this trade we want volatility to decrease for
the duration of the position. An increase in volatility with GOOG can easily
threaten our B/E on the down side.
Mid-Course Guidance:
Profit Target: Profit Target is 1.80, 22% return on risk. 100% return
on premium.
51
Threats to Success:
Jobs Data is being reported Friday, a positive report could
cause a move to the upside.
We are going against the longer-term trend of GOOG and
buyers could step in if they dont see any more down side.
Eject Criteria/Contingency Plan:

Commit Criteria becomes invalid
We will set our stop loss 25%...Eject if the premium gets to
2.25
Exit Plan
1. Profit Target or Eject Criteria Reached.
2. To close position, simultaneously,
Buy JAN10 610 Call
Sell JAN10 620 Call
52
CONCLUSION
The time invested in putting a plan together is well worth the effort.
This trade ended up working out for us and we bought it back for 10
cents and made a 1.70 on the trade. We got out prior to reaching our
profit target because we had made a nice profit in the short time the trade
was open and market volatility, the VIX, was starting to show signs of life
heading into earnings season back in January.
Wrap Up
Having a plan will substantially increase your trading Discipline; it lays
out your Risk Management plan and will lead to consistent Superior
Execution. You can complete your plan before or after pulling the trigger.
If we complete the plan after executing the trade, it is because we are
familiar with the target and are comfortable trading it. After we pull the
trigger though, we sit back and fill out the plan immediately.
Our planning process represents the minimum knowledge we want to
have before we open a trade and it is the tool that gives us the confidence
we need to execute our trades with Discipline, manage our risk based on
our comfort with the current market climate and consistently manage our
trades with Superior Execution. You may want a bit more or a bit less in
your plan, but our system provides a solid foundation for customizing your
own trade plans to suit your trading needs.
Your Options Pocket Checklist (OPCL) contains a planning guide that will
help you build solid plans every time. Plus, we will walk you through many
trade plans as we go through Top Gun Options.
53
SPECIAL OFFER
Click here to enroll in our live trading programs and to see this trade plan
being used by our professional traders. Visit www.topgunoptions.com to
learn more information.
THE MOVIE
Learn more about Top Gun Options CLICK HERE
ABOUT THE AUTHOR

E. Matthew Whiz Buckley is the founder and
CEO of Top Gun Options LLC and is the Chief
Development Officer and a partner at Black Bay
Fund Management LP.
Whiz is a highly experienced financial business
executive with decades of leadership and
execution experience from the front lines to the
front office. Whiz was the founder and CEO of
PEAK6 Media LLC, a financial media company.
The company provided options and futures news, commentary, analysis,

entertainment, and up to the minute reporting directly from the floors of the
Chicago Board Options Exchange (CBOE) and Board of Trade (CBOT).
This exclusive information allowed retail and professional options and
futures traders around the world to execute at a higher level.
54
How to Add Weekly Option to Your

Trading Arsenal
By Andrew Keene
Founder and CEO, Keene on The Market
If you trade stocks, futures or Forex, you should consider adding weekly
options to your trading arsenal. In this chapter you will learn how to trade
weekly options using the Ichimoku cloud. We will also focus on four stocks
that have weekly options: Apple, Facebook, Tesla and Twitter.
Now is one of the best times in history to trade weekly options, and here
are a few reasons why:
Now is the best time in history trade options. Markets are tighter and
more liquid than ever.
There are over 8,700 stocks and 4,200 stocks with options.
Of the 4,200 stocks with options, 320 stocks are listed with weekly
options.
The CBOE lists weekly options on indices, stocks and ETFs.
The CBOE publishes a list of all assets with weekly options.
Gives traders 52 expirations to trade instead of 12.
Weekly index options account for 11% of all index options
volume in 2011 and this number is increasing over time.
55
Weekly options give you the opportunity to rake in huge percentage returns
in a short period of time. The CBOE puts out several reports on weekly
options and this graphic shows you the huge increase in in the volume of
weekly options traded since 2010:
Why should you trade weekly options? The answer is twofold. First,
stocks are boring. They move 1-3 percent on a big move and you have to
outlay huge amounts of capital to own stocks. Google trades at $600 per
share. If you wanted to buy 100 shares of Google, you would have to lay
out $60,000 dollars. Since options are leveraged, you can take returns
and magnify them. Small moves in stocks can lead to huge returns using
weekly options. Whether you are a novice or seasoned trader, anyone
56
can trade weekly options. Green Mountain Coffee weekly options had
profits that exploded 1,500 percent, but the stock moved just 6 percent.
It is very difficult to trade stocks, futures or Forex because you are trading
against algorithms. High frequency trading and dark pools dominate these
spaces, and they are programmed to win. Its like playing chess against a
computer, it is been programmed to win, and its not likely that the average
chess play can beat the computer. In weekly options, however, there is
a bluffing mechanism built in. A trader isnt always buying calls to get
long on a stock. Maybe they are buying the calls to go short on the stock.
The added benefit to weekly options is that dark pools do not currently
operate in these markets. Another advantage of trading weekly options
is that there are multiple different ways to trade them depending on your
trading style and personality.
57
Lets take a look at Facebook using a 5-minute chart and the Ichimoku
cloud.
The Ichimoku Cloud
The Ichimoku cloud is a highly valuable technical indicator because it looks

at the past, the present and the future. It is also free and available on a
wide variety of trading platforms. If youre not familiar with the Ichimoku
cloud, here are the basics:
The term Ichimoku means at first glance. At first glance, is a stock bearish,
bullish or neutral? Where is a good entry, and where is a good exit? Lets
take a look at the components that make up the Ichimoku cloud:
58
First, lets look at the tenken-sen (red) line. This line shows the short-
term trend and it is calculated as follows:
Tenken-sen line = the highest high + the lowest low over the last 9
periods divided by 2.
This formula has a Fibonacci retracement built into its calculation. Its an
effective indicator because it works better than simple moving averages.
59
The Kinjun-sen line (green) shows the longer-term trend. The calculations
for this line is:
Kinjun-sen line= the highest high + the lowest low over the last 26
periods divided by 2.
So the tenken-sen and kinjun-sen lines show the short-term and longer-
term trends in a market at the present time.
60
The Senkou Span A is the future short-term trend. It forms one of the
boundaries of the cloud, and heres the formula:
Senkou Span A = tenken-sen line + kinjun-sen divided by 2 plotted
26 periods in the future.
61
Senkou Span B is the future long-term trend. It is calculated as follows:

