2011-10-19 Trading Options For Potential Income in A Volatile Market Slides

10/18/2011
Trading Options for Potential

Income in a Volatile Market
Dan Sheridan
Sheridan Mentoring
&
Brian Overby
TradeKing
TradeKing is a member of FINRA & SIPC
October 19 & 20, 2011
Disclaimer
Options involve risks and are not suitable for all investors. Prior to buying or selling options, an
investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be
obtained by calling TRADEKING at 877-495-KING, visiting www.tradeking.com/ODD or by asking a
TradeKing representative at this event.
System response and access times may vary due to market conditions,
conditions system performance,
performance and
other factors.
Market timing is a complex investment strategy which involves risk and may incur additional
commission costs.
Multiple leg options strategies involve additional risks and multiple commissions, and may result in
complex tax treatments. Please consult a tax advisor.
Any strategies discussed and examples using actual securities and price data are strictly for illustrative
and educational purposes only and are not to be construed as an endorsement, recommendation, or
solicitation to buy or sell securities. Past performance is not a guarantee of future results. Consider
the following when making an investment decision: your financial situation,
situation your risk profile and
transaction costs.
This event is provided for educational and informational purposes only. All investments involve risk,
losses may exceed the principal invested, and the past performance of a security, industry, sector,
market, or financial product does not guarantee future results or returns. TradeKing provides selfdirected investors with discount brokerage services, and does not make recommendations or offer
investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks
associated with the use of TradeKing's systems, services or products.
10/18/2011
Disclaimer
The projections or other information generated by TradeKing's tools regarding the likelihood of various
investment outcomes are hypothetical in nature, do not reflect actual investment results and are not
guarantees of future results. The calculations do not take into consideration all costs, such as
commissions and margin interest which may impact the results shown. It is the user's sole
responsibility to select the criteria to enter in the TradeKing's tools, or to choose among the predefined screens, and to evaluate the merits and risks associated with the use of the tools before
making any investment decisions. TradeKing is not responsible for any losses that occur from such
investment decisions.
The material presented by Dan Sheridan is a product of SheridanMentoring.com and as such, is solely
responsible for its content. TradeKing maintains a business relationship with SheridanMentoring.com.
TradeKing charges $4.95 for equity and option trades, add 65 cents per option contract. Trade more
than 8 contracts, and we'll automatically lower your cost to 15 cents per contract plus $8.95 per trade.
TradeKing charges an additional $0.35 per contract on certain index products where the exchange
charges fees. See our FAQ for details. TradeKing adds $0.01 per share on the entire order for stocks
priced less than $1.00. See our Commissions + Fees page for commissions on low-priced stocks,
option spreads, and other securities.
Implied volatility represents the consensus of the marketplace as to the future level of stock price
volatility. Delta represents the consensus of the marketplace as to the theoretical price movement of
the option relative to the underlying security. Gamma represents the consensus of the marketplace as
to the theoretical rate of change of Delta relative to the underlying security. Theta represents the
consensus of the marketplace as to the amount a theoretical option's price will change for a
corresponding one-unit (day) change in the days to expiration of the option contract. There is no
guarantee that these forecasts will be correct.
Crash Course in the Greeks
TradeKing is a member of FINRA & SIPC
10/18/2011
The Black-Scholes Formula

C(S, E, t, r, ) = e t SN(d
d
d
) Ee rt N(d
= [ ln(S/E)
(
)
+ ((r + 2 /2)) t ] /
= d
2
S
E
r
N()
= current price
= strike price
= continuously compounded risk-free interest rate
= continuously compounded dividend yield
= time to expiration of the option
= rate of return volatility on the stock
= cumulative normal density function
Example:
Let S = 40; E = 40; r = 8%; = 30%; t = 91 days; = 0

The Black-Scholes price is 2.78
The Greeks
Delta: The amount a theoretical option's price will change for a
corresponding one-unit (point) change in the price of the underlying security.
Gamma: The amount a theoretical option's delta will change for a

corresponding one
one-unit
unit (point) change in the price of the underlying security.
security
Theta: The amount a theoretical option's price will change for a

corresponding one-unit (day) change in the days to expiration of the option
contract.
Vega: The amount a theoretical option's price will change for a

corresponding one-unit (percentage-point) change in the implied volatility of
the option contract.
Rho:
Rh The amount a theoretical option's price will change for a
corresponding one-unit (percentage-point) change in the interest rate used to
price the option contract.
10/18/2011
Delta Example I
Delta: The amount a theoretical option's price will
change for a corresponding one-unit (point) change
in the price of the underlying security.
Stock @ 50
Strike is 50
3 Month Call
$3
3.50
51
52
4.10
N
Non-Textbook
T tb k Definition
D fi iti
The delta is the probability of the option being in the money
on expiration.
Delta Example II
Delta: Non-Textbook Definition
The delta is the probability of the option being in the
money on expiration.
Stock @ 50
Call Strike is 50
51
1) One Day to Expiration

