Top Trader

“Putting the odds in your favor”

Selling Premium for Profits

Workshop Study Guide

© 2008 Eagle Interests, LLC 1

Version 1.0 Rev 2 © Copyright under US and International Law
 Disclaimer
In order to simplify the computations, commissions and potential tax implications have not
been included in the examples used in these materials. Commissions and taxes will impact
the outcome of all stock and options transactions and must be taken into account.
Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a
person must receive a copy of Characteristics and Risks of Standardized Options. Copies
may be obtained from The Chicago Board Options Exchange (1-800-OPTIONS) or from
your broker. The investor considering options should consult their tax advisor as to how
taxes may affect the outcome of contemplated options transactions. A prospectus, which
discusses the role of the Options Clearing Corporation, is also available, without charge,
upon request, addressed to the Options Clearing Corporation: 440 S. LaSalle St., Suite 908,
Chicago, Illinois 60605 or to the Chicago Board Options Exchange: LaSalle at Van Buren,
Chicago, Illinois 60605.
ANY STRATEGIES DISCUSSED, INCLUDING EXAMPLES USING ACTUAL
SECURITIES AND PRICE DATA, ARE STRICTLY FOR ILLUSTRATIVE AND
EDUCATIONAL PURPOSES, AND ARE NOT TO BE CONSTRUED AS
ENDORSEMENTS, RECOMMENDATIONS, OR SOLICITATIONS TO BUY OR SELL
SECURITIES.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE.
SUPPORTING DOCUMENTATION WILL BE SUPPLIED UPON REQUEST

Unauthorized duplication of this book is strictly prohibited. No part of this publication may be
reproduced, stored into a retrieval system, translated into any language, or transmitted in any
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permission of Eagle Interests, LLC

© Copyright under US and International Law

(Circular 38a – International Copyright Relations of the United States)
© 2015 Eagle Interests, LLC 2
Version 1.0 Rev 2
 Our Strategy - What we will focus on
CALLS PUTS
OUT OF THE MONEY IN THE MONEY

AT THE MONEY –PRECIO ACTUAL DEL INSTRUMENTO– AT THE MONEY

IN THE MONEY OUT OF THE MONEY

© 2015 Eagle Interests, LLC 3

If we expect a stock/underlying to go up
What are our choices to make money on it?
• Buy the underlying
We make money only if the we are right
• Buy an in the money call
We make money only if the underlying moves up enough to make
up for time decay (extrinsic value)
• Sell an out of the money put
We make money if
1) The underlying goes up
2) The underlying stays where it is
3) The underlying goes down a bit without going in the
money on our put
© 2015 Eagle Interests, LLC 4
 The Bull Put Vertical Spread
So, if we can lose 1,000 - $65 = $935
and we can make $65, we have a
potential ROI of $65/$935 = 6.9%

As long as it stays above 610 we

Underlying at 720
Get to keep the net credit (as we
Close the position or it expires)

Sell the 610 Put for a credit of $3.25 x 100 (one contract) = $325

Buy the 600 Put for insurance for $2.60 x 100 (one contract) = $260

Net credit received = $0.65 x 100 = $65

We buy the 600 Put to limit our potential loss to $10 = $1,000 per contract < broker keeps this money until
position is closed out or expires! They will give us our $65 credit before they retain the money though 5
 The Bear Call Vertical Spread
Buy the 820 Call for insurance for $1.05 x 100 (one contract) = $105

Sell the 810 Call for a credit of $1.70 x 100 (one contract) = $170

As long as it stays below 810 we

Get to keep the net credit (as we
Underlying at 720 Close the position or it expires)

So, if we can lose 1,000 - $65 = $935

and we can make $65, we have a
potential ROI of $65/$935 = 6.9%

Net credit received = $0.65 x 100 = $65

We buy the 820 Call to limit our potential loss to $10 = $1,000 per contract < broker keeps this money until
position is closed out or expires! They will give us our $65 credit before they retain the money though 6
 The Iron Condor!!
Buy the 820 Call for insurance for $1.05 x 100 (one contract) = $105

Sell the 810 Call for a credit of $1.70 x 100 (one contract) = $170
Extrinsic Value Time Decay

120

100

80

60 Extrinsic
Value

40

20

0
15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

As long as it stays between 610

Underlying at 720 And 810 we keep the net credit
(as we close the position or it
expires)
So, if we can lose 1,000 - $130 = $870
and we can make $130, we have a
potential ROI of $130/$870 = 14.9%
Sell the 610 Put for a credit of $3.25 x 100 (one contract) = $325

Buy the 600 Put for insurance for $2.60 x 100 (one contract) = $260

Net credit received = ($0.65 + 0.65) x 100 = $130

Broker will STILL only keep $1,000 per contract after paying us $130 credit because they realize the
Underlying cannot expire in two places at the same time!!! PUTTING THE ODDS IN YOUR FAVOR 7
 The Iron Condor on ThinkorSwim

We sell because we
want to receive
credit for the position

© 2015 Eagle Interests, LLC 8

 The Iron Condor on ThinkorSwim

Now we adjust the By pressing ‘Ctrl’ in a strike

We are selling the Note how we get a
other side manually under ASK to buy and under
strikes with negative credit value, which
to sell and buy the the BID to sell we can also
values and buying we will adjust lower!
correct strikes quickly construct an IC (or
the ones with
any other strategy)
positive values
© 2015 Eagle Interests, LLC 9
 The Iron Condor on ThinkorSwim

