Options Trading Strategies | Implied Volatility & Probability Option's Anatomy The anatomy of an option's value is made up of 6 elements

with the corresponding "Greek" measuring the sensitivity/exposure to that specific element: 1. Underlying instrument's Price. Delta & Gamma (& Lambda). 2. Time to Expiration remaining. Theta. 3. Implied Volatility. Vega (not a "Greek", a.k.a Kappa). 4. Short-term interest rate. Rho. 3 Month (90 Day) Tbill is the default rate. 5. Strike price of the option (ITM, ATM and OTM). Mix of Greeks specific to strike. 6. Dividends (if relevant). No directly corresponding Greek(s). Both Time to Expiration and Volatility have a DIRECT impact on the option's value More Time to Expiration makes both calls and puts rise in value. Less Time to Expiration makes both calls and puts fall in value. Higher volatility makes both calls and puts rise in value. Lower volatility makes both calls and puts fall in value. The product's Price itself has its own varying impact on calls distinct from puts, for e.g. As price rises, straight calls increase in value; but, puts decrease in value. As price falls, straight calls decrease in value; but, puts increase in value. Interest Rates and Dividends (if relevant) have opposite effects on calls versus puts As Interest Rates rise, long calls rise in value; but, long puts decrease in value. As Interest Rates rise, short calls decrease in value; but, short puts rise in value. As Interest Rates fall, long calls decrease in value; but, long puts rise in value. As Interest Rates fall, short calls rise in value; but, short puts decrease in value.

 As a company raises its Dividend, long calls decrease in value; but, long puts increase in value. As a company raises its Dividend, short calls rise in value; but, short puts decrease in value. As a company lowers its Dividend, long calls increase in value; but, long puts decrease in value. As a company lowers its Dividend, short calls decrease in value; but, short puts rise in value. Listed options have no right to the dividend. The options just reflect what the product's price is expected to do. As a Dividend is raised, the drop in price will be more, once the underlying goes ex-dividend. This makes calls decrease in value; but puts increase in value. As a Dividend is lowered, the drop in price will be less once the underlying goes exdividend. This makes calls increase in value; but, puts decrease in value. You may choose to trade European-style Indexes that are absent of dividends, to remove dividends out of the equation from the start. Direct and opposing effects explain why calls and puts do not share identical values at their common ITM, ATM and OTM strikes. Calls and Puts shift between asymmetrical distribution curves, losing their symmetry remember at any given strike there will always be a pairing of an OTM Call with an ITM Put, an ITM Put is paired off with an OTM Call, and an ATM/NTM Call is paired up with an ATM/NTM Put. Paired does not mean one is an identical twin of the other. Which elements impacting an option's anatomy do you not have the choice of accepting or rejecting, when structuring a chosen option spread? Federal Open Market Committee determines Interest Rate policy. Not your say. Dividend policy is decided by the listed company. Not your say. Price of the underlying product is marketdriven. Not your say. Quote: Of a stocks move ... 31% can be attributed to the general stock market, 13% to industry influence, 36% to influence of other groupings, and the remaining 20% is peculiar to the one stock.

Benjamin F. King, Market and Industry Factors, Journal of Business, Jan 1966. So, which elements of an option's anatomy is left for you to decide on? Strikes, Time to Expiration & Volatility. As Time is Synthetic Volatility and Volatility is Synthetic Time, for which both are unique to an option's strike, at minimum, 50% of your trading day's effort must focus on Volatility analysis. Strikes The exchange on which the product is traded decides the number of strikes and increments between strikes. For retail traders, to control the risks within limits due to smaller sized accounts, it is advisable to choose products with $1 wide increments between strikes for Calendars. Maximum width would be a product with $2.50 increments between strikes. $1 to $2.50 wide increments between strikes for Verticals, maximum of $5. Are you too wide or slim? Not your waistline. But, are you exposing short positions to too much credit margin at risk for a given strike width; and, you construct long positions that are too cramped without room for the debit to expand? Reconfigure the strike width. Time to Expiration You decide how much time to sell and buy. Advisable for retail traders to be Short Net Credit spreads between 3050 days with an ROI of between 1%2% per day at minimum, at maximum 3%4% per day. Long Net Debit Spreads between 6090 days up to a maximum of 120 days, with an ROI range between 150%200+% within 60 days of being in the trade, is considered a reasonable expectation. Volatility Debating Historical versus Implied & Which Options Pricing Model Applies? Much debate surrounds comparing both Implied Volatility (IV) and Historical/Statistical Volatility (HV/SV) against each other. While IV and HV are meant to converge at an option's expiration, it is not certain that convergence will occur. Why? Various combinations of corporate action (e.g. takeovers/investigations), or variance in earnings guidance may prevent an assumed "over/underpriced" option reaching convergence at expiry. Moreover, you cannot resimulate the macro economic parameters affecting the volatility specific to an Asset Class. The Home Options Trading process has chosen to remove the use of Historical Volatility altogether. HVIV crossover signals only cause visual confusion: no such crossover

signals were used as trade entry criteria in generating the Consistent Results shown in the model portfolio.

IV is a forward looking estimate, which explains why there are back/far month expiration intervals. So, for practical trading purposes, it makes sense to forecast IV 30-120 days forward. There is no reason to look backwards, as you cannot Theoretically Price Historical Volatility into the option/spread you plan to be long/short in. Of note, Vega measures the amount of change in the option price for a 1% change in Implied Volatility (not HV/SV). There is no "Greek" that measures HV/SV. Here's the key difference between Historical Volatility and Implied Volatility. HV is an annualized standard deviation of price changes expressed as a %. It calculates how volatile the underlying was for X. number of past trading days (adjustable period), prior to each observation date in the data series, for that given period. For HV you can adjust the period to be different from the option's expiration cycle; but not with IV the expiration cycle is fixed. HV measures how fast the underlying has been moving around in the past for that given period. HV is not a substitute for IV. HV of an underlying may have benign volatility behavior in the past but become extremely active suddenly, with nothing to anticipate this change in activity. Especially with volatility, history fails to predict future expectations based on past experiences. Rather than rely on HV, it's more meaningful to look at Gamma, as how fast (acceleration) or how slow (deceleration) it can manufacture positive/negative Deltas to propel/stabilise your position. A HV measure of "fast" is not needed, as you can view Deltas live each trading day in your platform, as the "Speed or Rate of Change" + Gamma as "Acceleration/Deceleration". Also, remember Theta is the cost of embedding that Acceleration/Deceleration in your Deltas, given the GammaTheta inverse relationship. Theta is the expense for pushing the pedal to the metal. IV is the collective forward estimate (forecast) of participants trading that underlying of its standard deviation of daily % changes in price from the present, until the option expires. In the anatomy of an option's value, it is IV that needs attention. Prices of an option's premium is entered into an options pricing model, to solve for IV. Depending on which of the 3 most commonly used Theoretical Pricing Models used, the IV value is computed using various algorithmic combinations, typically using both ATM/NearestTheMoney Calls and Puts. It is the IV (not HV) of an option that is the required standard deviation input when entered into a pricing model that makes an option's current Theoretical

Price equal to the current market price. When you price to enter or exit trades for a particular day, you use the current spot prices to Theoretically price the intrinsic/extrinsic value of the ITM/ATM/OTM strikes of a spread's construction, not a historical number. The volatility variable is the only unobservable parameter in an option's pricing model. It is termed a "variable" parameter as volatility is not fixed but rises/falls to extreme levels; then, reverts to its mean, or is repulsed away from its mean. There are upper and lower limits within which IV is contained or breaks out of. The option price, the futures price, time to expiration, interest rate and strike price(s) are all observable (i.e. known/measurable). So, these known parameters can be entered into specific fields in most trading platforms, to solve for the only unknown parameter volatility. As volatility is derived from known parameters that is why it is called "Implied" Volatility. In practice, what this means is to evaluate IV levels (Low, Medium or High in % terms) first, then Probability. Finally, reconcile both pieces of analysis using the Reward:Risk Ratio of the underlying's PRICE (with and without analysis of changing dates to simulate Theta as decay bought/premium sold separately), to accept/reject the opportunity as an economically viable trade. Now, let's look at probability. Delving into the intricacies of the maths of options pricing models is not for everyone. Still, you must know which of the 3 Options Pricing Models: BjerksundStensland, Binomial and BlackScholes, matches the Exercise Style (American or European) of the underlying product you are trading. It affects the outcome of your probability analysis. Some may dismiss minor probability differences in constructing constrained Delta (& Gamma) rangebound strategies like Iron Condors and Calendars. Calendars require a separate treatment of probability. But, for highly break even sensitive strategies like a Straddle/Strangle or Ratio Backspreads that must break out of a range to be profitable, using a consistent model to be precise with the Probability of Touching specific strikes is critical. While these strategies cited are all indifferent to direction, you need to reconcile the chosen strategy with the relevant probability model. Models Humps & Curves ... Probability Distribution, Skew & Kurtosis that is! With any of the 3 Options Pricing Models, all have a common feature a Distribution Curve. There are 4 measures associated with the Distribution Curve. These 4 measures in mathspeak are called "moments", a concept originated from physics expressing quantity. A moment represents the magnitude of force, measuring distance from an axis of rotation.

As a retail trader, do not get hung up about the mathspeak; but, understand how the mechanics of these 4 measures apply to the Distribution Curve of the Option Pricing Model you select in the trading screen. Taken all together, these 4 moments express the probability distribution of your constructed spread in relation to the underlying product traded. 4 Moments 1. The Mode of the probability distribution of X, where X is the underlying's price. Measures of central tendency ('"averages"): Mean, Mode and Median can be used to describe what price could behaviourally do in a certain way around the live price itself. Most trading platforms use the "Mode" in their distribution curve to calculate probability, as it's the most widelyaccepted central tendency measure for trading purposes. Back to basic statistics ... Mode is the most frequently occurring value in a data series. The number of occurrences at a price point expressed as a probability is useful for trading. The order gets filled as price occurs at a particular point. Median is the value in a data series, where half the values are higher than it and half the values are lower than it. It doesn't help traders with the frequency of price occurring. Mean is calculated by adding all values in the data series, then dividing it by the number of values in the data series. It is not an observable number in itself, as it derived from other numbers. To see the impact of price movements on your option trade, there is no use in expressing probability with mean numbers, as it is composed of other numbers. 2. Variance, is expressed as a positive or negative interval away from the mean. The square root of which is the Standard Deviation (SD) or Standard Error, also referred to as the "Probability Range". Most trading platforms have a +/ symbol ("sigma") representing the SD, with a Probability Range field that can be set to 1 (68%), 2 (95%) & 3 (99%). 3. Skew, is the measure of the shift ("lopsidedness") in the density of the probabilities of a distribution curve, as the MeanMedianMode separate from each other and are no longer equal to one another. See "Distribution Types: Normal, Positive & Negative Skew". Skews exist for the very reason that institutions are taking on/laying off the risks in their underlying positions against that market they are trading in (a.k.a "hedging"). Skews arise from institutional hedging needs and their requirement to limit unexpected arbitrage in the market(s) they are exposed to. To hedge, institutions use large amounts of Calls and Puts in varying quantities and combinations, in turn affecting the supply and demand for options (ITM, ATM & OTM), reflected in changes of the underlying's Put-Call Ratio.

A retail trader may say ... I typically only use ATM and OTM options, so what has Institutions taking ITM positions have to do with me? Always remember at a given strike, there is an ITM Call/Put paired with an OTM Put/Call at that SAME strike. So, as Institutions drive Supply/Demand for ITM Calls/ITM Puts impacting the IV, on the flip side, your OTM Puts/OTM Calls get affected. ATM/NTM options are not exempt from this Supply/Demand action either, as they sit between ITM and OTM options. Only when there is no skew (skew = 0), is the Supply/Demand of Calls exactly equal to the Supply/Demand of Puts. Precise equilibrium of the fear of price rising matches off exactly against the fear of price rising. Perfect equilibrium is unlikely to last (a few seconds maybe; but, not over days). Especially in highly liquid Index/ETF products, there is an inherent skew bias in the underlying. And zero skew conditions do not remain, as Supply/Demand of Puts/Calls must become imbalanced at some point, to create a twosided market with BidAsk differentials. Other than a Zero Skew, there are 3 other types of Skews: Positive Skew: As strike prices increase, Implied Volatility of both Calls & Puts rises higher. Most prevalent in Agricultural Commodities (Corn, Wheat, Soybeans, Bean oil, meal), Orange juice, Coffee and Oil/Oil products. Negative Skew: As strike prices increase, Implied Volatility of both Calls & Puts falls lower. Most prevalent in equity Indexes: S&P, OEX (XEO), bonds and livestock (cattle). Dual Skew: product has both Positive and Negative skews, typically the skew reverses around the Near-the-Money strikes or ATM. Most prevalent in Gold, Silver, Metals and Currencies/Currency ETFs. Look on the right pagelets for examples of how to use Positive, Negative and Dual Skews. 4. Kurtosis, measures whether the distribution is tall and thin or short and flat, compared to the normal distribution of the same variance, around the Mode (the Live Price of the underlying traded). It suggests when and which options are over/underpriced. A Normal Distribution curve has Zero Kurtosis. Positive Kurtosis (Leptokurtic) has A pointed peak around the live price of the distribution = higher probability or greater frequency than a normal distribution of future price occurrences to be closer to the live price; and "Narrow shoulders" = higher probability or greater frequency than a normal distribution for price occurrences to have extreme moves within 1, 2 or 3

Standard Deviations, as the body of the Leptokurtic midsection is narrower than a normal distribution. Narrower midsection = lower probability or less frequency of intermediate moves compared to a normal distribution. Positive Kurtosis suggests OTM Calls & OTM Puts and ITM Calls & ITM Puts are underpriced. Negative Kurtosis (Platykurtic) has A flatter rounder peak around the live price of the distribution = lower probability or less frequency than a normal distribution of future price occurrences to be closer to the live price; and, "Wider shoulders" = lower probability or less frequency than a normal distribution for price occurrences to have extreme moves within 1, 2 or 3 Standard Deviations, as the body of the Platykurtic midsection is wider than a normal distribution. Wider midsection = higher probability or more frequency of intermediate moves compared to a normal distribution. Negative Kurtosis suggests OTM Calls & OTM Puts and ITM Calls & ITM Puts are overpriced. Specifically, with Kurtosis, you will get differing views on how useful it is for retail trading, especially from ex-market makers/floor traders. Namely, because with liquid products, options are never mispriced. The price of the an option is what you are able to buy it marginally below Theoretical Price; or, sell it marginally above the Theoretical Price for that day. Though, you will get consensus with the value of using Skew for retail trading purposes. So, if you use a paid service that provides IV data, make sure at minimum the service provides measures of Skewness, as part of the package. If it provides Kurtosis (without additional charges), it's a bonus and a clear differentiator. Ranges and extremes of Implied Volatility, Skewness and Kurtosis act as magnetic fields pushing/pulling price towards/away from its mean/mode, as measurable dimensions of price.

Conclusion: It is the Demand/Supply of Put/Calls, priced by Implied Volatility that shapes the Skew (and Kurtosis) of the underlying traded. In turn, forming the Probability traits of how price occurrences are to be distributed from where the live price is trading. Always choose a higher probability and lower reward trade to control the risks. Want more on factoring the increase/decrease in forecasted IV to Theoretically Price an option or spread?

The Earliest Date Test for Credit Spreads and Latest Date Test for Debit Spreads ...

