Supercharge Your Trading & Inve - Younes, Danny PDF

Supercharge Your Trading &
Investment Account Using Wyckoff /

Volume Spread Analysis
Danny Younes
Copyright © 2017 Danny Younes
All rights reserved.
ISBN-10: 1542517133
ISBN-13: 978-1542517133
CONTENTS
Foreword 1
4
Why I Wrote This Book 6
Introduction
1 How the Markets Really Work 14

2 How, When & Why Markets Go Up and Down 18
3 What are Options 25
4 The Key to Using Options to Generate a Monthly Income 40
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5 Minimize Risk = Buy Insurance 50
6 Basics of Technical Analysis 70
7 How Wyckoff / Volume Spread Analysis Can Assist You in Your 84
Trading Decisions
8 Covered Call / VSA Stock Selection Criteria 109
9 How to Find Trading Candidates Using the TradeGuider End of 130
Day Software
10 Trading Plan 140
11 The Future of Volume Spread Analysis 158
DEDICATION
To my amazing wife, Georgette and my three children Nicholas, Jacob

and Joshua. Thank you for giving me the strength to keep on keeping on.
You guys are my rock.
FOREWORD
Foreword by Gavin Holmes, Author, “Trading in the Shadow of the Smart

Money”
I had the good fortune to connect with the Author of “Supercharge Your
Trading & Investment Account Using Wyckoff / Volume Spread Analysis”
Danny Younes, several years ago, as an aspiring student of the works of the
great traders and investors, Richard D Wyckoff and the late Tom Williams
who passed away just before this book was published.
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Danny became a customer of TradeGuider Systems, the company that owns
the Wyckoff / Volume Spread Analysis trading and investing methodology
that Danny shows you in this book.
Danny attended many courses and webinars and was personally coached by
Tom Williams and myself, so I am extremely proud of his achievement with
this work which I know Tom would have been extremely proud of as well.
As an author myself, I know how difficult actually writing a book is, but I
can say without a doubt that Danny has produced in this work one of the
finest books on the Wyckoff / Volume Spread Analysis trading method
currently available.
In “Supercharge Your Trading & Investment Account Using Wyckoff /
Volume Spread Analysis” Danny goes well beyond the basic principles of the
Wyckoff / Volume Spread Analysis method, by introducing trading strategies
using options that can be used once a stock has been located as a possible buy
or sell based on accumulation and distribution.
As with anything in life, you need to be motivated to achieve your goals, and
Danny reminds us of this in each chapter with very poignant quotes from Les
Brown, Eric Thomas, Tony Robbins and Steve Jobs.
Trading and Investing in the financial markets has never been easier to access
thanks to the internet, and more and more retail traders are getting involved
from all over the world. In the book, Danny explains in detail the traps that
get the uninformed “herd” traders into bad positions and shows through
detailed charts and news clippings how the mainstream media is used to
wrong foot this group into making very poor trading and investment
decisions.
Danny’s experience trading options is extensive and he explains in great
detail strategies that you can use right now to grow your account and mitigate
your risk by insuring your positions, something many traders and investors
will be totally unaware off.
The book is easy to read and the charts clearly show the key principles that
all traders and investors should understand before they risk real capital in the
markets. Danny generously shares with us his personal trading plan at the end
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of the book and this really brings the book together perfectly so the reader
can take immediate action on the knowledge they have received.
Like me, Danny’s mission is to enlighten and help the uninformed traders and
investors who get fleeced by Smart Money if they do not have the correct
knowledge.
In “Supercharge Your Trading & Investment Account Using Wyckoff /
Volume Spread Analysis” Danny has achieved that objective in a clear, easy
to understand book that evens the odds for the retail trader and investor and
lifts the fog on how the financial markets REALLY work.
I hope you enjoy the book as much as I did and I have already taken two
strategies from the book for use in the Wyckoff / Williams Investment
Portfolio Hedge Fund that I am running.
Gavin Holmes 27/12/2016
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WHY I WROTE THIS BOOK
There are various reasons why I wrote this book but there is one main reason
and that is to assist the retail trader. From my experience the retail trader always
loses out and it’s my mission to educate as many people as I can. There are two
road blocks that face the retail trader:
1. The financial markets are manipulated. I will explain in my book why the markets
are manipulated but more importantly how you can identify when the markets are
being manipulated and how to trade in harmony with the professional traders, often
referred to as the “Smart Money”.
2. The other reason is that many educators that teach retail traders how to trade the
financial markets use indicators that are lagging and most investors are getting into
poorly conceived trades based on these indicators. Indicators such as MACD, RSI
or Stochastics are based on mathematical formulas and when they notify you of an
entry the markets more often than not, will do the very opposite. These educators
mean well with the education they supply to their customers, however, there are
some customers who do make in trading. It is now recognised there is a large
number of traders and investors that do not make it in the markets, consistently
blowing up one’s account. It comes down to being disciplined and having the belief
in the strategy that you are trading and most traders and investors do not have that
belief and enter trades that are poorly conceived.
When I started, I was getting into poorly conceived trades, when pricing action
broke out of consolidation I would get in on a trade. I would see an increase in
volume, the MACD indicator will tell me ‘it’s a buy’ only to find pricing action
going the other way. I needed to find a solution to this issue that I was having and I
came across TradeGuider. TradeGuider opened my eyes to how the financial
markets really work and I am grateful that we have crossed paths. One thing I have
in common with the CEO of TradeGuider, Gavin Holmes is that we want to spread
the word around the world about how the markets really work and to educate as
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many retail traders as we can.
I also wanted to pay tribute to the late Tom Williams, the inventor of Volume Spread
Analysis, who through his work has certainly assisted many traders around the
world with their trading. His dream of computerizing the Wyckoff method of trading
has certainly come to fruition over the last fifteen years and it’s through his work I
can bring you this book. Thank you, Tom, for sharing your wisdom, you will be
missed, may you rest in peace.
I hope you gain a lot of value from this book and that it assists you in your trading. If
you have any questions or you want to know more about the trading method that I
discuss in this book, please email me, danny@tradeguider.com.
At the start of every chapter I have provided you with motivational quotes from the
likes of Les Brown, Eric Thomas, Tony Robbins and Steve Jobs. Their words
propelled me to write this book and I hope their words will also inspire you to fulfill
your dreams.
INTRODUCTION
“The truth that will set you free, it’s the truth you don’t want to hear. You’ve
got to change, you’ve got to take responsibility for your stuff. You’ve got to
clean your act up. You’ve better get your life together; you’ve got genius in
you. Challenge yourself, push yourself, make yourself come up with
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something. Use your imagination. So what, you fell flat on your face, so what.
Learn from the experience and start again, don’t count yourself out. Forget
about the mistakes yesterday, forget about all your failures yesterday, forget
about all you had, that’s not important. Only thing that we have is right now.
What you will find is that you will know more than you realize that you know.
That you're more creative and more resourceful that you realize that you are.
See the universe responds to the man or woman that refuses to be denied.
That business that you want, that dream that you have of controlling your
destiny, that is yours, that power to create that is yours, that’s available to
you, but you have got to be willing to stand there and face disappointment,
not have support, be lonely, doubt yourself sometimes, be rejected again and
again and again, become bankrupt if necessary. If it’s difficult so what, if it’s
inconvenient, so what, don’t sentence yourself to a lifetime of being
miserable, a lifetime of being broke, a lifetime of being unhealthy, a lifetime
of being in a relationship that is no longer fulfilling to you. You are a human
being, don’t volunteer your life that way. Your life has too much value to the
universe, you’ve got something to contribute, you’ve got something to give,
but the challenge is to hold on, and if you hold on tenaciously, I say the
universe is on your side.” – Les Brown
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When it comes to investing in the stock market, the most popular strategy is
the Buy, Hope, and Pray. Investors buy an instrument and hope it moves in
your direction to make money. There is no certainty in this strategy and when
it comes to investing, I want to put the probabilities in my favour and get as
close to certainty as I can. Buying and holding stocks is so 1980s, because it's
a time bomb waiting to go off. I want you to think about the following, if you
buy a parcel of shares:
Do you make money if the stock price goes up?

Do you make money if the stock price goes down?
Do you make money if the stock price goes sideways?
There is only one scenario where the investor will make money and that is if
the stock price goes up. So why do investors invest this way? They have only
one-third of an opportunity in making money. The one thing it comes down
to is that most investors are not educated. You don't know what you don't
know.
There is another interesting fact that I want to share with you. Most investors
invest in the stock market where they have 100% risk, meaning there is
a possibility that they may lose 100% of their money. There is that chance
that a stock that you’re investing in, can fall very sharply or in some cases, I
have seen companies that have been delisted from an exchange. Take for
example at the height of the financial crises we had Lehman Brothers file for
bankruptcy, and other bankruptcies prior to the GFC such as WorldCom and
General Motors just to name a few.
Let's face it, most retail investors invest in the stock market with their hard
earned after tax dollars which they cannot afford to lose. Still, they invest in
the stock market with 100% risk and this doesn't faze them. It doesn't faze
them as they don't look at trading from a risk management point of view.
They only think about it from a profit taking point of view and completely
ignore the downside.
Did you know that you can save so much heartache and money if you
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purchased an insurance policy on your shares? Let me share with you a real-
life example which I think will hit home for you.
Prior to the Global Financial Crisis (GFC), BHP Billiton Limited (BHP) on
the Australian Stock Exchange (ASX) reached the highs of AUD$45.30. Let's
say you entered this stock at AUD$45.30 because it broke a resistance level.
The stock is on a magnificent run and you fear missing out on this fabulous
up move and everything seems to be positive for the stock. You see articles
about the company stating "Shares in BHP Billiton have jumped on fresh
speculation, a Chinese investor is eyeing up to a 9% stake in the company.
China is the biggest consumer of iron ore and the move would help China
secure supplies of key raw materials, such as iron ore and oil, needed to fuel
its booming economy". The news is positive on BHP, and you invest in the
stock thinking you are on a sure winner.
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Figure 1: BBC news article, Chinese whispers fuel BHP shares
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In a matter of six months, BHP plummeted from AUD$45.30 to a low of
AUD$18.12. How would you feel if you had entered BHP at AUD$45.30,
only to see it 6 months later at AUD$18.12? One word would describe how
you'll feel, devastated. The news around the stock at the highs was positive,
surely you were on a winner. So why didn't the stock perform, it's a safe
investment, it's a blue-chip stock?
I will show you later in this book how the financial markets are manipulated
by the professional traders (Smart Money) and that all is not what it seems in
the markets.
The stock of BHP is now trading at AUD$18.12, and all you can think of is
not losing all your hard-earned money. The pain in staying in a trade which is
losing you money is unbearable, so you exit out of the trade with a loss.
What if this was a long-term investment such as in your retirement account?

