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

Thank You

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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