OPTIONS ACADEMY ONLINE Learning to Trade Options for

OPTIONS ACADEMY ONLINE Learning to Trade Options for Profit Steve Suminski, CEO Options University © Copyright 2015 Options University

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BUYING PUTS AND CALLS ü KEY REASONS or trade PURPOSE: - Leverage small risk capital into big returns - As a Hedge (protect longs and/or shorts) - To trade volatility - To adjust your DELTA ü KEY POINTS: - What’s your CATALYST? - IN THE MONEY or OUT OF THE MONEY? - How far OUT? - Avoiding the dark shadow of THETA - EXIT: Taking profit and/or Stopping OUT

BUYING PUTS AND CALLS FOR DIRECTIONALLY § GOLDEN RULES 1) You MUST have a DIRECTIONAL CATALYST - Must be right far enough and fast enough - Do you have a proven SYSTEM? 2) The Implied Volatility MUST be relatively LOW 3) It MUST fit your risk profile 4) The longer the term, use Fundamentals more 5) Harmonize with the trend of the market or stock 6) Options must be adequately LIQUID 7) Avoid holding Long Options inside of two weeks to expiration 8) Let winners run, cut your losers

IMPLIED VOLATILITY (IV) = THE “EXPECTED” Volatility as determined by the market. HISTORICAL VOLATILITY (HV) = THE ACTUAL MEASURED past volatility. Rule #1: IF the IV is at the bottom of its range = cheap options (BUY) Rule #2: (if Rule #1 is vague)…IV > HV = expensive options (Don’t Buy)

MY FAVORITE WAY TO TRADE For decades, the “ 4 week rule” developed by Donchian has been profitable EVERY YEAR SINCE THE EARLY 1960’s. 1) Go long if you break above the 20 day high 2) Go short if you break below the 20 day low Most brokerages allow you to put in “Donchian channels” to help you see this on your charts. Courtney Smith’s improvement to this is the 55/20 rule: 1) Go long above the 55 day high, stop out: 20 day low. 2) Go short below the 55 day low, stop out: 20 day high 3) Enter with the trend and ADX turning UP 4) 55 day breakout channel to be flat for 5 days prior.

MY FAVORITE WAY TO TRADE Using options, as long as volatility is reasonable, we can: 1) Buy long CALLS on a break above the 55 day high 2) Buy long PUTS on a break below the 55 day low Ø It is important to use “contingent” or “conditional” orders to execute based on the STOCK price, note the option price. Ø The goal is to catch the BIG move on a breakout. One huge breakout big move can more than make up for MANY small losing trades. If it keeps running, GO WITH IT!!! Ø If the Breakout totally fails, you can get out. If it “runs out of gas” and goes sideways, you can sell short OTM options and convert the trade to a “Diagonal Spread” (a cash flow strategy where you sell short options against a long option).

Example of a 55 Day Channel Breakout

Bought 3 CONTRACTS 3 x 100 x $0. 44 = $132 INITIAL INVESTMENT RESULT? OPTION APPRECIATED TO $1. 22: 3 x 100 x $122 = $366 A 277% return in 13 days

ENTER ONLY IF YOU HAVE A “ 5 DAY CONDITION” This means the 55 DAY HI/LO line is flat for at least 5 days

BMY 3/4 BMY ON 3/4 BMY TODAY ABOUT A 6% MOVE IN 10 DAYS AFTER BREAKING THE CHANNEL

ANOTHER REAL EXAMPLE – Mallinckrodt (MNK) FRESH 55 DAY CHANNEL BREAKOUT? CHECK. UPTREND? CHECK. 5 DAY CONDITION? CHECK. LOW VOLATILITY? CHECK. STOP

ANOTHER REAL EXAMPLE – Mallinckrodt (MNK) FRESH 55 DAY CHANNEL BREAKOUT? CHECK. UPTREND? CHECK. 5 DAY CONDITION? CHECK. LOW VOLATILITY? CHECK. STOP UP OVER $5. 00 in the last TWO DAYS.

PICKING THE STRIKE - MNK

MY FAVORITE WAY TO TRADE THESE TRADES ARE EASY TO FIND!!!

SHALL WE FIND ONE NOW? ? ?

www. finviz. com screen criteria

SHALL WE FIND SOME NOW? ? ? JUNE 35 CALL Others Candidates: CTSH, DIS, SBUX