The investment fund that you invest in has purchased BHP at these highs and
investment funds usually invest in safe blue chip stocks. It's August 2016 as I
write this book, BHP is only trading at around AUD$21.00. It hasn't gone
back up above AUD$45.30 in the last eight years.
Figure 2: Stock chart of BHP
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It has been eight years and the stock has not produced a positive result. Let’s
say you held onto the investment for the long-term. Holding onto a stock that
is not producing a result is not an ideal investment. You’re no longer looking
at making a profit, you just want your initial investment back, as you'll be
satisfied with achieving a break-even result.
If I told you that there was an investment opportunity where you had only
one-third of an opportunity in making money, would you consider this
investment opportunity? Most investors will not consider it, but a lot of
traders and investors invest by Buying, Hoping, and Praying. Let’s face it
they are not stacking the odds in their favour.
What I'm about to reveal to you is a trading strategy that has been around
since the 1970s and many people do not know that it exists. It's a strategy that
several governments around the world allow you to invest your retirement
account because it's a safe strategy and it's much safer than Buying, Hoping,
and Praying and you'll come to realize this as you read through this book.
You will kick yourself for not knowing about it earlier. If you knew about
this strategy, your trading & investment account would look very different
today.
How would you feel if I told you there was a strategy where you can generate
an income from your share portfolio regardless of whether the stock goes up,
down or sideways, you will still make money? You’re probably thinking that
this can't be true, but it is true, it's been around for over 40 years and it's a
strategy that works for many traders and investors who have embraced it. The
strategy is called the “Covered Call" and it’s a strategy where you can
supercharge your trading and investment account. Excited? I bet you are and
I am excited to be sharing this with you.
It's all well and good for me to show you a strategy that you can implement,
but what most traders and investors want to know is ‘How do I find these
trading opportunities?’ Throughout this book, I will share with you a
methodology known as Wyckoff/Volume Spread Analysis (VSA). VSA will
assist you in finding imbalances of supply and demand in the financial
markets and this knowledge would have prevented you from investing into
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BHP back in 2008.
Most traders are aware of the two widely known approaches used to analyze
a market; fundamental analysis and technical analysis. Many different
methods can be used in each approach, but the fundamental analysis is
concerned with the question of why something in the market will happen, and
technical analysis attempts to answer the question of when something will
happen. Volume Spread Analysis, however, is a third approach to analyzing
a market. It combines the best of both fundamental and technical analysis into
a singular approach that answers both questions of 'why' and 'when'
simultaneously.
HOW MARKETS REALLY WORK
“You can’t connect the dots looking forward, you can only connect looking
backward. So you have to trust somehow, that the dots will connect somehow
in your future. You have to trust in something, your gut, destiny, life, karma
or whatever. Because believing that the dots will connect down the road, will
give you the confidence to follow your heart, even when it leads you off the
well-worn path. And that will make all the difference. Your time is limited, so
don’t waste it living somebody else’s life.
Don’t be trapped by dogma, which is living with the results of other people’s
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thinking. Don’t let the noise of other people's opinion drown out your own
inner voice. You’ve got to find what you love and that is true for your work as
it is for your lovers. Your work is going to fill a large part of your life, and
the only way you are going to be truly satisfied is to do what you believe is
great work, and the only way to do great work, is to love what you do. If you
haven’t found it yet, keep looking and don’t settle. Have the courage to follow
your heart and intuition, they somehow already know what you truly want to
become.” – Steve Jobs
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Welcome to the largest business in the world. Every day billions of dollars
exchange hands in the world stock markets, financial futures and currency
markets. Trading these markets is by far the biggest business on the planet.
The average person has no idea what drives the financial markets. Even more
surprising is that the average trader doesn't know what drives the markets
either. So, despite financial trading being the largest business in the world, it's
also the least understood business in the world.
Sudden moves are a mystery, arriving when they are least expected,
appearing to have little logic attached to them. Frequently the market does the
exact opposite of a trader’s intuitive judgment. Even those people who make
a living from trading, particularly the brokers and the pundits, who you
would expect to have a detailed knowledge of the cause and effect in their
chosen field, very often know little about how the markets work.
Essentially the financial markets show a lot of similarities within the other
types of markets. If you look, for instance at a street market, it consists of
four things; location, items for sale, buyers, and sellers. The location is
known as a place to buy and sell items. The prices advertised by the seller is
what the seller thinks they can get based on the competition in the location
and the demand for the products by the passing buyers. In a buyers’ market,
the prices fall and in a sellers’ market, where the demand is high, they rise.
The financial markets are not much different. Instead of antiques, clothes, and
food, what's been sold here are stocks, commodities, currencies and
derivatives. Buyers purchase stocks and commodities through the trading
exchanges such as the New York Stock Exchange (NYSE) or the Australian
Stock Exchange (ASX). The sellers also sell through the exchanges with both
sides using brokerage firms to transact the business.
Stock markets grew out of small meetings of people who wanted to buy and
sell their stocks. These people realized that it would be much easier to make
trades if they were all in the same place at the same time. Today, people from
all over the world use the stock markets to buy and sell stocks in thousands of
different companies.
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New issues of stock must be registered with the relevant exchange, such as
the U.S. Securities and Exchange Commission or the London Stock
Exchange. A prospectus giving details about the companies’ operation and
the stock to be issued is distributed to interested parties. Investment bankers
buy large quantities of the stock from the company and re-sell the stock on
the exchange.
Sitting between the markets and buyers and sellers are the brokerage firms.
These firms act as an intermediary between the market and buyer or seller. A
potential buyer places an order with a broker for the stock he/she wishes to
purchase. The transaction takes place when someone wants to sell and
someone wants to purchase at the same price.
When you purchase a stock, you receive a stock certificate. The certificate
may be issued on paper or issued electronically. It may be transferred from
one owner to another or it can be held by the broker on behalf of the investor.
What Affects the Markets?
There are several factors that affect the markets. They are individual,
institutional, mutual funds and investors all affect market prices. If a large
number of people want to buy a certain stock, the price of the stock initially
is going to rally. Just as if there were many people bidding on an item at an
auction. Both the condition of the individual business and the strength of the
industry that it's in, will affect the price of its stock. Profits earned, the
volume of sales and even the time of the year will also affect how much an
investor wants to own a stock.
Governments make all kinds of decisions that affect how much an individual
stock may be worth and what sort of instruments people want to be investing
in. The governments interest rates, tax rates, trade policies and budget deficits
all impact prices.
General trends that signal changes in the economy are watched closely by the
investors to predict what is going to happen next. Indicators include the gross
national product, the inflation rate, the budget deficit and the unemployment
rate. These indicators point to changes in the way ordinary people spend their
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money and how the economy is likely to perform.
Events from around the world and changes in currency values, trade barriers,
wars, natural disasters, epidemics and changes in government all affect how
people think about the value of different investments and about how they
should invest in the future.
Today, investments can be bought and sold around the clock. When the
Tokyo markets have just closed, for example, the London market takes over,
and when London closes the New York exchanges take over. When big
moves in price occur in one market, the other markets can be affected too.
A bull market and a bear market are terms used to describe market trends. A
bull market is a period when prices are generally rising. If investors feel that
they will be in a bull market, they will feel confident in investing, adding to
the growth of the market.
A bear market is a period when stock prices are generally falling. If investors
think that the markets are generally falling, they will sell stock at lower
prices. Each of these markets is fueled by investors’ perceptions of where the
economy and markets are going. These trends can quickly change.
The first secret in learning trading successfully is to forget about the intrinsic
value of stock or any other instrument. What you need to be concerned with
is its perceived value, its value to the market and not the value that it
represents as its interest in the company. This is a contradiction that
undoubtedly mystifies the directors of strong companies with a low stock
value. From now on it's the perceived value which is reflected in the price of
the stock.
HOW, WHEN AND WHY MARKETS GO UP AND

DOWN
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“Fear kills dreams, fear kills hope, fear puts people in the hospital, fear can
age you, can hold you back from doing something that you know within
yourself that you are capable of doing, but it will paralyze you.” – Les
Brown
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All markets move up and down, none stay static, why? They move as the
result of market forces, essentially all markets are moved by supply and
demand. If more people want to buy, demand will overcome supply and
prices will move up. Conversely if more people want to sell than buy, supply
will overcome demand and prices will fall.
So, who trades the markets?
The markets are traded by a number of trading entities. Most people will be
aware of three entities. The first group being retail traders, people like you or
me who trade the markets either as a full-time job, or part time for a second
income or as a hobby. If we are trading full time, then we will place trades in
the live markets. If we trade as a hobby, we might take position trades on a
daily basis.
The second group is the pension funds who trade longer term positions,
holding stocks for week or months. The final group controls about 85% of the
money in the markets and they are what we call the “Smart Money”. They are
made up of hedge funds, private trading syndicates, and investment banks.
These entities have the power to move the markets. These professional
players sell at the top of the market and buy at the bottom. In between, they
have to move the markets by making them rise and fall. To do this, they use
the emotions of greed and fear to herd the majority of traders into the wrong
side of the market.
They have developed many ways of wrong-footing the retail investor and
trader and one of their biggest weapons is the unwitting media. Here are just
a few examples. Let's start with the British Petroleum oil spill disaster in
2010. On the 25th June 2010, the stock price of BP fell to just under $27.00.
The news was grim. The pundits and reporters were talking in terms of huge
losses and a possible breakup of the company and everyone who had stock
was looking to sell from the expectation that prices were plummeting. Sell
they did, straight into the hands of the smart money, professionals who
bought cheap. Within six months the price of the stock doubled. Buy cheap,
sell back when the market rises, that's how the game’s played.
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On May 6th, 2010, something very strange happened in the financial markets.
This day is now referred to as the flash crash because no credible explanation
has ever been provided by the regulatory authorities as to exactly what
caused the crash, or who was responsible. In fact, many investors began to
suspect that all was not what it seemed to be. CNBC's 'Closing Bell" anchor
Maria Bartiromo was reporting on the day the 'Flash Crash' happened. Below
is the transcript of fellow reporter Matt Nesto explaining to Bartiromo some
unusual anomalies in several stocks, even though the mainstream media
claimed that it was caused by a lone trader from a major banking institution
hitting the wrong button. 'B' for billion was entered instead of a 'M' for
million while trading the CMS eMini S&P Futures. The conversation went as
follows:
NESTO: "A person familiar with the Citi investigation said one focus of the
trading probes were the futures contracts tied to the S&P 500 stock index
known as the eMini S&P 500 futures, and in particular, that two-minute
window in which 16 billion of the futures were sold... Again, those sources
are telling us that Citigroup's total eMini volume for the entire day was only
9 billion, suggesting that the origin of the trades was elsewhere."
Nesto named eight stocks that were hit with the supposed computer error/bad
trade that went all the way down to zero or one cent, including Exelon
(NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP),
Eagle Material (NYSE:EXP), Genpact Ltd (NYSE:G), ITC Holdings
(NYSE:ITC), Brown & Brown (NYSE:BRO), Casey's General
(NASDAQ:CASY) and Boston Beer (NYSE:SAM)
NESTO: "Now according to someone else close to Citigroup's own probe of

the situation, the eMinis trade on the CME. Now, Maria, I want to add
something else, just in terms of these erroneous trades that Duncan
Niederauer; the NYSE CEO was talking about. I mean, we've talked a lot
about Accenture, ACN. This is a Dublin-based company. It's not in any of the
indexes. If you look in the S&P 500, for example, I show at least two stocks
that traded to zero or one cent - Exelon and CenterPoint. If you look in the
Russel 1000, I show Eagle Materials, Genpact, ITC and Brown & Brown,
also trading to zero or a penny, and also Casey's General Stores, as well as
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Boston Beer trading today, intraday, to zero or a penny. So they have at least
eight names that they're going to have to track down on top of the Accenture
trade, where we have the stock price intraday showing us at least, we'll
assume, a bogus trade of zero."
When Matt Nesto called these trades 'bogus', host and CNBC veteran Maria
Bartiromo looked shocked and a little angry and replied:
BARTIROMO: "That is ridiculous, I mean this really sounds like market

manipulation to me. This is outrageous."
According to Nesto, these are frequent occurrences, at least at the NASDAQ

exchange, and if you make a trade and lose money, there's no recourse.
NESTO: "It happens a lot. It really does. I mean, we could probably ask the
NASDAQ, they may not want to say how often it happens, but it happens
frequently. And they go back and they correct. And the thing that stinks is if
you, in good faith, put in a trade and made money and then lost it, you lose it.
And there's no recourse and there's no way to appeal."
What we witnessed on May 6th, 2010 was a giant shakeout of the market.
The Smart Money were expecting higher prices and wanted to catch the retail
traders by marking the price down heavily, before moving the price up. They
were bullish, the stocks were going to rise and they wanted to buy at the best
possible price. Wouldn't you want to do the same? Buy at the lowest price,
knowing you can sell it for much more than you bought it for. That's the
trading game, buy low sell high.
Be a predator, a clever predator that understands exactly how the prey thinks
and act. It's like herding sheep, steering them, rounding them up and locking
them in a pen.
In 2009, gas and petrol prices skyrocketed around the world and oil was
supposed to be in scarce supply. Some of the world’s top oil analysts were
predicting a price of $200 per barrel. You can appreciate for yourself, just
how influenced someone can become when you see and hear information that
all points in one direction. In this case, oil was to go to $200 per barrel, and
many traders and investors and indeed even the airlines got caught up in
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the maelstrom of higher prices. A headline in the New York Times stated;
"An Oracle of oil predicts $200 a barrel of crude" on May 21st, 2009. Exactly
three weeks later the price of crude oil plummeted.
In April 2011, silver was very much in the news as the commodity to invest
in. The price had steadily risen towards $50 and all the news was about the
relentless rise of silver. This commodity had a very bullish medium term
outlook and once again, retail traders bought in abundance, anxious not to
miss out. Later in 2011, silver crashed once the smart money had finished
distributing at the highest price, so maximizing their profit.
CNN Money reported; "J.P. Morgan scores big in latest quarter" is the
headline 14th October 2009. The words strongest performance, towered
above Wall St expectations are used directly below the headline. All the news
is now bullish; the stock is going up and up because it's in an uptrend. To the
retail trader and the investing community, this appeared to be a great
opportunity to buy, because everything lined up and if you didn't go to the
market by now, you missed the move. So, you buy, buy, buy. What
happened? The stock plummeted spectacularly and the uninformed retail
trader said bye bye to their capital.
These are just very few examples; the reality is that all markets are moved to
a greater or lesser extent the same way and it's why a small and enlightened
minority of traders are successful in the markets. So we have seen how
markets rise and fall, and why they fall. So how do you know when markets
will change direction.
Traditionally, there have been two ways to try and predict price movement,
by technical analysis and fundamental analysis. Let's begin with technical
analysis. Wikipedia defines technical analysis as "a security analysis
discipline for forecasting the future direction of prices through the study of
past market data." Another definition, this time from City Index is "Analysis
of a financial market by charting its performance using historical patterns,
and focusing on trends."
There are many technical analysis tools and methodologies out there, some
like Bollinger Bands, MACD, and Stochastics, use mathematical formulas to
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identify trends. Others like Fibonacci and Elliot Wave use historical patterns.
In summary, technical analysis tools look at historical price movement and
based on the price action, you can determine to some level where the price
will go. By looking at charts, you can identify trends and patterns which will
help you find good trading opportunities.
Fundamental analysis is a way of looking at the market through economic,

social and political forces that affect supply and demand. In other words, you
look at what economy is doing well and whose economy is strong. The idea
behind this type of analysis is that if the country’s economy is doing well,
their currency will also be doing well. This is because the better the country’s
economy the more trust other countries have in that currency.
Both these analysis models can provide valuable help for traders and
investors. The question arises, well if they're good, why do over 90% of
people lose money in the markets? Well, the actual day to day movement of
the market is shrouded in deep, dense fog, which is why the technical and
fundamental analysis approach cannot be sufficiently successful on their
own. That fog is deliberately generated by the market makers and the trading
syndicates to force you, the retail trader, onto the wrong side of the trade.
Technical analysis tools try to predict price movement, by analyzing in

various ways what the market is going to do, based on what it did
historically. It's a bit like trying to predict what the weather is going to do
tomorrow based on what it did in a similar period historically.
That would be a more successful approach if the market behaved

consistently, unfortunately, it appears to be unpredictable. The reason for this
is that the smart money, the trading professionals constantly monitor both
sides of the market, and know exactly when to move the market as it wrong-
foots the retail traders. The “Smart Money” do it in a very subtle and clever
way, which are invisible, hidden in the fog. This means just as your technical
analysis indicators tell you to enter the market, the market turns and you are
locked in at higher prices and you've lost.
So, technical analysis on its own cannot alert you to the real movements in
the markets, because the market does not work in a vacuum. Going back to
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that real street market, if you are not an enlightened expert, knowing exactly
what to look for, how likely are you to find a bargain when the people that
you are buying it from are full-time experienced traders? The same is true in
all the financial markets.
Fundamental analysis relies on research, whether it's researching an economy