.90
.50
2) Sixty Days to Expiration
.60
.50
10/18/2011
Gamma
Gamma: The amount a theoretical option's delta will
change for a corresponding one-unit (point) change in
the price of the underlying security.
Gamma is highest for the near-term ATM strike, and
slopes off toward the ITM and OTM strikes.
Delta Example II
Delta: Non-Textbook Definition
The delta is the probability of the option being in the
money on expiration
expiration.
Stock @ 50
Call Strike is 50
51
Gamma
1) One Day to Expiration

.90
.50
2) Sixty Days to Expiration
.60
.50
10
10/18/2011
Graph of Gamma ATM Calls

0.10
15-Day 85 Strike Call

45-Day 85 Strike Call
0.09
0.08
Gamma
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
80
85
Stock Price
90
95
11
Theta
Theta: The amount a theoretical option's price will
change for a corresponding one-unit (day) change in the
days to expiration of the option contract.
12
10/18/2011
Time Decay of ATM Call Option

2
1 73
1.73
1.41
Option
1
Premium
1.00
0
90
60
30
Days to Expiration
13
Vega
Vega: The amount a theoretical option's price will
change for a corresponding one-unit (percentage-point)
change in the implied volatility of the option contract.
The more time premium, the higher the Vega is for an
option. By that rational, longer term options will have a
higher Vega number then shorter term options.
Option ATM $4 Vega .10
IV was 60 and went to 59
1% move
Option is now trading for $3.90 in theory.
14
10/18/2011
Position Greeks
Lets look at some position deltas
XYZ at 103.27
Long 1 XYZ May 105 Call at 3.60
Position Delta Equals 46.00


15
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Today!
10/18/2011
Dan Sheridan
Managing Potential
Income Trades
Sheridan Options Mentoring, Inc.
www.SheridanMentoring.com
Disclaimer
Options involve risk and are not suitable for all investors. Prior to buying or selling an
option, a person must receive a copy of Characteristics and Risks of Standardized
Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The
Options Clearing Corporation at www.theocc.com. The information in this presentation
is provided solely for general education and information purposes. Any strategies
di
discussed,
d including
i l di examples
l using
i actuall securities
i i andd price
i data,
d
are strictly
i l for
f
illustrative and educational purposes. In order to simplify the computations,
commissions and other transaction costs have not been included in the examples used in
this presentation. Such costs will impact the outcome of the stock and options
transactions and should be considered. Multiple leg strategies involve multiple
commission charges. Investors should consult their tax advisor about any potential tax
consequences. No statement within the presentation should be construed as a
recommendation to buy or sell a security or to provide investment advice. Supporting
documentation for any claims,
claims statistics,
statistics or other technical data is available from
Sheridan Options Mentoring at www.sheridanoptionsmentoring.com. Chicago Board
Options Exchange, Incorporated (CBOE) is not affiliated with Sheridan Options
Mentoring or OptionNet. This presentation should not be construed as an endorsement or
an indication by CBOE of the value of any non-CBOE product or service described in
this presentation.
@ Copyright 2010. All rights reserved.
Page 18
10/18/2011
Running
Business
g an Options
p
Page 19
Portfolio Plan
Speculative
Strategies
IIncome
Strategies
Long Term
Strategies
Page 20
10
10/18/2011
Portfolio Plan
Calendar Spreads
p
Double Calendar Spreads
Double Diagonals
ATM Butterflies
Condors
Long Calls/Puts,
Diagonal Spreads
OTM Butterflies
Vertical Spreads
Directional Calendars
Long Straddles
Collars
LEAPS
Covered Writes/Straddles
Long Stock
Long Term Calendars
Page 21
Credit Spreads
Page 22
11
10/18/2011
How to Find Credit Spread Vehicles?

z
1.
Stocks you would buy in retirement account?
2.
Stocks over $65
3. Stocks with option implied volatilities 20-40
Page 23
May NFLX Credit Spread