Senkou Span B = (highest high + lowest low) divided by 2, over the
past 52 periods, plotted 26 periods in the future. If a stock is not making
a new high or a new low, then this line is going to be flat.
So we now know the present trend. If you pull up the Ichimoku cloud, you
can tell at a glance if the market is bullish, bearish or neutral. If it is above
the cloud, its bullish. If it is below the cloud, its bearish. If the market is in
the cloud, its neutral. Now we know how the cloud is constructed for the
future.
62
Kumo is the cloud, and it communicates how hard or easy it is to

break the trend. Since everyone trades differently, there will be different
approaches to trading in the cloud. Some people are breakout traders. In
that case, a thinner cloud is preferable, because there are more entries
and traps. Thicker clouds have less entries, less traps and wider stops. A
medium size cloud has not too many traps and communicated that a trend
is strong.
63
Finally, the Chinkou Span Line is the current closing price, plotted
26 bars back. If you trade a daily chart, it shows you where the price
of that stock was a month ago. The Chinkou line gives you a historical
perspective. How is your relationship with this stock versus the last month?
Is it better or worse?
How to Apply the Ichimoku Cloud in Trading Weekly Options
Now that we know the elements of the cloud. Lets apply it to this weekly
option chart of Facebook. The stock makes rises above the cloud, breaking
through the short-term (tenken-sen) and long-term (kinjun-sen) moving
averages. The cloud also looks bullish moving forward.
64
As Facebook breaks the cloud to the upside, you want to plot the ATR,
or Average True Range for Facebook. When the opening bell rings, most
institutional traders, mutual funds, hedge funds, etc. have a plan whether
they are go to buy Facebook and accumulate shares or sell Facebook
to offload shares. It is very important to know if institutional traders are
buying or selling Facebook. The ATR measures how much a stock actually
moves from high to low during a trading day.
Facebook has an average daily range of about $2.10. In this example, the
low of the day for Facebook is $60.20. If we see the stock breaking to the
upside, it is reasonable to expect that Facebook will move to $62.20.
65
So here is the trade:

1. Entry to Open and filled: 40 FB weekly 62 calls for $.41
2. Targets: $.55 and up every $.15
a. Sold 10 FB Calls for $0.55 (40 percent return)
b. Sold 10 FB Calls for $0.70 (75 percent return)
c. Sold 10 FB Calls for $0.85 (100 percent return)
d. Sold 10 FB Calls for $1.00 (250 percent return)
The 62 calls were bought because they realistically reflected where the
market was going to move, given the ATR for Facebook and information
revealed in the Ichimoku cloud. A 64 Call is too far out of the money, and
anything less than 62 is too far in the money.
How to Select a Target on a Trade
FB Statistics for YTD on May 2, 2014
Trading Days 83
Up Days 36 43.37%
Down Days 46 55.42%
Average Range 2.20
Standard Deviation 5.17
It is very important to have the right information to make decisions at your

fingertips. If you dont know the ATR and track record for FB over the past
year, then you are flying blind. You can manually record this information if
you follow Facebook daily, or you can subscribe to services that publish
this data.
Conclusion
Trading weekly options can add significant income. If you become familiar
66
with the Ichimoku cloud, and you have all of the information you need on
the stocks you follow that have weekly options, then you can fine-tune
your portfolio to a handful of stocks that are reliable performers.
Weekly options offer a trader more expirations than standard options.
Generally speaking, weekly options tend to trade at a lower price
than standard options.
Weekly options expire on Friday, and they are listed on the previous
Thursday.
Weekly options can experience fast, violent moves in delta.
Can be used as a vehicle for trading during the day in stocks like FB,
TWTR, AAPL and TSLA
THE MOVIE
Watch the video of this presentation here-
Andrew Keene does an excellent job of explaining why weekly options
can be a powerful addition to your trading arsenal. He covers the Ichimoku
cloud in depth, and the video also analyzes several stocks using the
Ichimoku cloud in a Lightning Round at the end of the presentation.
SPECIAL OFFER
Learn how to choose long term trade setups using unusual options
activity. Sign up for a class with Andrew here
67
ABOUT THE AUTHOR

Prior to founding KeeneOnTheMarket.com in
2011, Andrew Keene worked as a proprietary
trader at the Chicago Board Options Exchange.
Keene graduated from Botta Capitals clerk-
to-trade program to become known as one of
fasted traders to make a market. As a market
maker he traded options in over 125 stocks,
including Apple, General Electric, Goldman Sachs, and Yahoo. Keene
left Botta Capital to co-found KATL Group, where he was the largest,
independent on-the-floor Apple trader in the world.
68
Trading Earnings Straddles

By Kim Klaiman
Founder and CEO of Steady Options
What is a straddle - Introduction

For those not familiar with thestraddlestrategy, it is a neutral strategy in
options trading that involves the simultaneously buying of a put and a call
on the same underlying, strike and expiration. The trade has a limited risk
(which is the debit paid for the trade) and unlimited profit potential. If you
buy different strikes, the trade is called astrangle.
You execute a straddle trade by simultaneously buying the call and
the put. You can leg in by buying calls and puts separately, but it will
expose you to directional risk. For example, if both calls and puts
are worth $5, you can buy a straddle for $10. If you buy the call first,
you become bullish - if the stock moves down, the calls you own
will decrease in value, but the puts will be more expensive to buy.
The Options Guide explains straddle:

Long straddle options are unlimited profit, limited risk options trading
strategies that are used when the options trader thinks that the underlying
securities will experience significant volatility in the near term.
Maximum loss for long straddles occurs when the underlying
stock price on expiration date is trading at the strike price of the
options bought. At this price, both options expire worthless and the
options trader loses the entire initial debit taken to enter the trade.
69
INVESTOPEDIA explains straddle:

Straddles are a good strategy to pursue if an investor believes that a
stock's price will move significantly, but is unsure as to which direction.
The stock price must move significantly if the investor is to make a
profit. Should only a small movement in price occur in either direction,
the investor will experience a loss. As a result, a straddle is extremely
risky to perform. Additionally, on stocks that are expected to jump, the
market tends to price options at a higher premium, which ultimately
reduces the expected payoff should the stock move significantly.
Example
With AAPL currently trading at $130.28, you could buy AAPL straddle by
buying 130 put and 130 call. This is how the P/L chart would look like:
70
How straddles make or lose money
A straddle isvegapositive,gammapositive andthetanegative trade. That

means that all other factors equal, the straddle will lose money every day due
to the time decay, and the loss will accelerate as we get closer to expiration.
For the straddle to make money, one of the two things (or both) has to happen:
1. The stock has to move (no matter which direction).

2. The IV (Implied Volatility) has to increase.
A straddle works based on the premise that both call and put options have
unlimited profit potential but limited loss. While one leg of the straddle losses
up to its limit, the other leg continues to gain as long as the underlying stock
rises, resulting in an overall profit. When the stock moves, one of the options will
gain value faster than the other option will lose, so the overall trade will make
money. If this happens, the trade can be close before expiration for a profit.
In many cases IV increase can also produce nice gains since

both options will increase in value as a result from increased IV.
When to use a straddle
Straddles are a good strategy to pursue if you believe that a stock's price
will move significantly, but unsure as to which direction. Another case is
if you believe that IV of the options will increase - for example, before
a significant event like earnings. IV (Implied Volatility) usually increases
sharply a few days before earnings, and the increase should compensate
for the negative theta. If the stock moves before earnings, the position
71
can be sold for a profit or rolled to new strikes.This is one of my favorite

strategies that we use in ourmodel portfolio for consistent gains.
Many traders like to buy straddles before earnings and hold them through
earnings hoping for a big move. While it can work sometimes, personally
I don't like it. The reason is that over time the options tend to overprice
the potential move. Those options experience huge volatility drop the day
after the earnings are announced. In most cases, this drop erases most of
the gains, even if the stock had a substantial move.
Buying a straddle before earnings
Few year ago, I came across an excellent book by Jeff Augen, The
Volatility Edge in Options Trading. One of the strategies described in the
book is called Exploiting Earnings - Associated Rising Volatility. Here is
how it works:
1. Find a stock with a history of big post-earnings moves.
2. Buy a strangle for this stock about 7-14 days before earnings.
3. Sell just before the earnings are announced.
IV (Implied Volatility) usually increases sharply a few days before earnings,
and the increase should compensate for the negative theta. If the stock
moves before earnings, the position can be sold for a profit or rolled to
new strikes.
Like every strategy, the devil is in details. The following questions need to
be answered:
1. Which stocks should be used? I tend to trade stocks with post-
72
earnings moves of at least 5-7% in the last four earnings cycles.

2. When to buy? IV starts to rise as early as three weeks before earnings
for some stocks and just a few days before earnings for others. Buy
too early and negative theta will kill the trade. Buy too late and you
might miss the big portion of the IV increase. I found that 5-7 days
usually works the best.
3. Which strikes to buy? If you go far OTM (Out of The Money), you get
big gains if the stock moves before earnings. But if the stock doesnt
move, closer to the money strikes might be a better choice.
Under normal conditions, a straddle or a strangle trade requires a big and
quick move in the underlying. If the move doesnt happen, the negative
theta will kill the trade. In case of the pre-earnings strangle, the negative
theta is neutralized, at least partially, by increasing IV. In some cases, the
theta is larger than the IV increase and the trade is a loser. However, the
losses in most cases are relatively small. Typical loss is around 7-10%, in
some rare cases it might reach 20-25%. But the winners far outpace the
losers and the strategy is overall profitable.
Market environment also plays a role in the strategy performance. The
strategy performs the best in a volatile environment when stocks move
a lot. If none of the stocks move, most of the trades would be around
breakeven or small winners. Fortunately, over time, stocks do move.
In fact, big chunk of the gains come from stock movement and not IV
increases. The IV increase just helps the trade not to lose in case the
stock doesnt move.
73
Would you like to rent your options for free?
I would like to explain the "underneath" of this strategy.