Most beginner traders are made aware of exiting Credit spreads 10 days to expiry to avoid Gamma risks and exiting Debit spreads 30 days to expiry to avoid acceleration in Theta decay. Aside from the Calendar which needs specific treatment (see below) Credit spreads are +Theta and at the same time Vega trades, there is an Earliest Date Test (before 10 days to expiry) that can be worked out to assess the exact date when 80% of the original Credit has been reduced to buy back the Credit spread for profit. Debit spreads are Theta but at the same time +Vega trades, there is a Latest Date Test (before 30 days to expiry) that can be worked out to assess the exact date when a forecasted rise in IV is overcome by Thetas erosion, to exit the trade before this happens, instead of incurring the Maximum Loss Options Strategies | Trading Plan Your Trade Plan specific to each spread type must include ... Entry Criteria that is consistently re-applied as Stay In-Play and Exit Criteria for ... Market Ranges: Extreme, Normal & Dull Days. Pure Price Technical Analysis: Point & Figure Patterns. Greeks unique to the construction of each spread type. Additional Criteria: VIX, Strike Width Intervals, Delta & Timeframe. Theoretical Pricing Models (choice of 3): applying the relevant model specific to the product. 3 Test Scenarios: 1. Construction Criteria, 2. Probability of Touching the strikes of the spread's construction & 3. IV & Theta: Earliest/Latest Date Test (based on IV Forecast). Reward : Risk Ratio. Implied Volatility Forecast: minimum of +10% IV for Debit spreads and 10% IV in Credit spreads. Skew Forecast. Work the Entry Hard. Work the Exit Hard. Automated Alerts to Monitor the Position: specific to each spread type set up a combination of Alerts to track the Rise/Fall of the price of the associated spreads Debit paid/Credit received at specific +/ % changes. Rise/Fall of Implied Volatility of the associated Debit/Credit spread at specific +/ % changes. Price movement based on preidentified P&F trading ranges for the Upside/Downside or Range-bound levels. Watch the video below for a preview inside the comprehensive trade plan template included in the Original Curriculum. RIGHT Mouse Click on the video, choose Full Screen and click play.

Or to get Full Screen mode, click on play and double click any corner of the video. Staggering contracts as part of the trade plan, as the Skew shifts ... Iron Condor: constructing a super wide wing span in response to difference in / + Skew Changes Recall the difference in Skew: Positive Skew makes Calls more expensive than Puts. Negative Skew makes Puts more expensive than Calls. Due to the inherent Skew especially in Index Products, OTM Call spreads can trade for about 20%30% higher in premium than equidistant OTM Put spreads.

For example, based on the money management rule of allocating 3% per trade out of 60% of the Net Liquidating Value in the account, say it translates into 6 Iron Condor contracts. Instead of placing 6 contracts at once on the same strikes, stagger the allocation of 2 contracts at the original OTM Call and Put strikes with Delta criteria cited above, 45-50 days to expiry. Then, after 5 days, if the Skew becomes increasingly Positive allocate another 2 contracts to the left of the original Iron Condor, 40-45 days from expiry. Then, after 10 -15 days, if the Skew turns Negative, allocate the remaining 2 contracts to the right of the Original Iron Condor, 30-35 days from expiry.

Staggering the allocation creates a giant Iron Condor with a super wide wing span to shoulder the +/ Skew changes. The Earliest Date Test for Credit Spreads and Latest Date Test for Debit Spreads ... Most beginner traders are made aware of exiting Credit spreads 10 days to expiry to avoid Gamma risks and exiting Debit spreads 30 days to expiry to avoid acceleration in Theta decay. Aside from the Calendar which needs specific treatment (see below) Credit spreads are +Theta and at the same time Vega trades, there is an Earliest Date Test (before 10 days to expiry) that can be worked out to assess the exact date when 80% of the original Credit has been reduced to buy back the Credit spread for profit. Debit spreads are Theta but at the same time +Vega trades, there is a Latest Date Test (before 30 days to expiry) that can be worked out to assess the exact date when a forecasted rise in IV is overcome by Thetas erosion, to exit the trade before this happens, instead of incurring the Maximum Loss. Options Strategies | Trading Plan This section specifically plans how to monetize the Greeks and Probability of Touching strikes criteria unique to each spread type for Entry, Staying In-Play and Exiting, to take Profits and limit Losses. There is plenty of web-available information on the construction of the well-known spreads discussed below. I wont unnecessarily repeat their definitions. Here, it is about emphasizing the criteria for controlling the risks. Design each trade template specific to the chosen strategy, planning that chosen set of Greeks that adds to Profit; versus, which Greeks runs the Risks of incurring Losses. Reconcile the planned versus actual Greeks-based P/L criteria to determine the set up of Entries and Exits, for that particular spread traded. Long Calendar (Debit Spread) Plan: Theta & Vega Affects Profit, Delta & Gamma Impacts the Loss. Both option legs in a Calendar share the same strike, making the intrinsic value in a common strike the same, for the 2 legs. Effectively, this cancels out the intrinsic value with the Short option leg paired against the Long option leg, at the same strike. With intrinsic value removed, only the extrinsic/time value of Theta and Vega remains in the Calendar to make it profitable. This is why the term Time Spreads is used to describe Calendars.

Characteristically of Index products, in comparing Call Calendars versus Put Calendars, the Volatility Skews favours Puts, more so if the market drifts or trends down with a low Volatility climate (i.e. VIX between 10-15). Unlike the current situation with the VIX trading near 40 and above. Typical of the trait of Indices is for their OTM Puts to carry higher Implied Volatilities compared to their corresponding OTM Calls on the upside. The market crashes down. There is no crash up. This allows higher premium to be sold at the Short strike of the ATM Put Calendar making it relatively cheaper than Call Calendars. With more embedded premium that can be sold at the outset, Put Calendars can and do expand more in value to lower the initial Debit than Call Calendars. As the Calendar starts of initially as a Debit spread, it just makes sense to give the position better odds in the first place of collecting more Credit on the Short leg to finance the Long leg. Thats why it makes sense to use Put Calendars for Downside protection; but, for the Upside use Call Diagonals (which is a Short Vertical to finance a Debit Calendar). From here on the term Calendar assumes the construction using Puts. Greeks Profile: Delta (~0.00), Gamma, +Vega and +Theta Profit from selling Theta to collect increasing amounts of premium to fund a rising Vega (IV needs to increase from a lower range to a higher range). Loss arises from sizeable Delta (and Gamma = Delta of the Delta) increasing. You want Delta and Gamma to remain as small numbers, meaning limited directional speed and slow price movement signalling restricted range bound behaviour. You do not want these 2 Greeks to become larger numbers. Theta is the highest when it is ATM (Delta 0.50). A Calendar is worth the most money when it closes exactly on the ATM strike, at expiration of the Front Month Short leg. This is when the Front Month Short leg expires without any time value left (Theta ~0) and the Back Month Long leg is ATM with one full month (or more) remaining. The Roll value of a Calendar, gets its highest value when the products price is ATM producing the greatest amount of Theta to sell the Front Month option again. Entry Strike width intervals. A Calendar strategy, by definition needs the products price to drift or inch up/down within a tightly confined range. So, choosing a product with strike increments of $1 at minimum and $2.50 at maximum between strikes, in the first place, avoids the risk of using a product that has strike intervals that are too far apart (e.g. $5$10 intervals). As there is no Profit to be made using intrinsic value, its not sensible to choose Calendars using a product with wider strike increments. Typically, widening a Calendar from a $1 width to a $2 width is adequate. The need to widen a $1 width Calendar to $3 is rare (i.e. 2 strikes away from the strike the Calendar is initiated

from, typically ATM) and that would be the maximum width. Else, it would be inviting more Delta & Gamma risk than is necessary to construct a viable Reward : Risk Roll Value. In turn, destabilizing Theta & Vega and diluting the Roll Value. If an exact ATM strike with Delta 0.50 is not available, Near The Money strikes (Delta 0.45 to 0.55) may make sense, depending on the Reward : Risk Ratio of the Theoretical Prices at the NTM strikes. Deltas used here are negative, as the chosen construction is using Puts. If the Delta of a product fails to have an ATM/Near the Money Delta between 0.45 to 0.55; but, instead has an OTM Delta of 0.40 (or less) jumping to an ITM Delta of 0.60 (or more), trying to construct an ATM Calendar is pointless. Same rule if the Delta jumps from ITM into OTM, skipping the ATM/Near-the-Money range, reject the product as a non-directional Calendar candidate. A directional spread for a product with such fast Delta characteristics is more relevant. As Delta denotes directional speed, look at the spatial differences between the Delta of the ATM strike and the Deltas of the subsequent OTM and ITM strikes moving away from the ATM strike. If the increments of 3-4 strikes towards the furthest OTM/ITM strike become increasingly bigger per strike up/down, the product has faster Deltas. There is more directional speed in each strike the closer it gets to OTM/ITM. If the increments of 3-4 strikes towards the furthest OTM/ITM strikes become increasingly smaller per strike up/down, the product has slower Deltas. There is less directional speed in each strike the closer it gets to OTM/ITM. Increments in an ideal Calendar would maintain near equally spaced Deltas apart as it moves 3-4 strikes away from the ATM strike towards the OTM/ITM. In absence of equally spaced Deltas, slow Deltas may be an acceptable alternative for a nondirectional Calendar. But, if the product shows fast Deltas, choose another product to assess Calendar candidates. There is no need to test the spatial increments of Deltas beyond 4 strikes up/down, as a non-directional Calendar has limited Profit potential, when the product moves 4 strikes away from the ATM strike. Why? Because the extrinsic value to sell for collecting Theta as premium diminishes, as strikes move away from the ATM strike towards OTM/ITM, given the ATM strike is highest in extrinsic value. Theoretical Price. Peculiar to a multi-month Calendars construction, the Short Front Month leg will always have a different expiry cycle from the Long Back Month leg (until the last month). This distinct difference gives the Calendar its Roll value, which is not present in Vertical Spreads as both legs expire in the same month. Separately measure the IV differences in Theoretical Price between the Front Month to the first Back Month, to estimate the Calendars payout ratio. Arguably, Theoretical Price will at best always be an estimate. Still, specific to the Calendar, as both legs

expire at different months, it is critical to evaluate the Theoretical Price of the first Roll separately. Then, repeat the test for the Long legs subsequent Back Months remaining as Rolls before the last month, which may not have any economic value left to Roll with the onset of accelerating Theta decay in the last 30 days. This is the key tool to gearing the payout ratio of Reward to Risk in the Calendar. The trading platform of your existing broker should already have an in-built Theoretical Price function in it for free. IV. The lower the Back Months IV is to the Front Months IV, the cheaper the initial Debit of the Calendar. Remember, the Calendars Short /Sell leg is the Front Month option and the Long/Buy leg is the Back Month option. For the Short/Sell leg, choose an option about 3-7 weeks away from expiration. For the Long/Buy leg, choose between 2-3 months (1 Roll at minimum, 2 rolls at maximum) away from expiration, to see which Back Month yields the lowest initial Debit. Index products are ideal to trade Calendars, as their Back Month options typically have an IV about the same, if not marginally lower/higher (within /+ 5%), than their Front Month options IV. An iVolatility IV forecast in the lower ranges (0.200.30 deciles; or, 0.600.80) moving up by +0.10 deciles representing an increase of +10% in IV is an ideal opportunity. IV forecasting tools from iVolatility.com have been blended into the Home Options Trading techniques. Select a $1.5 Reward at minimum (ideally $2) to $1 Risk Ratio. In a Calendar, the Reward is the Theoretical Prices estimate of the payout. And the Maximum Risk is limited to the Initial Debit. So, to determine how many Back Months to embed into the Long option, assess the number of months that will yield the biggest difference between the Initial Debit and Theoretical Price. For example, compare a Calendar with 3 months apart, e.g. Apr-Jun with 2 rolls in it: Initial Debit is $0.70 and Theoretical Price payout is $1.05. So this is a $1.5 Reward : $1 Risk opportunity; versus, 3 months apart, e.g. May-Sep with 2 rolls in it: Initial Debit is $0.90 and Theoretical Price payout is $1.58. So, this is a $1.75 Reward : $1 risk opportunity. Choose the Calendar with the higher payout of Reward. You do not need to use all the Rolls, especially if you have met the Roll Target of halving the initial Debit with the

first Roll. How do you work out the exact Theoretical Price to target the first roll of the Calendar? Click here. As it is the Long leg that generates the Profits, whereas the Short leg finances the Long leg, take the effort to evaluate the Long leg separately to make sense of the payout. Remember to value the Long Calendar for its Theoretical Price, to buy this as a Debit spread below the market value. See Price Scout: Work the Entry Hard. Open Interest. For the Front Month Short leg, the Open Interest should be at minimum 1020 times the number of Calendar contracts you plan to fill. (e.g. If you plan to do 4 ATM Put Calendars, the Open Interest number for the ATM Put strike needs be above 40). Same rule applies when rolling the strike in the following Front Month that the Short option is being rolled to must have at least 1020 times Open Interest. Same for the Back Month Long leg, check that Open Interest is between 1020 times the number of Calendar contracts you plan to fill at that same strike. Exit (versus Stay In-Play) For a Calendar Exit always test How much of a +/ change in Price will cause zero change in the Calendars Theoretical Price, i.e. Reward = Risk, a point of no Profit but also no Loss. Plan below/above this price, as an Exit/Roll. How much of a +/ % change in IV (rush & crush) will cause zero change in the Calendars Theoretical Price, i.e. Reward = Risk, a point of no Profit but also no Loss. Plan below/above this IV%, as an Exit/Roll. Specifically for IV, you must stress test the % change in IV of the Short leg separate of the % change in Long leg. Why? Breakdown the construction of the Calendar. The Short leg needs to make money from the Credit collected (premium from Theta sold), as well as IV falling. IV rising in the Short leg wipes out the Theta collected as premium. The Long leg only makes money as IV rises while suffering the Loss of Theta decay. But as the Short legs IV falls, at the same time, the Long legs IV will also fall; but, at different rates. The analysis is flawed if you assume IVs fall on the Short leg shares the same trajectory as a rise in IV on the Long leg, simply because both legs share the same strike. Remember the Short leg is in a Front Month while the Long leg has multiple Back Months built into it. Forward the date to each expiration cycle (1 or 2 rolls) to note the dates before expiration of when Thetas premium contribution of the Short leg fails to compensate the Long legs accelerating Theta decay, especially in the final expiration month of the Calendar. Take note of the date/specific week when Reward = Risk, when no Profit but also no Loss is made. Plan the week(s) of these dates to watch for an Exit/Roll.

Plan each Exit scenario independently. Then, keep the worst case scenario of the Price change, add the worst case scenario of the IV% change and combine the remaining days discounted with forward dates for a complete and robust stress test of the Calendars Exit plan. Any change that adds to Profits, re-evaluate the Roll value. Any change that incurs Losses, consider an Exit. A Roll may or may not be 10 days from expiration. It may be sooner. Though, never Roll a Calendar inside expiration week, as it leaves the Long leg unhedged in that week itself. Always, give priority to Theoretical Price to guide you on timing the date or the week for an Exit/Roll. Base the Break Even Exits of the Calendar on the strikes above/below where the Calendar is initiated (typically ATM) and Theoretical Price conditions. Increase/decrease the products price up/down to a point where the Theoretical Price of the Calendar is not making Profit or incurring a Loss. These are the specific points where the Calendar can move up/down to with zero Roll value remaining points where the Calendar loses its ability to generate a Profit. As IV changes, this impacts the value of the Back Month(s) option. Subsequently, affecting the Calendars Theoretical Price Payout, which makes it mandatory to reassess the trend of the Probability of Touching the Break Even strikes on a weekly basis. Remain in trade, to Roll the Front Month Short option, if the $1.50 Reward : $1 Risk ratio holds up and is Supported by an increasing/progressively modest rise in IV. About 5 days before the 10 days to the Short options expiry, look for highest/higher Roll values as products price drifts between Deltas of 0.45 to 0.55. At these Delta ranges, Theta produces higher/the highest time value to sell the Roll for. Once within the 10 day period before expiry, you are unlikely to get higher Credit premiums to sell, mechanically Roll the Calendar if the Roll can at least lower the initial Debit by 10% 15% for the minimum economic justification to proceed onto the second roll. Otherwise, exit entirely. The higher the Front Month Short options IV is compared to the Back Month Long options IV, the higher the Credit you will receive for selling the Short month, to lower the cost of the initial Debit more than you would otherwise get. Monitor the Calendar more vigilantly if the $1.50 Reward drops down to a $1.25 Reward : $1 Risk ratio, with an increasing/mild rising trend in the Probability of Touching the Break Even points. Exit the entire Calendar if the ratio drops below $1.25 Reward : $1 Risk, with a rising trend in the Probability of Touching the Break Even Points and a flat IV trend. Do not wait to lose 50%-100% of the Initial Debit before exiting entirely. Losing 100% of the Initial Debit is the Maximum Loss.

