Dan Sheridan

Top 5 mistakes when creating monthly income

Feb 18, 2010
Sheridan Options Mentoring, Inc. www.SheridanMentoring.com g

Disclaimer
The views of third party speakers and their materials are their own and do not necessarily represent the views of Chicago Board Options Exchange, Incorporated (CBOE). Third party speakers are not affiliated with CBOE. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation. Options involve risks and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com. The information in this presentation is provided solely for general education and information purposes. No statement should be construed as a recommendation d ti t to b buy or sell ll a security it or t to provide id i investment t t advice. d i S Supporting ti d documentation t ti f for any claims, comparisons, statistics or other technical data in this presentation is available at Sheridan Options Mentoring ([email protected]). Past performance is not indicative of future results. Parameters relating to past performance of strategies discussed are not capable of being duplicated. In order to simplify p y the computations, p , commissions, , fees, , margin g interest and taxes have not been included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Multiple leg strategies involve multiple commission charges. Brokerage firms may require customers to post higher margins than the minimum margins specified in this presentation. Investors should consult their tax advisor about any potential tax consequences consequences. The views of third party speakers are their own and do not necessarily reflect the views of Chicago Board Options Exchange, Incorporated (CBOE). CBOE is not affiliated with Sheridan Options Mentoring. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation.

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Point #1: No Plan or Road Map

Financial edge to start a monthly income business? Probabilities or Decay? Capital to start with? Plan to increase capital? What strategies to trade? Which vehicles? Risk Management Plan for each strategy? What to do when trade goes bad? Key: Do K D you h have a passion? i ? Do D you think hi k its i easy or hard to be good trader?

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Insurance Company

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Standard Deviations (Sigma)

OneDay StandardDeviations Range Price $100.00 Volatility 19.1% $ 1.00 $99.00 to $ 101.00 1 2 $2.00 $ 98.00 to $102.00 3 $3.00 $ 97.00 to $103.00

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FREE STANDARD DEVIATION CALCULATOR AT: http://www.sheridanmentoring.com/sigma Page 5

Portfolio Plan

Income Strategies

Speculative Strategies

Long Term Strategies

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Portfolio Plan

Calendar Spreads Double Calendar Spreads Double Diagonals ATM Butterflies Condors
Collars LEAPS Covered Writes/Straddles Long Stock Long Term Calendars

Long Calls/Puts, Calls/Puts Diagonal Spreads OTM Butterflies Vertical Spreads Directional Calendars Long Straddles

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Income Strategies
Calendars and Butterflies focus on Time decay

Iron condors focus on probabilities

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Big Picture Portfolio Portfolio- Sample Portfolio , ( 50%, , 40%, , 10% Mix) ) $500,000

$250,000 Long Term Strategies ( 180 days or longer)- Collars, Covered Writes, Long Stock, Long Term Calendars $200,000 Monthly Income Strategies ( 25-60 days)Condors , Credit Spreads, Calendars and Multiple Calendars, Butterflies, Double Diagonals $50,000 S $ Speculative S Strategies ( (1-90 days)) Straddles, Earnings Plays, Long calls and puts, Debit spreads, p , Reverse Calendars, , Back spreads p How would I make my percentages?

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How to Scale to Larger Trades

Month 16 712 1318 1924

Size $10,000 $20,000 $40 000 $40,000 $80,000

LiveTrades PerMonth 46 47 47 48

Monthly Profit Breakeven atleast3% 45% 47%

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Sample PlanPlan- $10,000 Portfolio (Monthly y Income Non Non-Directional) )

$1000 Cash $3000 Condors $3000 Butterflies $3000 Calendars and Double Diagonals How much capital should a novice start with?

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Points #2 and #3 combined: Plan and Risk Management g

Profit target 15%? Max Loss -20%? Adjustment points? Goal of adjustments This is a business. We cant make $1000 in a good month and lose $3000 in a bad month.

