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Index Credit Spreads & Iron Condors + Directionals to Hedge/Augment Our Monthly Income
DATE 2006
Brad W. Reinard – Editor in Chief www. MonthlyCashThruOptions.com
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Directionals vs. Non-Directionals
Directional trades are more difficult, stressful & less consistent 60% go the wrong way Takes a lot of time to:
• Research the trades • Place the trade and stops, and manage the stops • Replenish the trades that stop out • Handle the anxiety of trades going the wrong way • Will lose 40% of investment if underlying goes the wrong way
Far OTM index credit spreads & Iron Condors Take less time – 2 hours/week Fewer trades needed 10 out of 12 months expire profitable Trades last 30 to 45 days Get results monthly 50% to 65% ROI annually Adjust the trades 2 months/year
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Directional Trades For Macro Cycles
Crash of 2008 has created opportunity Watching120 stocks Building Jan10 bullish trades
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Longer-Term Bullish Trades Targeted to return 150% to 300% in 6 to 9 months
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Methodology to Find Jan10 Bullish Plays Scan Value Line database (650 stocks)
Big-caps (>$10B) Timeliness rank 1- 4 Financial health rank A++, A+, A, and B++ >$15/share Trades >500k shares daily
Scan for stocks that were beaten down by crash (150 stocks) 100 day SMA below 200 day SMA and 50 day SMA below 100 day SMA
Visually identify stocks that grew last 3 to 5 yrs and then crashed Eliminate stocks that don't offer January 2010 (120 stocks) Find out when earnings will be announced
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Methodology to Find Jan10 Bullish Plays
We now have a list of 120 high quality, big-cap companies that have: Solid balance sheets with a lot of cash Are fundamentally strong Have a lot of liquidity Have a following by mutual funds Value Line analyst believes the company will continue to grow
revenue and earnings Wall street liked the company and the stock grew nicely over the last
3 to 5 years Were sold off 40% to 50% during the Oct 2008 crash
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Jan10 Bullish Plays – Trigger Point
Run a 10/30 bullish crossover scan weekly Fundamental analysis tells us if the company is good with growing
sales and earnings; technical analysis tells us when to get in and when to get out
Then look at additional indicators such as support/resistance, ADX, MACD, Elliott Wave, 5/35 & 10/70 oscillators and Accumulation/Distribution to make a determination if the stock is truly breaking-out, or if it is still consolidating and building a base.
Build a directional, bullish option trade that will take advantage of an upward trending stock and one that can handle a gradual drop in volatility.
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Honeywell – Weekly Chart
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Honeywell – Daily Chart
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Honeywell – Straight ATM Jan10 Call
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United Technologies Weekly Chart
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United Technologies Daily Chart
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United Technologies - ATM Jan10 55 Call
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Henry Schein Weekly Chart
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Henry Schein Daily Chart
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Henry Schein Straight Jan10 40 Call
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Index Credit Spreads & Iron Condors
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How to Make Consistent Money in Credit Spreads
Focus on only a few underlying securities We like the RUT and SPY
Become an expert on the underlying Become a good technician where you can put money behind
your analysis Be patient when opening trades and trust your technical
analysis
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DOW Weekly Chart
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SPY Weekly Chart
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RUT Weekly Chart
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SPY Daily Chart
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DOW Daily Chart
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IWM (ETF that tracks the RUT) Daily Chart
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Buy a Call on the RUT
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Sell a Call on the RUT
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Buy & Sell a Call - Bear Call Spread
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Far OTM Bear Call Spread
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Buy a Put on the RUT
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Sell a Put
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Sell & Buy a Put – Bull Put Spread
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Better Bull Put Spread
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Far OTM Bear Call Spread
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Bull Put + Bear Call Spreads = Iron Condor
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Trading Rules – Primarily for the RUT
When 35 to 45 days out Enter Trade with 60+ point cushion for each spread
• Delta for the short leg is around 9 to 11 • Shoot for 50 to 70 cents for the Bear Call Spread • Shoot for 65 to 95 cents for the Bull Put Spread • Slowly collect your fills over a week or two
Use 10 point spread between short and long positions Open Bear Call spread on an UP-day Open Bull Put spread on a DOWN-day Be patient on the fills; trust your instincts and technicals to get good
fills On the strong UP days or DOWN days you can feel the adrenalin….put on
your seat belt and collect some premium. Don’t get greedy….keep the safe zone wide Be careful placing the Bear Call Spreads to complete the iron condor
Completing the iron condor is opening a maintenance-free trade
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Adjustments
Watch the technicals, including candlesticks, Bollinger bands, moving averages, volume, trend lines, 5/35 oscillator, past support and resistance levels
Watch the VIX and if it starts climbing, a storm might be coming Watch the Delta on your short legs. If they increase from 10 up to
17, we need to be careful Move additional cash into your secondary brokerage account if
these things are happening
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Example 1 – Iron Condor on the SPX
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7% Move on the SPX in May/June 2006
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Then Our Short Put is Under Pressure
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Big Picture of the SPX – Weekly Chart
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Adjusted Iron Condor
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Example 2: Oct08 Bull Put Spread
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After the Oct08 Crash
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One Adjustment Strategy
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Transform it into a Bear Put Spread
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Converting it to a Bear Put Spread Paid Off
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After Rolling Oct into Nov
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ROI – About 45% to 6% annually
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ROI Summary
2008 2007 2006 January ‐11.0% 6.0% 6.0%
February 13.0% 8.0% 7.0%
March 8.5% 8.0% 12.0%
April 10.5% 4.0% 5.0%
May 10.0% 0.0% 3.0%
June 9.5% 8.5% ‐7.0%
July ‐10.5% 10.5% 5.0%
August 3.5% ‐5.0% 7.0%
September 11.5% 9.5% 4.0%
October ‐35.0% 8.0% 7.0%
November 13.0% 7.5% 0.0%
December 15.0% 8.5% 5.0%
Yearly Total 33.0% 63.0% 42.0%
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Appendix
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MACD Indicator
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ADX (DMI) Indicator
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Accumulation/Distribution Line