Let's take a step back. When someone starts trading options, the first and
most simple strategy is just buying calls (if you are bullish) or puts (if you
are bearish). However, when doing that, you must be right three times: on
the direction of the move, the size of the move and the timing. Be wrong
just in one of them - and you lose money. You will also find out very quickly
that options are a wasting asset. They lose value every day. If the stock
doesn't move, the option is losing value. If it moves but not fast enough,
it is losing value as well. It is called a negativetheta. You can read more
about the options Greekshere.
Another factor having a great impact on options value is IV (Implied
Volatility). Rising IV will increase the option value, falling IV will decrease it.
For volatile stocks, IV usually becomes extremely inflated as the earnings
approach and collapses just after the announcement. This is why if you buy
calls or puts before earnings and hold them through the announcement,
you might still lose money even if the stock moves in the right direction.
Having said that, I would like to achieve the following three goals when
trading options:
1. Not to bet on the direction of the stock.
2. To minimize the effect of the time decay.
3. To take advantage of the rising IV.
The strategy of buying a strangle (or a straddle) before earnings fits all
three parameters. First of all, since I'm buying both calls and puts, I'm not
betting on the direction of the stock. Second, I'm holding for a very short
period of time, so the impact of the time decay is minimal.
74
Third, since I'm buying a few days before earnings, the IV in most cases will
rise into earnings. However, I will be selling just before the announcement,
so the options will not suffer from the IV collapse.
Now, few scenarios are possible.
1. The IV increase is not enough to offset the negative theta and the
stock doesn't move. In this case the trade will probably be a small
loser. However, since the theta will be at least partially offset by
the rising IV, the loss is likely to be in the 7-10% range. It is very
unlikely to lose more than 10-15% on those trades if held 2-5 days.
2. The IV increase offsets the negative theta and the stock doesn't
move. In this case, depending on the size of the IV increase, the
gains are likely to be in the 5-20% range. In some rare cases, the
IV increase will be dramatic enough to produce 30-40% gains.
For example, AAPL strangle could be purchased on Friday before
October 2011 earnings and sold the following Monday for 32%
gain.
3. The IV goes up followed by the stock movement. This is where the
strategy really shines. It could bring few very significant winners.
For example, when Google moved 7% in the first few day of July
2011, a strangle produced a 178% gain. In the same cycle, Apple's
3% move was enough to produce a 102% gain. In August 2011
when VIX jumped from 20 to 45 in a few days, I had the Disney
DIS strangle and few other trades doubled in a matter of two days.
This is why I call those trades "renting a strangle/straddle for free" (or
almost free). Even under the most unfavorable conditions, your loss is
usually limited to 7-10%. But if you get a decent IV increase and/or a
stock movement, the gains could be much higher.
75
Another big advantage of this strategy is the fact that it is not exposed to
the gaps in the stock prices - in fact, it benefits from them.
So you cannot suddenly find yourself down 30-50%. You can always
control the losses and limit them.
Selection of strikes and expiration
I would like to start the trade as delta neutral as possible. That usually
happens when the stock trades close to the strike. If the stock starts to
move from the strike, I will usually roll the trade to stay delta neutral.
To be clear, rolling is not critical - it just helps us to stay delta neutral.
In case you did not roll and the stock continues moving in the same
direction, you can actually have higher gains. But if the stock reverses,
you will be in better position if you rolled.
I usually select expiration at least two weeks from the earnings,
to reduce the negative theta. The further the expiration, the more
conservative the trade is. Going with closer expiration increases
both the risk (negative theta) and the reward (positive gamma).
If you expect the stock to move, going with closer expiration might be a
better trade. Higher positive gamma means higher gains if the stock moves.
But if it doesn't, you will need bigger IV spike to offset the negative theta.
In a low IV environment, further expiration tends to produce better results.
76
Profit Target and Stop Loss
My typical profit target on straddles is 10-15%. I might increase it in more

volatile markets. I usually don't set a stop loss on a straddle. The reason
is that the upcoming earnings will usually set a floor under the price of
the straddle. Typically those trades don't lose more than 5-10%. I believe
our biggest loss on a straddle was around 25%, and only handful of them
have lost more than 20% since inception.
The biggest risk of those trades is pre-announcement. If a company pre-
announces earnings before the planned date, the IV of the options will
collapse and the straddle can be a big loser. However, pre-announcement
usually means that the results will be not as expected, which in most
cases causes the stock to move. So most of the time, the loss will not be
too high, especially if there is still more than two weeks to expiration. But
this is a risk that needs to be considered.
As a rule, I will always close those trade before earnings.
Why I don't hold through earnings
Some people would argue that selling before earnings is premature. Why
not to hold through earnings, hoping for a big move?
The problem is you are not the only one knowing that earnings are
coming. Everyone knows that those stocks move a lot after earnings, and
everyone bids those options. Following the laws of supply and demand,
those options become very expensive before earnings. The IV (Implied
Volatility) jumps to the roof. The next day the IV crashes to the normal
levels and the options trade much cheaper.
For example, holding straddles on stocks like AMZN or NFLX could be very
profitable during some of the last cycles. However, we have to remember
that those stocks experienced much larger moves than their average move
77
in the last few cycles. Chances are this is not going to happen every cycle.
There is no reliable way to predict those events. The big question is the
long term expectancy of the strategy. It is very important to understand
that for the strategy to make money it is not enough for the stock to move.
It has to move more than the markets expect. In some cases, even a 15-
20% move might not be enough to generate a profit.
Some people might argue that if the trade is not profitable the same day,
you can continue holding or selling only the winning side till the stock moves
in the right direction. It can work under certain conditions. For example,
if you followed the specific stock in the last few cycles and noticed some
patterns, such as the stock continuously moving in the same direction for
a few days after beating the estimates. Another example is holding the
calls when the general market is in uptrend (or downtrend for the puts).
However, it has nothing to do with the original strategy. From the minute
you decide to hold that trade, you are no longer using the original strategy.
If the stock didnt move enough to generate a profit, you must be ready to
make a judgment call by selling one side and taking a directional bet. This
might work for some people, but the pure performance of the strategy can
be measured only by looking at a one day change of the strangle or the
straddle (buying a day before earnings, selling the next day).
The bottom line:
Over time the options tend to overprice the potential move. Those options
experience huge volatility drop the day after the earnings are announced.
In most cases, this drop erases most of the gains, even if the stock had a
substantial move.
Jeff Augen, a successful options trader and author of six books,agrees:
There are many examples of extraordinary large earnings-related price
spikes that are not reflected in pre-announcement prices. Unfortunately,
there is no reliable method for predicting such an event. The opposite case
78
is much more common pre-earnings option prices tend to exaggerate