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RUT Butterfly example to demonstrate Plan and Risk Management

Date: 1/19/2010
Options 690 Calls 650 Calls 610 Calls

RUT Price: $649.07 +11.11

FEB(31)
Price IV Delta Trade 11.8 11 8 51.5 85.6 +2 2 4 +2 $1.65 $1 65 16.9% 16 9% $14.00 19.3% $42.80 22.9%

Delta -11.2 Gamma -2.4 Th Theta 40 3 40.3 Vega -123.9

Margin

3,290

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RUT Butterfly
Date: 1/19/2010 RUT Price: $649.07 +11.11

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RUT Butterfly
Date: 1/21/2010 RUT Price: $ $628.40 628.40 -11.21
FEB(29)
Options 690 Calls 650 Calls 610 Calls Price IV Delta Trade 3.5 27.8 71.8 +2 4 +2 $0.65 19.4% $6.00 20.0% $26.60 23.0%

Delta Gamma Theta Vega

39.5 -2.0 21.7 -81.7

Margin Loss

$ $

3,290 (240)

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RUT Butterfly
Date: 1/21/2010 RUT Price: $628.40 -11.21

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RUT Butterfly Adjustment

Date: 1/21/2010
Options 690 Calls 650 Calls 610 Calls 660 Puts 620 Puts 580 Puts Price $0.65 $0 65 $6.00 $26.60 $36 70 $36.70 $13.30 $4.40

RUT Price: $628.40 -11.21

FEB(29)
IV Delta Trade New +2 4 +2 +2 4 +2 19.4% 19 4% 3.5 35 20.0% 27.8 23.0% 71.8 22 1% -81 22.1% 81.7 7 24.4% -37.9 29.2% -10.5

Before B f Adj Adjusting ti Delta 39.5 Gamma -2.0 Th t Theta 21 7 21.7 Vega -81.7

After Adj Aft Adjusting ti Delta 6.7 Gamma -4.0 Th t Theta 55 3 55.3 Vega -181.0
$ $ $ 3,290 6,170 (240)

Margin Before Adjusting Margin After Adjusting Loss

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RUT Butterfly Adjustment

Date: 1/21/2010 RUT Price: $628.40 -11.21

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RUT Butterfly
Date: 1/22/2010
Options 690 650 610 660 620 580 Calls Calls Calls Puts Puts Puts

RUT Price: $ $617.01 617.01 -11.35

FEB(28)
Price $0.65 $4.80 $21.70 $47.00 $19.90 $7.70 IV Delta Trade +2 4 +2 +2 4 +2 23.0% 2.0 23.2% 18.0 26.7% 60.5 24.8% -88.8 26.8% -50.5 32.1% -15.8

Delta 45.5 Gamma -3.2 Th t Theta 39 5 39.5 Vega -140.1

Margin Loss

$ $

6,170 (660)

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RUT Butterfly
Date: 1/22/2010 RUT Price: $617.01 -11.35

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RUT Butterfly Adjustment

Date: 1/22/2010
Options 690 650 610 660 650 620 610 580 570 Calls Calls Calls Puts Puts Puts Puts Puts Puts Price $0.65 $0 65 $4.80 $21.70 $47.00 $38.70 $19.90 $15.70 $7.70 $6.30

RUT Price: $617.01 -11.35

FEB(28)
IV 23.0% 23 0% 23.2% 26.7% 24.8% 24.8% 26.8% 27.9% 32.1% 34.0% Delta Trade 2.0 2 0 18.0 60.5 -88.8 -81.9 -50.5 -39.5 -15.8 -11.7 +2 4 +2 +2 4 2 +2 +1 New 1 +2 1 +1

Before Adjusting Delta 45.5 Gamma -3.2 Theta 39 5 39.5 Vega -140.1
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Margin g Before Adjusting j g After Adjusting Delta 4.6 Margin After Adjusting Gamma -3.8 Loss Theta 52 6 52.6 Vega -169.9
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$ $ $

6,170 6,270 (660)

RUT Butterfly Adjustment

Date: 1/22/2010 RUT Price: $617.01 -11.35

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RUT Butterfly
Date: 1/27/2010
Options 690 650 610 660 650 620 610 580 570 Calls Calls Calls Puts Puts Puts Puts Puts Puts

RUT Price: $618.42 $618.42 +6.26

FEB(23)
Price $0.15 $2.30 $18.40 $43 40 $43.40 $34.60 $14.70 $10 60 $10.60 $4.00 $2.90 IV 20.2% 19.0% 22.7% 20 5% 20.5% 20.3% 22.2% 23 3% 23.3% 27.6% 29.1% Delta Trade 1.0 17.0 62.7 -90.3 90 3 -83.0 -48.8 -37 37.3 3 -14.0 -10.2 +1 2 +1 +2 +1 4 2 +2 +1