 Use Point & Figure charting techniques: Look left at the last 3 columns of Xs and Os. Take the Longest column of Xs and Longest column of Os (widest trading ranges) as the worst-case test for a price move in either direction in evaluating a nondirectional Calendars Probability staying ATM/Near The Money. An Exit at Maximum Profit is obvious. Maximum Profit occurs when the products price remains at the strike of the Short leg at expiration. The Front Months Short option expires worthless, while the Back Month retains the highest Theta (extrinsic time value) as it remained ATM. If the products price fails at expiration to stay precisely at the strike of the Short leg, there is zero intrinsic value left. Remember, the Short leg and Long leg share a common strike, eliminating any intrinsic value. An ATM Calendar is worth approximately the same, if price closes an equal distance ITM or OTM from the ATM strike. Close out the Calendar entirely, once you have rolled to the final month before expiration of the Short option. Else, all that is left is a Long naked option exposed to Delta and Gamma risk, plus accelerating Theta decay. Back Ratio Spread (Credit, Even Money or Debit Spread) Plan: Delta, Gamma & Vega affects Profit, Theta Impacts the Loss. A Back Ratio Spread is essentially a Short Vertical Spread, plus buying 12 more options at the Long strike. Hence, the ratio of 1 Short option: 2 Long options or 1 Short option : 3 Long options. Regardless of the ratio, the position is always Net Long options. Remember you need to be Net Long for the directional bias you have forecasted: Calls being Bullish and Puts are for a Bearish outlook. Due to the embedded Vertical, you need a sizeable movement in the expected price direction (Delta & Gamma) and IV to rise as forecasted these are the Greeks to plan for to generate Profits. Remember, the entire position has to fight against the extra Long options increasing Theta decay. The Short Vertical (choose ATM to ITM strikes) is embedded deliberately to subsidize the purchase of the Long options (which shares the same strike of the Long leg of the Short Vertical). Being Net Long options, requires IV to take the central role in increasing the value of the Long legs. Hence, the Back Ratio Spread is often called a Volatility spread. Greeks Profile for a Back Ratio Call: +Delta, +Gamma, +Vega and Theta Greeks Profile for a Back Ratio Put: Delta, +Gamma, +Vega and Theta Profit from increasing +/Delta, +Gamma and +Vega (IV needs to increase from a lower range to a higher range). The Net Long position depends on increases in these 3 Greeks to make money.

 Loss arises from Theta decay. The Short ITM options Credit is used to finance the decay of the Long ITM/ATM or Near The Money (NTM) leg. While Theta is highest ATM where the sale of the Short leg here collects the highest possible Credit practically speaking this may not be the logical strike to construct the Short leg. As price will need to move pas 1 Standard Deviation for the Back Ratio to begin breaking even and closer to 2 Standard Deviations to generate a Profit. This overburdens Delta & Gamma to make such a huge move, effectively lowering the odds of making Profit. It makes more sense to sell the Short leg deep ITM to collect adequate credit to almost offset the cost of buying the Long legs ITM/ATM or NTM options. A positive Vega means IV must rise as forecasted from a lower range to a higher range, for the Long legs ITM/ATM or NTM options to increase in value. Entry Choose a ratio of 1 ITM Short option: 2 ITM/ATM/NTM Long options at a minimum; and, 1 ITM Short option: 3 ITM/ATM/NTM Long options at maximum. Select the ratio that buys you the most Long OTM options, with the total cost of the entire position near zero (or a small debit below $0.75). The way to look at the Credit of the Short ITM option in subsidizing the Long options, is to ask how many Long ITM/ATM/NTM options can the Short ITM option finance is it 2 or 3?; before, it becomes an outright Debit spread where you would typically pay up to 1/3 for the strike width of a Debit Vertical? Choose the combination (2 or 3) that is closest to placing the entire Back Ratio Spread for ~$0.00 (even money). Typically, it is unlikely that the one Short options Credit can subsidize completely the purchase of more than 23 Long options. If the construction allows for a Credit, at maximum, leave $0.01 to $0.10 Credit in the position. Use up as much of the Short options Credit to finance the Long options, as it is the Long legs of the Back Ratio that generates the Profits. The Short leg merely acts as a subsidy for the Theta decay working against the Delta and Gamma of the Long legs that are fighting against the decay to increase in value, as IV rises. While price may move in the direction forecasted, the size of the move may lack sufficient Delta and Gamma to adequately increase the value of the Long ITM/ATM/NTM option(s) as the Long options are further away from the products price compared to the Short leg being deep ITM which is more likely to increase in value, being closer to the products price. As all options are in the same expiry month, the nearer it is to expiration, there is more pressure on the size and directional speed of Delta and Gammas velocity to move the Long option(s), as the Short ITM options Gamma becomes smaller. The Back Ratio spreads risk is characterized by its Valley of Loss. It is the size of Delta plus Gammas move that needs to overcome the Valleys width. And the Valleys depth is a battle between how much Profit a positive and increasing Vega can contribute against how much Loss a negative and increasing Theta takes away with each day of decay. This is why it makes sense to construct the position to fill at near

even money or a small Credit to begin with to make the Valley of Loss as shallow as possible from the first day of entry. Vega must rise to supplement the inadequacies of Delta & Gammas move. The positive Vega in a Back Ratio Spread means IV must increase for the position to become profitable. As the position will always be Net Long more naked options, it is not prudent to place a Back Ratio Spread for an large Debit at the start. Do not give up the opportunity to subsidize the Long naked option(s) with as much credit as you can sell in the Short leg. If you are absolutely certain of the products price direction, get a Long straight ITM call/put option and pay the Debit. At the same time, do not lower the number of Long options just to get a Credit, as it is the Long legs that are responsible for generating the Profit. Given the Net Long feature of these spreads, construct a Back Ratio Call spread to be Net Long at the ITM/ATM/NTM Higher Call strike, for $0.00 or a Credit between $0.01$0.10. At minimum, the Probability of the Call Back Ratio spread Touching its Higher strike should be 30%50% more than the spread Touching its Lower strike. More than 60%, you may well consider a straight ITM call. Back Ratio Put spread to be Net Long at the ITM/ATM/NTM Lower Put strike, for $0.00 or a Credit between $0.01-$0.10. At minimum, the Probability of the Put Back Ratio spread Touching its Lower strike should be 30%-50% more than the spread Touching its Higher strike. More than 60%, you may well consider a straight ITM put. In both scenarios, if you are unable price the spread at $0.00 or a minimum Credit between $0.01$0.10; and, the preferred range of the Probability of Touching the 1 Standard Deviations boundary towards the profitable strike fails to be met, reject the Back Ratio opportunity and evaluate another product. Strike width intervals. In constructing the Back Ratio Spread for a minimal Credit/even money ($0.00), you will have to widen out the strikes. Effectively, stretching the horizontal width of the Valley of Loss. Choose a product with strike increments of $1 at minimum and $2.50 at maximum between strikes. Choose products with tighter strike intervals in the first place, as you will need to widen the strikes apart to price the spread at near $0.00 or a Credit. Avoid a product with strike intervals of $5$10, as you will end up with a Valley of Loss as wide as $30 (or more) apart between the lower and higher strikes to price the position near $0.00. This places overreliance on Delta and Gamma to move violently

in your forecasted price direction, to bridge such a large gap before the position can even start to break even, let alone become profitable. The Valleys depth is determined by how many more Long options there are than the one Short option. The more Long options there are, the deeper the Valley. Always, choose a ratio that keeps the Valleys depth shallow to limit the risk. Work on the width of the Valley first. Then, if needed, adjust the ratio of Long options to the Short option to change the depth of the Valley. As Delta denotes directional speed, look at the spatial differences between the Delta of the Short ITM strike and the Deltas of the Long NTM strikes moving away from the ATM strike. If the increments between strikes towards the NTM strike becomes increasingly bigger per strike, the product has faster Deltas. There is more directional speed in each strike moving towards the furthest OTM strike. Fast Deltas moving to the Long NTM strike is favourable for the Back Ratio Spread signalling more directional speed towards the Break Even Point and the outer boundary of 1SD. What is not favourable is fast Deltas towards the Maximum Risk point, when price moves in the opposite direction it was forecasted to move. If the increments between strikes towards the NTM strike becomes increasingly smaller per strike, the product has slower Deltas. There is less directional speed in each strike moving towards the furthest OTM strike. Slow Deltas moving to the Long NTM strike is not favourable for the Back Ratio Spread signalling lack of directional speed towards the Break Even Point and the outer boundary of 1SD. What is favourable is slow Deltas towards the Maximum Risk point, when price moves in the opposite direction it was forecasted to move. IV. Placing a Back Ratio spread at lower IV levels helps price it closer to $0.00/near evenmoney. At lower IV levels, the ITM Credit received from the sale of the Short option to fund the purchase of more Long options is lower than if IV were in the midlevels; but, the IV of Long options has less to rise if they have already risen to the midlevels. This is the trade-off. An iVolatility IV forecast in the lower ranges (0.200.30 deciles; or, 0.600.80) moving up by +0.10 deciles representing an increase of +10% in IV is an ideal opportunity. IV forecasting tools from iVolatility.com have been blended into the Home Options Trading techniques. Currency ETFs/UltraShort Pro Shares & Commodity Indexes are suited for Back Ratio spreads, as their IV characteristically behaves in an explosive manner. Target a $1.5 Reward to $1 Risk Ratio, at minimum. The Maximum Risk is the width of the Back Ratio spread (difference between Long and Short strike), minus the Credit received; or, plus the Debit paid.

Work the entry hard, it makes sense to value the spread for its Theoretical Price, to fill it slightly above market value if the Back Ratio is to be done for a credit; or marginally below market value if the Back Ratio is to be done for debit. See Price Scout: Work the Entry Hard. Evaluate the Reward in context of 1 Standard Deviation (+1, 1). For a Back Ratio Call spread, the Probability of Touching the Upside Exit within +1 from the live price needs to be 60% or more. This leaves a 50+% Probability of Price reaching the Upside boundary of +1. Back Ratio Put spread, the Probability of Touching the Downside Exit within 1 from the live price needs to be 60% or more. This leaves a 50+% Probability of price reaching the Downside boundary of 1. Determine at what price, after +1 or 1 is passed that a Reward of 1.5 times the risk incurred can be made. Then, test if the Probability of Touching this price point is at least 40%. Also, raise Volatility by +10% to see how much more the Probability increases. Reject any opportunity that fails to yield a 40% Probability of Touching the price point at which a $1.5 Reward per $1 Risk is generated. Likewise, evaluate the Risk in context of 1 Standard Deviation (+1, 1). Take note of the price at the lowest point in the V shape of the Valleys bottom evaluate the Probability of Touching this price point it is where the Maximum Risk of the spread occurs. Within +1 or 1, for a Back Ratio Call, compare the Probability of Touching the Maximum Risk point against the Probability of Touching the Upside Exit. Back Ratio Put, compare the Probability of Touching the Maximum Risk point against the Probability of Touching the Downside Exit. In both cases, the Probability of Touching the Upside/Downside Exits should be at minimum 10% (ideally 20%) more than the Probability of Touching the point of the Maximum Risk. If there is no material edge in the Upside/Downside Exits having obviously higher odds than the Maximum Risk point of being touched, consider a Strangle/Straddle instead. Remember to value the Back Ratio Spread for its Theoretical Price, to fill it close to near even money or as a Credit spread between $0.01 to $0.10 above the market value. See Price Scout: Work the Entry Hard. Open Interest & Days to Expiry

 For both the Short and Long legs, choose strikes with Open Interest between 10-20 times the number of Back Ratio spread contracts you plan to fill. This ensures adequate liquidity, especially when its time to exit the trade. Look to fill the spread between 80-90 days at minimum to 100-120 days at maximum before expiration. Exit Criteria for Profit/Loss (versus Stay In-Play) Maximum Profit is finite the product can drop to zero, in a Back Ratio Put. A Call Back Ratio Call Spreads Profit is unlimited (in theory). The guideline to exit the Call or Put Back Ratio spread is when the Profit is 1.5-2.0 times the original Risk (which could have been a small Credit or $0.00). If price has violently shot past the Long legs strike, it is unlikely to move favourably much more. The price movement would have gone past 1 Standard Deviation and is 1/3rd to half-way towards the boundary of 2 Standard Deviations, which is a rare event. Profit at this level is an obvious signal to close out the entire spread. Once the Profit Target is met, there is an alternative to closing out the entire spread. Sell off only the additional Long option(s). Meaning, the Short Vertical Spread remains in play in losing its maximum Credit premium, you have drained the Credit effectively to finance the Long options. If price reverses in the opposite direction of the Back Ratio Spread, the Short option of the Vertical remaining in-play becomes even cheaper to buy, increasing its Profit contribution. Mechanically close out the Vertical 710 days before expiration. Do not leave it inplay inside expiration week. Price may have dropped/risen to a Support/Resistance level within the expiration week. Do not risk a reversal against the Verticals position with limited days to recover, as there is a remaining Short option in the spread with an obligation to settle it. As IV changes, this impacts the value of the additional Long option(s). Remember, in a Back Ratio spread the Long leg has 12 more naked options which needs a rise in IV to become profitable. Subsequently, affecting the spreads value, which makes it mandatory to reassess the trend of the Probability of Touching the Upside/Downside Exits against the Probability of Touching the Maximum Risk point, on a weekly basis. Stay in play, if the Probability of Touching the Upside/Downside Exits exceeds the Probability of Touching the Maximum Risk by 10% or more. A positive trend is when this difference in Probability of Touching the Upside/Downside Exits increases every week progressively beyond 10% (without a break across weeks where it falls below 10% for a sustained 23 days), in favour of Touching the Upside/Downside Exit. The Probability of Touching the Upside/Downside Exit should increase from the original 50% (which was an entry criteria) towards 60%. Consequently, the Probability of Touching the Maximum Risk point should fall by a near equal %.

Exit the trade, if the Probability of Touching the Break Even Exit falls below the Probability of Touching the Maximum Risk by 10% or less. A negative trend is when this difference of Probability of Touching the Upside/Downside Exits decreases every week regressively below 10% (without a break across weeks where it rises above 10% for a sustained 23 days), in favour of Touching the Maximum Risk point. The Probability of Touching the Break Even Point itself fails to increase from the original 50% (which was an entry criteria); but, is reduced towards 40%. Consequently, the Probability of Touching the Maximum Risk point rises by a near equal %. This signals the Probability of price Touching the Upside/Downside Exit has lost its edge to move away from the Maximum Risk point. Do not wait to incur 50+% of the Maximum Loss before exiting entirely. Point & Figure charting techniques: Look left at the last 3 columns of Xs and Os. Shortest column of Xs (tightest Upside range) as the worst-case test for a favourable price move up of a Bullish Back Ratio Calls Probability. Use the Longest column of Os (widest Downside range) as the worst-case for price moving in the opposite direction of a Bullish Back Ratio Calls Probability. Shortest column of Os (tightest Downside range) as the worst-case test for a favourable price move down of a Bearish Back Ratio Puts Probability. Use the Longest column of Xs (widest Upside range) as the worst-case for price moving in the opposite direction of a Bearish Back Ratio Puts Probability. Exit on price drifting with 3540 days before expiry. With 12 weeks before 30 days remaining, if price fails to move past 1 Standard Deviation; but, inches up/down or drifts within the Upside/Downside Exit of the Long strike and the boundary at 1 and +1, exit the position that shows a marginal Profit or Loss. Close out the entire spread to avoid incurring the Maximum Risk. With 510 days before 30 days to expiry, while the Credit of the Short option is funding the additional Long options, there is not much Delta, Gamma & Vega can do to generate Profit in the Long leg. There is only Theta decaying at the square root of time (days) that is certain, accelerating exponentially with 2123 days remaining before expiry. This Theta decaying as premium collected only acts as the subsidy for the Long options, it does not generate the Profit. Alternative Exit for directional failure. Price moves in the opposite direction to that originally planned for the Back Ratio Spread: Call = Bullish, Put = Bearish. Other than closing out the entire spread, buy back only the Short option if possible, for $0.20 or less; but, leave the additional Long options in play. The absence of the Short option takes out the Valley in the Maximum Risk, should price reverse back towards the original direction forecasted. Short Iron Condor (Credit Spread) Plan: Vega & Theta affects Profit; Delta & Gamma Impacts the Loss.

