Strategy #1 Bullish Strategy

Net Debit/ Section Sentiment Strategy Entries Risk Reward Credit Bullish Long Call Buy a Call Limited Unlimited Debit Buy a Lower Strike Call Bull Call Spread Limited Limited Debit 3 Sell a Higher Strike Call Sell a Higher Strike Put Bull Put Spread Limited Limited Credit 6 Moderate Bullish Buy a Lower Strike Put Buy 100 units of Stock Covered Call Unlimited Limited Debit 2 Sell a Higher Strike Call Short (Naked) Put Sell a Put Unlimited Limited Credit Sell a Bull Put Spread + Rangebound Long Iron Condor Limited Limited Credit 7 Sell a Bear Call Spread Buy a Higher Strike Put Bear Put Spread Limited Limited Debit 5 Sell a Lower Strike Put Sell a Lower Strike Call Bear Call Spread Limited Limited Credit 4 Moderate Bearish Buy a Higher Strike Call Short (Naked) Call Sell a Call Unlimited Limited Credit Sell 100 units of Stock Covered Put Unlimited Limited Credit Sell a Put Bearish Long Put Buy a Put Limited Unlimited Debit

Straddle Buy a Call (ATM) + Buy a Put (ATM) Limited Unlimited Debit Breakout either way Strangle Buy a Call (OTM) + Buy a Put (OTM) Limited Unlimited Debit Copyright © 2012 Beyond Insights Sdn. Bhd Smart Options Credit Spreads Debit Spreads (Receive Premium) (Pay Premium) Bear Call Spreads Bear Put Spreads Lower Premium B Higher Premium S B Higher Premium X Stock Price RESISTANCE X Stock Price ` S Lower Premium

S Lower Premium

X Stock Price SUPPORT X Stock Price Higher Premium S B Higher Premium Lower Premium B Bull Put Spreads Bull Call Spreads

Copyright © 2012 Beyond Insights Sdn. Bhd Smart Options Difference of Credit vs. Debit Spreads Credit Spreads Debit Spreads • Best for • Best for – Conservative entries (OTM) – Moderate Aggressive Entry (ATM) • Advantages – OTM options have narrower bid/ask • Advantages spread – Higher ROI compared to OTM credit – Do not need to close the position if it both option legs stays OTM by expiry spreads (Expired worthless) -> Save • Disadvantages Commission. – Receive Premium in advance – Need to close before expiry if it any (However the max risk requires of the options leg is ITM margin) – Comparing to same strike price as • Disadvantages Credit spreads, the ITM option has – Lower ROI compared to ATM debit spreads wider bid/ask spread.

• Make sure Both legs are OTM • Make sure Buy Leg is ATM/ITM and Sell leg is OTM to reduce risk of being exercised or assigned stock • Go for 1 month or less expiry to have faster time value decay as long as meet condition below • Go for more than 1 month expiry to allow time for the price to move above the higher strike price for optimum return. • Minimum premium received should be more than 20% of the difference of the strike price + 5cts commission. • If the Delta between the 2 strike price is too close, can go for 2 or more strike price difference. Take note that when the • When the stock price moves fast in your favour and hit the stock price moves $1, the spread will only move the resistance (for bull spread) or support(for bear spread), you difference of the 2 strikes delta. However your cost is also can consider closing the position even when the maximum lower. premium is not reached • Sell leg Premium Received should be able to cover downside • When there is only less than 25% of the target premium left risk until support, if not go for longer expiry to make, you can consider closing the position and choose another new spread entry that gives better ROI for the capital • When stock price hit resistance (for Bull Call Spread) or especially when the expiry is still far support (for Bear Put Spread) you can consider closing the position instead of waiting for near expiry. • Must close the positions if any of the options legs goes ITM before expiry to prevent being exercised or assigned stocks • It’s unlikely to get the max premium, so profit taking should be set 0.05-0.10cts below the strike price difference. • If sentiment risk is high to go against your direction, it’s better to close the position or at least hedge with a opposite spread • Must close the positions if any of the leg stays ITM before expiry to avoid being exercised or assigned stocks

Copyright © 2012 Beyond Insights Sdn. Bhd Smart Options Key Decisions for Options Strategy What are the key decisions ? 1. Strategy (e.g. Buy a Call or Buy a Bull Call Spread?) 2. Expiration Month 3. Strike Price(s) 4. Target Entry Premium for a good reward vs risk

How to decide? 1. Direction - Up/Down/Sideways(Rangebound) 2. Degree of Bullishness or Bearishness 3. Time to Reach Target Price 4. Volatility 5. Priority for Protection or ROI?

1. Determine Overall Market Sentiment (SPY Chart) • Is the overall market trending up/down/sideways? • What is the current Seasonal Pattern? • Where are the major Support & Resistance? • Are there any major sentiment risks? 2. Determine Specific Stock Direction (Stock Chart) • Is the stock trending Up/Down/Sideways? • Is it aligned with overall market direction? • Where are the Key Support and Resistance? • Is the Fundamental & Technical aligned? 3. Determine Major Levels for : • Entry point, Profit Targets (Partial + Final), Stop Loss 4. Shortlist Options Strategy that match the direction 5. Check Reward vs Risk of the trade

• Check if there is any latest overall market sentiment risks before market open. – www.forexfactory.com (for any statistics announcement) – www.marketwatch.com or www.cnbc.com (for headlines)

• Check for latest events for this company – finance.google.com – When is the next earnings date? – When is the next dividends ex-date? – How was the company most recent quarter earnings and forecast? – Any negative news? E.g. Lawsuit, downgrades, heavy selling, insider selling – You can subscribe to seekingalpha.com to get summary updates of your selected stocks sent to your email.

Smart Options Money Management

• According to interview with Top Investors and Traders, 90% of Success in Investment & Trading is Money Management + Psychology • Golden Rule – Use maximum 5% of your capital to enter any stock/options trade – Do not risk more than 2% of your capital in any one trade (means your stop loss should be set to limit your risk to a max 2% of your capital) • Good Practices – Always have partial profit taking at 30-50% of the target move – Take your profit if the stock move 80% within the first few days (do not need to wait until expiration) – Take your final profit if there is not much premium left to make even though there is still many days to expiration. – Do not max out your trade allocation when market sentiment is not stable. – Avoid buying all in 1 direction especially when near market turning point. – Move up your stop loss as the stock goes higher (when you are long / buying) – Move down your stop loss as the stock goes lower (when you are short / selling)

Smart Options Psychology

• Success in Investment does not correlate with IQ, you just need to control the urge / emotions that get other people into trouble – Warren Buffet

• It’s not about how much money you make when you are right but how little you lose when you are wrong that determine your long term success – George Soros