the risk by anticipating the largest possible spike.
It doesnt necessarily mean that the strategy cannot work and produce great
results. However, in most cases, you should be prepared to hold beyond
the earnings day, in which case the performance will be impacted by many
other factors, such as your trading skills, general market conditions etc.
Test Case #1
On July 28, 2014 we purchased EXPE 80 straddle expiring in 18 days. We
paid $8.45 for the trade. The IV of the options was around 59%.
Two days later, the IV of the options jumped to 73% and we sold the
straddle at $9.85, for 16.6% gain. An hour later, IV reached 80%, and the
straddle could be sold for 26% gain. The stock itself moved less than 1%.
79
Test Case #2
On June 24, 2014, we purchased MSFT $42 straddle expiring in August.
We were able to roll the straddle twice, and finally closed it on July 17 for
35.4% gain. In this case, most of the gains came from the stock movement.
80
Conclusion
Buying a straddle or a strangle few days before earnings can be a very
profitable strategy if used properly. Of course the devil is in the details.
There are many moving parts to this strategy:
1. When to enter?
2. Which stocks to use?
3. How to manage the position?
4. When to take profits?
And much more. But overall, this strategy has been working very well for
us.
Here is an example how this strategy performed during the August 2011
crisis:
81
THE SPECIAL OFFER

If you want to learn how to use the straddle strategy (and many other
profitable strategies):
Start Your Free TrialYou can see our full performance here.
ABOUT THE AUTHOR

Kim Klaiman is a full time options trader. He
is a founder of steadyoptions.com - options
education and trade ideas, earnings trades and
non-directional options strategies. Kim has been
trading stocks and options for more than 10 years.
He likes to trade variety of non-directional trades
with low correlation to limit the total portfolio risk.
Kim wrote over 100 articles forSeeking Alpha.
He started the SteadyOptions educational forum
after numerous requests from his Seeking Alpha
readers, to share his experience and trading
ideas. Kim holds a BSc degree in Computer Science. He lives in Toronto,
Canada. You can follow him onGoogle+andTwitter.
steadyoptions.com is a combination of a high quality education and
actionable trade ideas. Our style is non-directional trading. We aim for
steady and consistent gains with a high winning ratio and limited risk.
Our focus is on trading Earnings-Associated Implied Volatility rise, Iron
Condors, Calendar spreadsetc. Our performance is based on real fills,
not hypothetical performance. We provide a full trading plan with complete
portfolio approach.
82
Two High Probability Nadex

Strategies You Can Count On
By Cam White
Partner Relationship Manager, TradingPub
If you trade stocks, options, futures or forex, you may want to consider
adding Nadex to your trading arsenal. Nadex gives you an opportunity to
manage your money, risk/reward and it serves as hedge against market
spikes that can keep you from losing trades.
With Nadex, you always know what your maximum risk and maximum
reward is before you place your order. In this chapter, you will be introduced
to Nadex and you will be exposed to 2 strategies that have high probabilities
of success.
Nadex Binary Options have been called yes or no trading propositions.
When you trade Nadex binary options, you are making an educated
opinion about the direction of the market relative to a specific strike price
within a defined time expiration of your choosing.
Each contract has a maximum value of $100. This means that the most
you could win or lose is $100 per contract traded. Probabilities of success
determine how much you can win or lose.
83
Lets say it is noon and gold futures are trading at $1254. The market
is on an uptrend, and you think the price of gold will be above $1250 at
1:30pm EST when the market closes.
The market determines that there is a 70 percent probability you

are right.
You would risk $70 on a market order to make $30 on this high
probability trade.
If you place a trade on this proposition, then your $70 risk is

deducted from your account balance, plus a $.90 cent execution
fee.
o If your statement is True and the market closes above

$1250, then you receive a $100 payout. Your gross profit is
$30 per contract, less $1.80 in execution and settlement fees,
per contract traded.
o If your statement is False and the market closes at or

below $1250, then you receive $0. You forfeit the $70 you
risked, plus a $.90 cent execution fee. No settlement fee is
charged.
84
Conversely, lets say gold futures are on an uptrend trading at $1254, and
you think the price of gold will reverse and close below $1250 at 1:30pm
EST.
The market determines there is a 30 percent chance you are right.
You would risk $30 on a market order to make $70 on this lower
probability trade.
If you place a trade on this proposition, then your $30 risk is

deducted from your account balance.
o If your statement is True and the market closes at or below

$1250, then you receive a $100 payout. Your gross profit is
$70 per contract, less $1.80 in execution and settlement fees,
per contract traded.
o If your statement is False and the market closes at or below
$1250, then you receive $0. You forfeit the $30 you risked, plus
a $.90 cent execution fee. No settlement fee is charged.
Nadex is the North American Derivatives Exchange. It is headquartered

in Chicago and subject to regulatory oversight from the CFTC. When you
trade with Nadex, your orders are placed directly on the exchange without
a broker. You therefore pay no commissions to brokers.
Nadex charges a $.90 cent fee to place an order on the exchange, and
charges a $.90 cent fee if your trade settles in the money, or if you close
your position early.
85
As an exchange, Nadex matches buyers with sellers, and they take no