The reason behind constructing the 2 Short OTM Verticals (a Call Vertical + a Put Vertical) of a Short OTM Iron Condor equidistant from the products price, is to neutralize the risk of movement in Delta and Gamma. For entry, do not leg into the position as 2 separate Verticals. Enter into the position as a whole Iron Condor. While the wing span of a typical Iron Condor appears equally balanced in terms of the left and right distance apart from where price is trading, the price dispersion of the product is unlikely to take the form of a normal bell shaped curve where the left halve is the exact mirror image of the right halve. The Skew bias in the product most notably in certain Index products, can flip between being positive and negative, throughout the expiration cycle. Greeks Profile: Delta (~0.00), Gamma, Vega and +Theta Profit from increasing amounts of Theta decay and descending Vega (IV needs to drop from a higher range to a lower range). Loss arises from sizeable Delta (and Gamma = Delta of the Delta) increases. You want Delta and Gamma to remain a small number, meaning limited directional speed and slow price movement signalling restricted range bound behaviour. You do not want these 2 Greeks to become large. While Delta is not exactly equal to an options Probability of Expiring ITM, in essence it is more a proxy, Delta is valid to use it as the starting point in constructing the wingspan of the Iron Condor. As the aim is to retain nearly all of the Credit sold within the 2 Short Verticals on either side, a Credit Iron Condor is typically constructed around where the Delta for Calls is between +0.20 to +0.30 and the Delta for Puts is between 0.20 to 0.30. Selling an Iron Condor within the Delta range of +/ 0.20 to +/ 0.30 gives the Short Verticals on both sides a ~65%-75% Probability of success for the Credit received to expire worthless. At maximum, tighten the wing span to choose Calls and Puts with a Delta of +/ 0.35 for a 60% Probability of success but no tighter. You want more than 50:50 odds of retaining the credit collected as premium. Entry Strike width intervals. An Iron Condor strategy, by definition needs the products price to drift or inch up/down within a tightly confined range. So, choosing a product with strike increments of $1 at minimum and $2.50 at maximum between strikes, in the first place, avoids the risk of using a product that has strike intervals that are too far apart (e.g. $5, $10 intervals). An alternative is to widen the $1 strike intervals to $2; or, widen out the $2.50 strike intervals to $5. You can sell $0.25-$0.35 out of $1 strike intervals, just as you can sell $2.50-$3.50 out of $10 strike intervals. Though its not identical.

 Choosing an Iron Condor from a product with $10 strike intervals does not guarantee that you can collect more Credit in selling the same fraction within the width of the strikes in a product with $1-$2.50 strike intervals. The reason the strikes are set that far apart in the first place, represents the propensity of the product to move at those intervals, which poses the Delta and Gamma risks that you do not want for a Credit Iron Condor. Lowering the initial Credit received (i.e. increasing the wing span) raises the probability of retaining the Credit that was sold. The entire wingspan of the Credit Iron Condor should stay within 1 Standard Deviation of where live price is trading, otherwise the Iron Condor is not collecting adequate premium to economically justify the construction in the first place. In other words, do not construct Short Iron Condors spanning 2 Standard Deviations wide. Using a product with $10 strike intervals, invites more Delta and Gamma risk than is necessary for Theta and Vega to cope with, diluting the amount of Profit contributed by these 2 Greeks. Of note, in general because the interest rate component is built into Calls plus the inherent Skew which is typically more pronounced in Index products, the OTM Calls can typically trade 30%-40% higher in Credit premium to sell than the equidistant OTM Puts. Within a Short period (less than 30 days), the richer premium on the Call side is driven by the inherent +/ Skew of the product and less to do with the interest rate. With richer premiums on the Call side, it is often easier to get filled on more aggressive mid-price fills by Shorting an Iron Condor when the product is going into a small to moderate rally; but, less so with a sell-off. So, use the Futures to gauge premarket open trading activity, to see if the major broad-based Indices are opening higher that day to sell the credit at marginally higher prices (up to +0.10 above the Theoretical Price of the Credit Iron Condor) and work the order hard to fill within 6090 minutes of the markets opening. If the Delta of a product fails to have an ATM/Near the Money Delta between +/ 0.45 to +/0.55; but, instead has an OTM Delta of +/ 0.40 (or less) jumping to an ITM Delta of +/0.60 (or more), trying to construct an equidistant Iron Condor with a missing ATM strike as the centre that joins the Short Vertical Put together with the Short Vertical Call, as one positions adds Delta risk in price movement. Deltas skipping the ATM/Near The Money strikes represent unstable Delta and Gamma, which is not the required criteria for an Iron Condor. Same rule if the Delta jumps from ITM into OTM, skipping the ATM/Near-the-Money range, reject the product to construct a non-directional Iron Condor on. An unbalanced/ratioed Iron Condor for a product with such Delta characteristics may be more relevant. Other than directional risk, Delta also denotes directional speed. So, look at the spatial differences between the Delta of the Short ATM/ITM strike and the Deltas of the Long OTM strikes moving away from the ATM strike.

 If the increments between strikes towards the OTM strike becomes increasingly bigger per strike, the product has faster Deltas. There is more directional speed in each strike the closer it gets to OTM. Fast Deltas moving to the Long OTM strike is not favourable for the Iron Condor signalling acceleration towards the Upside/Downside Exits and the outer boundary of 1 and +1. If the increments between strikes towards the OTM strike becomes increasingly smaller per strike, the product has slower Deltas. There is less directional speed in each strike the closer it gets to OTM. Slow Deltas moving to the Long OTM strike is favorable for the Iron Condor signalling deceleration towards the Upside/Downside Exits and the outer boundary of 1 and +1. Increments in an ideal Iron Condor would maintain near equally spaced Deltas apart as it moves 3-4 strikes away from the ATM strike towards the OTM strikes both on the Call and Put side. In absence of equally spaced Deltas, slow Deltas may be an acceptable alternative for a non-directional spread. But, if the product shows fast Deltas, choose another product to construct an Iron Condor on. There is no need to test the spatial increments of Deltas beyond 4-5 strikes up/down, as a non-directional Iron Condor has limited Profit potential with price moving 4-5 strikes from the ATM strike, price will almost be Touching the Exits on either side. Never sell options (be it an Iron Condor or Vertical) in the Front Month. In the last 21-23 days before expiration, the negative Gamma risk outweighs the Theta premium collected. With 10-15 days to expiry, Gamma explodes at the ATM options. Even if Delta stays flat (~0.00), the negative Gamma risk (measuring in/stability) expands exponentially at an acute curvature that is in multiples of Theta decaying also exponentially (at the square root of time). Do not initiate an Iron Condor with less than 20 days before expiry. Point & Figure charting techniques: Look left at the last 3 columns of Xs and Os. Use the Longest column of Xs and Longest column of Os (widest trading ranges) as the worst-case test for a price move in either direction in evaluating a non-directional Iron Condors probability of price staying within the wing span. IV. While at higher IV levels, you get to sell 2 Short Verticals combined as one Iron Condor for more Credit, the risk of IV making a higher high increases. IV forecasting tools from iVolatility.com have been blended into the Home Trading techniques. An IV forecast in the decile ranges of 0.700.80 falling or 0.300.40 decreasing by 0.10, i.e. a drop of 10% helps drop the credit further in addition to the Theta collected as premium in a Credit Iron Condor, given its Vega and +Theta profile. If IV is in the decile range of 0.000.10, IV could fail to fall lower and rise instead. IV increasing raises the Iron Condors Credit value, when we want it to fall to buy it back cheaper than when we sold it.

 If IV is in the decile range of 0.901.00, IV could rise to make a higher high. Again, IV increasing raises the Iron Condors Credit value, when we want it to fall to buy it back cheaper than when we sold it. Broad based Indexes (e.g. DIA/DJX, QQQQ/MNX, SPY/XSP) are ideal to trade Iron Condors, because within 50 days their Front Months composite IV is often marginally higher than their Back Months composite IV. This gradual decline in IV together with price drifting collecting positive decay, improves the odds of trading Iron Condors. Even with an inherent Skew bias unique to specific Index products, its very rare to find more than a 3%-5% difference in the composite IV between the near and far month in most tracking Indexes/ETFs. Do not expose Iron Condors unnecessarily to spikes in an IV rush, hoping to gamble on an IV crush after the rush to make it profitable. Other strategies using other products are better suited for sudden and large changes in IV differences. Within the stipulated time frame to trade Iron Condors, the practical IV testing range of an Iron Condor of most major tracking Indexes for an IV rise/fall is between +/ 5% to +/ 10%. Any more will not be a realistic simulation. The major broad-based and tracking Indexes/ETFs are absent of single event-related news (peculiar to a stock) that spikes the IV within any individual month. Indexes/ETFs are more conducive to trading Iron Condors as they contain Volatility Skews within acceptable limits that do not add Volatility risk. High IV is not a license to sell it. IV must fall below its high. Neither is Low IV a license to buy it. IV must rise above its low. The core gauge of the broader markets propensity to buy/sell 30-day IV is the VIX. It makes more sense to identify Short Iron Condor opportunities when the VIX is at a higher trading range versus when it is at a lower trading range. The higher the VIX is, the IV levels improves the odds of collecting higher premium. The historical trading ranges of the VIX ranging between 10-20-30 was broken, since October 2008. And a year of trading under the new ranges needs to happen, to comment on what the new ranges would be. The Reward : Risk Ratio of the Iron Condor needs to be analyzed differently. Sell at minimum 25% up to a maximum of 35%, of the strike width of the Verticals making up the Iron Condor. So, for an Iron Condor with ... $1 strike intervals for the Call and Put Short Verticals, sell the OTM strikes at +/ Delta 0.250.35 to receive between $0.25 to $0.40 of credit in total. $2.50 strike intervals for the Call and Put Short Verticals, sell the OTM strikes at +/ Delta 0.250.35, to receive between $0.65 to $1.00 of credit in total. If you have clear reasons to sell higher Call/Put Deltas, stop at +/- 0.35 Deltas as the maximum. Otherwise, the edge in the odds of expiring ITM becomes unfavourable towards the OTM Short strike.

Selling these consistent fractions of the width of the Verticals making up the Iron Condor, regardless of the different strike intervals, exposes the edge of Iron Condors wings to ~40% (or less) of being touched by price movement. In turn, giving the Iron Condors outer wings a minimum of ~60% (or more) probability of price not touching them, for the position to retain the Total Credit received. At maximum, choose OTM strikes that give the entire Iron Condor a 30% probability of both outer wings being touched by price movement, i.e. 70% probability of not being touched. Lowering the probability beyond 30% is margining capital on a credit spread beyond what is efficient that could have been used for another strategy. Regardless of the strike width chosen, the typical method of constructing an entire Iron Condor position is to contain its entire wing span within 1 Standard Deviation ( 1 to the Downside/left of the Live Price and +1 to the Upside/right of the Live Price). Outside the range of 1 and +1 makes it difficult to collect sufficient credit premium to justify the return on probabilities of initiating a 4legged, 2ways nondirectional trade. However, beyond the typical method and unique to trading Iron Condors is the method of staggering the number of contracts allocated for the entire trade, across an increasing number of strikes. See pagelet on the right for depiction of staggering contracts within a given % allocation per trade. Remember to value the Short Iron Condor for its Theoretical Price, to sell it as a credit spread above the market value. See Price Scout: Work the Entry Hard. Open Interest & Days to Expiry For the entire position, choose strikes with Open Interest between 1020 times the number of Short Iron Condor contracts you plan to fill. This ensures adequate liquidity, especially when its time to exit the trade. Look to fill the Iron Condor more than 35 days at minimum up to 50 days at maximum before expiration. Below 30 days, the Credit collected is insufficient to reward the position for the Delta & Gamma risk going into the 5-10 days before expiry. Above 50 days, exposes the Iron Condor to too much IV uncertainty and possibly changes in interest rates. Exit Criteria for Profit/Loss (versus Stay In-Play) Exit criteria for Profit ~10 days before expiry, exit all 4 legs; or If the Short Call Vertical or Short Put Verticals value has dropped to $0.10-$0.15, buy back the Vertical to close out the Short side that is closer to where price is

trading. Do not risk the possibility of price retracing in the opposite direction to hit either side of the Short Verticals in the week of expiration itself. For Long options in the Verticals trading near $0.05, do not close these legs out. Buy back only the Short options in the Verticals. This leaves you with Long options should price bounce back unexpectedly. Always observe the closing rule of 10 days before expiry. Only if favourable pricing conditions occur as stated above, then use the variation in closing just the Short leg and leaving the Long option of the Vertical untouched. Otherwise, mechanically exit the entire Iron Condor. Some more experienced traders choose to hold the Iron Condor till 57 days within the expiry week itself, to close it out. Namely, this is what they have consistently done as a routine. Stay consistent with the number of days to exit: if its 10 days stick to it, if the decision to exit is between 57 days stick with it. Before 1015 days expiry, when 70%80% of the Iron Condors credit has been reduced, exit the trade entirely. For e.g., an Iron Condor sold for $1.00 decays down to $0.20, close out all 4 legs. The remaining 20% of Profit is marginal and not worth the Delta and Gamma risk of remaining in play. Its not logical to risk the entire $1.00 (of which youve already gained ~80%) for less than 20% more Profit to milk in 2+ week s. Guard against the greed and let sensible fear prevail. Stay In-Play, with 20-30 days before expiry If the Probability of Touching the Upside/Downside wings is between 30% 40%; but, watch the position when the Probability of Touching the wings drifts higher towards 45%55%. Watch the Iron Condor more closely, if the iVolatility Hi/Low Indicator drifts aimlessly between the 0.450.55 decile without a clear signal, if IV will drop further or stay range bound. For example, if IV has already dropped from the 0.80 decile down to the 0.60 decile, i.e. IV has fallen 2 full deciles = 20%, it may be bouncing against Support for the IVs mid-range between the 0.450.55 decile range and fail to fall further. Be vigilant when the original Deltas of the short OTM Calls (+0.25 to +0.35) of the Credit Call Vertical grows larger, as price moves towards the Call Vertical side. And when the original Deltas of the short OTM Puts (0.25 to 0.35 ) for the Credit Put Vertical grows larger, as price moves towards the Put Vertical side. In either case, this signals the original OTM strikes are at risk of becoming more costly to buy back, which reduces the Profit of the trade. Exit Criteria to Limit Losses Exit the entire trade before/during economic or political news that violently increases the overall markets Volatility. i.e. VIX shoots up above its daily volatility range.