or its currency, commerce or individual company performance. That research
requires reading articles, reports and listening to the news. Taking too much
notice of incoming news stories and reports in the media is one of the main
reasons why traders and investors make very poor trading and investing
decisions at the wrong time. Here is an example, the chairman of the Federal
Reserve appears on television, and makes what appears to be a bearish
statement. The markets fall alarmingly in response to this news.
The news reporter appears grim-faced on television, reporting why the
market has fallen today - "The market has fallen dramatically today, on
negative statements made by the chairman of the Federal Reserve." To add to
the impact and drama of the announcement, any other negative information is
collected to support the story.
Why is the news release leading you astray and harming your trading?
Because this is how the news should have been reported; "The market has
fallen alarmingly today. Bearish statements made by the chairman of the
Federal Reserve, caused the professionals to mark the market down, in a
maneuver to discount the negative news. This had an effect on weak holders
and uninformed traders, causing them to panic sell their holdings to
professional traders, who have been waiting for this opportunity to buy at
lower prices."
It was highly likely professional traders, the “Smart Money”, were fully
aware of the forthcoming press release well in advance of the announcement,
and they were ready to absorb the huge amount of stock. They stand to profit
handsomely in the days ahead as a result of the successful and expertly timed
operation. Fundamental analysis can't accurately point to price movement
because the media is all too often manipulated and used by the smart money
to wrong foot the retail trader.
Remember it's perceived value and not actual value. There is another
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methodology which is the missing piece of the jigsaw, it's called Volume
Spread Analysis (VSA) and it forms the basis of TradeGuider's education and
trading systems.
Volume Spread Analysis lifts the fog, it identifies, when interpreted

correctly whether the smart money is buying, selling, or not
actively participating in the markets.
WHAT ARE OPTIONS
“Don’t allow your emotions to control you, we are emotional but you have to
learn to discipline your emotion. If you don’t discipline and contain your
emotions, they will use you.” – Les Brown
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Options should be one tool in every trader’s arsenal, as it can quickly grow
your investment portfolio if used correctly. It can also be detrimental to those
who are not educated in options and use it incorrectly. There are lots of
different strategies that can be traded with options such as spreads, iron
condors or butterflies to name a few. These are trading strategies that are
implemented without holding stock and are high-risk strategies. These
strategies can make you a lot of money, but you can also lose a lot of money
if you have no idea of what you are doing.
In this chapter, I will be focusing on the basics of options and then I will lead
into the covered call strategy, a conservative income producing strategy.
Stock market educators normally charge a large fee for the information that I
will impart to you. I think that is ludicrous and I sometimes wonder if these
companies are making money from actually trading their strategy or from the
education they sell. From my experience, the retail trader always gets shafted
and it's my aim to educate the retail trader and investor about how to trade the
financial markets without the hefty upfront costs to learning it. That money is
better utilized in your trading.
The Option Basics
There are two types of options used in the financial markets, one is known as
a call option and the other is a put option. With every option, there is a buyer
and a seller. The buyer of a call option has the right to buy the stock that it
represents at an agreed price, and the seller of the call option has
the obligation to sell their stock at an agreed price. The inverse happens with
put options, the buyer of a put option has the right to sell the stock it
represents at an agreed price and the seller of the put option has the
obligation to buy the stock at an agreed price.
Buyer Seller
Call Option Right to Buy Obligation to Sell
Put Option Right to Sell Obligation to Buy
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Table 1: Options Rights and Obligations
Let's run through an example for a call option. If Trader A buys Apple Inc
(AAPL) call option at a strike price of $110, Trader B is the seller of the call
option. Trader A has the right to buy AAPL stock for $110 and Trader B has
the obligation to sell AAPL stock at $110. Trader A is long and wants the
AAPL stock price to go up in value in order to make money and Trader B is
Short and wants the AAPL stock price to go down in value in order to make
money.
Let's run through an example for a put option. If Trader A buys a put option
for AAPL at a strike price of $110, Trader B sells a put option of AAPL at a
strike price of $110. Trader A has the right to sell AAPL stock at $110 and
Trader B has the obligation to buy AAPL stock at $110.
The Lingo
You'll need to know some terminology if you would like to trade options.
Don't worry it's very simple once you get the hang of it.
Strike Price or Exercise Price

The strike price of an option is the price at which the underlying stock can be
purchased or sold. In a call option, the strike price is the price that the option
holder can purchase the underlying security. For a put option, the strike price
is the price that the option buyer can sell the underlying security.
If Trader A purchases 100 shares, (1 contract) of AAPL call option at

$110.00 which expires in three months at a cost of $4.00 per share, the
$110.00 price is known as the strike price. Trader A has the right to buy 100
shares (1 contract) of AAPL stock at $110 anytime during the three-month
period. It does not matter if the underlying share price is trading above or
below the strike price.
Likewise, with put options, if Trader A purchases 100 shares (1 contract) of

AAPL put option at $110.00 which expires in three months at a cost of $4.00
per share, the $110 price is known as the strike price and Trader A has the
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right to sell 100 shares (1 contract) of AAPL stock at $110.00 anytime during
the three-month period. The strike price, also known as the exercise price, is
the most important determinant of the option value. Strike prices are
established when a contract is first written. Most strike prices are in
increments of $0.50, $1.00, $2.50 and $5.00.
Option Premium
The option premium is the income that the option seller receives by selling an
option and the amount that the buyer of the option must pay. The option
premium refers to the current price of any specific option contract that has yet
to expire. Option prices are quoted on the exchange such as the Chicago
Board of Options Exchange (CBOE). Option premiums are made up of
intrinsic value, time value and implied volatility of the underlying asset.
Intrinsic Value
The value of an option is determined first by market forces. There are three
components that influence an option's premium. The first is the intrinsic
value, which is the value of the option if exercised and is the amount of the
option being In-the-Money. Intrinsic Value of a call option is the difference
between the underlying stock price and the strike price, meanwhile, the
intrinsic value of a put option is the difference between the strike price and
the underlying stock price.
Only options that have intrinsic value are said to be In-the-Money. For call
options, In-the-Money refers to options where the strike price is less that the
current underlying stock price. A put option is In-the-Money if its strike price
is greater than the current underlying stock price.
E.g. Trader A
purchased a $110.00 call option of AAPL at $2.50, at the time when the
underlying share price is $112.00. The intrinsic value of the call option is
$2.00, underlying stock price ($112.00) - strike price ($110.00). The 50 cents
remaining from the $2.50 option price is known as time value.
Time Value
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Any value above the intrinsic value of an option is known as time value. If an
option is Out-of-the-Money, 100% of the options value is time value. This
shows the amount of time value remaining until the expiration of the option
contract. An options time value is equal to its premium (cost of the option)
minus its intrinsic value (the difference between the strike price and the price
of the underlying stock). As a rule of thumb, the more time remains
until expiration, the greater the time value of the option. This is because
traders are willing to pay a higher premium for more time and will enable the
trader to have a longer period of time to become profitable.
In general, an option loses one-third of its time value during the first half of
its life, and the remaining two-thirds of its time value is lost during the 2nd
half. Time value decreases over time, eventually decaying to $0.00 at
expiration, which is known as time decay. Just think of an options life like an
ice cube that is melting and the expiration date as a heater. As the ice cube
gets closer to the heater, it will melt much more rapidly than if it was further
away from the heater. Once the ice cube is at the heater, the ice cube will
evaporate, just like an Out-of-the-Money option after expiration day will be
worthless.
Option Market Price Intrinsic Value Time Value
105.00 Call 5.65 5.00 0.65
105.00 Put 0.60 0.00 0.60
110.00 Call 2.45 0.00 2.45
110.00 Put 2.40 0.00 2.40
115.00 Call 0.85 0.00 0.85
115.00 Put 5.75 5.00 0.75
Table 2: Breakdown of intrinsic value with AAPL trading at $110.00
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Based on the table above, only the $105.00 Call and $115.00 Put will have
intrinsic value, being In-the-Money. When the underlying stock is trading at
$110.00, both the $110.00 Call and $110.00 Put have no intrinsic value, but
only time value as do far Out-of-the-Money $105.00 Put and $115.00 Call.
Implied Volatility
Implied volatility represents the expected volatility of the options underlying
asset, i.e. it’s the estimated volatility of the security’s price. It works on the
assumption that implied volatility will increase when the market is bearish
and decrease when the market is bullish. The reason for this is that investors
think that bearish markets are a lot riskier than bullish markets. Implied
volatility will allow an investor to gauge the future price fluctuations of an
instrument.
Implied volatility is the major component of the premium making up the

intrinsic value of the option’s total price. The option’s premium changes
when the option’s volatility changes over time. These expectations are
influenced by supply and demand and the overall direction of the underlying
asset. If the demand for the asset goes up, then the implied volatility goes up
and this will increase the premium of the option. If the demand decreases,
then the implied volatility will go down which in effect will cause the
premium of the option to go down.
In-The-Money (ITM) Options

In-The-Money means an option that will produce a profit if it's exercised. For
a call option, In-The-Money means that the strike price is below the market
price of the underlying asset. An example would be if Trader A purchases an
AAPL call option at a strike price of $110.00, the call option will be In-The-
Money when the AAPL is priced above $110.00. This means Trader A can
now exercise his option and buy AAPL stock for $110.00.
The opposite is true for a put option, if Trader A buys an AAPL put option at
$110.00 strike, the option will be In-The-Money when the share price of
AAPL falls below $110.00. Once the put option is In-The-Money, Trader A
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can sell his shares for $110 even though the underlying stock price is below
the strike price.
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How profitable an option is at any given moment depends on how much the
value of the underlying stock exceeds the strike price of a call option or how
much the value falls below the strike price of a put option.
Out-of-the-Money (OTM) Options

OTM refers to an option that will not produce a profit if it's exercised. For a
call option, if Trader A buys an AAPL call option at a strike price of $110.00,
this gives the right for Trader A to buy AAPL stock for $110.00 at or before a
specified expiration date. If the underlying stock price is currently $105.00,
this means that the call option is currently OTM, meaning there is no profit if
Trader A exercises the call option. There would be no need to exercise the
option because Trader A can purchase AAPL shares in the open market for
$105.00.
Likewise, for a put option, if Trader A buys a put option for AAPL at a strike
price of $110.00 and the underlying stock price is trading at $112.00, the put
option is OTM. Trader A will not sell his shares for $110.00 because in the
open market he can sell them for $112.00.
OTM options can be used to bet against future movement in the underlying
stock price. Therefore, investors buy OTM options because they expect a
large move to occur. Out-of-the-Money options are cheaper than In-the-
Money options. When the option is OTM, this simply means that if you
exercise the option, you will be "Out of Money", losing money on the
transaction.
At-the-Money (ATM) or Near-the-Money (NTM) Options

ATM refers to an option’s strike price that is equal to the price of the
underlying stock so if Trader A purchases a call option at a strike price of
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$110 and the underlying stock price is $110, the option is said to be ATM.
An option contract is referred to being NTM when the strike price and the
underlying stock price are close. ATM or NTM option contracts
typically cost more than OTM options. A stock trading at $110.20 and the
strike price of the option is $110.00, would be considered NTM as the
difference between the strike price and the share price is 20 cents. Generally,
the difference is less than 50 cents where the option contract is NTM.
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Figure 3: Call Option In-Out-At the Money example
35
Figure 4: Put Option In-Out-At the Money Example
Expiration Date
The expiration date is the date on which the option will expire. All options
have an expiration date and it's prudent that you select the correct expiration
date according to your strategy. Some option strategies require a longer
expiration date while others require a shorter expiration date. You may select
an expiration date for an option a year in advance or a week in advance.
Primarily with the covered call strategy, we will focus on options with an
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expiration date of the current month or the week, depending on our view of
the underlying stock.
Expiration
Options have a certain amount of shelf life and will expire at the close of the
expiration date. As the expiration date nears, the time value of the option
continually decreases until it reaches $0 by the end of expiration, while the
intrinsic value will closely represent the difference between the underlying
stock price and the strike price of the contract. The expiration of options
occurs on the third Friday of every month (American Style Options) and
those options can be exercised at any time prior to the expiration date.
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Option Seller Vs Option Buyer
What is the goal of the option seller and buyer in a transaction? The goal of
the option seller is to receive an income on their stock and reduce their break-
even price. So, a covered call investor may be looking to hold their stock for
the long-term and want to earn a monthly income to reduce the cost of the
stock or there are other covered call investors who want to hold onto their
stock for a very short period of time and produce a return on a monthly basis
and ultimately have the stock exercised by the end of expiration. Doesn't
matter what your goal is, this strategy will work for your needs.
What is the motive of the option buyer? The motive of the call option buyer
is for the stock to appreciate in value. As the stock appreciates in value, so
does the call option and as the stock depreciates in value, the call option
value depreciates in value. Now think of the amount of risk the option buyer
is taking. He/she is outlaying money, hoping for the stock to appreciate in
value in order for them to make money. So, there is only one way the option
buyer will make money and that’s if the stock appreciates. Does that sound
familiar to you?
The option buyer is taking on all the risk, they only make money if the stock
appreciates in value and more importantly, they have a certain amount of
time to make money. It must be made prior to the end of the expiration
period. If the option buyer does not see any appreciation in the stock price,
and if the call option is not In-the-Money, the call option will expire
worthless and they will lose 100% of the investment will be lost. So, if you
sold a call option which expires in a week, the option buyer has a week for
the stock to appreciate in order for them to make money.
With the covered call strategy, you are the option seller, meaning you have
made money up front because you were paid as soon as you sold the call
option. You have made money regardless if the stock goes up, down or
sideways. Ultimately, most of the risk is on the option buyer. Depending on
the option strike price selection there could also be some risk to the option
seller.
In my experience, it's better to be an option seller of a decaying asset, rather
38
than the buyer because by selling options:
1. You have the opportunity for monthly cash-flow with higher

annualized returns using low-risk strategies.
2. Appropriate for most market conditions.
3. Downside protection as we start with an option credit.
4. Covered call writers also capture dividend.
5. Opportunities to trade in retirement accounts using the covered
call strategy.
How to Read an Option Table