Delta -2.1 Gamma -4.4 Theta 69.6 Vega -174.1

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Margin Loss

$ $

6,270 350

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RUT Butterfly
Date: 1/29/2010
Options 690 Calls 650 Calls 610 Calls 660 Puts 650 Puts 620 Puts 610 Puts 580 Puts 570 Puts

RUT Price: $602.00 -5.93

FEB(23)
Price $0.10 $0.80 $9.20 $59 70 $59.70 $50.20 $24.70 $18 60 $18.60 $7.10 $5.10 IV 20.7% 22.2% Delta Trade 0.1 5.4 42.2 -97.4 97 4 -94.5 -70.6 -57 57.8 8 -23.5 -16.4 +1 2 +1 +2 +1 4 2 +2 +1

23.5% 24 3% 24.3% 27.6% 29.0%

Delta 76.4 Gamma -3.7 Theta 58.7 Vega -117.4

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Margin Loss

$ $

6,270 215

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RUT Butterfly Adjustment

Date: 1/29/2010
Options 690 650 610 660 650 630 620 610 590 580 570 560 Calls Calls Calls Puts Puts Puts Puts Puts Puts Puts Puts Puts Price $0.10 $0 10 $0.80 $9.20 $59 70 $59.70 $50.20 $32.40 $24.70 $18.60 $9.90 $7.10 $5.10 $2.65 IV 20.7% 22.2%

RUT Price: $602.00 $602.00 -5.93

FEB(21)
Delta Trade 0.1 0 1 5.4 42.2 -97 97.4 4 -94.5 -81.5 -70.6 -57.8 -33.1 -23.5 -16.4 -8.4 +1 2 +1 +2 +1 4 2 2 +2 +1 +1 New 1 +2 1

Before Adjusting Delta 76.4 Gamma -3 3.7 7 Theta 58.7 Vega -117.4
After Adjusting Delta 21.3 Gamma -5 3 -5.3 Theta 95.0 Vega -182.0

23.8% 23.5% 24.3% 26.3% 27.6% 29.0% 32.1%

+1

Margin a g Before e o e Adjusting djust g Margin After Adjusting Loss

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$ $ $

6,270 6,670 (215)

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RUT Butterfly Adjustment

Date: 1/29/2010 RUT Price: $617.01 -5.93

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RUT Butterfly
Date: 2/4/2010
Options 660 650 630 620 610 590 580 570 560 Puts Puts Puts Puts Puts Puts Puts Puts Puts

RUT Price: $589.77 -20.89

FEB(15)
Price $70.20 $60.20 $41.10 $32 20 $32.20 $24.20 $12.20 $8 40 $8.40 $5.70 $2.65 IV Delta Trade -99.6 -98.8 -93.3 -86.9 86 9 -76.6 -48.0 -34 34.2 2 -23.1 -10.3 +2 +1 +1 4 2 2 +2 +1 +1

22.4% 22 4% 22.9% 25.2% 26 8% 26.8% 28.3% 31.9%

Delta Gamma Theta Vega

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103.7 -3.9 54.2 -97.9

Margin Loss

$ $

6,670 740

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RUT Butterfly
Date: 2/4/2010 RUT Price: $589.77 -20.89

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Point #4 - Stay with SAME vehicle, SAME strategy gy , SAME methodology!! gy

Switch vehicles monthly? NO How are craftsmen or experts developed? Losing months take 2 month hiatus? Can you follow a plan and stay disciplined?

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Point #5 Do you really , really love this stuff? PASSION

First 1-1 1/2 years you might imitate The Three Stooges more than a trader!

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Learn to Trade and Join Our Community!

Trading takes a long time to learn. Our mentoring program has lifetime access so you never stop learning. The fastest way to learn a new skill is with an experienced mentor. Its no different with learning to trade options. Our Mentors are all experienced and active traders. traders Trading can be lonely! Our special p community y of over 750 active option p traders helps p each other daily in our forums and trading groups. Its like having a partner to go to the gym with. Youre more likely to be successful if you surround yourself with others doing the same activity.

Learn more about our Mentoring Program!

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Dan Sheridan
+1-800-288-9341 [email protected]

Sheridan S e da Opt Options o s Mentoring, e to g, Inc. c

http://www.SheridanMentoring.com/

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