Date: 4/4/2011
NFLX Price: $244.72
Page 24
12
10/18/2011
May NFLX Credit Spread

Date: 4/4/2011
NFLX Price: $244.72
Page 25
Plan for Credit Spread

Date: 4/4/2011
NFLX Price: $244.72
Page 26
13
10/18/2011
Stock Drops from

Original Price of $244.72
Date: 4/8/2011
NFLX Price: $234.86
Page 27
Stock Drops from

Original Price of $244.72
Date: 4/8/2011
NFLX Price: $234.86
Page 28
14
10/18/2011
Adjustment #1 Roll Down Credit Spread

Date: 4/8/2011
NFLX Price: $234.86
Page 29
Adjustment #1 Roll Down Credit Spread

Date: 4/8/2011
NFLX Price: $234.86
Page 30
15
10/18/2011
Adjustment #2 Buy a Long Option

Date: 4/8/2011
NFLX Price: $234.86
Page 31
Adjustment #2 Buy a Long Option

Date: 4/8/2011
NFLX Price: $234.86
Page 32
16
10/18/2011
Adjustment #3 Debit Spread

Date: 4/8/2011
NFLX Price: $234.86
Page 33
Adjustment #3 Debit Spread

Date: 4/8/2011
NFLX Price: $234.86
Page 34
17
10/18/2011
Adjustment #4 Turn Into Butterfly

Date: 4/8/2011
NFLX Price: $234.86
Page 35
Adjustment #4 Turn Into Butterfly

Date: 4/8/2011
NFLX Price: $234.86
Page 36
18
10/18/2011
Adjustment #5 Condorize
Date: 4/8/2011
NFLX Price: $234.86
Page 37
Adjustment #5 Condorize
Date: 4/8/2011
NFLX Price: $234.86
Page 38
19
10/18/2011
Adjustment #6 Diagonal Adjustment

Date: 4/8/2011
NFLX Price: $234.86
Page 39
Adjustment #6 Diagonal Adjustment

Date: 4/8/2011
NFLX Price: $234.86
Page 40
20
10/18/2011
Adjustment # 7 Condorize in Puts

Date: 4/8/2011
NFLX Price: $234.86
Page 41
Adjustment # 7 Condorize in Puts

Date: 4/8/2011
NFLX Price: $234.86
Page 42
21
10/18/2011
Adjustment #8 Reduce Size

Date: 4/8/2011
NFLX Price: $234.86
Page 43
Adjustment #8 Reduce Size

Date: 4/8/2011
NFLX Price: $234.86
Page 44
22
10/18/2011
Calendars
Page 45
Why do calendars?
calendars?
Page 46
23
10/18/2011
Why Do Calendars?
z
Time Decay
Limited risk
Easy to understand- same risk as long option
Two legged spread versus 3 and 4 legged spreads,

butterflies and calendars
Commissions are typically lower on two leg

spreads than 3 or 4 leg strategies.
Page 47
Finding Calendar candidates
Page 48
24
10/18/2011
Finding Calendar candidates

z
Good stocks you would own in retirement
Implied volatility between 14-30
Stocks over $60
Page 49
Finding Calendar Candidates

z
NDX
HPQ
SPX
XOM
RUT
NSC
PG
IBM
WMT
AAPL
CL
CVX
GOOG
QCOM
CAT
AMZN
BA
Page 50
25
10/18/2011
VIPES Process for filtering

candidates
Page 51
VIPES ( Calendar Filtering System )

z
Volatility- Long option of calendar in lower end of IV

range
Industry- Is this a whacko industry?

Industry
Price- Channeling or Trending? Looking for speed!
Earnings- Stay out of earnings month
Skew- Positive skew greater than 3 investigate,