To successfully select options to trade, all good brokers will have an options
table with their trading platform, whether it's an on-line broker or a full-
service broker. The options table displays all available call and put options,
their strike prices, and the premium of the options. Other information that
may be displayed in an options table is a price change for the day passed,
volume and open interest.
39
Figure 5 AAPL Call Options for expiry March 2017. Courtesy OptionsXpress:
http://www.optionsxpress.com
The options table above show the Call Options of AAPL that expire on
March 3, 2017. Down the middle of the options table, you have the strike
prices, and as you can see from $90.00 to $100.00, the strike price increment
is $2.50. Beyond $100.00, the strike price increments are $5.00. What does
this mean? Why is there a difference in strike prices for the same stock? The
reason why there is a variance in strike prices is because, Apple had not
regularly traded above $100.00, but below it.
To reduce confusion, the exchanges typically determine strike prices based

on the current share price. If a stock is trading between $5 and $25, then the
strike prices will be in increments of $1.00 and $2.50, for example, $5.00,
$7.50, $10.00, and so on. If a stock is trading between $25 and $200, then the
strike prices will be in increments of $5, for example, $25, $30, $35, $40 and
so on. If the stock is trading above $200, then the strike price will be in
increments of $10, for example, $200, $210, $220, $230 and so on. On
occasion, you will see $1 price increments for stocks that are low priced and
heavily liquid (for example, Microsoft (NYSE:MSFT)). These stocks are
40
usually trading under $50.00.
Figure 6: AAPL Option Table for expiry March 17, 2017. Courtesy Google Finance
http://finance.google.com
The image above shows the full options table of AAPL. On the left-hand side
of the table are the call options and on the right-hand side are the put options.
The Price column on each side of the table shows the premium of each
option. At the time of this writing, AAPL stock was trading at $121.85. The
areas shaded in yellow represent the options that are In-the-Money. Call
option strike prices lower than the current stock price are In-the-Money and
put options strike prices that are greater than the stock price are In-the-
Money. The further In-the-Money the option is, the more expensive those
options are as there is a lot more intrinsic value. The option strike prices that
are outside the yellow shaded area are options that are Out-of-the-Money and
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are only made up of Time Value.
The expiration date for AAPL is 17th March 2017, the current date is 27th
January 2017 so there is just under a couple of months before all options for
March 2017 will expire. So, if we had purchased the $120.00 call option, the
cost will be $4.15. This option will have $1.85 = ($121.85 - $120.00), worth
of intrinsic value and the remaining $2.30 = ($4.15 - $1.85) is the time value.
The option that is Out-of-the-Money like the $125 call option is only worth
$1.71, and the $130 strike is only worth $0.56, so the further Out-of-the-
Money the strike price, the lower the premium.
Bid and Ask

The Bid and Ask price columns show the investor the sell prices and the buy
prices of the options. If we were to sell the $120.00 call option for AAPL, we
would receive $4.05, the bid price, and if we were to buy the $120 call
option, Ask Price, we would pay $4.15. So, if you were to place a market
order to sell the $120 call option, you will receive $4.05 and likewise if you
are buying the option, the least you would pay is $4.15. There is another
column that is not displayed here which is known as the midpoint and this
price is the average between the bid and the ask price, and when placing
orders, it's best to place a limit order based on the midpoint price. This will
enable you to pay a lower price for buying an option and receive the best
price for selling an option.
You also need to be careful when choosing options to trade. Why do I say
this? Well, for a stock like Apple the difference between the bid and ask price
of the call or put options is around 5-10 cents where the underlying stock is
trading. But there are some options where you may get a wider difference
between the Bid and Ask price, such as $1-$2. The difference between the
bid and ask price is known as the spread. What the spread tells us is how
liquid an option is. The wider the spread of the option, the less liquid it is,
meaning the fewer buyers or sellers that are available and the smaller the
spread, the more liquid the option is meaning the option will be a lot easier to
transact. So, when it comes to trade shares and/or options, ensure you select
those which have a smaller spread anywhere in the vicinity of 1-15 cents.
We'll talk more about this when we go through the strategy and stock
selection.
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Limit Order and Market Orders
When an investor places an order in the marketplace, there are two types of
orders that can be placed; Limit Orders or Market Orders. Market orders give
the instruction to place the order as quickly as possible. Meaning the order
will be placed at the next available price. A limit order provides instruction
to place an order at a specific price and the order will only get filled once that
limit price is reached.
When a market order is entered, a broker receives a security trade order and
that order is processed at the current market price. There is a great likelihood
of a trade being executed as a market order, but there is no guarantee of the
order actually going through as all stock market orders are subject to
availability of the underlying asset and this can vary significantly based on
the size of the order and the timing. The risk with market orders is that there
will be price variations from when the broker receives the trade to when it’s
placed and the larger the order the increased amount of time it takes to fulfill
the order. The length of time it takes to place a market order is subject to how
liquid the stock is. The more liquid the stock is the quicker the transaction
occurs. Market orders should be avoided as you could get a very poor fill.
Limit orders are the method I particularly like to choose as it gives me more
control over the price I wish the stock to be executed at. The price that is
selected, is the price what the stock will either be bought or sold at. The risk
with limit orders is that the price may not ever reach the limit price and this
results in orders not being executed. The other concern is the price may be
reached but there is not enough liquidity to fully transact the order.
THE KEY TO USING OPTIONS TO GENERATE A

MONTHLY INCOME
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“You want it and you’re going to go all out to have it. It’s not going to be
easy when you want to change, it’s not easy. If it were in fact easy, everybody
would do it. But if you are serious, you will go all out.
I’m in control here. I’m not going to let this get me down, I’m not going to let
this destroy me. I’m coming back and I’ll be stronger and better because of
it. You have got to make a declaration, that this is what you stand for. You're
standing up for your dreams, you're standing up for peace of mind, you're
standing up for your health, take full responsibility for your life.
Accept where you are and the responsibility that you are going to take
yourself to where you want to go. You are going to decide that I’m going to
live each day as if it were my last. Live your life with passion, with some
drive. Decide that you’re going to push yourself. The last chapter to your life
has not been written yet and it doesn’t matter what happened yesterday.
Doesn’t matter what happens to you, what matters is what are you going to
do about it.” – Les Brown
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What is the covered call strategy?
Just think of the covered call strategy in terms of property, this will make it a
whole lot easier to get a grasp of this phenomenal strategy. Let's say that you
are a landlord of a property and you wish to rent out this property because
you want to receive the rental income by renting the property to a tenant.
Over time as the property value rises you continue to earn an income on a
monthly basis. You find a tenant for your property and they pay you every
single month to rent the property from you and they continue to do this until
their contract expires.
You as the landlord receive the rent for the property every month regardless
of whether or not the property value goes up, down or sideways. That is a
great position to be in, no matter what happens to the value of the property,
you are still getting paid month in, month out. If we can do this with
property, why not do this with stocks? That's right, we can rent out our
shares, and by renting out our shares what I am referring to is selling call
options over our shares.
How would you feel if you owned an investment property and you didn't
know that you could rent out your property and earn an income? In that
whole time of owning the property, you left your property vacant, and you’re
just waiting for your property to appreciate in value. Then I come along and
say you can rent out your property to a tenant and earn an income each and
every month. How would you feel if you did not know about the landlord
strategy? You would be quite upset with all that missed income you could
have received. You should feel the same way with your share portfolio, as
you are missing out on income by selling call options over your shares and I
am going to show you how to do that step by step.
The mechanics of the strategy

Like I stated in the introduction of this book, the usual way to invest in shares
is to buy and hold for the medium to long-term. If the share price goes up,
then you'll make a profit. I went through an example of BHP that collapsed in
price from $45.30 and since its collapse, it has not gone back above its
highest price eight years ago. In all that time holders of the BHP shares could
have traded the covered call strategy and recouped the bulk of their losses.
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Let me show you how.
With the covered call strategy, you first buy shares and sell call options over
them to earn an income. The covered call strategy is also known as buy/write,
as we are buying and writing call options over our shares. The reason why
it's called ‘Covered Call’ is that our obligation with the selling of call options
is covered by owning the underlying stock.
With the premium received from selling the call option, it provides the
investor a downside cushion in the event the share price falls and can boost
returns on the upside. The aim here for investors is for the share price
to appreciate in value and be exercised by the end of the contract period.
The Covered Call strategy works by the holder of the shares selling a call
option at a specific strike price. This strike price is the price that the seller of
the call option is agreeing to sell their shares at anytime throughout the
contract period or until the expiration date. The buyer of the call option has
the right but not the obligation to buy shares that the option contract
represents.
Selling Call Options on Disney (DIS)

Let's go through an example here. We purchase 100 shares of Disney (DIS)
and the stock is currently trading at $108.51. The options table below shows
us the call options that can be sold on DIS. The strike prices of DIS are $1.00
price increments. These are the strike prices that I tend to favour.
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Figure 7: DIS Call Options February 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
Looking at the $109.00 strike price we can potentially receive an income of

$1.86, the price that's in the bid column. That might not sound like much but
that is a 1.7% return for the next 3 weeks. Just think about that for a moment.
If you received a 1.7% return on a monthly basis on DIS, potentially, what
sort of return can you achieve on a yearly basis? Potentially, that is a 20.56%
return per annum that is much better than holding your money in the bank
where you are lucky to get a 2% return per annum.
Let's compare holding a stock for the long term and not selling call options
over our stock in that period. If you purchase DIS at its highs in November
2015 where it traded to $120.07, and still held it, on the 26th January 2017 it’s
trading at $108.34. Just over a year has gone by and the DIS trade is in a loss
of $11.73. Now that is a sizable dent in your capital, but what I want you to
concentrate on is the amount of lost income over the last year. On 100 shares
of DIS, if we collected on a monthly basis $1.86 per share, $186.00 per 100
shares or per contract, over the course of the year, potentially we would have
made $2,604 profit, rather than an $1,173 loss. Which position would you
rather be in?
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By selling a $109.00 call option on our DIS shares, the investor agrees to sell
their DIS shares at $109.00 anytime throughout the contract period. The call
option buyer has the right, but not the obligation to buy our DIS shares at
$109.00 at any time.
When is the option buyer likely to take our DIS shares from us?
The option buyer will take our shares when our call option is In-the-Money,
meaning the stock price is above the call option strike price. They will not
take our shares from us if the stock price is below the strike price as the
option buyer can go into the open market and buy the shares at the lower
price. From my experience, during the contract period, the option buyer is
likely to exercise their option and take our shares away from us when the
stock price is at least $2.00 above the strike price. Understand the option
buyer can take our shares at any time (American Style Options), no matter
where the stock price is in relation to the strike price.
Purchasing Shares at Wholesale

What I have just shown you here is how you can purchase your shares at
wholesale. You’ve probably had a shock at this statement and said, “What are
you talking about Willis?”
We have purchased DIS for $108.32 and sold an February 2017 $109.00 call
option and received $1.86 per share.
Our wholesale price = ($108.32 - $1.86) = $106.46
We have gone into the open market and purchased our shares at a wholesale
price, where the uneducated purchase their shares at retail price.
How About the 3-9% Return?

Now you probably read earlier on in my book that we can achieve between 3-
9% return on a monthly basis. This is true, but the premiums of options all
depend on the volatility of the market. Now there are some shares that are
much more volatile than others, which means you will receive a higher
premium for selling their call options, and with higher volatility comes higher
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risk. Stocks like BAC have much less volatility and hence lower premiums.
Shares that have higher volatility than other shares will have larger price
swings for the day than low volatility stocks.
Selling Call Options on Southwestern Energy (SWN)

Southwestern Energy (SWN) is a stock that is a lot more volatile than DIS.
On the 26th January 2017, the stock is trading at $9.75 and we can sell a call
option at $10.00 and potentially receive $0.42 per share. That is a 4.3% return
by February 2017. A 4.3% return every month, can potentially return 51.69%
for the year. This is just the percentage return on the income of selling the
call option and not taking into account the capital gain of the stock.
Figure 8: SWN Call Options December 2016. Courtesy OptionsXpress: http://www.optionsxpress.com
What if we Take the Capital Gain into Account?

What you need to remember is if you sell an Out-of-the-Money call option
and are exercised, you will also collect the capital gain on top of the income
that you receive from selling the call option. In the example of DIS we
purchased the stock for $108.32 and sold an February 2017 $109.00 Call
Option and received $1.86 per share. If the stock remains above $109.00 by
the expiration date, our shares will be exercised and we will receive $109.00
per share.
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Disney (DIS)
Stock: DIS
Quantity: 100
Purchase Price: $108.32
Call Option Strike Price: $109.00
Call Option premium (February 2017): $1.86
Call Option Premium Per Contract: $1.86 x 100 = $186
Percentage Return: 1.98%
Our DIS shares are exercised at $16.00
Capital Gain: $0.68 ($109.00 - $108.32) x 100 = $68.00

Total Return Per Share = $2.54 ($1.86 + $0.68)
Total Return: $254.00 per contract
Total Percentage Return: 2.34% for the month
Southwestern Energy (SWN)

Stock: SWN
Quantity: 100
Call Option premium (December 2016): $0.42
Call Option Premium Per Contract; $0.42 x 100 = $42.00
Our SWN shares are exercised at $10.00
Capital Gain: $0.25 ($10.00 - $9.75) x 100 = $25.00

In-Out-At-the-Money Examples
Let’s run through some examples of In, Out and At-the-Money options so
that we fully understand how they work.
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At-the-Money
We purchase 100 shares of U.S. Bancorp (USB) currently trading at $52.85.
The strike price increments of the stock is $0.50. Selling an At-the-Money
call option would be at the strike price of $53.00. Recall an At-the-Money
call option is considered to be within 20 cents of the stock price. USB is
within 15 cents of our strike price of $53.00. By selling a $53.00 February
2017 Call Option we would receive $0.74 premium. If we are exercised, we
would receive a capital gain of $0.15.
Figure 9: USB Call Options February 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
U.S. Bancorp (USB)

Stock: USB
Quantity: 100
Call Option Premium Per Contract: $0.74 x 100 = $74.00
Our USB shares are exercised at $53.00
Capital Gain: $0.15 ($53.00 - $52.85) x 100 = $15.00

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In-the-Money
We purchase 100 shares of Southwest Airlines (LUV) currently trading at
$52.90. The strike price increments of the stock is $0.50. Selling an In-the-
Money call option would be at the strike price of $52.50. Recall an In-the-
Money call option is selling a call option below the current underlying stock
price. By selling a $52.50 February 2017 Call Option we would receive $1.55
in premium. If we are exercised, we would receive a capital loss of $0.40.
Figure 10: LUV Call Options February 2017. Courtesy OptionsXpress:

Southwest Airlines (LUV)