positions in any of the assets made available for trading. In the gold example
above, if you bought gold at $70, you would be matched against someone
who is selling gold for $30 for an even $100 contract value. Nadex was
previously only available to legal residents of the United States, Canada,
Mexico and U.S. territories. As of March 2015, Nadex is now available
in 49 countries!
How do Binary Options Work?
Everything starts with your opinion on which direction the market is
going
Choose the market you want to trade:
o Major Indices, Major Commodities, Popular Forex Currency
Pairs
Select a contract expiration time (hourly, daily weekly)
Determine whether you are buying or selling. How many contracts
are you trading?
Decide what price you are willing to pay. Will it be a market or limit
order?
Place your order directly on the exchange
You can let your trade ride until expiration or close it out early.
86
The Nadex Trading Platform
The Nadex trading platform is extremely easy to use. On the left side,
you can quickly find the market and time-frame you want to trade. In the
middle of the screen you will find a watchlist of popular markets currently
being traded, or you can populate this screen with a customized view of
the markets you like to trade. Next, you can take a closer look at the chart
of the market you want to trade.
87
Nadex charts give you a wide variety of indicators you can use for
technical analysis. On this chart, the 8 EMA (T-Line), 50 period MA,
Stochastics (12,3,3) are plotted along with a volume indicator. Once you
have determined the direction of the market, it is time to place an order.
88
Here are two Nadex order tickets. On the top of each ticket is the strike
price we are planning to BUY. The proposition is:
Germany 30 (Dec) >9120 (4PM) (30-OCT-14)
The proposition is that we think the price of the Germany 30 (DAX) will
settle above 9120 at 4:00pm EST. Other areas on the order ticket include:
Expires in: 2h : 40m Shows you how much time left until expiration
Nadex Indicative Index: 9137.000 Shows you the current price of
the market
Bid and Offer Prices: Shows you where the buyers and sellers are
on this proposition
BUY and SELL Buttons: Choose if you plan to BUY or SELL the
proposition
Size: Number of contracts you want to trade
Price: The price you are willing to pay to BUY or SELL the proposition
89
Max loss: The total amount of money you are risking

Max profit: The total amount of your reward.
Place Order: Once you have reviewed your order, submit it to the
exchange
The ticket on the left is a market order. When you click BUY and select
the number of contracts you want to trade, the Price box ix populated
with the current market price for this proposition. Looking below, you can
instantly see that you will be risking a maximum of $61.50 to make a
maximum of $38.50. Since this trade is already in the money, you are
risking more money on a higher probability trade. The amount of money
at risk ($61.50, plus a $.90 cent execution fee) is deducted from your
account balance. If you are successful on this trade at expiration, you will
be paid $100 (less a $.90 cent settlement fee). If you are unsuccessful at
expiration, you will make $0.
The ticket on the right is a working (pending) order. This is the same
ticket, but this time the price has been manually adjusted to fit your risk/
reward plan. Now you are risking $40 to make $60 in profit. Since there is
no current market for your proposition, your order will be filed as a Working
Order until the contract is accepted. The amount of money at risk ($40,
plus a $.90 cent execution fee) is deducted from your account balance. If
the market retraces and fills your order, then your order will change from
a Working Order to an Open Position. If the market does not retrace to
fill your order at expiration, then the trade never happened. If your order
gets filled and you are successful on this trade at expiration, you will be
paid $100 (less a $.90 cent settlement fee). If you are unsuccessful at
expiration, you will make $0.
90
High Probability Strategy #1

The 7am-9am (EST) DAX Strudel Strategy
If you live in the United States or Canada, heres a great trade

you can make at breakfast before the markets open in New York.
Tom Busby, Founder of Diversified Trading Institute (DTI) presented

a webinar entitled 30 Trading Insights to Help Overcome Your Trading
Fears in 2014. In one of his observations, Tom remarked that the 7am
EST hourly bar of the DAX is a pivotal point that sets the tone for the next
hour or so of the trading session. When you think about that statement,
what he is saying is that a directional trend is in play, triggered by the
7am EST hourly bar. When the hourly charts of the DAX were reviewed, it
turned out that Tom was right a great majority the time!
Heres a look at four consecutive days using the hourly charts for Nadex
on the Germany 30 (DAX). Notice how the 7am hourly candlestick controls
the 8am hourly candlestick. Four consecutive days, four successful trades.
91
This strategy is very simple, and it is based on the opening price of

the 7am EST bar for the Nadex Germany 30 Index (DAX). If the 7am
hourly bar is bullish, then you BUY the first proposition that Nadex
offers below the 7am opening price. If the 7am hourly bar is bearish
then you want to SELL above the 7am opening price. Its that simple.
Preparation for the 7am (EST) DAX Strudel Strategy
Be at your computer by 7am EST

Check the Economic Calendar for any major news out of Germany
and the US
Check the Daily Chart of the DAX for a long-term bias. Uptrend or
downtrend?
Check the Hourly Chart of the DAX for the day. Uptrend or downtrend?
Check the 15 minute and 5 minute Chart of the Dax. Whats
happening?
Check the 5-minute Ichimoku Cloud of the DAX. Confirming bearish
or bullish?
Plot the following indicators:
o 8 Period Exponential Moving Average (EMA)
o 50 period Moving Average (MA)
o Stochastic Indicator set at 12,3,3
Now that you have done your technical analysis, and you feel comfortable
with the probable direction of the DAX, it is time to execute the strategy.
92
Executing the 7am (EST) DAX Strudel Strategy
Select the 7am-9am time period
Record the opening price of the 7am hourly bar
When the 7am-9am time period opens, switch to the 5-minute chart.
Is the market moving in your direction? If there is very sluggish
or sideways movement at the open of the 7am bar, be patient
and wait for the direction of the 7am hourly bar to reveal itself.
Only make a decision to BUY or SELL once you are
convinced that the 7am hourly candlestick will close bullish
or bearish. Be patient. Sometimes this can take an hour.
If the direction of the 7am hourly candlestick is bullish, then BUY the
DAX at the first strike price available below the 7am opening price
.
If the direction of the 7am hourly candlestick is bearish, then SELL the
DAX at the first strike price available above the 7am opening price.
You can place a market order and risk more money for a lesser
profit, or you can place a working order and manually adjust your
risk reward for a better return. Remember with a working order, the
market will need to retrace to fill your order, so there is a chance
your order will not be filled.
Thats it. You are good to go. Simple enough?
93
Heres an example of the a trade using the 7am-9am Germany 30