Once filled you will right click on the filled order and select “Create Opposite Order”
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1 4 10
© 2015 Eagle Interests, LLC
 The effect of Volatility on an Iron Condor
As stated earlier:
Premium is what we pay for an options and is composed of
 _______ Value
 _______ Value
 ____________
 ____________

But how do we find out the Volatility of an Underlying? Definitions…

Implied Volatility
- Implied Volatility: In financial mathematics, the implied volatility of an option contract is
that value of the volatility of the underlying instrument which, when input in an option
pricing model (such as Black–Scholes) will return a theoretical value equal to the
current market price of the option

Volatility is a measure of how much the market is expecting an underlying to

move in the next year with a probability of 68% (1 Std Deviation)
© 2015 Eagle Interests, LLC 11
The effect of Volatility on an Iron Condor
Implied Volatility
Volatility is a measure of how much the market is expecting an underlying
to move in the next year with a probability of 68% (1 Std Deviation)

Implied Volatility is always expressed annually, if we wish to calculate the

movement for a certain number of Calendar Days we can use the below

© 2015 Eagle Interests, LLC 12

The effect of Volatility on an Iron Condor

All IC were opened

with 30 Days to
Expiration and same
credit, you can
clearly appreciate
how Volatility is
perfectly
proportional to how
wide we can sell the
Iron Condors (since
the price of an
option is tied to
volatility)

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© 2015 Eagle Interests, LLC
 The effect of Volatility on an Iron Condor
It is a known fact (numerous studies) that Implied Volatility is mostly
overstated in times of fear and uncertainty

Each Underlying has its own Volatility measure (For example, the
average volatility in the last year for the S&P500 index is approx.
17% and that of Wynn Resorts is 35%), so how do we find the
Relative Volatility of an Underlying?

IVPercentile
IVPercentile measures where current implied volatility stands in relation
to the range it has been in for a given period of time (we will utilize
one year). The max rank is 100 and the minimum rank is 0! The
formula can be seen below

(Imp_Volatility-lowest(Imp_Volatility,252))/(highest(Imp_Volatility,252)-lowest(Imp_Volatility,252))

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© 2015 Eagle Interests, LLC
 What does all this mean?
Implied Volatility tells us
what the market expects the
underlying to do in the
future, high IV means there
is uncertainty/fear and the
stock is expected to move
big in the future (options are
expensive)

But what value of IV is high

or low? IVPercentile tells us
where IV is now in relation to
the previous year’s IV for the
underlying.

You can find IVPercentile

under the TODAY’S
OPTIONS STATISTICS
in the Trade tab of TOS)
IVPercentile is mean reverting to its mean of 50% (since it can only be between 0% and 100%)

© 2015 Eagle Interests, LLC 15

 What creates High Volatility in the Market?

 Fear
 We frequently see how volatility goes up as the market goes
down (for the most part they are reverse functions)

 Uncertainty
 As news is eminent we see volatility go up (only up to the point
of the news being disseminated)
 FDA Results/News – Since pharmaceuticals/biotech companies always have
drugs in development the results by the FDA are given intermittently. We do
not play in this sector since these news are sometimes very specific and of
unknown timing
 Earnings Releases – The most common type of uncertain news are earnings
releases, mostly 4 times a year for every company (every 3 months). This is
when a company releases their results for the past 3 months and their
guidance going forward – We can benefit from these events (risking very
little of our account in a defined risk trade – guidelines to be given later). In
its majority these are in January, April, July and October
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© 2015 Eagle Interests, LLC
 What creates High Volatility in the Market?
 Fear (Inverse Curves)

 Earnings Releases

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© 2015 Eagle Interests, LLC
The effects of Volatility Contraction on Iron Condors
As an example, the Volatility of stock ORCL went from .31 to .21 (a 10 point drop)

A drop in Implied
Volatility of 10 points
would inflate our
profits per contract
from $1.02 a $34.44
giving us our 50%
expected profit (since
$34.44 is more than
half of our initial credit
of $60)

Note how Vega in the

upper graph is -2.93 x
-10 = +29.93 (very
close to our $34.44
profit)

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© 2015 Eagle Interests, LLC
 The effect of time on Iron Condors
As an example, the passage of time in DIA of 39 days

The passage of time

takes us to a profit of
$82.17, our exit point
(since $82.17 is higher
than half our initial
credit of $158)

Note that Theta in the

upper graph is 2.07 x
39 = $80.73, (very
close to our $82.17
profit)

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© 2015 Eagle Interests, LLC
 Our Strategy – Selling Premium
 We will sell to Open Out of the Money Options
 Since they only have Extrinsic Value
 They will lose their value with time (Theta Positive) and
that is what we want, since we are going to ‘Sell to Open’
 We will chose underlying's with High Relative Volatility
(IVPercentile), above __%, so that when volatility drops
our profits will be accelerated (Vega Negative)
 The closest to __ days to expiration
 With enough liquidity as defined earlier

 We will buy our positions back at __% of the initial sell value

© 2015 Eagle Interests, LLC 20

 Selling Premium for Profits
Thank you very much for your participation!
Best of luck with our Strategies!
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© 2015 Eagle Interests, LLC 21