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DISCIPLINE | RISK MANAGEMENT | SUPERIOR EXECUTION 1 Table of Contents In Brief .................................................................................................................................................... 3 Lesson 1 – Long Straddles and Strangles ................................................................................................. 4 Lesson 2 – Short Straddles and Strangles .............................................................................................. 22 Lesson 3 – Call, Put and Iron Butterflies ................................................................................................ 39 Lesson 4 – Broken Wing Butterflies ...................................................................................................... 58 Lesson 5 – Call, Put and Iron Condors ................................................................................................... 76 Lesson 6 – Call and Put Diagonals ......................................................................................................... 98 Out Brief ............................................................................................................................................. 116 Fox3 Terms Glossary ........................................................................................................................... 117 Answer Key ......................................................................................................................................... 120 DISCIPLINE | RISK MANAGEMENT | SUPERIOR EXECUTION 2 In Brief Hello Traders, Welcome to Advanced Top Gun Options. In Advanced we’ll be exploring spreads that move beyond simple directional and time decay plays. Many of the tactics in this section will build upon what you have learned to this point so that you can now attack your targets with three and four leg tactics that, normally, only professional options traders know how to properly use. In order to master these tactics you must accomplish more intense training to achieve a much deeper level of understanding of options trading. However, the rewards for understanding these tactics are plentiful because you will complete your arsenal with the ability to perfectly match your tactic to anything the market throws at you. You’ll be heading into battle with every weapon at your disposal. One thing that most amateur option traders cannot properly handle is the changes that occur in the implied volatility of the options. As the volatility changes, the option prices all fluctuate and critically impact the profit or loss for any position. Volatility isn’t to be feared; rather it needs to be understood so that you can protect yourself and then profit from it. It is critical that you understand these tactics thoroughly before employing them in your cash account. Practice, practice, practice in your paper account before trading real money. Learn how these trades behave in the market and how to identify ideal targets for each. Once you have these tactics down you will be in the top tier of option traders. Enjoy! DISCIPLINE | RISK MANAGEMENT | SUPERIOR EXECUTION 3 Lesson One Long Straddles and Strangles Introduction In this first lesson we’re going to cover two similar tactics that are extremely sensitive to changes in the implied volatility and direction. So while this is a risk to be aware of, it’s also a path for making money. These tactics are the Long Straddle and the Long Strangle. Note: Since these are nearly identical tactics we’ll discuss the Straddle and assume that everything applies equally to the Strangle and we’ll add in Strangle comments where necessary. These tactics involve the buying of both a Call and a Put in the same expiration month. Straddles involve the ATM strike; Strangles use OTM Calls and OTM Puts. Since there aren’t short options in this tactic, these can be expensive trades on a dollar basis. And without the aid of a short option, Theta and Vega are extremely important Greeks for this trade as we will explore later. There is a two-fold purpose to creating a tactic with a Long Call and a Long Put. The first is to profit from price movement without having to forecast the direction. The second is to profit from a substantial increase in the volatility that raises the price of both options. What kind of event causes an extreme price movement and/or a substantial increase in the volatility? We will answer this in the Commit Criteria. Commit Criteria Large price movements in the stock and/or substantial increase in volatility are sometimes the product of known news events. Of course the unknown can also have this effect, but we can’t plan for the unknown. However, there are many “known” events that can produce the desired effect. Such events include earnings announcement, lawsuit, legal settlements, FDA announcements, major product announcements, etc. These are events that occur on a specific day, or at least within a known time frame. Here are a few examples: Earnings release dates for public companies are listed on many free websites, such