Stock: LUV
Quantity: 100
Our LUV shares are exercised at $52.50
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Capital Gain: -$0.40 ($52.50 - $52.90) x 100 = -$40.00
Total Return Per Share = $1.15 ($1.55 - $0.40)
Out-of-the-Money
We purchase 100 shares of Apple Inc (AAPL) currently trading at $121.76.
The strike price increments of the stock are $1.00. Selling an Out-of-the-
Money call option would be at the strike price of $123.00. Recall an Out-of-
the-Money call options is when the strike price of the call option is above the
current underlying stock price. By selling a $123.00 February 2017 Call
Option we would receive $1.90 in premium. If we are exercised, we would
receive a capital gain of $1.24.
Figure 11: AAPL Call Options February 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
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Apple Inc (AAPL)
Stock: AAPL
Quantity: 100
Our AAPL shares are exercised at $123.00
Capital Gain Per Share: ($123.00 - $121.76) = $1.24

Capital Gain Per Contract: $1.24 x 100 = $224.00
Total Return Per Share: ($1.90 + $1.24) = $3.14
Total Return Per Contract: $3.14 x 100 = $314.00
Keep a Track of Your Break Even

It's very important with the covered call strategy that for the amount of time
that we own the stock we endeavor to sell call options over our stock, i.e. our
stock is always covered by the call option. By doing this we reduce the
purchase price of our stock.
As we keep on selling call options, we must keep a track of our break-even

price so we know where we stand. The break-even price is simply:
Break-Even = Stock Purchase Price - Call Option Premium
Purchasing AAPL at $121.76 and selling a $123 February 2017 Call Option
yields us $1.90, our break-even price will be as follows:
Stock Purchase Price ($121.76) - Call Option Premium ($1.90) = Break Even
price ($119.86)
With our break-even price at $119.86, this means that we will always be in a
profit until the stock price goes below $119.86. Once the stock price goes
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below our break-even, we need to monitor our trade closely and look to take
necessary action if the stock continues to drop.
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Roll Down in a Falling Market
If the price of the stock that you have invested in, is falling, and starts to drop
down below your Break-Even Price, you will need to take the necessary
steps to recoup your losses. What you can do in this situation is to Roll Down
your call option. To roll down a call option means to buy back the sold call
option to close it out, and sell another call option at a lower strike price. This
will give you extra income, dropping down your break-even price.
When the price of our shares is falling, so does the value of the call option,
and the call option is only made of time value because it’s Out-of-the-Money.
The value of the call option will be lower than the premium that was received
up front when the call option was sold originally.
Going by our AAPL example where our trade was executed as follows:
Apple Inc (AAPL)

Stock: AAPL
Break Even Price: $119.86
If the stock price dropped to $119.00, what will be the value of the call
option?
The $123.00 call option is so far Out-of-the-Money that it may be only worth
~$0.75 (the value of the call option depends on the amount of time value left
and the volatility of the stock). We would buy back our call option for $0.75,
we received $1.90 for selling it originally and then we'll look to sell a
$120.00 call option to bring in extra premium. The premium we could
potentially receive for selling a $120.00 Out-of-the-Money call option is
~$2.35. So how does our position look now by rolling down our call option:
Current Stock Price: $119.00

Buy Back $123.00 Call Option: ~$0.75
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Sell $120.00 Call Option: ~$2.35
New Break Even price: $118.26 = ($119.86 + $0.75 - $2.35)
Paper Profit: $0.74 per share
We have just dropped our break-even price considerably and instead of being
in a paper loss of $2.76, we are now in a paper profit of $0.74. Rolling down
our call option is one of the strategies that we implement to protect our
position. If we feel that the stock that we are holding is going to drop even
further, we can roll down our call option to an option that is In-the-Money
and receive a higher premium. The deeper we roll our call option In-the-
Money, the higher the premium. If we rolled down our call option from
(February 2017 $123.00) to (February 2017 $117.00) strike price, with the
stock trading at $119.00, we'll pay $0.75 back to close out our original call
option ($123.00 February 2017) and receive approximately ~$4.50 for our
(February 2017 $117.00) call option. So how does our position look if we
rolled down our call option to $117.00:

New Break Even price: $116.11 ($119.86 + $0.75 - $4.50)
Paper Profit: $0.89 per share
This is a very extreme circumstance as we'll look to roll deep in the money if
our analysis of the stock is bearish and we foresee a continued drop in the
share price. There would have to be an extreme change in behavior and
confirmation of our VSA principles (The principles we'll look out for will be
covered in a later chapter) to implement this extreme roll down.
The steps to roll down a call option are:

1. Document current break-even price.
2. Close (Buy) existing call option position.
3. Add buy back price to break even.
4. Open (Sell) new call option position with a lower strike price at
the same expiration date.
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5. Subtract option premium from break-even price.
Rolling Down & Out

If you are looking to hold onto the stock for longer than a month, then it may
pay to roll down and out your call option. By rolling out means we sell a call
option for the following expiration month. In the case of AAPL, we could roll
down our call option to $120 and out to March 2017 instead of February
2017. By doing this we will receive a higher premium, as the option will have
a lot more time value. As you can see below the option prices for March 2017
contracts are worth a lot more than February 2017 contracts. We can see from
the option table below, the strike price increments are now $5.00.
From our previous roll down example where we rolled down to $119.00, for
March we are unable to do this. Rolling down to $120.00 is much more
beneficial as we will be receiving $4.10 for March 2017.
Figure 12: AAPL Call Options March 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
Roll Up in a Rising Market
If the price of the stock that you have invested in starts to appreciate, rolling
up a call option can be utilized to capture further profits or it can save you
from physically losing the shares if you don't want to be exercised. To roll up
a call option, we need to buy back the original call option and sell another
call option at a higher strike price, either for the current expiration month or
the next month. As the stock price appreciates in value, so does the call
option price and this will mean that the call option will be more expensive
buy back than the premium that we received upfront.
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Figure 13: AAPL Call Options February 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
Going by our AAPL example where our trade was executed as follows:
Apple Inc (AAPL)

Stock: AAPL
Potential Profit if exercised: $3.14 per share
If the stock price rose to $125.50, what will be the value of the call option?
The $123.00 call option is now In-the-Money and it may be worth ~$3.68
(the value of the call option depends on the amount of time value left,
intrinsic value and the volatility of the stock). We would buy back our
original $123.00 February 2017 call option for $3.68, we received $1.90 for
selling it originally and then we'll look to sell a $126.00 call option to bring
in extra premium.
The premium we could potentially receive for selling a $126.00 Out-of-the-

Money call option is ~$2.00. So how does our position look now by rolling
up our call option:

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New Break Even price: $121.10 ($119.86 + $3.68 - $2.44)
Potential Profit if exercised: $4.90 per share
By rolling up our call option we have gone from making $3.14 per share to
now $4.90, that is an increase of 1.4% by rolling up the call option. We
would only look to roll up our call option if we get the confirmed Signs of
Strength VSA indicators advising us that strength is coming into the market.
Another scenario when we will roll up our call option is when we would
suffer a physical loss by being exercised or we want to hold onto the stock for
the long term. Again, we'll look at buying back our original call option and
sell a call option at a higher strike price.
The steps to roll up a call option are:

1. Document current break-even price.
2. Close (Buy) existing call option position.
3. Add buy back price to break even.
4. Open (Sell) new call option position at a higher strike price at the
same expiration date.
5. Subtract option premium from break-even price.
Rolling Up & Out

If you are looking to hold onto the stock for longer than a month, then it may
pay to roll up and out your call option. Rolling out means we sell a call
option for the following expiration month. In the case of AAPL, we could roll
up our call option to $126.00 and out to March 2017 instead of February
2017. By doing this we will receive a higher premium, as the option will have
a lot more time value. As you can see below the option prices for March 2017
contracts are worth a lot more than February 2017 contracts.
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Figure 14: AAPL Call Options March 2017. Courtesy OptionsXpress: http://www.optionsxpress.com
What to do at expiration
As stated earlier in this book, options have a certain amount of shelf life and
there comes a time when they will expire. Expiration occurs on the 3rd
Friday of the month for monthly options or every Friday for weekly options,
(U.S. Styled Options). Before expiration occurs, you must decide on the
course of action you'll take. There are three choices available to you and they
are:
1. Do nothing and let the option expire worthless if the share price
is below the strike price.
2. Be exercised and sell your stock at the agreed strike price if the
share price is above the strike price.
3. Roll out your call option
Worthless Options
The only time we would let our options expire worthless is when they are
Out-of-the-Money. As you’re aware, an options time value decays over time,
and the closer it gets to expiration, the smaller the amount of time value. If
the option continues to be Out-of-the-Money by the expiration date, the value
of the option will be $0.00 and become worthless.
Below is the time decay curve and you can clearly see, an option loses most
of its value in the last third of its life.
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Figure 15: Time Decay Curve of an Option
If your option expires worthless at the end of the expiration period, all you
will be left with is the stock, vacant, just like a property without a tenant. So
what do you do, well you continue to sell call options over it and receive your
monthly income? So long as you own the stock, you can continue to sell call
options and collect your premium.
Where do you sell your call option, In or Out-of-the-Money?
If the stock has declined in price during the month and is below your
breakeven point at expiry, simply sell another call option above the current
stock price, Out-of-the-Money. If this is the case, you'll need to watch the
stock like a hawk because if it starts to rally and your option becomes In-the-
Money and you're not in a profitable position, then you will need to roll up
your call option.
Where you sell your call option will depend on your view of the stock. If we
have a confirmed VSA signal that there's weakness appearing in the stock, we
could sell an In-the-Money call option, collecting a larger premium or if our
view is bullish, sell an Out-of-the-Money call option.
Take into consideration our AAPL trade, we purchased the stock for $121.76
and sold an February 2017 $123.00 call option. If the stock price stays below
$123.00 by the expiration date, our February 2017 $123.00 call option will
expire worthless and we'll be left with the stock. The following are the
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figures for the trade:
Apple Inc (AAPL)

Stock: AAPL
Immediately following expiration, let’s assume the stock closed at $121.50.

You would consider selling a March 2017 $125.00 call option and collecting
a further $1.71 and by doing so your new break-even price will be ($119.86 -
$1.71 = $118.50). We also have the choice to sell our AAPL stock back to
the market, why? Our break-even price is below the stock price and we are in
a profit.
Sell the stock and collect profit

Break Even price: $119.86
Current Profit: $1.64
As you can see, we are in profit by $1.64 per share, so we can choose
between holding onto the stock and again selling call options collecting
further premium, increasing your return on investment, or we can look to sell
the stock back to the open market. The choice is yours here on whatever you
decide to do but, your decision will be influenced by your perspective of the
stock.
If your choice is to sell further call options over the stock, depending on the
stock price, you can either sell a call option one strike price Out-of-the-
Money at $125 or one strike price In-the-Money at $120.00.
With the covered call strategy, your aim is to keep your break-even price
below your strike price, so select the strike price that will assist you in
achieving this. Always sell an Out-of-the-Money call option when your
break-even price is above your strike price.
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Being Exercised
By the end of expiration, if the stock price is above your strike price and you
take no action, you will be exercised. Being exercised means that your stock
will be sold at the strike price of your call option. In the case of AAPL, we
have an Oct $115 call option, if by expiration the stock price was trading at
$115.40, our stock will be sold for $115.00. Our stock will be sold for $115
regardless of how high the stock price is. Even if the stock price reached
$130.00, we have agreed to sell our shares for $115. There are no ifs or buts
about it.
Figure 16: AAPL Options ITM & OTM
Keeping the Stock

If you don't want to be exercised at your current strike price, you simply need
to remove your obligation by buying back the call option. Or you can look to
roll your call option out to the following expiration month. Please note, the
premium that you'll pay to buy it back in most cases will be higher than the
premium that you received upfront.
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5
MINIMIZE RISK = BUY INSURANCE
“I got a simple, simple question for you. Here’s the question. Do you believe
that one day that you’re not going to live in a world that was given to you,
but you are actually going to live in a world that you dream of?” – Eric
Thomas
65
Figure 17: Santa Ana Register “Billions Lost as Stock Crash”
When I tell investors that you can insure your shares in your stock portfolio,
they look at me as if I must be on something. It's true, you can insure your
shares against a dramatic downturn in the markets. An insurance policy in the
stock market works exactly the same as your home and contents insurance.
When you insure your home and contents, you set an agreed price with your
insurance company to the value of your home and its contents. If your house
was to burn to the ground, your insurance company will pay you the agreed
value. For that agreement, you pay a yearly fee, a premium.
There are investors who know about insuring shares on the stock market, but
they refuse to safeguard themselves and take out insurance. I don't know
what it is that stops investors from buying insurance. Is it the cost of the
policy that will eat into their profits? It maybe so, but investors have their
blinders on when it comes to protecting themselves, they only see the profit
aspect of the trade and neglect the risk management side of the trade.
I want to drill this home so that you understand the reasons why it's so crucial
to have an insurance policy in place. Think about it, would you drive a car
without insuring it? Of course, you won't. Why not? If you were to have an
accident, you would be liable for thousands of dollars in repairs if the
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accident was deemed to be your fault.
In the share market, there are always accidents occurring. Just look what
happened in 2008, the Global Financial Crisis (GFC) where the market lost a
considerable amount of money, stocks plummeted and we even saw banks
close down. If you were holding a stock and it lost 50% of its value and you
never had an insurance policy, how would you feel?
Figure 18: Stock Market Crash Horror
I have seen a lot of horror stories over the last eight years when it comes to
investors losing money. There was a gentleman I knew who had $500,000
invested in the stock market, who did not have an insurance policy on his
investment and overnight lost 50% of his capital. He lost $250,000 because
he decided not to buy an insurance policy.
You need to understand, anything can happen in the markets and it may not
be the market crashing as a whole like the GFC, it may be a news
announcement on a particular stock, a profit downgrade, and the stock could
capitulate. The chart below represents the company Chesapeake Energy
(CHK) when it collapsed during the GFC. The stock reached a high of $70
and 4 months later was trading down towards $10.
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Figure 19: Stock Chart Chesapeake (CHK), Courtesy of TradeGuider EOD
When I ask investors, “When it comes to risk management, do you want to

have 100% exposure to the markets, meaning you could potentially lose
100% of your money or do you want to have 5% exposure to the markets?”,
they quickly say to me 5%! YOU should be saying the same too. Yes, an
insurance policy is going to cost you money, but it's a cost of doing business.
You are running a business and your insurance policy is a tax deduction. Use
it, it's there to safeguard you against adverse events in the market.
How Do I Go About Buying an Insurance Policy?