 The Probability of Touching the Exit on either the Upside or Downside of the Iron Condor increases from the original 40% to 60%70% with 5-10 days before expiry. IV rises to raise the Iron Condors original credit by ~125%, making it more expensive to buy back, instead of decreasing the premium collected, which is what is needed to make it cheaper to buy back. An Iron Condor needs to maintain a negative Vega, representing a drop in IV to stay profitable. The negative Vega needs to become an increasingly larger number for the forecasted fall in IV to add to Profit. If the negative Vega number gets progressively smaller towards ~0.00, IV is rising and without sufficient positive Theta decay to offset the IV increase, the position starts incurring Losses. Theta collected as premium is wiped out by a rising IV, and there may be insufficient days remaining to collect the adequate amount of premium to restore the drop in the credit spread. Remember, just as you can only lose 1 days worth of decay in a debit spread, you can only effectively collect one days worth of premium per day in a credit spread. Straddle/Strangle (Debit Spread) Plan: Delta, Gamma & Vega affects Profit, Theta Impacts the Loss. In terms of construction, there really is only one material difference between a Straddle and a Strangle. For any given product, if there is no +0.50 Delta Call with a corresponding exact 0.50 Delta Put, there is no ATM Straddle. ATM by definition requires a precise 50:50 Delta for the Call and Put. Construct a Strangle instead using a Near-The-Money Call and Put strike. For a Straddle/Strangle, a price Rise in the product, increases the Theoretical Price of the Call. Simultaneously, lowering the Theoretical Price of the Put. Drop in the product, increases the Theoretical Price of the Put. Simultaneously, lowering the Theoretical Price of the Call. This increase in Theoretical Price is necessary to generate a higher sale price than the original Debit paid, to make a Profit. Greeks Profile: ( / +)Delta, +Gamma, +Vega and Theta Profit from increasing amounts of / + Delta, + Gamma and a rising +Vega (IV needs to increase from a lower range to a higher range). The Straddle/Strangles risk is characterized by its V-shaped Valley of Loss. It is the size of Delta & Gammas move that needs to overcome the Valleys width. And the Valleys depth is a battle between how much Profit a positive Vega indicating a rising IV can contribute against how much Loss a negative and increasing Theta takes away with each day of decay.

 The sum of a Calls Delta and Puts Delta is mean to approximate ~1.00. It seldom equals 1.00 exactly because of the inherent Skew bias towards the Put/Call side, in any given product. At any given OTM/ATM/ITM strike, the sum of the absolute value of a Call Delta plus the corresponding Put Delta is typically equal to between ~0.95 1.05 (i.e. no exactly 1.00). Absolute value means removing the + sign in front of the Call Delta and sign in front of the Put Delta. Specific to a Straddle/Strangle, an increase in the Call Delta results in a near equal decrease in the Put Delta; and vice-versa. Loss arises from sizeable Gamma reduction, Vega reduction and increasing Theta decay. Specific to a Straddle/Strangle, it is the Gamma and Vega that needs to work together to overcome Thetas decay. Gamma is at its highest ATM. Theta is also at its highest ATM. So, as the products price moves towards being more ITM on the Call side (consequently, more OTM on the Put side), IV must rise to supplement the Loss in Gamma to overcome Thetas acceleration. Conversely, if price moves towards the more ITM strikes on the Put side (consequently, more OTM on the Call side), IV needs to rise to bridge the gap of Gammas reduction to battle the increasing time decay. Gamma and Theta are irreconcilable enemies. A Straddle/Strangle needs Gamma to hold out against Theta, until Delta moves the price outside either the Call or Put strike forming the boundary of the Valley of Loss. With any of the 3 Theoretical Pricing models, the mathematical expression of Gamma (same for Calls and Puts) will show it does not share a 1:1 linear relationship with Theta (as Calls are expressed differently from Puts, with the interest rate built into Calls). So, a Straddle/Strangle needs multiples of +Gamma to offset the exponentially increasing Theta, with additional +Gamma left over to add to the acceleration of Deltas directional speed of movement. In a Straddle/Strangle, Gamma has 2 jobs: fight Theta and Support Delta. This also, why IV needs to rise to Support an everexhausting Gamma. Think of Theta as the necessary cost incurred to pay for the much needed explosion in Gamma to push price outside the Valley of Loss. Entry Strike intervals. A Straddle/Strangle strategy, by definition needs the products price to explode outside 1 Standard Deviation (1 or +1) and move into 1/3rd to a half of the 2nd Standard Deviation (2 or +2) to make a reasonable Profit.

 So, choosing a product with strike increments of $1 at minimum and $2.50 at maximum between strikes, in the first place, avoids the risk of using a product that has strike intervals that are too far apart (e.g. $5, $10 intervals). Tighten the Valley of Loss - make it narrow in the first place, by using $1$2.50 strike intervals to reduce the Debit paid and lower the initial risk. At maximum pay a Debit that is twice the strike intervals of the product. So, if the products strike intervals are $1 apart, pay $2.00 at maximum. If the products strike intervals are $2.50, pay $5.00 at maximum. Choose an ATM/Near The Money Call and Put strike that has between +/ 0.450.55 Deltas, to construct a Straddle/Strangle. Reject a +/ 0.60-0.40 Delta profile that is biased towards the Call or Put side. Otherwise, the Debit is misspent on a bias towards a neutral Delta, which you should be indifferent to directionally. Other than direction, Delta denotes directional speed, look at the spatial differences between the Delta of the ATM/Near The Money strike and the Deltas of the prices at 1 Standard Deviation, moving away from the ATM strike. If the increments between strikes towards the price at the 1 or +1 boundary becomes increasingly bigger per strike, the product has faster Deltas. There is more directional speed in each strike the closer it gets to the boundary of 1 or +1. Fast Deltas moving toward the 1 or +1 boundary on either side is favourable for the Straddle/Strangle signalling acceleration towards the Upside/Downside Exit and the outer boundary of 1 or +1. If the increments between strikes towards the prices at the 1 or +1 boundary becomes increasingly smaller per strike, the product has slower Deltas. There is less directional speed in each strike the closer it gets towards the boundary of 1 or +1. Slow Deltas moving toward the 1SD boundary on either side is not favourable for the Straddle/Strangle signalling deceleration towards the Upside/Downside Exit and the outer boundary of 1 or +1. For a Long straddle, Gamma is always positive. At minimum, Gamma needs to be at least 3-4 times that of Theta. So, other than offsetting Thetas decay, there is adequate Gamma remaining to manufacture enough Delta, for Delta (be it on the Call or Put side) to grow between 1.5 to 2 times its original value to move price sufficiently for the spread to be profitable. Point & Figure charting techniques: Look left at the last 3 columns of Xs and Os. Use the Longest column of Xs and Longest column of Os (widest trading ranges) as the worst-case test for a price move in either direction in evaluating a non-directional Straddle/Strangles probability of moving outside its Valley of Loss. Also, use P&F charting to identify price forming a Triangle pattern. Historically, if the product shows a tendency to have either/both Bullish Triangle Breakouts and/or

Bearish Triangle Breakdowns, this makes it a stronger candidate versus one that fails to show Triangle behaviour. Ideally, the ATM/Near The Money strike you plan to buy is at a price that forms the intersection where the triangle forms its sideways V-shaped point. IV. Straddles/Strangles are affordable at lower IV ranges. It is uneconomic to trade Straddles/Strangles when the IV of the product is in the mid to high ranges. IV forecasting tools from iVolatility.com have been blended into the Home Trading techniques. An IV forecast in the lower decile range of 0.200.30 or 0.600.70 rising by at least 0.10 (+10%) make for an ideal Straddle/Strangle opportunity. Between the 0.000.10 decile, IV could make a lower low, harming the Straddle/Strangle which is a debit spread in need of IV rising. Choose another product to construct the Straddle/Strangle on. Between the 0.901.00 decile range, IV may fail to make a higher high, harming the Straddle/Strangle which is a debit spread in need of IV rising. Choose another product to construct the Straddle/Strangle on. Without sufficient Gamma, the risk is a 0.45 0.55 ATM/Near the Money Delta fails to move at all and price sits in the middle of the Valley at the Maximum Loss, where Theta decay is also the highest eating into the debit paid without an adequate rise in IV to battle the Theta erosion. Fast markets: Commodities (Gold, Oil, Metals), Currency ETFs and the VIX are ideal to trade Straddles/Strangles. Any news is welcome, for e.g. good news: relief funds/government aid in response to bad news: floods destroying agricultural crops, fuel shortages, hurricanes, etc. Straddles/Strangles are indifferent to good or bad news. The news just has to add sudden uncertainty to amplify the repercussions of the single event in fast markets. Much of the news is observable and embedded in the +/ Skew of the product for a given market, without having to subscribe to news services. If you see a huge Skew (more than +/ 10%) and theres nothing in the business news channels, someone knows something and that someone aint you. Avoid the product. Seasonality. IV of Index Options especially OEX options for the last 20+ years drops more than 3-4% during the July to mid-August period. IV becomes volatile from the second half of August till September, rising 4%-5% or more. This makes it an opportune time to specifically scout for buying Straddles/Strangles throughout June, especially during the last 2 weeks of June for 80-90 day opportunities.

 For equity-based Indexes/ETFs, reconcile the IV range in relative terms to where the VIX is trading at. For Indexes/ETFs from other asset classes (Commodities/Currencies), use an IV forecasting service (for e.g. iVolatilitys Advanced Historical Data, which forecasts IV for 30-60-90-120-180 days for Calls, distinct of Puts and Calls+Puts combined). As the Reward of the Straddle/Strangle only occurs after price moves past the boundaries of 1 Standard Deviation (1 or +1), there is a need to test the Probability of Touching the Upside/Downside Exits of an identified opportunity to qualify it as a candidate to trade. At minimum, the Probability of Touching either Exit points on the Call or Put side needs to be ~50-60%, without an increase in IV. Then, raise the IV by +10% to check if the Probability of Touching either strikes increases above 50%-60%. The use of +10% comes from the IV forecast specific to the IV forecast of the IV of Calls+Puts combined for the term that the Straddle/Strange is to be inplay. Use P&F charting to see the 3-4 prior trading ranges of the product for both the Upside/Downside to confirm a history of triangle formations. If the trading range for both the Upside or Downside gets progressively larger than 1 or +1 after the breakout, this improves the odds of price shooting outside the 1 or +1 boundary from the ATM/Near The Money strike. Remember to value the Long Straddle/Strangle for its Theoretical Price, to buy this as a Debit spread below the market value. See Price Scout: Work the Entry Hard. Open Interest & Days to Expiry For the Straddle/Strangle, choose strikes with a minimum Open Interest between 1020 times the number of contracts you plan to buy. This ensures adequate liquidity to exit the spread, especially on the very day price shoots past the 1 or +1 boundary. You want to sell off and close out the entire Straddle/Strangle on the day of such a big move, as the probability of price moving towards 2 Standard Deviations diminishes, after price has moved 1 Standard Deviation. At latest, you should only wait one day to lapse to close out the position. At this point of Maximum Profit with price having made its large move, do not risk not getting the position filled for 3-5 days. After such a violent move, price tends to stall or may reverse and this can happen within 3-5 days. Get at least 60-70 days before the last 20 days to expiry for a Straddle/Strangle. So, at 80-90 days before expiry, look at identifying candidates. Beyond 90 days, the Debit premium is likely to be more than twice the strike interval do not overspend on extrinsic value especially at the ATM strike where it is highest, even if the product is in the low IV range.

Exit Criteria for Profit/Loss (versus Stay In-Play) Exit Criteria for Profit Target a minimum of 1.5 and a maximum of 1.75 gain in the Debit paid for the Straddle/Strangle. Exit entirely, once you get between 150%-175% ROI. To get more than 2 times the Profit on a Straddle/Strangle is a rare event, as price will need to shoot past the half-way point of the second Standard Deviation (2 or +2) into almost 2/3rds of it. For price to move outside 1 or +1 into half the area within the 2 or +2 is already a extremely huge move, beyond which Gamma will be exhausted as price has moved so far away from the original ATM/Near the Money strike (Delta +/0.450.55), into a deep ITM strike (Delta +/ 1.00) on the Call or Put side. Stay In-Play, 3045 days before expiry, if price failed to move 1 or +1 but The Probability of Touching either the Upside/Downside Exit remains 50%-60%. Watch the position more closely when the Probability of Touching drops below 50% and drifts between 40%-45%. Positive Gamma remains at least 22.5 times that of Theta to offset the exponentially accelerating decay, as the debit spread approaches 30 days to expiry. Prioritize +Gammas ability to offset Theta above the Probability of Touching Break Even Points. If +Gamma fails to offset Theta, count the trade as a Loss. IV is still rising between the 0.20-0.40 deciles but has not yet reached the 0.45 0.55 decile. If IV already has reached the mid-ranges of 0.450.55, IV is likely to stall; and, there may not be sufficient days remaining for IV to rise another full 0.10 decile (+10%) to lift the Straddle/Strangle. IV at the 0.450.55 mid-range risk area has reverted to its mean and is likely to rest at this level as both Support and Resistance. This also poses the risk that IV may fall an IV crush damages the Straddle/Strangle. Exit Criteria to Limit Losses Exit with 30 days to expiry, if price has not moved away from the ATM/Near The Money strike. Within 30 days to expiry, Gamma gets higher and higher, making its curve almost twice as tall at the ATM strike, compared to the original Gamma on the day the Straddle/Strangle was filled. This makes the width of the Gamma curve much narrower, effectively lowering the frequency of a potential price move outside the 1 or +1 boundary. The less frequent a 1 or +1 move is to occur, reduces the probability for price to move outside the Upside/Downside boundary.

 Positive Gamma falls to 11.5 times that of Theta. At this level, +Gamma is suffering exhaustion and lacks the strength to offset the increasingly magnified decay of Theta. Do not wait for Gamma to collapse, coupled with Theta decay, price ends up staying at the bottom of the Valley incurring the Maximum Loss. With less than 30 days to expiry, the Probability of Touching either Upside/Downside Exit falls below 40%, with the Probability of Touching the ATM/Near The Money strike between ~80%90%. Meaning, price will remain in the middle of the Valley of Loss, incurring the Maximum Risk. IV drifts between 0.45-0.55 deciles but fails to rise towards the 0.60 decile. IV is running up against Resistance, as most of the mean reversion has occurred. This signals the end of IVs rising trend. Short Vertical Call/Put (Credit Spread) Plan: Vega & Theta affects Profit; Delta & Gamma Impacts the Loss. Verticals are designed to be directional. The only material difference in choosing between constructing a Vertical for a Credit versus a Debit is the range at which the products IV is at and the +/ Skew of the product. For a Credit Vertical (Bear) Call, identify a clear Support level. A Breakdown below old Support, forms new Resistance to identify OTM Call strikes to sell a Credit Vertical Call. A Positive Skew helps the Calls IV fall as price drops from higher call strikes to lower call strikes in favour of the direction of the Credit Vertical Call. All the P&F Sell Confirmation (Breakdown) patterns, except the Bearish Triangle Breakdown are useful in identifying where price breaks Support towards the Downside. Only after Confirmation, sell the Credit Vertical Call. Given this is a Bearish trade, ensure the use of P&F Breakdown patterns is below the Bearish Resistance Trend Line. For a Credit Vertical (Bull) Put, identify a clear Resistance level. A Breakout to the upside above old Resistance, forms new Support to identify OTM Put strikes to sell a Credit Vertical Put. A Negative Skew helps the Puts IV fall as price rises from lower put strikes to higher put strikes in favour of the direction of the Credit Vertical Put. All the P&F Buy Confirmation (Breakout) patterns, except the Bullish Triangle Breakout are useful in identifying where price breaks Resistance towards the Upside. Only after Confirmation, then sell the Credit Vertical Put. Given this is a Bullish trade, ensure the use of P&F Breakout patterns is above the Bullish Support Trend Line.

Greeks Profile for Credit Vertical (Bear) Call: Delta, Gamma, Vega and +Theta Profit from Delta getting smaller and Gamma getting bigger as price falls down. Profit from Vega means (IV needs to drop from a higher range to a lower range). Loss arises from sizeable Delta increases as price rises against the planned downward direction with Gamma becoming smaller. Greeks Profile for Credit Vertical (Bull) Put: +Delta, Gamma, Vega and +Theta Profit from +Delta getting smaller and Gamma getting smaller as price rises up. Profit from Vega means (IV needs to drop from a higher range to a lower range). Loss arises from sizeable +Delta increases as price falls against the planned upward direction with Gamma becoming smaller. Both Verticals, share the same Theta and Vega characteristics: Profit from increasing amounts of Theta collected as premium each passing day, at the same time, a Vega means IV needs to decrease from a higher range to a lower range. As the aim is to retain nearly all of the Credit sold within the Short Vertical (be it a Bear Call or Bull Put spread), a Short Vertical is typically constructed around where the Delta for Calls approximates +0.30 (+0.25 to +0.35 range) and the Delta for Puts approximates 0.30 (0.25 to 0.35 range).