Negative skew more than 2 back off
News- keep up! Dont like words like buy back or

takeover ( Beware of descending IV pattern)
Page 52
26
10/18/2011
Consistency?
z
January
$500
September $ -1000
February $500
October
March
$300
November $300
April
- $800
December $500
May
$500
Net profits for 12
June
$500
months = $1500 (30%)
July
-700
capital $5000
August
$400
target 10% ($500)
$500
Page 53
What is a Calendar?
Date: 6/15/2011
SPX Price: $1265.42
JUL(30)
O ti
Options
Pi
Price
IV
1265 Calls $26.15 17.9%
Delta
Gamma
Theta
Vega
Debit
0.5
-0.2
14.5
68.1
1,150
AUG(65)
T d
Trade
1
Pi
Price
IV
$37.65 17.5%
T d
Trade
+1
At July Expiration:
Max Risk: 11.50
Max Gain: Limited & Unknown
Commission: $6.95 at TradeKing
Page 54
27
10/18/2011
What is a Calendar?
Date: 6/15/2011
SPX Price: $1265.42
Page 55
Finding Calendar Candidates

z
Stocks you would buy in retirement account
Stocks over $60
Implied Volatility levels between 17-31
Betas less than the market
Good solid candidates
Indexes RUT, MNX, SPX
Stocks like IBM, MCD, WMT, AAPL
Page 56
28
10/18/2011
Executing Calendars
z
Depends on Vehicle, compare Index vs Stock
Mid Prices
Entering versus exiting
Time of Day
Contingent and market orders
Page 57
Calendar Adjustments
Page 58
29
10/18/2011
Adjustments
Date: 6/3/2011
RUT Price: $808.13
JUL(42)
O ti
Options
810 Calls
Delta
Gamma
Theta
Vega
Debit
Pi
Price
IV
T d
Trade
$21.80 20.7%
2.0
-0.4
12 2
12.2
77.3
1,900
AUG(77)
2
Pi
Price
IV
$31.30 21.6%
T d
Trade
+2
At July Expiration:
Max Loss: 9.50
Page 59
Adjustments
Date: 6/3/2011
RUT Price: $808.13
779.79
843.43
Page 60
30
10/18/2011
Why Adjust?
Date: 6/8/2011
RUT Price: $788.04
5 Days in Trade
Original RUT Price: $808.13
JUL(37)
O ti
Options
Pi
Price
E t P
Entry
Pr
810 Calls
AUG(72)
IV
T d
Trade
$11.20 $21.80 20.0%
Delta
Gamma
Theta
Vega
Debit
Loss
11.9
-0.4
9.9
86.3
1,900
50
Pi
Price
E t Pr
Entry
P
IV
T d
Trade
$20.45 $31.30 21.2%
+2
At July Expiration:
Max Loss: 9.50
Page 61
Why Adjust?
Date: 6/8/2011
RUT Price: $788.04
780.72
842.04
Page 62
31
10/18/2011
Adjustment #1
#1-- Turn into Double
Calendar
Date: 6/8/2011
RUT Price:$788.04
5 Days in Trade
JUL(37)
Options
Price
810 Calls
790 Puts
$11.20
$24.95
AUG(72)
Trade Adjust New

2
Before Adjusting
Delta
11.9
Gamma
-0.4
04
Theta
9.9
Vega
86.3
Debit
1,900
Loss
50
+1
1
1
1
Price
Trade Adjust New
$20.45
$35.25
After Adjusting
Delta
7.1
Gamma
-0.4
04
Theta
13.5
Vega
82.6
Debit
2,005
Loss
50
+2
1
+1
+1
+1
Commission to
adjust $7.55 at
TradeKing
Page 63
Adjustment #1
#1-- Turn into Double
Calendar
Date: 6/8/2011
RUT Price:$788.04
842.04
767.28
780.72
834.48
Page 64
32
10/18/2011
Adjustment #2 ReRe-Position
Date: 6/8/2011
RUT Price:$788.04
5 Days in Trade
JUL(37)
O ti
Options
Pi
Price
810 Calls
790 Puts
$11.20
$24.95
AUG(72)
T d Adjust
Trade
Adj t New
N
2
Before Adjusting
Delta
11.9
Gamma
-0.4
04
Theta
9.9
Vega
86.3
Debit
1,900
Loss
50
+2
2
Pi
Price
T d Adjust
Trade
Adj t New
N
$20.45
$35.25
After Adjusting
Delta
2.2
Gamma
-0.4
04
Theta
17.2
Vega
78.9
Debit
2,110
Loss
50
+2
2
+2
+2
Commission to
adjust $9.55 at
TradeKing
Page 65
Adjustment #2 ReRe-Position
Date: 6/8/2011
RUT Price:$788.04
757.20
842.04
780.72
826.08
Page 66
33
10/18/2011
Adjustment #3 Diagonalize
Date: 6/8/2011
RUT Price:$788.04
5 Days in Trade
JUL(37)
Options
Price
810 Calls
795 Calls
$11.20
$17.80
AUG(72)
Trade Adjust New