To buy an insurance policy in the markets, investors buy a Put Option. A put
option hedges your position by limiting your loss. A put option works the
opposite to a call option. A put option will increase in value when the
underlying stock price decreases in value. You can either purchase an Out-of-
the-Money put option, strike price below the current stock price, or an In-the-
Money put option where the strike price is above the current stock price.
Below is an options table showing AAPL put options. The options that are
highlighted in yellow are In-the-Money and the options in white are Out-of-
the-Money. The lower the strike price of a put option from the stock price,
the lower the premium and vice versa, the higher the strike price, the higher
the premium.
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Figure 20: AAPL Put Options; Courtesy of Google Finance http://finance.google.com
If you purchased an AAPL February 2017 $118.00 put option, that is your
agreement price. That is the price that you as an option buyer have the right
to sell your shares in the event the stock plummeted. By buying a $118.00 put
option, you will pay $1.26 per share.
The Collar Strategy

In the covered call strategy, when you purchase a put option with the same
expiration as the call option, the strategy becomes known as a Collar. A
Collar is when you buy the stock, sell a call option and buy a put option
simultaneously. This strategy curbs the ability to produce a large return but it
also prevents a sizeable draw down in your bank balance. When we buy a put
option, we may sell our shares at any time during the contract period at the
agreed strike price. Just as the buyer of our call option has the right to buy
our shares at the agreed price at any time during the contract period.
Example of a collar trade

Let’s put this into practice and we'll place a collar trade on the stock First
Majestic Silver Corp (AG). The stock is currently trading at $12.66 and
we'll place a collar trade for the October expiration period. The options table
below shows us that the strike price increments for AG is $1.00 and it's
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exactly what I look for in a collar trade. We can look to sell an Oct $13.00
Call option and buy an Oct $11.00 Put option. By selling the $13.00 Call
option, we'll receive around $0.80 and buy the $11.00 Put option we'll pay
around $0.40.
Figure 21: Option Table Majestic Silver Corp February 2017 Options; courtesy OptionsXpress
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First majestic Silver Corp (AG)
Stock Price: $8.92
Option Expiration Month: February 2017
Call Option Premium: $0.50
Put Option Strike Price: $8.00
Put Option Premium: $0.25
Break Even
Let’s work out our cost to get into the trade:
Break Even = (Stock Purchase Price) $8.92 - (Call Option premium) $0.50 +
(Put Option Premium) $0.25
Break Even = $8.67
Our breakeven for this trade is $8.67. Don't forget, we have an $8.00 put
option in place, so we are not 100% exposed.
Insurance Coverage
Let’s work out our insurance coverage; what percentage of our capital is at
risk and what portion of our capital is covered. The total amount of loss is the
difference between the Break Even Point and the Put Option Strike Price.
To complete our insurance coverage calculation, we need to consider the
Stock Purchase Price.
Break Even: $8.67

Put Option Strike Price: $8.00
Stock Purchase Price: $8.92
Formula: (Break Even - Put Strike Price) / Stock Purchase Price

$8.67 - $8.00 / $8.92
$0.67 / $8.92 = 0.0075 * 100 = 7.5% risk
Insurance coverage: 100 – 7.5 = 92.5%
The maximum that we can lose for this trade is 7.5% of our capital, with our
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coverage just above 90%. Having our put option in place and knowing
whatever happens with this stock, the maximum we'll lose is 7.75%, is
certainly better than 100% risk. Most importantly, you will have that sleep at
night factor.
What to do at Expiration
At expiration, there are three possible outcomes:
1. Call option In-the-Money

2. Options expire worthless
3. Put option In-the-Money
If the stock price remains above our call option strike price (In-the-Money)
and we take no action, our shares will be sold for $9.00 per share and our put
option which is Out-of-the-Money will expire worthless.
Percentage Return if Exercised

If the call option is exercised at the end of the February 2017 expiration
period, i.e. stock price above $9.00, our overall return would be:
Profit = (Call Option Strike Price) $9.00 - (Break Even) $8.67

Profit = $0.33 per share
% return: 3.69%
Put & Call Options Expire Worthless

If the stock price remains between our call option strike price, $9.00, and our
put option strike price, $8.00, both our call option and put options will expire
worthless as they will both be Out-of-the-Money. The only thing to do in this
scenario is to sell another call option, one strike price above the current stock
price and buy a put option one-two strike prices below the stock price. Let’s
assume the stock price on expiry closed at $8.20, between our call and put
option strike price. We'll look to sell a call option for March 2017 and buy a
put option at the same expiration. Again our decision on what strike prices to
select will be based on our view of the underlying stock.
We'll execute the following trades:
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Sell March 2017 $9.00 Call Option and receive $0.55
Buy March 2017 $8.00 Put Option and pay $0.27
Once we have executed the trades, we'll need to work out our new break-even
price.
Current Break Even: $8.67

Call option premium (March 2017 $9.00): $0.55
Put option premium (March 2017 $8.00): $0.27
Seeing that the stock is decreasing in value, we are still able to generate an
income and reduce our losses, compared to just holding onto the stock and
hoping for the stock to recover. If we were to get exercised we will still be in
a profit, which is a good position to be in. According to what is happening
with the underlying share price, we can alter our strategy to accommodate.
Put Option In-the-Money

By the end of the expiration period, if the stock price is below the put option
strike price, then you will be exercised if you take no action. Recall our
break-even is above our put option strike price, so we'll be in a losing trade if
we are exercised. You can either be exercised and receive $8.00 per share
back and suffer a loss or you can sell back the put option and buy another put
option for the following month. As the put option is In-the-Money, that
means it will have intrinsic value and it will potentially be worth more than
what you paid when you first entered the trade.
If the stock price dropped to $7.80 what will the put option be worth? Recall
we paid $0.25 for the February 2017 $8.00 put option, by expiration, the
intrinsic value of the option will be $0.20 = $8.00 - $7.80 and whatever the
time value that is left, let's say $0.05, so the put option by expiry may be
worth $0.25. We can sell the put option back to the market and receive $0.25
and buy another put option for the following month.
How will our trade look if we took these necessary steps?
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Current Break Even Price: $8.67
Buy back February 2017 $8.00 Put: $0.25
Call option expires worthless: $0.00
Break Even: $8.42 ($8.67 - $0.25)
Sell March 2017 $8.00 Call @ $0.95

Buy March 2017 $7.00 Put @ $0.45
Break Even: $8.42 -$0.95 + $0.45 = $7.92
As we can see from this example our stock has dropped by 12.5% and by
implementing the collar strategy and taking the necessary steps to recoup our
losses. If our call option is exercised we would make a small profit. A much
better result, don't you agree!!!
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6
BASICS OF TECHNICAL ANALYSIS
“You don’t have to personally be perfect. There are those of you right now,
you should have cut a CD, you should have written a book, you should have
gone to school and got that degree, you should have started your own
business. There are so many things you should have done, but you didn’t do it
because you are scared. You're scared of failure, you’re scared to make a
mistake, you’re scared that you’re not perfect. I’m telling you today that you
don’t have to be perfect to get what you want, to do what you want, to have
what you want, to be what you want. You don’t have to be perfect it’s a lie.”
– Eric Thomas
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Basics of Technical Analysis
Technical analysis is a trading tool employed to evaluate securities and

attempt to forecast their future movement by analyzing statistics gathered
from trading activity, such as price movement and volume. Technical
analysis focusses on charts of price movement and various analytical tools to
evaluate the securities strength or weakness and forecast future price changes.
Technical analysis is used to attempt to forecast the price movement of

virtually any tradable instrument that is generally subject to forces of supply
and demand, including stocks, bonds, futures and currency pairs. In fact,
technical analysis can be viewed as simply the study of supply and demand
forces as reflected in the market price movements of a security. It is most
commonly applied to price changes, but some analysts may additionally track
numbers other than just price, such as trading volume or open interest figures.
Over the years, numerous technical indicators have been developed by

analysts in attempts to accurately forecast future price movements. Some
indicators are focused primarily on identifying the current market trend,
including support and resistance areas, while others are focused on
determining the strength of a trend and the likelihood of its continuation.
Commonly used technical indicators include trendlines, moving averages and
momentum indicators such as the moving average convergence divergence
(MACD), Relative Strength Index (RSI) indicator.
Technical analysts apply technical indicators to charts of various timeframes.

Short-term traders may use charts ranging from one-minute timeframes to
hourly or four-hour timeframes, while traders analyzing longer-term price
movement scrutinize daily, weekly or monthly charts.
In this book, we'll focus on Volume Spread Analysis (VSA) as the majority
of technical indicators are lagging. VSA focuses on volume and pricing
action as the volume is a leading indicator. I feel that all traders should use
volume as part of their trading decisions because volume to a chart is what a
petrol tank is to a car, it's very crucial.
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Price Bar
A price bar shows you the range of price, HIGH, and LOW, for a certain time
period. It also shows you where the price bar opened and where it closed.
With VSA, when viewing price bars, we only take notice of the spread of the
bar and where it closes. Where the bar opens, we don't take any notice of, as
we don't care where it opens. Just think about when you go to work and your
supervisor gives you a task to do, your supervisor doesn't care about where
you start, all they care about is the end result, what you have done by the end
of the day.
Figure 22: High, Low, Close Price Bar
Up and Down bars

An up bar is a bar that closes higher than the close of the previous bar and a
down bar is a bar that closes lower than the close of the previous bar.
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Figure 23: Up Bars and Down Bars
Trends
When you look at almost any chart, it’s fairly evident that prices do not go up
and down in straight lines, but move in zigzag patterns instead. A trend is
when prices generally move in a certain direction, up or down, over a period
of time. A trend-line depends on three factors; the duration of the trend, the
points of trend validation and the slope of the trend line.
During a bull trend, prices rally creating a high point known as the peak. The
rally is interrupted by a correction in which part of the advance is retraced
and forms a trough. This is then followed by another rally, after which a
subsequent correction follows, and so on. These are the peaks and troughs.
As long as a trend experiences a series of rising peaks and rising troughs, the
trend is considered to be intact. However, when a series of rising peaks and
troughs is replaced by a series of declining peaks and troughs, the prevailing
trend has reversed.
From the chart below we can see clearly that each of the peaks are either at
the same level or higher than the previous peak. The troughs as well are
higher than the previous troughs. If you draw a line along the bottom of the
troughs you can clearly see an uptrend.
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Figure 24: Uptrend with higher troughs and higher peaks.
In a bear trend, prices continue their downward zigzag until the latest trough
fails to make a new low for the move. During a downtrend, prices rally
creating a high point known as the peak. The rally is interrupted and we see
price reverse and fall creating a trough. The pricing then retraces forming a
lower peak and pushes back down to form a lower trough.
From the chart below we can see clearly that each of the peaks are either at
the same level or lower than the previous peak. The troughs as well are lower
than the previous troughs. If you draw a line through the top of the peaks you
can clearly see a downtrend.
Figure 25: Uptrend with higher troughs and higher peaks.
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Support and Resistance
In the previous section, we stated that prices move in a series of peaks and
troughs and the direction of the peaks and troughs determine the trend of the
market. Peaks and troughs are also known as support and resistance.
The troughs are known as support and this is the area where buying interest is
sufficiently strong to overcome the selling pressure.
Figure 26: Support area on a price chart
Peaks are known as resistance and are an area where buying pressure is
overcome by selling pressure. In an uptrend, resistance levels are pauses in a
trend. In a downtrend, support levels are not sufficient to stop the
decline permanently but able to stop it temporarily.
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Figure 27: Price chart with resistance
For an uptrend to continue, each successive low (support level) must be

higher than the one preceding it. Each rally high (resistance level) must be
higher than the one before it. If the corrective dip in an uptrend comes all the
way down to the previous low, it may be an early warning that the uptrend is
ending or at least moving from an uptrend to a sideways trend. If the support
level is violated, then a trend reversal from up to down is likely.
Each time a previous resistance is being tested, the uptrend is in a critical

phase. Failure to exceed the previous peak in an uptrend, or the ability of
prices to bounce off previous support low in a downtrend, is usually the first
warning that the existing trend is changing.
Support and Resistance Roles Reversal
One of the most interesting phenomena regarding support and resistance

occurs when the price of the underlying asset is finally able to break out and
go beyond an identified support or resistance level. When this happens, it is
not uncommon to see a previous level of support change its role and become
a new area of short-term resistance or support.
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Figure 28: Roles reversal support becoming resistance
On the chart above, Resistance 1, is the first level of resistance. You can see
that supply was overcoming demand each time price reached the resistance
level. Just think of resistance as a ceiling. Price gets knocked down and
reaches Support 1. Price bounces off the support level, buying overcoming
supply and immediately goes back up to Resistance 1. Think of
a support level as the floor.
Price fails to break through Resistance 1 and heads back down to Support 1.
This time prices breaks through Support 1 and travels down to Support 2.
Price bounces off Support 2 and heads back up to Resistance 2.
The level that Resistance 2 is sitting is also the level of Support 1. You can
see from this chart that as prices break through the support level, what was
once a support now becomes a resistance. There were two attempts to break
through Resistance 2, but each time, the attempt failed.
There were three attempts to break through Support 2 and on the third
occasion, price finally breaks through and now support becomes resistance.
This is what typically happens in a downtrend, what was once support
becomes resistance.
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Figure 29: Role reversal resistance becoming support
The chart below shows an uptrend where support and resistance reverse roles.
Starting at Support 1 we see price create a support level, price rises slightly
before testing the support level once again. Price rises higher to create a
resistance level at Resistance 1, drops slightly and retests resistance before
dropping back to test Support 1.
Price rebounds up back to Resistance 1 before finally breaking through and