Selling OTM Calls/Puts within the Delta range of +/0.25 to +/0.35 gives the Short Verticals a ~65%-75% probability of success for the Credit received to expire worthless. At maximum, increase the Delta to +/ 0.40 for the Short Vertical to have ~60% probability of retaining the credit sold; but, no higher, as you will be reaching strikes Near The Money and towards ATM: where Gamma is at its highest. Entry Strike width intervals. With a Short Vertical, as it is essentially a directional strategy, there needs to be sufficient room for the products price to rise or fall. For products with $1 strike intervals, widen the construction of the Vertical out to $2 strike intervals apart, only if you can sell a marginally higher credit by 0.050.10 with the $2 strike apart Vertical, than you can with the Vertical being $1 strike apart. At maximum, choose a product with strike increments of $2.50. Do not choose a product with $5-$10 strike intervals, as the change of larger Delta risks is amplified without any added benefit of improving the ROI on the trade. You can sell $0.50$0.70 out of $2 strike intervals, just as you can sell $2.50-$3.50 out of $10 strike intervals. Though its not identical.

 Choosing a Vertical from a product with $10 strike intervals does not guarantee that you can collect more Credit in selling the same fraction within the width of the strikes in a product widened out to $2 strike intervals. The reason the $10 strikes are set that far apart in the first place, represents the propensity of the product to move at those intervals. Using a product with $10 strike intervals, invites more Delta and Gamma risk than is necessary for Theta and Vega to cope with, diluting the amount of Profit contributed by these 2 Greeks.

Of note, in general because the interest rate component is built into Calls, OTM Calls are typically 30%-40% higher in Credit premium to sell than equidistant OTM Puts. The richer premium on the Call side is also driven by the inherent +/- Skew of the product. With richer premiums on the Call side, it is often easier to get filled on marginally higher than mid-price fills by selling a Credit Vertical Call when the product is going into a mild to moderate rally; Go Short on a Credit Vertical Put with a mild to moderate pull-back to get filled on marginally higher than mid-price fills. So, use the Futures to gauge pre-market open trading activity, to see if the major broad-based Indices are opening higher that day to sell the credit at marginally higher prices (up to +0.10 above the Theoretical Price of the Credit Vertical) and work the order hard to fill within 60-90 minutes of the markets opening.

As Delta denotes directional speed, look at the spatial differences between the Delta of the ATM strike and the Deltas of the OTM Calls/Puts you plan to sell. If the Delta increments from the OTM strikes becomes increasingly bigger per strike up/down, the product has faster Deltas. There is more directional speed in each strike the closer price moves towards ITM. This is helpful, as price can move quickly away from the OTM strikes, if it moves in the planned direction. If the Delta increments from the OTM strikes becomes increasingly smaller per strike up/down, the product has slower Deltas. There is less directional speed in each strike the closer price moves towards ITM. This is not helpful, as price moves slowly away from the OTM strikes, if it moves in the planned direction.

If the Delta of a product is missing an ATM/Near the Money Delta between +/0.450.55; but, instead has an OTM Delta of +/0.40 (or less) jumping to an ITM Delta of

+/0.60 (or more), the product has fast Deltas. There is more directional speed in each strike. As Long as price moves in the direction planned for the Vertical, this is a benefit to the Vertical. Conversely, it can move fast against the position, if price fails to move in the planned direction; but, moves in the opposite direction instead.

Never sell options in the Front Month. In the last 21-23 days before expiration, the negative Gamma risk outweighs the Theta premium collected. With 10-15 days to expiry, Gamma explodes for the ATM options. Even if Delta stays flat (~0.00), the negative Gamma risk (in/stability of movement) expands exponentially at an acute curvature that is in multiples, which will overcome the Theta decaying also exponentially (at the square root of time). During this period, there will be inadequate Theta collected as premium to offset Gammas explosion. Do not initiate a Short Vertical with less than 20 days before expiry. Point & Figure charting techniques: Look left at the last 3 columns of Xs and Os. Shortest column of Xs (tightest Upside range) as the worst-case test for a favourable price move up of a Credit Vertical Puts probability. Use the Longest column of Os (widest Downside range) as the worst-case for price moving in the opposite direction of the bullish Verticals probability. Shortest column of Os (tightest Downside range) as the worst-case test for a favourable price move down of a Credit Vertical Calls probability. Use the Longest column of Xs (widest Upside range) as the worst-case for price moving in the opposite direction of the bearish Verticals probability. IV. While at higher IV levels, you get to sell Short Verticals for more Credit, there is a need to guard against the risk of IV making a higher high. IV forecasting tools from iVolatility.com have been blended into the Home Options Trading techniques. An IV forecast in the higher decile range of 0.700.80 or 0.300.40 decreasing by 0.10 decile (10%) makes for an ideal Short Vertical opportunity. If IV is in the decile range of 0.901.00, IV may make a higher high. IV increasing raises the Verticals Credit value, when we want it to fall to buy it back cheaper than when we sold it. Choose another product to construct a Credit Vertical trade on. For an existing Credit Vertical, exit the position entirely. If IV is in the decile range of 0.000.10, IV may fail to make lower lows, instead IV bounces back up. Again, IV increasing raises the Verticals Credit value, when we want it to fall to buy it back cheaper than when we sold it. Choose another product to construct a Credit Vertical trade on. For an existing Credit Vertical, exit the position entirely. Sector Indexes that are interest rate sensitive (e.g. BKX Financials), seasonally cyclical (e.g. UTY Utilities & XLB Materials) or oil-sensitive (e.g. SOX/SMH

Semiconductors) are ideal to trade directional Verticals. ETFs in other asset classes (Currency, Emerging Markets & Real Estate) are suited for directional Verticals as well. The practical testing range of a Vertical of most major tracking Indexes for an IV rise/fall is +/ 10%. Any more will not be a realistic simulation. The Reward:Risk Ratio evaluation of the Vertical is similar to that of the Iron Condor. Sell at minimum 25% up to a maximum of 40%, of the width of the Verticals (be it a Credit Vertical Call or Credit Vertical Put). So, for a Short Vertical $2 strike intervals for the Call and Put Short Verticals, sell the OTM strikes at +/ Delta 0.25-0.35, to receive between $0.50 to $0.80 of Credit in Total. $2.50 strike intervals for the Call and Put Short Verticals, sell the OTM strikes at +/ Delta 0.25-0.35, to receive between $0.65 to $1.00 of Credit in Total. If you have clear reasons to sell higher Call/Put Deltas, stop at +/- 0.40 Deltas as the maximum. Otherwise, the odds of retaining the Credit becomes unfavourable towards the OTM Short strike. Selling these consistent fractions of the width of the Verticals making up the Vertical, regardless of the different strike intervals, exposes the Verticals Short leg to less than ~40% of being touched by price movement. In turn, giving the Verticals Short leg a minimum of 60+% probability of price not touching it, for the position to retain the Total Credit received. At maximum, choose OTM strikes that give the Credit Verticals Short leg a 30% probability of being touched by price movement, i.e. 70% probability of not being touched. Lowering the probability beyond 30% is margining capital on a credit spread beyond what is efficient that could have been used for another strategy. Regardless of the strike width chosen, the typical method of constructing an entire Vertical position is to contain the entire position within 1 Standard Deviation (1 and +1). Outside 1 and +1 makes it difficult to collect sufficient Credit premium to sell. However, beyond the typical method and unique to trading Verticals is the method of staggering the number of contracts allocated for the entire trade, across an increasing number of strikes. This method of staggering contracts is similar to that used for the Credit Iron Condor. So, for example, based on the money management rule of allocating 4% of the Net Liquidating Value per trade, say it translates into 6 Vertical contracts.

 Instead of placing 6 contracts at once on the same strikes, stagger the allocation of 2 contracts at the original OTM Call and Put strikes with the Delta criteria cited above, 45-50 days to expiry. Then, after 5 days (with 40-45 days from expiry remaining), if price moves in the planned direction, sell another 2 contracts with the same Delta criteria to Roll down the Credit Vertical Call; or, Roll up the Credit Vertical Put. Then, after 5 days (with 30-35 days from expiry remaining), if price moves in the planned direction, sell the remaining 2 contracts with the same Delta criteria to Roll down the Credit Vertical Call; or, Roll up the Credit Vertical Put. Within either period of staggering contracts, if price moves drastically against the planned direction, use the remaining contracts to sell the opposite Vertical to that initiated (e.g. if you originally sold 2 Credit Vertical Call contracts for $0.70 Credit; but, price rises, then sell 2 Credit Vertical Put contracts for ~$0.70 Credit) at an equivalent amount of Credit to offset the original Vertical for a near break even position. In this case, youve legged into an Iron Condor contrary to the normal practice of not legging into spreads but here it is deliberate to break even at ~$0.00 to write-off the original Vertical gone wrong. Rolling up/down the Credit Vertical Put Spread/Credit Vertical Call with each allocation of 2 contracts per Roll should be treated as a new trade with its own individual risk. As this pushes the Verticals Break Even point further aLong the same direction as price movement. If price moves in the planned direction making the original 2 Verticals you sold profitable, try to sell the subsequent 2 Verticals progressively around ~1.25 times more Credit than the original Credit you sold. Staggering the allocation of Verticals builds in a step function into the risk, allowing you to ladder up the Profit potential of the Vertical; yet, still satisfy the money management rule of 2%5% per trade. Otherwise, allocating all 6 contracts at one limits the Profit potential to only one level. Remember to value the Credit Vertical for its Theoretical Price, to sell it as a credit spread marginally above the market value by ~0.10. See Price Scout: Work the Entry Hard. Open Interest & Days to Expiry For a Short Vertical choose strikes with Open Interest between 10-20 times the number of contracts you plan to fill. This ensures adequate liquidity, especially when its time to exit the trade. Look to fill the Vertical more than 35 days at minimum up to 50 days at maximum before expiration. Below 30 days, the Credit collected is insufficient to reward the position for the Delta & Gamma risk going into the 5-10 days before expiry. Above 50 days, exposes the Short Vertical to too much IV uncertainty and possibly changes in interest rates.

Exit Criteria for Profit/Loss (versus Stay In-Play) Exit Criteria for Profit 1015 days before expiry, exit both legs of the Vertical; or If the Credit Vertical Call or Credit Vertical Puts value has dropped to $0.10$0.15, buy back only the Short leg. Do not risk the possibility of price retracing in the opposite direction to hit the Short leg within the week of expiration itself. For the Long option remaining in the Vertical trading near $0.05, there is not much value remaining to sell this leg to close it. Buy back only the Short options in the Verticals. This leaves you with a Long option should price bounce back unexpectedly. Always observe the rule of exiting the entire Vertical 10 days before expiry. Only if favourable pricing conditions occur as stated above, then use the variation in closing just the Short leg and leaving the Long option untouched. Otherwise, mechanically exit entirely. Some more experienced traders choose to hold the Vertical till 57 days to close it out. Namely, this is what they have consistently done as a routine. Stay consistent with the number of days to exit: if its 10 days stick to it, if the decision to exit is between 57 days stick with it. Before 1015 days expiry, when 70%80% of the Verticals premium has decayed, exit the entire trade. For e.g., a Vertical sold for $1.00 decays down to $0.20, close out both legs. The remaining 20% of Profit is marginal and not worth the Delta and Gamma risk of remaining in play. Its not logical to risk the entire $1.00 (of which youve already gained ~80%) for less than 20% more Profit to milk in 2+ weeks. Guard against the greed and let sensible fear prevail. Stay In-Play, with 15-20 days before expiry, if the Probability of Touching the Upside Exit for the Credit Vertical Call and Downside Exit for the Credit Vertical Put is between 20%40%. Watch the position when the Probability of Touching the Short leg drifts between 40%55%. Watch the Vertical more closely, if the iVolatility Hi/Low Indicator drifts aimlessly between the 0.450.55 decile without a clear signal, if IV will drop further or stay range bound. For example, if IV has already dropped from the 0.80 decile down to the 0.60 decile, i.e. IV has fallen 2 full deciles = 20%, it may be bouncing against Support for the IVs mid-range between the 0.450.55 decile range and fail to fall further. Be vigilant when the original Deltas of the short OTM Calls (+0.25 to +0.35), as Credit Vertical Call grows larger, as price moves towards the Call Vertical side. And when the original Deltas of the short OTM Puts (0.25 to 0.35 ), as a Credit Vertical Put grows larger, as price moves towards the Put Vertical side. In either case, this signals the original OTM strikes are at risk of becoming more costly to buy back, which reduces the Profit of the trade.

Exit Criteria to Limit Losses Exit the entire trade before/during economic or political news that violently increases the overall markets Volatility. i.e. VIX shoots up above its daily volatility range. The Probability of Touching the Verticals Upside Exit for the Credit Vertical Call and Downside Exit for the Credit Vertical Put increases from the original 40% to 60%70% with 10-15 days before expiry. Either, close out the Short leg only or the entire Vertical. IV rises to raise the Verticals value to ~125% of what the Credit spread was sold for (making it more expensive to buy back), instead of decreasing the premium collected, which is what is needed to make it cheaper to buy back. A Vertical needs to maintain a negative Vega, representing a drop in IV to stay profitable. The negative Vega needs to become an increasingly larger number for the forecasted fall in IV to add to Profit. If the negative Vega number gets progressively smaller towards ~0.00, IV is rising and without sufficient positive Theta decay to offset the IV increase, the position starts incurring Losses. Theta collected as premium is wiped out by a rising IV, and there may be insufficient days remaining to collect the adequate amount of premium to restore the drop in the credit spread. Remember, just as you can only lose 1 days worth of decay in a debit spread, you can only effectively collect one days worth of premium per day in a credit spread. Long Vertical Call/Put (Debit spread) Plan: Delta, Gamma & Vega affects Profit; Theta impacts the Loss. Debit Vertical spreads are twins of their Credit counterparts (in reverse). I will only state the obvious differences and refrain from repeating the opposite elements that you can work out. Greeks Profile for Debit Vertical (Bear) Put: Delta, +Gamma, +Vega and Theta Profit from Delta getting larger as price falls down and +Gamma gets smaller towards 0.00 and becomes negative. Profit from +Vega means IV needs to increase from a lower range to a higher range. Loss arises from Delta getting smaller as price rises opposing the downtrend, with positive Gamma becoming smaller. The Debit Vertical (Bear) Put is the counterpart of the Credit Vertical (Bear) Call. Greeks Profile for Debit Vertical (Bull) Call: +Delta, +Gamma, +Vega and Theta Profit from +Delta getting larger as price rises up and +Gamma gets smaller towards 0.00 and becomes negative. Profit from +Vega means IV needs to increase from a lower range to a higher range.