2
Before Adjusting
Delta
11.9
Gamma
-0.4
Theta
9.9
Vega
86.3
Debit
1,900
Margin
1,900
Loss
50
+2
2
Price
$20.45
Trade Adjust New

+2
+2
After Adjusting
Delta
-11.4
Gamma
-0.5
Theta
16.4
Vega
72.1
Debit
580
Margin
3,542
Loss
50
Commission to
adjust $7.55 at
TradeKing
Page 67
Adjustment #3 Diagonalize
Date: 6/8/2011
RUT Price:$788.04
817.68
748.80
842.04
780.72
Page 68
34
10/18/2011
Adjustment #4 Add More Calendars

Date: 6/8/2011
RUT Price:$788.04
5 Days in Trade
JUL(37)
O ti
Options
Pi
Price
810 Calls
790 Puts
$11.20
$24.95
AUG(72)
T d Adjust
Trade
Adj t New
N
2
2
Before Adjusting
Delta
11.9
Gamma
-0.4
0.4
Theta
9.9
Vega
86.3
Debit
1,900
Loss
50
2
2
Pi
Price
$20.45
$35.25
After Adjusting
Delta
14.1
Gamma
-0.8
0.8
Theta
27.1
Vega
165.2
Debit
3,960
Loss
50
T d Adjust
Trade
Adj t New
N
+2
+2
+2
+2
Commission to
adjust $7.55 at
TradeKing
Page 69
Adjustment #4 Add More Calendars

Date: 6/8/2011
RUT Price:$788.04
767.28
780.72
Page 70
35
10/18/2011
Adjustment #5 Add Long Options

Date: 6/8/2011
RUT Price:$788.04
5 Days in Trade
JUL(37)
O ti
Options
Pi
Price
810 Calls
680 Puts
$11.20
$1.85
AUG(72)
T d Adjust
Trade
Adj t New
N
2
+1
Before Adjusting
Delta
11.9
Gamma
-0.4
Theta
9.9
Vega
86.3
Debit
1,900
Loss
50
2
+1
Pi
Price
$20.45
After Adjusting
Delta
5.3
Gamma
0.3
Theta
-1.9
Vega
116.1
Debit
2,085
Loss
50
T d Adjust
Trade
Adj t New
N
+2
+2
Commission to
adjust $5.60 at
TradeKing
Page 71
Adjustment #5 Add Long Options

Date: 6/8/2011
RUT Price:$788.04
780 72
780.72
781.56
Page 72
36
10/18/2011
Dan Sheridan
+1-630-835-4691
dan@SheridanMentoring.com
Sheridan Options Mentoring, Inc.

http://www.SheridanMentoring.com/
Page 73
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2011-10-19 Trading Options For Potential Income in A Volatile Market Slides

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2011-10-19 Trading Options For Potential Income in A Volatile Market Slides

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10/18/2011

Trading Options for Potential

TradeKing is a member of FINRA & SIPC

October 19 & 20, 2011

Crash Course in the Greeks

TradeKing is a member of FINRA & SIPC

The Black-Scholes Formula

Let S = 40; E = 40; r = 8%; = 30%; t = 91 days; = 0

Gamma: The amount a theoretical option's delta will change for a

Theta: The amount a theoretical option's price will change for a

Vega: The amount a theoretical option's price will change for a

1) One Day to Expiration

1) One Day to Expiration

Graph of Gamma ATM Calls

15-Day 85 Strike Call

Time Decay of ATM Call Option

Option is now trading for $3.90 in theory.

Long 2 XYZ May 105 Call at 3.60

Long 5 XYZ May 105 Call at 3.60

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

How to Find Credit Spread Vehicles?

Stocks you would buy in retirement account?

Stocks over $65

3. Stocks with option implied volatilities 20-40

@ Copyright 2010. All rights reserved.

May NFLX Credit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $244.72

May NFLX Credit Spread

NFLX Price: $244.72

@ Copyright 2010. All rights reserved.

Plan for Credit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $244.72

Stock Drops from

NFLX Price: $234.86

@ Copyright 2010. All rights reserved.

Stock Drops from

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #1 Roll Down Credit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #1 Roll Down Credit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #2 Buy a Long Option

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #2 Buy a Long Option

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #3 Debit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #3 Debit Spread

@ Copyright 2010. All rights reserved.

NFLX Price: $234.86

Adjustment #4 Turn Into Butterfly