(DAX) Strudel Strategy
In this example, the 7am hourly candlestick of the Nadex Germany 30

(DAX) market opened at 10625. The market moved aggressively bullish
on the 5-minute charts, triggering a BUY order from the first strike price
below the 7am opening price. The following order was placed:
Trade Details:
Contract: Germany 30 (Dec) >10614 (9AM)
Expiration: Fri Jan 23 09:00:00 EST 2015
Direction: BUY
Quantity: 1
Price: 50.00
94
This was a working order. When the order was placed at 7:12 the market
was moving upward aggressively. If a market order had been placed, it
would have likely required $70 risk or greater per contract. But the decision
was made to hold firm at 10614, risking $50. For this order to fill, the
market would need to retrace.
Sure enough, after 8am, the market started grinding its way back down. At
8:40, the market dove briefly, breaching the 10614 strike price and filled
the working order. It was now a live order with less than 20 minutes left in
the trade. The market then moved back upward and expired safely in the
money at 10636.
Remember, in order for this trade to be successful, the market needed to
expire above 10614 at 9:00am EST. The trade yielded a gross profit of
$50 per contract, less $1.80 in exchange fees for a net profit of $48.20.
Backtesting this Strategy
If you backtest this strategy using hourly Nadex charts of the Germany 30
(DAX) market, all you have to do is go back 20 days or so and compare
the 7am candlestick to the 8am candlestick. If the 7am candlestick is
bullish, its not likely that the 8am hourly candlestick will close below the
7am opening price. Conversely if the 7am hourly candlestick is bearish,
its also not likely that the 8am hourly candlestick will close above the 7am
opening price.
95
A Couple Words of Caution Trading this Strategy
Dont Try to Catch a Falling Knife
In this example, the market was moving

downward on bad economic news from
Germany with momentum.
The 4am and 5 am candlestick moved
sharply downward, gapping away from the
8 Exponential Moving Average. Whenever
the market drifts too far away from the 8
EMA, it always returns back to the line.
The 6am candlestick was a battle between
the bulls and the bears, signaling a return
to the 8 EMA line.
When the 7am candlestick turned green
and returned to the 8 EMA, the market
continued on its downward path on the
8am hourly candlestick.
If the rules of this strategy had been fol-
lowed to the letter, then we would have en-
tered a BUY order below the 7am candle-
stick, and we would have gotten run over
by the 8am candlestick.
Its wise not to step in front of a market that
is falling like a knife. Get out of the way.
96
Avoid the temptation of trying to chase the DAX if your limit order
doesnt get filled. The more you chase the market, the more vulnerable
you are to getting trapped in a market reversal.
If the market is on an aggressive uptrend/downtrend at 7am and you dont
think your order is going to get filled, you might want to consider trading
a Nadex Spread. Nadex spreads are different than binary options, and
they more closely resemble traditional trading. Click Here to find out more
about trading Nadex Spreads.
High Probability Strategy #2

The GBP/USD London Open Strategy
This Nadex Strategy is based on a successful

Forex trading strategy that has been around
for years. Its a great strategy to trade,
especially if you are an early riser, or if you
dont have time to trade when the markets
open in New York.
If you can wake yourself up at 4am-5am

EST, you can log on to Nadex, place a trade
and go back to sleep with a strong chance of
having a successful trade.
97
The basic rule of this strategy couldnt be simpler:

The daily low or high of the GBP/USD currency pair will be
established between 2am-5am EST, when the European and
London financial markets open.
The opposite high or low of the day will be established

between 8am-2pm EDT after the opening of the New York
market.
Think of it like a see-saw, where the 6am-7am time period is the fulcrum.
Why does this happen?
At 2am EST, the European markets open and financial transactions start
to happen. At 3am the London market and the Bank of England opens.
3am is also the final hour of trading in the Tokyo exchange. At 3am EDT,
a huge volume of transactions are processed and cleared in a very short
one-hour period of time. The result is often a very bullish or bearish move
with the GBP and its related currency pairs.
98
Think of it like a garden hose being crimped, with water accelerating out
the hose when you squeeze it.
The volume of transactions, coupled with any economic news reports
coming out of the UK (usually at 4:30am EDT) will set the direction of the
market for the rest of the dy. Heres an example:
The GBP/USD had been on a downtrend on the daily charts. At 2am, the
European markets was grinding downward. At 3am, when the London
market opened, there was a sharp sell-off before shooting up at 3:40am
and establishing a high at 4:05am. At 4:30am, the UK Construction PMI
report was released, and the news was bearish. The market dove again.
99
Convinced that the 2am-5am high had already been established at 4:05am,
the following order was placed at 5:30am:
SELL GBP/USD >1.5720 (7am expiration) Risk: $60 Reward $40 (2
contracts sold)
The order filled, and the market moved sharply downward and expired
safely in the money at 7am. Since 2 contracts were traded, the gross profit
was $80, less $3.60 in exchange fees.
100
If you can spot the low or the high of the market between 2-5am EST,
there is a high probability that the opposing high or low will be revealed
after 8am EST. If the low or the high of the morning session isnt obvious
to you, then its probably a good day to skip this strategy for the day.
Rules for Trading the GBP/USD London Open Strategy
Check the Economic Calendar for news from the UK and the US.
Most news reports out of the UK are released at 4:30am EDT, so you
want to hold off trading this strategy until those reports are released.
Check the US Dollar Index. Is it trending up or down? The US Dollar
Index moves in the opposite direction of the GBP/USD.
Check the daily chart for the GBP/USD. Is it trending up or down?
Look for the daily low or high between 2am-5am EDT
o If LOW has been established, then BUY
o If HIGH has been established, then SELL
o If you cant find the low or high, then dont trade this strategy
Strike Price: +/- 20 pips above the morning low, or below the morning
high
Set the expiration of the contract for 7am or 3pm EDT depending on
your preference.
The London Open Strategy works consistently as long as there is some
give-and-take between the US Dollar and the British Pound.
A Word of Caution Using this Strategy:

At the time this chapter was written (April 2015), the US Dollar Index is
trading at 14 year highs (around 100), and the GBP/USD is trading at lows
not seen in years (1.4954).
101
This is like a tug-of-war that needs to be resolved. Under normal

circumstances, bullish economic news out of the UK propels the GBP/
USD upward. But the strength of the dollar can actually drive the GBP/
USD downward in spite of good news out of the UK. Bearish news out of
the UK normally cause the GBP/USD to fall, but a sudden selloff of the
strong US Dollar, will cause the GBP/USD to rise sharply in spite of bad
UK economic reports.
This strategy works the best when theres a little bit of give-
and-take between the US Dollar Index and the British Pound.
Conclusion
Trading Nadex Binary Options is a simple yes or no, up or down
proposition. To trade Nadex Binary Options successfully, you need to
master three areas of trading:
Disciplined money management Never risk more than 5% of
your account per trade
Risk/Reward Management Make sure your documented
probability of success is always greater than the amount you risk per
trade. If you have tested a strategy, and you have proven that it has
a 70% probability of being successful, then make sure you never risk
more than $60 per trade on that strategy.
Trade Strategies with a High Probability of Success The only
way to know for sure that you have a high probability strategy is to
test that strategy 20+ times in demo and record your results.
If you can master these three areas, you will achieve much better
consistency in your trading and your account balance will likely grow.
Trading Nadex binary options and spreads is not a replacement for
102
traditional futures trading, but it can serve as an excellent hedge for futures
traders. You can trade many of the markets you normally trade without
the fear of getting stopped-out by market spikes and your maximum risk
is always clearly defined and capped when you place your trade. With
Nadex, you place your trade directly on an exchange, and not through
a broker. Nadex is also now available for trading in 49 countries. A live
Nadex account can be funded for as little as $100.
THE MOVIE
Watch the Video here where Cam White walks you through the Nadex
platform, how to use it and how to apply the two High Probability
strategies discussed in this chapter.
THE SPECAIL OFFER

Sign up for a free Nadex demo account. It will be funded with $25,000 in
play money. Test these strategies and see how they work out for you.
Get a Free Library of Nadex Information Courtesy of TradingPub
ABOUT THE AUTHOR

Cam White is a Partner Relationship Manager with
TradingPub. When he joined TradingPub in June 2014, his
first assignment was to become familiar with Nadex. He
downloaded the demo software and dove into the Nadex
platform. A self-professed crash test dummy, Cam tests
directional and non-directional strategies with Nadex Binary
Options and Nadex spreads and publishes results.
Cam also publishes The Probability Report, a monthly newsletter featuring
Nadex webinars, and contributes articles on Nadex to financial media outlets.
103

Options Small Account Trading

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Options Small Account Trading

Hochgeladen von

Copyright:

Verfügbare Formate

Risk Disclaimer

Go-To Options Strategies for Defined, Low-Risk Trading

How to Minimize Risk and Maximize Gains with Options

Using Flight Combat Tactics to Trade Options

Using the Ichimoku Cloud to Identify the Best Options

16 Minimize Risk and Maximize Gains with Options

31 Combat Trade Planning

55 How to Add Weekly Option to Your

69 Trading Earnings Straddles

83 Two High Probability Nadex Strategies You

How to Trade a Small Account

not be just focused on making money but should really be focused on

I. Actions & Attitudes of Successful Traders:

Mistakes sabotage every area of our lives, and trading is no exception.

1. Consistently getting in or out of trades too soonor too late

2. Being a lone ranger

Everyone knows that the nature of trading is to go it alone. Trading

3. No plan for success or goals

4. Trading a model that doesn't work

6. Not accounting for trades

7. Lack of goal setting

8. Trading with the emotions of fear and greed

II. An Option strategy guide to get you started:

General Option Guidelines:

When Implied volatility is high it is better to sell options

When Implied Volatility is low its better to buy options

When a market is in a consolidation phase or a volatility

And change your trading style accordingly.

Go-to-Option Strategies ~ for defined, low risk trading:

Long Butterfly ~ this spread is a neutral strategy that is a

ABOUT THE AUTHOR

Minimize Risk and Maximize

Daily AMZN Chart

we keep the $300 just for trying.

So total premium brought in will be $600. If AMZN drops and stops us

AMZN Option Chain

Daily CAT Chart

CAT Option Chain

S&P and 3M chart

This should give us enough background to discuss the Utility trade.

ABOUT THE AUTHOR

Combat Trade Planning

Which is why at Top Gun Options, Trading is Combat, because it is!

So just what is a plan? You dont have to be a Rocket Surgeon to

A plan is a series of steps to achieve an objective.

When I am giving a presentation on planning, I always ask the crowd to

Ultimately Discipline, Risk Management and Superior Execution

Our objective as traders and investors is universal:

Make Money, Dont Lose It!

Defines our Strategic Mindset

And finally outlines our Exit Plan

We can qualify our mindset if needed; we can be short-term bearish if we

Our Strategic Mindset drives many our trading decisions. It helps us to

Commit criteria is our justification for entering in a trade. Commit criteria

Here is an example of what Commit Criteria might sound like if we had a

This is a valid Commit Criteria for entering a entering a trade. Commit

In current options lingo this is referred to as a strategy, but to call this a

Objective: Make Money, Dont Lose It!

Tactical Employment is the set up for our option position. It includes:

Outlining Tactical Employment lets us know what we are getting into

Mid-Course Guidance encompasses our trade management plan. The

Make Money, Dont Lose It!

Back in January 2010 we were beginning to think that Google (GOOG)

We had some technical indicators and some fundamental uncertainty we