 Loss arises from +Delta getting smaller as price falls down against the uptrend, with +Gamma becoming larger. The Debit Vertical (Bull) Call is the counterpart of the Credit Vertical (Bull) Put. The Exit and Entry criteria stated for Credit Vertical spreads applies, except it is reversed to recognize the Debit. With Long Verticals, a wider width between strikes allows Delta & Gamma to expand (within reason) which is required in a directional Debit spread to gain from the price movement. For both types of Long Verticals: Buy at minimum 25% up to a maximum of 35%, of the width of the Verticals (be it a Debit Vertical Call or Debit Vertical Put). So, for a Debit Vertical Call/ Debit Vertical Put with For products with $1 strike intervals, widen the construction of the Vertical out to $2 strike intervals apart, only if you can buy a marginally lower debit by 0.050.10 with the $2 strike apart Vertical, than you can with the Vertical being $1 strike apart. For a $2 strike width apart Vertical, buy the OTM Call/Put strikes at +/ Delta 0.250.35, for a Debit between $0.50 to $0.70 in Total for the entire long Vertical. At maximum, choose a product with strike increments of $2.50. Do not choose a product with $5-$10 strike intervals, as the change of larger Delta risks is amplified without any added benefit of improving the ROI on the trade. For $2.50 strike intervals, buy the OTM Call/Put strikes at +/- Delta 0.25-0.35, for a Debit between $0.60 to $0.85 in Total for the entire Vertical. IV. While at lower IV levels, you get to buy Long Verticals for a lower Debit, the risk of IV making lower lows increases. IV forecasting tools from iVolatility.com have been blended into the Home Options Trading techniques. An IV forecast in the lower decile range of 0.200.30 or 0.600.70 increasing by 0.10 decile (+10%) makes for an ideal Long Vertical opportunity. If IV is in the decile range of 0.00-0.10, IV could fall to a lower low. IV falling decreases the Verticals Debit value, when we want it to rise to sell it back for a higher price than what it was purchased for. Choose another product to construct a Debit Vertical trade on. For an existing Debit Vertical, exit the position entirely. If IV is in the decile range of 0.90-1.00, IV could fail to make a higher high. Again, IV falling decreases the Verticals Debit value, when we want it to rise to sell it back for a higher price than what it was purchased for. Choose another product to construct a Debit Vertical trade on. For an existing Debit Vertical, exit the position entirely. Skew for Debit Verticals

 A Negative Skew helps the long Puts IV rise as price drops from higher put strikes to lower put strikes in favour of the direction of the Debit Vertical Put. A Positive Skew helps the long Calls IV rise as price rises from lower call strikes to higher call strikes in favour of the direction of the Debit Vertical Call. Days to Expiry Look to fill the Debit Vertical with 60 days at minimum before the last 30 days to expiry, i.e. look for candidates 80-90 days out. Only if the Debit paid is still within 25%40% of the width of the Vertical, look for a candidate more than 90 days up to 120 days at maximum. Exit Criteria for Profit, Stay In-Play and Limiting Losses Exit the entire Long Vertical before 30 days to expiry, Theta rises to its highest point of its exponential decay, poised to plummet with 30 days remaining. Within 45 days to expiry, if the Debit Vertical: increases in value by 1.5 times, scale-off 2/3 to 3/4 of the position to lock in Profits. Leaving only 1/31/4 of the position at risk with 70+% Probability of Touching the Upside Exit for the Debit Vertical Call and Downside Exit for the Debit Vertical Put that is profitable, giving you fair odds to sell the remaining Vertical contracts up to 1.75 times the original Debit. Waiting to sell all contracts of the Vertical for 2-3 times its original Debit is not recommended. reduces in value by 30%40%, take off 1/3 to 1/2 the position to limit Losses. Leaving 1/2 to 2/3 of the position at risk and stay in-play for another 10-15 days, if IV continues to rise. But if the Probability of Touching the short put of the Debit Vertical Put and the short call of the Debit Vertical Call decreases below ~40%, close out the remaining contracts and exit entirely. Do not wait to incur the Maximum Loss. Watch the Vertical more closely, if IV drifts aimlessly between the 0.45 0.55 decile without a clear signal, if IV will rise further or stay range bound. If IV has already risen from the 0.10 decile up to the 0.30 decile, i.e. IV has increased 2 full deciles, it may hitting Resistance at the IVs mid-range and fail to rise further. Do not fix the busted Debit Vertical. If price moves drastically against the Debit Vertical spread, exit it entirely. Open Interest and remaining Probability of Touching criteria (Upside/Downside, 1 or +1) for Entries/Exits is similar to that of Credit Verticals. Now, you may know all the criteria stated here but how do you compress it all within 2 hours per day to turn it into a home-based business? Option Greeks | Beta | Alpha

3 other Greeksounding measures: Beta, is useful for retail traders. The Beta coefficient measures a stock's (or portfolios) volatility in relation to the rest of the market. Beta is most commonly used with respect to equities. It is a useful parameter in optimising the choice of assets within your portfolio. As Beta isolates the measure of that part of an asset's statistical variance that cannot be mitigated by the diversification in the portfolio that contains other risk-weighted assets, because it is correlated with the risk of the other assets in the same portfolio. So, if you Betaweight one ticker against another ticker in your portfolio and Beta shows "0", they are uncorrelated. Beta of 0 (uncorrelated) = no related risk between the two tickers. Beta of 1 (fully correlated) = one ticker shares the equivalent risk of the other. Separate of this related risk, you must still manage the trade specific risks inherent in the construction of a particular type of spread. Lambda, is the option's elasticity or leverage: the ratio of the % change in the option price relative to the % change in the Present Value of the underlying's price. It is not a price or absolute measure, but attempts to measure if the ratio is (non)linear. While it features in the mathematics of typical option pricing models which retail traders use, it is excluded from retail trading screens as an observable Greek (like Delta, Gamma, Theta & Vega). There is little practical use for smaller retail traders. It is institutions with large amounts of capital across multiple asset classes as they need to budget the hedging costs of multiple streams of cash flows in tandem with the financing of their portfolios for which Lambda becomes material. Alpha: the ratio of Gamma to Theta. The ratio is more of a Reward to Risk characteristic, rather than a pure measure of sensitivity to changes in risk. It's excluded for practical trading purposes and you won't find it on any screen of retail based trading platforms. All spreads used in the Home Options Trading process are Defined-Risk spreads.

Probability of Touching

The Probability of Expiry measures the probability that the underlying product is expected to be above/below or at a given price ON the exact date of expiry. The probability is specific to the expiration date itself, not before expiration, only on the very day of the expiration date. Other than a butterfly (be it a for a conventional debit; or a a modified fly for a credit), most other Credit spreads: short Verticals & short Iron Condors are exited 710 days before expiry; and for Debit spreads: a Long Calendar, Long Iron Condor, Long Straddle/Strangle & Long Back Ratio Call/Back Ratio Put are exited well before 30 days to expiry, given their Theta decay component. Verticals/ Calendars/Iron Condors should be the core trades in your portfolio, not Butterflies. So, with the majority of spreads there is a need to know the probability before expiration, which is the Probability of Touching: this is the Probability that the product is expected to be above/below or at a given price BETWEEN now (now being the day you fill the spread, say today) and the date of expiry. There is obvious practical trading value in knowing the probability well before the expiration date itself, as stated above. Beyond determining the probability of an ATM/OTM option expiring/not expiring ITM; or, an ITM option's probability of not becoming ATM/OTM (i.e. remaining ITM) ... on any day during the life-cycle of the trade ... make it a practice to track if the Probability of Touching the chosen strikes (for which you have an obligation for selling the option) of your constructed spread has improved/deteriorated, to take the appropriate action.

The Probability of Touch tool is unique only to ThinkorSwim. MB Trading, TradeStation, Interactive Brokers, OptionsXpress, TradeKing, OptionsHouse, E*Trade, Scotttrade & Zecco do not have this tool. ThinkorSwim is in a league of their own not to be mistakenly compared in a "peergroup" with other brokers. Why Forecast Implied Volatility of Calls separate from IV of Puts; or IV with Calls+Puts combined? Design of the spread type makes Calls or Puts unique to its construction. Components of the: Vertical Call (Credit/Debit) only uses ALL Calls. No Puts are involved.

 Back Ratio Call (typically ~Debit) is Net Long a Call and only uses all Calls. No Puts are involved. Vertical Put (Credit/Debit) only uses ALL Puts. No Calls are involved. Back Ratio Put (typically ~Debit) is Net Long a Put and only uses all Puts. No Calls are involved. Put Calendar (typically ~Debit) only uses all Puts. Call Calendar comprises only of Calls. . . . but . . . An Iron Condor (typically Credit) uses BOTH Calls and Puts (Vertical Call + Vertical Put). A Straddle/Strangle (typically Debit) uses BOTH a Call and a Put. Due to the Skew and the Interest Rate component built into Calls, Calls and and Puts are not identical, i.e. asymmetrical, as the absolute value of the Deltas of a Call and Put at the same strike do not add up exactly to 1.00. Given the construction of the spread (all Calls or all Puts), it is critical to forecast the IV of Calls separate of Puts. If the construction of the spread uses both Calls and Puts, it makes sense to have a combined forecast using the IV Index. iVolatility is the only volatility provider with a unique Hi/Low Indicator that forecasts IV specific to Calls separate of Puts; plus, Calls+Puts combined for a given product.

How do you apply the Hi/Low Indicator in the analysis of IV specific to debit spreads distinct from credit spreads? IV(y) She's a Fan of Bands HiLow Indicator for IV and Skew.

As IV reaches it's forecasted deciles ~ forming Resistance/Support ~ Skew reaches it's forecasted deciles to either support/resist IV's Support/Resistance, assuming Skew remains as it was originally forecasted ( / +). As Skew changes, this alters the pricing of options in IV terms, in turn impacting the value of the spread constructed with all Calls or all Puts. It's prudent to either Scale-Off Profits or Exit entirely, as IV reaches its Resistance/Support levels, as IV may not break Support/Resistance with the remaining days left before expiration.

Skewness: Zero, Positive & Negative While the probability distribution curve in your trading screen appears like an equally shaped cone, do be aware that a distribution curve is not "Normal", typically most traded products have a Positive/Negative Skew. Determining if a +/- Skew exists in the expiry month for which you will trade, determines the type of spread that makes to construct for the IV to function as designed. For example, take the "VIX" as the product. Products are visually represented as having a bell shaped distribution at 1 Standard Deviation (68%). But see below "Positive Skew Example" using the VIX, clearly showing that it is not "normally" distributed.

More on using Skew & Probability Positive Skew A Positive Skew is also known as a Forward Skew. What it means ... For Calls ... Implied Volatility increases from lower ITM Call strikes towards ATM/NTM Call strikes and continues increasing towards higher OTM Call strikes. And for Puts ... Implied Volatility increases from lower OTM Put strikes towards ATM/NTM Put strikes and continues increasing towards higher ITM Put strikes. A Positive Skew is suitable for trading A Debit spread like a long Vertical Call: as price rises from lower strikes to higher strikes and Implied Volatility rises in the same direction. A Debit Vertical Call being a positive Vega but negative Theta trade needs IV to rise. Same logic for a single long call paid for a debit. A Credit spread like a short Vertical Call: as price falls from higher strikes to lower strikes and Implied Volatility falls in the same direction. A Credit Vertical Call being a negative Vega trade but positive Theta trade needs IV to fall. Same logic for a single short call sold for a credit. Trading options against the Skew loses money.

More on Positive Skew & Probability Negative Skew

A Negative Skew is also known as a Reverse Skew. What it means ...

For Calls ... Implied Volatility decreases from lower ITM Call strikes towards ATM/NTM Call strikes and continues decreasing towards higher OTM Call strikes.

And for Puts ... Implied Volatility decreases from lower OTM Put strikes towards ATM/NTM Put strikes and continues decreasing towards higher ITM Put strikes.

A Negative Skew is suitable for trading A Debit spread like a long Vertical Put: as price falls from higher strikes to lower strikes but Implied Volatility rises. A Debit Vertical Put being a positive Vega but negative Theta trade needs IV to rise. Same logic for a single long put paid with a debit.

A Credit spread like a short Vertical Put: as price rises from lower strikes to higher strikes but Implied Volatility falls. A Credit Vertical Put being a negative Vega trade but positive Theta trade needs IV to fall. Same logic for a single short put sold for a credit.

Trading options against the Skew loses money.

More on Negative Skew & Probability Dual Skew

Non-equity based products typically have a Dual Skew: both Positive Skew and Negative Skew feature in the same expiry month either on the Call side or Put side; or, on both sides. Non-equity based traded products include Currency Indexes/ETFs and Commodity Indexes/ETFs.

As the Positive Skew cancels out the Negative Skew and viceversa, in terms of the total effect, a Dual Skew is suitable for trading these market-neutral spreads.

A Short Iron Condor. Though as a Net Credit spread, a short Iron Condor being positive Theta and negative Vega still needs IV to fall.

A Long Calendar. Though starting off as a small Debit spread, a long Calendar being a positive Theta and positive Vega trade, needs IV to fall in the front month for the short leg and IV to rise in the back month for the long leg.

A Long Straddle/Strangle. Though as a Net Debit spread, a long Straddle/Strangle being a negative Theta and positive Vega trade, still needs IV to rise.

More on using Skew & Probability Forecasting Skew: Be wary of weekly reversals and from month-to-month Reversals in Skew means there are changes in the correlation between Implied Volatility and frequency of price testing Support/Resistance levels.

More on using Skew & Probability Kurtosis

Positive Kurtosis = Leptokurtic. Zero Kurtosis = Mesokurtic. Negative Kurtosis = Platykurtic.

Kurtosis only makes sense when it is interpreted in conjunction with Skewness ... for more .. IVX Volatility Monitor Stock Option Trading | Options Trading Strategies Home Trading Profit | Loss Learn How to Trade Options Order Now Cry-Me-a-Trade Asset Allocation | Intermarket Point and Figure | Relative Strength Volatility | Skew | Probability Trading System | Portfolio Management Options Strategies | Trading Plan Trading from Home Trading for a Living Options Education Trading Crew | Contact

Trade | FAQs Why Time-Based Charts (Bar/ Candlesticks/Heikin Ashi, etc.) lose their characteristics once mapped onto a Distribution Curve ...

The only data point that feeds the Distribution Curve which in turn is used to calculate Probabilities only needs to include price and the expiry date, not the different time units of (minute/hour/day/week, etc.)

Click on play and FullScreen Toggle button.

Unlike candlesticks with multiple permutations of reversal and continuation patterns, P&F charting requires you to grasp effectively 25 finite patterns.

Clarity on the measured move in your trading process is crucial to the trading techniques you adopt. Stop visually confusing yourself.

Point & Figure | Price Analysis Price is a Continuous variable but Time is a Discreet variable ...

Price being a continuous variable measuring how much is useful to understand, as you can translate the impact of a measured move on an option in Delta terms, knowing how much price needs to move (in a directional spread); or, not to move (in a market-neutral spread). Time in a Bar/Candlestick is a discreet variable that measures how many occurrences price moved for a given unit of time (hour/day/week, etc). Using one time frame to confirm another, confirms nothing other than the ability of your eyes to confuse your brain. Remove visual confusion. You do not need to know how many times during the day price moved in favour; or, against your positions P/L to take action. Knowing how much price moved ONCE is sufficient to act on a trade.

To set Price Targets, you need to measure "how much" price moved, not "how many" times price moved ...

Price versus Time: Two characteristically different variables that only confuses the observation of price when using timebased charts (Bar, Candlesticks & Heikin Ashi). Point & Figure charting is the only method that focuses purely on price by excluding time. Also, with P&F charts, price reversals recorded by construction means volume activity is already embedded in the reversal counts without having to graph volume separately. P&F with Relative Strength Matrix With your portfolio how do you measure which Asset Class should you be over/underweighting in terms of allocation to Equity Indexes, Bonds, Commodities or REITs? Which Asset Class should you be Long versus Short?

Items to pay attention to in the Relative Strength Matrix "B" = Relative Strength Chart is on a Buy Signal. "Xs" = Relative Strength is in column of Xs.

Technical Attributes rank one ticker against all the other tickers in the Matrix as a peer group comparison, based on these criteria for an upside opportunity: 1. Relative Strength versus market (Buy Signal). 2. Relative Strength column versus market (in Xs). 3. Relative Strength signal versus peer group (Buy Signal). 4. Relative Strength column versus peer group (in Xs).

5. Underlying is trading above its Bullish Support line with an Uptrend of Higher Xs (Higher Highs) and Higher Os (Higher Lows). The range of scores is 1 being the lowest and 5 the Highest. A score closer to 5, means the ticker has the strongest Relative Strength as a Long position relative to its peers. A score closer to 1 means that ticker has the weakest Relative Strength as a Long position relative to its peers. But, this also identifies it as a Short opportunity. Reverse the logic in points 15, for a downside trade.

Bullish Percent Indexes (BPI) Specific to Sectors Free BPI charts specific to each Sector can be found at StockCharts. In OverBought/OverSold conditions, the risk is that price of a Sector Index is not sustainable, not that time is not sustainable an option's expiration cycle decides the amount of time it has left, nothing else. Even before an opportunity becomes a trade, how do you use the Bullish Percent Index to gauge if price is trading near/inside or outside the OverBought/OverSold range?