creating a resistance level at Resistance 2. Resistance 1 now becomes
Support 2 and price drops to test that support level attempting to break back
down. Price fails to break, and heads back up to Resistance 2 and breaks
through creating Resistance 3.
Once again Resistance 2 becomes Support 3 and price tests the support
level, fails to break through to the downside and continues higher breaking
through Resistance 3 and heads up and creates Resistance 4 and comes back
down to test previous resistance which is now support.
Trend Lines
Trend lines are an important technical tool when it comes to analyzing a chart
for both trend identification and confirmation. A trend line is a straight line
which connects two or more price points and extends into the future. The
trend line acts as support or resistance. Trend lines can be used for both up
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trends and downtrends.
In an uptrend, the trend line is to be drawn on the lows, the troughs, of the
pricing action. The trend line is to connect with two intervening lows. From
the chart below, you can clearly see that the trend line is treated as a support
level. Pricing action retraces back down towards the trend line and bounces
off it. The uptrend shows that there is more demand than supply. As long as
price remains above the trend line, the uptrend is considered to being solid
and intact. A trend line helps an investor in determining where price may go
in the future. A break below the trend line indicates that demand
has weakened and a change in trend is possible.
Figure 30: Constructing an uptrend line
In a downtrend, the trend line is to be drawn on the highs, the peaks, of the
pricing action. The trend line is to connect with two intervening highs. From
the chart below, you can clearly see that the trend line is treated as a
resistance level. Pricing action retraces back up towards the trend line and
bounces off it. The downtrend shows that there is more supply than demand.
As long as price remains below the trend line, the downtrend is considered to
be solid and intact. A break above the trend line indicates that supply
has weakened and a change in trend is imminent.
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Figure 31: Constructing a downtrend line
A trend line not only shows us the direction of a trend; you can also
determine the health of a trend. We can judge the health of a trend by the
steepness of the slopes. If the slopes of a trend is very steep, this could
be potentially very good for profits, but this can also be fuel for sudden
reversals. Steep slopes are normally shorter in duration as a lot more
momentum is required to keep the move going. As they say, what goes up
must come down and if you see a steep slope moving up, expect the same
when the price drops. A shallow slope indicates that buyers are plentiful and
the trend can usually continue for a significant period of time.
Figure 32: Steepness of a trend
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Trend Line Reversals
A trend line reversal occurs when the pricing action breaches the trend line
and moves in the opposite direction to the overall trend. The breach of a trend
line does not mean the trend is over. There are times when the price does
breach the trend line, but returns and continues in the direction of the trend.
There are two types of reversals, a bearish reversal, and a bullish reversal.
Figure 33: Bearish reversal
Figure 34: Bullish reversal
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Trend Channels
The covered call strategy works best when an instrument is in an uptrend.
This is where we have higher troughs and higher peaks and we aim to enter a
covered call position at the trough, the bottom of the trend, and swim with the
tide. To identify a trend on a chart we use trend lines. With the trend lines
running along the peaks and troughs a trend channel is created. The trend
lines represent support and resistance levels and we can identify when an
instrument is being overbought or oversold.
The area between the upper and the lower trend lines is known as the trading
range. When the market is going sideways between the upper and lower
trend lines, the old Technical Analysis term "trading range" can be said to be
in effect. In VSA terms, the (sideways) market is trading within its range and
will continue to do so until applied (selling or buying) effort makes it break
out.
Figure 35: Uptrend channel
A trader who uses VSA principles will analyze price action in the top and
bottom quarters of the trading range, because important observations take
place in these areas, as the price heads for the resistance and support lines
respectively. The area above the resistance (higher) trend line is known as
overbought and the area below the support (lower) trend line is referred to as
oversold. You will find this a far more reliable indication than the traditional
methods. The middle of the range represents the mean of the data and price
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can move in any direction.
In some cases, the pricing action may break through the upper or lower trend
lines and then attempt to break back into the range. This can be explained by
the action of the market makers. If there is increased effort to break down
below the lower trend line then there may be a view by the professional
traders that the instrument is weakening, i.e. they have a bearish view.
There would be extra effort required by the professionals to push the price
back up into the trend channel. If the market makers are bearish, there would
be no effort to go back up. The amount of volume will tell you if the trend
line is going to hold. We require effort to penetrate the trend line. Any low
volume appearing as price approaches the trend line will indicate that it will
be unlikely to be breached this time. That is exactly what we see in the chart
below.
Figure 36: Downtrend Channel
HOW WYCKOFF / VOLUME SPREAD ANALYSIS

CAN ASSIST YOU IN YOUR TRADING DECISIONS
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“Someone said we had two primary choices in life. We can either accept
conditions as they exist or we can take the responsibility to change them. A
lot of people want to exempt themselves from taking responsibility, all they
want to do is talk about the problem. Every time you see them, they will tell
you their story, over and over and over and over again. No, No, you want to
take responsibility for your life, I got me here I can get me out of this, and
I’m getting out. I’m not going to be a volunteer victim. So are you looking for
are new breakthroughs to practice and practice and practice, you’ll get
better and better and better and there’s still some things that will happen to
you that will catch you on the blind side, that you did not anticipate.
You’ll get knocked down but you won’t be knocked out, and I say to you, it’s
possible that you can live your dream, whether it’s becoming a diamond, if
it’s having more or achieving more or being a better father or being a better
mother, overcoming addiction, changing our society, it’s possible you can
live your dream, it’s necessary that you have a plan of action, that your
resilient, that you stick to and you work with the system and that you work
with people and that you give support and that you be there for them and you
have the vision and you never give up and that you become creative and
relentless and keep on coming back again and again and again and that it’s
you that you got to take personal responsibility to make it happen and that
it’s hard, easy is not an option and when life knocks you down, jump back up
and say it’s not over until I win.” – Les Brown
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Do you find that when you enter the market, the market turns against you?
Your indicators, whatever they are MACD, RSI, Stochastics or Bollinger
Bands are giving you signals to enter the market but you are consistently in
losing trades, or you’re not achieving the results you desire. The markets are
designed to trap the retail traders into poor trades by the professional traders,
the Smart Money. The Smart Money are not there to assist you in making
money, they only care about their own best interests and they will do
whatever it takes to position you into poor trades. There is a way to identify
when the Smart Money are starting to be active in the markets and that is
through Wyckoff / Volume Spread Analysis methodology.
Wyckoff/Volume Spread Analysis allows you to identify imbalances of

supply and demand. It was developed as an enhancement of the Wyckoff
method of chart reading by Tom Williams who before becoming a trader was
working as a registered nurse. In the late 1950s, Tom decided that he wanted
to make serious money and decided to travel to California, as he figured that
was where the money was. Working as a registered nurse, he was assigned to
take care of a very wealthy tycoon and trading syndicate member.
The patient was the boss of an elite trading syndicate based in Beverly Hills,
California, one of about three hundred in the United States at that time. These
trading syndicates shunned publicity and very few people knew about
their existence. The goal of a trading syndicate was to target company stocks
and remove their floating supply and thereby taking control of the stock by
accumulating as much of the stock as they could. When the general market
conditions were favourable they would drive the price up. This was easy for
them to do as there were not many sellers in the market. At some point in the
future, the syndicate traders will look to take profits. They will start selling
the stock to traders, also known as distribution. The retail traders, the herd,
would be looking to jump on the bandwagon as they see higher prices in the
stock, whereas the syndicate traders have made a handsome profit and are
starting to sell.
How to lure the retail trader into poor trades?
The perfect time to do this is around news announcements because when the
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professional traders want to offload their holdings, they would want the retail
traders to buy. The perfect way to persuade them is by a positive
news announcement. The following was a discussion between Tom Williams
and the CEO of TradeGuider, Gavin Holmes, about how syndicate traders
work:
I asked Tom how the syndicate will get the 'Herd' to buy stock at much higher
prices than what the syndicate had originally paid. Tom just gave me a big
smile as he remembered the moment he was about to share with me.
"Well Gavin," he said, "I can remember, very clearly actually, a particular
U.S. stock which I believe is still around today. At the time, they were called
Teledyne Technologies" (TDY). Our syndicate had heavily accumulated them
and it was time to take profits. To acquire this, any tricks are fair game. For
example, we would target the annual general meetings and ask bullish
questions that would often be reported in the media the next day. We would
'create' as much positive news as possible to get the crowd excited. True or
not, it was irrelevant to us, as long as people were buying the now high-
priced stock from the syndicate."
"This was a very profitable business and is one of the basic reasons why
there are Bull moves and Bear moves in the markets. It's Supply and Demand
working in the longer term. Ironically, the directors of most companies
barely have an idea of why their stocks move up or down. Most will often
shrug their shoulders if asked why their stock had just fallen 10%. They will
have no clue why their stock declined, especially when the company is in
better shape now than the previous year. To them there appears to be no
logical reason why these moves happen. However, the syndicates know better
since they were actively involved in trading these stocks up and down!"
Once you master this methodology you will, more often than not, be on the
right side of the market. Like I said previously, the markets are designed to
trick the retail traders into poor trades and what better time to do that than
around news announcements as this is when markets are likely to be
manipulated. It happens more often than you think. On the 14th September
2016, a news announcement came out from The Australian newspaper
"Australian Dollar Sinks on Rate Rise Concern".
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Figure 37: Article – “Australian dollar sinks on rate rise concerns”, Courtesy of AAP
The article stated that the FOMC were looking at ending easing of interest
rates and it’s time to start raising interest rates. With this news, the Australian
Dollar will fall in value and fall it did. The following is the Australian Dollar,
four-hour chart and we can see that the Australian Dollar broke down below
the 75 cents support level, which would have been an indication for traders to
short the Australian Dollar. We have bad news and a break of support so
traders think they are getting in on a good trade.
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Figure 38: 4hr Australian Dollar Futures chart
What happened was that we observed a down bar, (a down bar is a bar that
closes lower than the close of the previous bar) closing towards the middle on
ultra-high volume. The ultra-high volume indicates that professional money
is starting to enter the markets. To the retail trader, it will look like there is
selling occurring in the market and that the currency is heading south. The
retail trader would think that the ultra-high volume is selling volume. But we
saw the market just went sideways and this is where the professional traders
are building their campaign for higher prices.
As a retail trader, you need to get a grasp on what I'm about to reveal to you
as it may seem confusing when you first read about it. When strength
appears, it appears on down bars and weakness appears on up bars. What
occurred with the Australian dollar is a perfect situation that strength
appeared on a down bar because we had the ultra-high volume on a down bar
which closed off its lows. If this was selling wouldn't you think the next bar
should be down? It wasn't, the following bar was a level bar and as you can
see from the pricing action, prices never went below the low of the ultra-high
volume bar.
Look at the chart very closely, around the 75 cents we have a level of
support. On the 12th September 2016, we had a candlestick pattern known as
a piercing pattern which would have prompted many retail traders to enter a
long position and their stop losses would be just beneath the 75 cents level.
Price did move up slightly but it came back down to test the level of support.
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Once the level of support was breached we had an ultra-high volume down
bar.
The TradeGuider software tool identified this move as a Shakeout in the

market. The professional traders wanted higher prices but they wanted to get
in at lower prices to make this a successful campaign. The shakeout is
a maneuver that is designed to catch all the stops before moving the price up.
Think about this for a second, how else are professional traders going to buy
cheap? They create a level of activity which will drive the price down. The
retail traders have their stops hit as professional traders can see exactly where
stop losses are located. They start to accumulate at lower prices and they
successfully take prices up. They buy at the lowest price possible knowing
that they can sell their stock at much higher prices later.
Figure 39: Shakeout on Australian dollar futures
SOS 87 SHAKEOUT
NOTE: None
Bar Description:
A 'Shakeout' is a mark down on a widespread closing up near the high to
shake out weak holders. If the volume is low, then supply has dried up. High
volume suggests demand overcame supply but remember this supply will
hold back future upward progress. If the spread is narrow it will have less
impact.
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This particular signal is more general and does not need to close near the high
of the bar. Exercise caution if the bar has gapped down as this can indicate
hidden weakness. If the volume is ultra-high, this can be climatic action and
start of accumulation.
Background:
The background is extremely important. You should see strength in the
background with stopping volume or a selling climax. Is there some minor
SOW in an uptrend or has supply hit the market?
Future:
A 'Shakeout' on low volume is really a violent test and has the same effect. It
shows supply has disappeared and you would expect higher prices.
A 'Shakeout' on high volume shows demand was prepared to absorb the

supply on that bar but they would likely want to test that supply in the future.
Any low volume testing back into the area of the Shakeout would be strong
SOS.
Be cautious if the Shakeout is followed by low volume up bars, or high

volume up bars closing in the middle, especially on narrow spread. If the
market starts to whipsaw and goes sideways, it may be building a cause for
the next up move. Remember, you need to look at the overall picture, not just
the individual bars.
copyright TradeGuider Systems, 2009
This always happens in the market and wouldn't it be great if you can identify
professional activity in the market and take advantage of it. This is why
TradeGuider was created and the tools that they offer have revolutionized
how traders view the market.
As I previously stated, when weakness appears in the market, it appears on up

bars and when strength appears, it appears on down bars. You're probably
thinking how can that be? When there is an up bar, doesn’t that mean buying
as the price is moving up, and isn't that strength? Vice versa, on down bars
there would be selling and that’s weakness. A lot of retail traders find this
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confusing and it's hard for them to get their heads around it. Let me just clear
that up for you now.
Weakness Appears on Up Bars