More on P&F Market Breadth Indicators Bullish Percent Index

Price Targets ... use a free resource... Support/Resistance with Simple Moving Averages remain the cornerstones of P&F analysis. Box Size and Reversal Size rules for trading Sector Indexes, Bonds, Currencies & Commodities Learn for free about P&F Charts: Dorsey Wright & Associates StockCharts P&F Charts Leading Practitioners of Point & Figure Methods | Individual Book Reviews

The Definitive Guide to Point and Figure Jeremy Du Plessis

Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices (Wiley Trading) Thomas J. Dorsey Recommended Reading, click on images above to get them at Amazon Options Trading | Point and Figure | Relative Strength Time Embedded in a Price Chart Simply Confuses What is the logic for recording price, when it does not move for a given unit of time? While price takes time to move, time alone does not move price. A Reward:Risk Ratio remains valid on price alone without time in the calculation.

 A Reversal point can be based on price alone, independent of time. Elasticity of price within a minute/day/week/month (how wide or narrow the trading range becomes) is a function of the demand & supply for calls and puts, driven by the amount of open interest. Price elasticity is not determined by "popular"/"special" patterns in time-based charts (Bar/Candlestick/Heikin Ashi). Embedding time with price, two characteristically different variables as one statistic dilutes the intensity of price and confuses the observation of price. See thumbnail on the right. Bar and Candlestick charts suffer frequent "fakeouts" (signal failures, instead of real breakouts and warning of true traps) in addition to whipsaws. For options, the only element of time worth focusing on especially for a beginner to intermediate retail trader who typically uses ATM and OTM options is Theta (time decay/premium), not to be confused with the unit of time (minute/day/week) in a bar/candlestick chart. What type of chart retains pure price data and excludes time? A Point & Figure chart. The more commonly known merits of using Point & Figure (P&F or PnF) charts compared to bar or candlestick charts, is because P&F charts: Eliminate insignificant price movements (noise). Remove misleading effects of time on price. Especially, in Overbought/Oversold conditions, time amplifies the noise. Identify obvious support/resistance levels. Make trend line recognition and range setting indisputable. Concentrate only on the essential longerterm price trends. Calculate Price Targets purely on price alone. Records price reversals by construction volume activity is already embedded in the reversal counts without having to graph volume separately. One lesser known use of P&F charts; but, absolutely critical measure of analysing pure priceperformance is combining P&F charting with Relative Strength. Do not confuse Relative Strength with the technical indicator RSI. The RSI tries to predict direction by weighting the advances and declines of price movement over a given time period. It suffers time confusion, as with any timebased indicator. RS measures the

intensity of price alone, irrespective of direction and without time. They are different, without similarities.

The Home Options Trading process combines P&F with Relative Strength to separate price outperformers from underperformers; then, trade the outperformers/underperformers based on their respectively unique but still consistent criteria to positively impact the portfolio's P/L. What is Relative Strength (RS)? Suprisingly, its mathematical construction is very simple. It is nothing more than taking one price as the Numerator, divided by another price as the Denominator, then multiplied by 100. RS = (Price 1 / Price 2) x 100. Typically, RS calculations use daily closing prices. Though simple in its construction, RS is ingeniously powerful when it is applied not only within a sector; but, across sectors and between asset classes. Lets start of within a sector. For example, if you choose 2 semiconductor stocks trading at different prices, how do you know if one stock is outperforming the other in the same sector, when the 2 stocks have price changes at different rates and the sectors price is also changing? Price1 RS#1 Numerator1: BRCM 33.15 7.33 Numerator2: TSM 9.91 2.19 Common Denominator: SOX 452.24 Price2 33.80 13.43 467.81 RS#2 7.23 2.87

SOX = Semiconductor Sector Index, trades up from 452.24 to 467.81. BRCM's price rises from 33.15 to 33.80 and TSM's price also rises from 9.91 to 13.43 Simply because BRCM is a larger stock, does that mean it benefits from the SOX trading up? No, the RS reading (RS1 compared to RS2) tells us, BRCM has weakened against TSM. BRCMs RS#1 = (33.15/452.24) x 100 = 7.33. BRCM's RS#2 = (33.80/467.81) x 100 = 7.23 TSMs RS#1 = (9.91/452.24) x 100 = 2.19. TSM's RS#2 = (13.43/467.81) x 100 = 2.87. RS confirmed TSM as the outperformer. RS is constructed on pure price rules. Especially, if you use an Index as the denominator, it is a much more durable benchmark to filter out insignificant noise and is much less sensitive to fluctuations, compared to any magical TA indicator that only evaluates a single underlying found in time-based charts.

Compare One Sector or Asset Class against Others Numerator 1 can be any Index of the 10 Sectors (e.g. BKX Financials) compared against Numerator 2 of any of the other 10 Sectors (e.g. UTY Utilities) with the Common Denominator being the S&P500 (SPX). Up till Numerator 10 being the 10th sector of the SPX. For Sectors, the RS may confirm heavier exposure to a particular Sector that is not a hot sector in the news. Forget the noise in the news, listen to the RS. Institutional money is rebalancing and reconstituting their portfolios by rotating out of sectors and into others, independent of what goes on in the news. If news cannot be translated into tradeable information, ignore it. Besides, there are only 10 defined sectors that make up the S&P500 money has to move between them; or, out of the sectors (i.e. away from equities) into the other asset classes. Stop paying for magical indicators and blackbox first to know services. The RS method can be extended to compare Bonds, Sector Indexes, Currency ETFs and Commodities any asset class against other asset classes. In practical terms, rank any ticker against any other ticker in your portfolio this is the optimal way to use RS. RS as a measure can be used independent of P&F charts. There is only one firm specializing in RS scans for trades: www.dorseywright.com. However, as RS is a pricecentric measure, it is only logical that it is combined with P&Fs pure price charting. The synergy results in the most robust and reliable method of sorting out price outperformance from underperformance. It is imperative to separate outperformers against underperformers amongst the underlying products, well before an option trade is constructed around the identified opportunity. Once the trade is in play, use RS on an ongoing basis to revalue the strength of outperformers and weakness of underperformers, checking that rankings remain as initially chosen; or, if their relative price-performance in the portfolio shifts. Shifts signal the need to evaluate rebalancing the cash allocation within your portfolio across asset classes other than equities. Together with Volatility, use RS to decide the proportion of long positions in outperformers to short positions in underperformers, in your portfolio. Remove the emotion in your choices. Trading within the Sweet Spot with Relative Strength and Bullish Price Indexes Bullish Percent Indexes (BPI) are calculated for a group of stocks and not a single stock. This makes them ideal to be used in tandem with trading Sector Indexes. The BPI is not about price but percentage changes to move a P&F box or shift columns. This why it is called a Bullish PERCENT Index. The underlying product that you trade is still the Sector Index. To avoid the risk of being in an unfavoured sector or not being in a favoured sector, as institutional money shifts between sectors, it is useful to track when the BPI of an entire sector is OverBought (OB) or OverSold (OS).

Price of Sector Index can become erratic as its corresponding BPI is near OB/OS conditions, affecting the RS reading of a sector. For Indexes, levels above 70% are OverBought and levels below 30% are OverSold. Each box in a BPI Index, is scaled at a net change size of 2%. For BPI charts, as the areas above 70% and area below 30% is taken out of the picture, leaving an observable area above 30% and below 70%, leading P&F practitioners, namely Tom Dorsey and Jeremy Du Plessis advocate adjusting sensitivity for the reduced area by increasing the % of the box size to 2%. With P&F methodology for BPI Indexes, the only way a column can change into the opposite column is by reversing 3 boxes, this is the only way that the trend comes to an end and reverses into the opposing trend. 3 boxes by 2% per box = 6%. Specific to BPIs, a minimum net change of 6% in buy/sell signals is needed to cause a reversal, resulting in a change in columns from Xs to Os, or Os to Xs. So, where is the "Sweet Spot" for Sector Indexes? When the corresponding BPI is between 36% and 64%. As the BPI of that Broad Market/Sector rises above 70%, the Index becomes OverBought. Strong Sell signals occur as the BPI rises above 70% reverses down by a minimum of 6%; signals become stronger with confirmed Breakdown patterns below prior Resistance levels. Downside Sweet Spots are between 64% down to 55% and 45% down to 36%. As the BPI of that Broad Market/Sector falls below 30%, the Index becomes OverSold. Strong Buy signals as the BPI falls below 30% reverses up by a minimum of 6%; signals become stronger with confirmed Breakout patterns above prior Support levels. Upside Sweet Spots are between 36% up to 45% and 55% up to 64%. When the BPI of that Broad Market/Sector is range-bound near 50%, the BPI signals price indecision. Non-Directional Sweet Spot is between 45% to 55%. So, for example to trade options on the BKX (Financials sector Index), look at the $BPFINA (S&P Financial Sector BPI). Trade the BKX up/down/sideways, when the $BPFINA is within the Upside/Downside/NonDirectional Sweet Spots. It is within this range of the Sweet Spots, that P&F patterns (see below) retain their ability to produce the intended outcomes, as price behaves in a non-erratic way for the signals to be taken as sensible.

 Why use this technique versus methods that show % changes mapping hot/cold areas in sectors/asset classes? "Heat" maps are merely graphic descriptions, failing to pin-point OverBought/OverSold conditions. P&F Patterns StockCharts uses commonly known P&F patterns as Alerts. And Dorsey Wright also defines the patterns. Both explain and depict the required patterns adequately. I won't elaborate on them, as the purpose of this section is on their application beyond their definition. There is no need to search for any other P&F patterns not listed in the Alert list, other than to recognise a ShakeOut pattern. 1 Buy Signal & 7 Buy Confirmation Patterns P&F Buy is only a signal, it is not a confirmed buy. The signal only shows that the last breakout was a column of Xs rising above the prior column of Xs and that no Sell Confirmation Pattern has occurred in the current O column.

Wait for these Buy Confirmation Patterns to occur: Double Top Breakout Triple Top Breakout Quadruple Top Breakout Ascending Triple Top Breakout Bullish Catapult Breakout (Triple Top Breakout + Double Top Breakout) Bullish Triangle Breakout# Spread Triple Top Breakout

#A Bullish Triangle Breakout is useful pending were Volatility is at for a Straddle/Strangle or Call/Put Backspread play, other than using it as a Vertical spread confirmation pattern for the upside. Often the problem with triangles because price converges into an apex, it is not clear if the triangle is "Bullish" until price breaks out to the upside. Near the apex, price can reverse and break down instead.

Strength of breakouts build up as subsequent patterns are made up of prior breakouts.

With any of the Buy Confirmation Patterns, the ideal buy set-up would also include: Higher Bottoms (Higher O columns), meaning selling pressure is weakening. SMA 13 crosses-over SMA 21 to the upside. 13 and 21 are Fibonnacci numbers. Both Xs and Os move increasingly further above the Bullish Support Line, meaning buying pressure increasingly dominates selling pressure. 1 Sell Signal & 7 Sell Confirmation Patterns P&F Sell is only a signal, it is not a confirmed sell. The signal only shows that the last breakout was a column of Os falling below the prior column of Os and that no Buy Confirmation Pattern has occurred in the current X Column. Wait for these Sell Confirmation Patterns to occur: Double Bottom Breakdown Triple Bottom Breakdown Quadruple Bottom Breakdown Descending Triple Bottom Breakdown Bearish Catapult Breakdown (Triple Bottom Breakdown + Double Bottom Breakdown) Bearish Triangle Breakdown# Spread Triple Bottom Breakdown

#A Bearish Triangle Breakdown is useful pending were Volatility is at for a Straddle/Strangle or Call/Put Backspread play, other than using it as a Vertical spread play for the downside. Often the problem with triangles because price converges into an apex, it is not clear if the triangle is "Bearish" until price breaks down. Near the apex, price can reverse and break out to the upside instead. Strength of breakdowns build up as subsequent patterns are made up of prior breakdowns.

With any of the Sell Confirmation Patterns, the ideal sell set-up would also include: Lower Highs (Lower X columns), meaning buying pressure is weakening. SMA 13 crosses-under SMA 21 to the downside. 13 and 21 are Fibonacci numbers. Both Xs and Os move increasingly further below the Bearish Resistance Line, meaning selling pressure increasingly dominates buying pressure. 2 Trap Patterns Bull Trap. Reversal right after a Triple Top Breakout. Not relevant for other Buy Patterns. Bear Trap. Reversal right after a Triple Bottom Breakdown. Not relevant for other Sell Patterns. Traps exist to ensnare you. If you insist on trading them, then wait at minimum for 1 more box after the 1 box of a Triple Top Breakout/Triple Bottom Breakdown. As a Triple Top Breakout/Bottom Breakdown needs to happen before these Traps qualify, be on guard to watch for Traps right after the Triple Top Breakout and Triple Bottom Breakdown. 2 Shakeout Patterns Cousins of Traps (see Dorsey Wright) As Traps are for Triple Top and Triple Bottom patterns, Shakeouts are for Double Top and Double Bottom patterns. You can avoid trading them. But if you insist on trading them, here's how ... Bullish Shakeout Pattern must have the following traits: Strong trend of Higher Xs and Higher Os, trading above the Bullish Support Line. Prior X columns form a Double Top but do not breakout (encounter resistance). Reversal from the Double Top resistance, the last O column becomes a Double Bottom Breakdown. From the Double Bottom Breakdown, in the current X column, buy at the 3rd reversal box and stay in play until a Triple Top Breakout completes the pattern. Bearish Shakeout Pattern must have the following traits: Strong trend of Lower Xs and Lower Os, trading below the Bearish Resistance Line. Prior O columns form a Double Bottom but do not breakdown (encounter support). Reversal from the Double Bottom support, the last X column becomes a Double Top Breakout. From the Double Top Breakout, in the current O column, sell at the 3rd reversal box and stay in play until a Triple Bottom Breakdown completes the pattern. What is more sensible as an entry technique, would be to

 Recognize a Bull Trap, then switch from Buy mode to look for Sell Confirmation Patterns. Recognize a Bear Trap, then switch from Sell mode to look for Buy Confirmation Patterns. 2 Signals Reversed Trend Stays a Friend, until it Ends Bullish Signal Reversed. A Double Bottom Breakdown reverses Higher Xs and Higher Os. For entry, look for Bearish Confirmation Patterns. Bearish Signal Reversed. A Double Top Breakout reverses Lower Xs and Lower Os. For entry, look for Bullish Confirmation Patterns. As these reversals require 7 prior columns of Xs and Os at minimum before the current column to qualify as a signal reverse pattern, it makes sense to exit a trade completely not just scale off part of the position, as the prevailing trend is over. No chance of continuation. 2 More Reversal Patterns at 50% Violently Undecided at the Mid-point High Pole Reversal. As the last column of Xs rises above the prior High by at least 3 boxes (some argue 5 boxes), but falls violently back to 50% at minimum of the height of its rise, volatility is likely to spike up past the mid towards higher deciles. Low Pole Reversal. As the last column of Os fall below the prior Low by at least 3 boxes, (some argue 5 boxes), but rises violently back to 50% at minimum of the height of its fall, volatility is likely to spike down past the mid towards lower deciles. Poles present opportunities for Volatility option plays Namely, Straddles/Strangles as price has violently reversed up to 50% of the pole but is undecided where to go next. Or for Credit Spreads way OTM from price levels where poles have violently reversed from and are unlikely to return there, having travelled 50% in the opposite direction. Deciding between which play makes sense, requires an understanding of Skewness & Probability. 1 Reversal Pattern to Avoid Low Tail Down Reversal. After a 20 box drop or more, while the first reversal may present Buy Confirmation Patterns, there must be other compelling reasons to take a long position on such a punishing fall in price.

 As price has dropped so far down, volatility is likely to remain within the higher range with price struggling to rise, some would argue such opportunities may be considered as a Short Iron Condor play. I would avoid opportunities that have suffered a harsh 20 box drop. Conclusion: The What, When and Why of P&F with Relative Strength plus Sweet Spot trading has been expounded on. Next, learn How to use these identified P&F patterns in the entire Home Trading Process.