As the market is moving up, weakness will appear on an up bar. An up bar is
a bar that closes higher than the close of the previous bar. The TradeGuider
software will identify this weakness with up bars that have the unusually high
volume or unusually low volume. Ultra-high volume occurs when
professional traders begin to sell their holdings, with orders coming in one
after another and it's this activity that causes the ultra-high volume. This is
the start of distribution by the professional traders as supply is overcoming
demand i.e. sellers overcoming buyers.
What we find, when weakness starts to appear, the pricing action does not
collapse straight away because the professional traders want to ensure their
sell orders are being satisfied. You will most likely see prices consolidate
creating a mushroom effect and this mushroom effect is caused
by professional traders buying to encourage the retail trader to remain in their
long positions. The high volume and higher prices that the retail trader sees
on the chart, are mistaken as being strength thinking that higher prices are to
follow. The exact opposite is happening.
Figure 40: Mushroom affect when Ultra-high volume appears
The chart above is the gold futures weekly chart. On the week of 20th June
2016, there was a widespread up bar with the biggest volume on the chart.
The bar closed towards the middle of the range. Retail traders are likely to
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view this as being bullish and will look to enter the market. The pricing
action does continue higher, giving confidence to the retail trader that they
are in a good trade. After the move higher, we can see the pricing action is
beginning to consolidate and create a mushroom effect.
The professional traders are only buying enough to encourage the retail
traders to stay in the trade, but they are looking to withdraw their interest
because they have already sold and made a nice profit. With the price not
moving much further than where it is, this confirms that they have no
intention of buying. Price quickly collapses and what seemed a good trade for
the retail investor quickly becomes a poor trade.
The news announcement that week of the 20th June 2016 - "Markets Facing
Trading Turmoil" which was due to the Brexit vote. When there is turmoil,
investors tend to flock to gold as it's a safe haven asset and on the day of
Brexit, gold rose 5%. The article highlighted that gold rose to $1,910 as the
Eurozone crisis worsened back in 2011. The crisis in the Eurozone is not over
with interest rates in negative territory. They have found it hard to stimulate
the Euro economy. The stock markets have been rallying but the gold price
still collapsed.
Figure 41: Gold Price collapse
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Strength Appears on Down Bars
As the market is moving down, strength will appear on a down bar. A down
bar is a bar that closes lower than the close of the previous bar. The
TradeGuider software will identify this strength with down bars that have
unusually high volume or unusually low volume. Ultra-high volume occurs
when professional traders begin to buy their holdings, with orders coming in
one after another and it's this activity that causes the ultra-high volume. This
is the start of accumulation by the professional traders as demand is
overcoming supply i.e. the buyers overcoming sellers.
When buying appears on down bars and we see ultra-high volume, price does
not often turn around immediately and go the other way. The professional
traders start a campaign where they create a level of activity to push prices to
the downside in an attempt to lure the retail traders to go short. A campaign
may last for several days, weeks or even years. At the lower level, prices are
cheap and that is where the professionals are looking to buy. In order for
them to buy, they require investors to sell, so they will create a level of
activity which will cause prices to drop as this will prompt the retail investor
to jump on board, fearing they may miss out on the move to the downside.
The professional traders are starting to buy and what was a good trade for the
retail trader quickly becomes a poor trade.
The chart below is the Australian Dollar and you can clearly see the ultra-
high volume on the down bar, it's the biggest volume on the chart. Any trader
looking at that bar with the ultra-high volume would think that was selling
and would look to jump on the bandwagon and go short. If that was all
selling, the next bar should have been a down bar, but in fact, it was an up
bar, confirming there was buying in the background. Prices then started to
consolidate and the area of the ultra-high volume was continually being
tested, and with each test there was much lower volume, meaning that there
are not many more investors prepared to go short. As prices were going back
down towards the low, professional traders were buying, accumulating, as
they always do buy at lower prices creating a support level. Finally, price
changes direction and heads back up.
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Figure 42: Australian dollar buying on a down bar
Is it time to buy?
When is it the right time to buy? You can try to determine market bottoms,
but trying to determine these levels is very high risk. When trading the
covered call strategy, you want the highest probability trade setups. These
take time to develop so you must be patient. A lot of investors are too
impatient and always get caught on the wrong side of the trade. So I will be
showing you the highest probability trade setups for the covered call strategy.
Remember, the covered call strategy works best when the stock is neutral or
bullish as we want our stock to be exercised so we collect the premium
upfront and any capital gain when our shares are exercised.
The following chart is the eMini S&P500 futures contract. On the 20th
January 2016, we witnessed losses throughout the trading day of over 3% but
towards the end of the day the stocks recovered and the S&P500 closed just
1.2% down. Why did the markets collapse like they did on that day? On that
day the headlines read "Is it 2008 all over again?". The S&P500 has dropped
over 275 points in January alone and the Nikkei market was officially in bear
market territory. Billions of dollars are being wiped out of the
markets...SELL, SELL, SELL, SELL.
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On the 20th January 2016, the Wyckoff/Volume Spread Analysis indicators
showed us that there was strength entering the markets, Signs of Strength
(SOS) 133 Strength Coming In. The following is a description of the
indicator:
SOS 133 Strength Coming In
Bar Description:
This indicator is a more general SOS which can appear in a number of forms.
A down bar closing in the middle or high must be considered a strong SOS
especially if you are into new low ground. Volume should be high to ultra-
high. If the volume is low this is also strength because there is little or no
selling pressure. If the volume is high, add more strength if the news is very
bad. The professionals are prepared to absorb the supply.
When the price spread is very wide and volume is very high this can be
stopping volume or climatic action which may mark the low of the market.
Background:
The background is extremely important. Do you have strength, minor SOW
or has supply hit the market? If there is weakness in the background those
who bought at a higher price (weak holders) reach a point where they dump
their holdings at a loss just to recover whatever money they can. As they
panic the professionals will absorb these at cheap prices.
Future:
The next bar should be an up bar to confirm the indicator. If the volume was
high on this bar, it may be the start of accumulation so be patient as the
market may not be ready to go up. Look for shakeouts and testing once the
professionals have finished their buying.
If volume was low on this bar, this may be a test of supply in the background.
If so, you would expect higher prices. Failure to do so is a sign that the
market is not ready to go up. Be cautious if you see weak bars.
Remember you need to look at the overall picture not just the individual bars.
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Copyright TradeGuider Systems, 2011
Figure 43: S&P500 strength entering the market
On the chart, we see a widespread down bar closing towards its highs and the
volume is ultra-high. With the next bar being up this confirms that there was
buying. This is the start of accumulation by the professional traders. Once
this indicator appears, the market is not ready to go up straight away, 80% of
the time the area of high volume will be tested. This is what happened on
this occasion, the price rose slightly and came back down towards the lows
and if you look very closely, the price bars that were testing the high-volume
area were closing in the middle to high of the price range. These price bars
are typical when areas are being tested. Also, you will notice that volume will
be lower on tests.
This is still not the area to start buying, why? Because the trend is still down.
The VSA proprietary diamond trending system shows us the trend of price
for a certain timeframe and in this case, it's down. Recall, I stated that we
want high probability setups so we need to wait for the diamond trending
system to turn green, up. Once that has been achieved we need to wait for a
confirmed sign of strength (SOS) indicator.
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What I like to do is place a horizontal line on the high of the ultra-high
volume bar. This becomes my trigger point. I wait for the price to cross
above the trigger point and then I look for Signs of Strength. What we see on
the price chart is that three days after price crossed our trigger point we got a
confirmed test indicator.
SOS 143: Test
Bar Description:
A test is a markdown during the bar (often on bad news) to challenge any
weak holders to panic and sell. If they do not sell the price rebounds up
towards the middle or high and volume is low (can be high in the futures
market). The lack of selling gives the professionals confidence that they do
not have to absorb large amounts of supply. Add extra weight if the low of
the bar is into fresh new low ground and if it is a down bar. Tests on low
volume in the cash market will cause the professionals to enter the futures
market resulting in higher volumes here.
Background:
The background is extremely important. Test work best when there is
strength in the background or following minor SOW in an uptrend. With
weakness in the background, this indicator carries less importance and at best
may only cause the market to rest for a few bars as the professionals stand
aside before resuming the down move.
Future:
Following a test expect higher prices. Failure to do so is a sign that the
market is not ready to go up. If volume was too high for a reliable test you
need to decide whether the market makers are prepared to absorb that supply
and take prices higher. If there is strength in the background and the test bar
is back down into the area of buying a successful test is a strong indication of
strength showing supply has disappeared. If you are in an uptrend and the test
follows some minor signs of weakness you would anticipate the up move to
continue. Supply appearing after a up move is often tested. If the supply is
sufficient to stop the up move expect and subsequent test to fail which
in itself is a sign of weakness. Give extra weight to a second test in a bullish
phase if the second test has lower volume than the first. Be cautious if the test
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is followed by low volume up bars, Upthrusts or high volume up bars closing
in the middle especially on a narrow spread.
Once our test indicators have been confirmed, i.e. the next bar has to be an up
bar, then we'll look to take a position in the market.
How traders & investors are forced out of the market.
Professional traders always want the upper hand and they will do whatever it
takes to buy cheap and sell high, even if they have to force you out of the
markets. What better way to force people out of the markets than by shaking
them out, and again this happens around news announcements. A stock
that suffered a Shakeout was Adobe Systems (ADBE) on the 5th February
2016. On that day ADBE announced their earnings and they did not meet
market analyst expectations. This is bad news for the company and its
investors, but not for professional traders, they will use this news to position
themselves to profit.
As you can see on the chart below, the market dipped down quite
considerably falling from a high of $88.16 to $71.27. The news was used by
the professional traders to force people out of the stock. Prior to the news
announcement, the stock was in a strong uptrend, so most investors would
have been long.
The news announcement was released and it was poor so the professional
traders started to sell, they will create a level of activity to encourage
investors to sell. Investors who are long would try and stay in the trade as
long as they can, knowing they are quickly losing money. The shakeout does
what it says, is shakes investors out of the market, the investors can't stand to
lose any more money so they opt to exit out of their positions and get back
whatever money there is left.
Where one investor is selling, another investor is buying and that investor is
the professional traders, buying low and selling high. As a Wyckoff / VSA
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trader, we can take advantage of shakeouts when they occur in the market. A
shakeout is simply a continuation of an uptrend. But do we get into a position
as soon as we see the shakeout occur? No, we wait for a confirmed test of the
shakeout.
Figure 44: ADBE price chart highlighting the Shakeout
Tests are a great place to go long in a bull market if you see strong bars in the
background. Always remember to place a buy order above the test bar a few
ticks and do not buy a market on a Test. A Test can sometimes fail and if you
have gone long on a Test, you would now be under pressure as the market
falls. A Test is deemed successful when the next bar closes higher than the
test bar, so placing a buy order above the Test you are buying as the Test is
confirming.
How to Recognize the End of a Down Move
A lot of the time I get asked the following question: "How do I recognize the
end of a down move?" My answer to this question is always the same; High
volume on a down bar always means buying, but if the close of the bar is
towards the middle or top of a range, then the professional traders
are attempting to buy into the selling and they will only buy into the selling if
they feel that prices are now attractive. The professional traders are now
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absorbing the selling, absorption volume, and this will generally mark the end
of a downtrend. You can also get ultra-high volume on a down bar that closes
on the low. With each of these bars, we need to wait for confirmation to see if
the ultra-high volume bar is in fact buying or selling. If the next bar was a
down bar then that would confirm that the ultra-high volume in the previous
bar was in fact selling, but if the next bar was an up bar, then there was
buying in the background.
The following chart shows the stock ERM Power Limited (EPW) which
trades on the Australian stock exchange. We can see that the stock took a
dive. notice the ultra-high volume on the down bars and they were
widespread down bars. Anyone holding the stock would have been forced to
sell with the stock losing 40% of its value. This down move would have been
initiated deliberately by the professional traders so that they can buy low.
Figure 45: EPW stock chart
The VSA indicator that appeared on the widespread ultra-high volume down
bar was a Climatic action bar.
SOS 129 Potential Climatic Action
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Bar Description
A down bar with high to ultra-high volume must contain buying from
the professionals especially if it is into fresh new ground and the next bar is
up.
One or more of the professional groups would have decided that the
underlying market is now good value and will step in and buy absorbing the
supply. Covering of shorts will add to the volume.
Background
There should be a clear downtrend in place in the background. Weak holders
will eventually panic and sell out regardless of price offering the
professionals the opportunity to acquire holdings at a good price.
Only buying by the professionals can stop a down move. covering shorts will
add to the volume. This has to be done on down bars so as not to move prices
against them. Study the background carefully.
Future
The next bar should be an up bar to confirm this indicator.
The market may need to accumulate further before an up move can begin so
be patient. The professionals do this by selling small amounts of their
holdings to push prices back down to the lows. However, overall they are
buying more than they are selling.
Remember this indicator picks up demand coming in but there is still supply
present. A market will not rally far until the professionals have checked to see
if supply has disappeared. This they do with shakeouts and testing.
Shakeouts are usually on a wide spread down bar closing near the highs. If
volume is low this becomes a test like bar and shows supply has disappeared.
If the volume on the shakeout is high expect testing at a later date. The ideal
test is back into the area of the stopping volume. The test should be a mark
down with narrow to average spread closing in the middle or high on low
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volume. This sends a message to weak holders to show their hand. The low
volume suggests the supply has disappeared.
Remember if the market is still weak you would expect high volume up bars
closing off the highs with the next bar down, Upthrusts especially on high
volume and No Demand.
The chart below shows a climatic action bar on the chart of EPW:
Figure 46: EPW stock chart with trigger point
At point (A), we have a wide spread down bar on ultra-high volume. This is
normally an indication of weakness (selling pressure) but the very next bar
was an up bar. If the ultra-high volume as seen at point (A) had been selling,
how can the market drift upwards? There was more selling at point (A) but
for the market to have gone up, the selling must have been absorbed by the
professional traders. They will only do this if they are bullish. This is a start
of the accumulation phase. We have marked the high price of the climatic bar
as our trigger point. Once the price breaks above the trigger point then we
may look for possible trade entries.
The market gets pushed up and at point (B), we get a narrow spread up bar
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with ultra-low volume. This signifies that there is no demand to drive the
price up further. The price gets knocked down a little but gets pushed back up
and at point (C) we have a test on low volume, telling us that the floating
supply is disappearing. We don't take a trade here because the price has yet to
break above our trigger point.
The next bar after the test bar at point (C) breaks through our trigger point, so
now we patiently wait for a test to confirm there is no more
floating supply and we get that at point (D). The next bar is an up bar
which confirms the test and at point (E) we get another confirmed test and
from that point, the stock rallies 20%.
The characteristics of an end to a downtrend are a ultra-high volume on a

wide spread down bar that closes towards the middle or high of the range. It
can also close on the bottom of the range. If the next bar is an up bar, this will
confirm the buying. You will find if there are large amount of supply, the
market will generally move sideways as it tests the floating supply. The test
is designed to check to see if there are any more sellers in the market at the
area of high volume, misleading the retail traders and catching stops on the
long side. At the point of a successful test, most of the supply will have been
removed and the market is free to move upwards.
For the inexperienced trader, they will find it difficult to see absorption
volume as it's happening because of what is coming from the media; in this
case, bad news will only allow them to think the market will continue to go
down. That's why I say do not pay too much attention to the news as you will
always be misled. There is a saying from Mark Twain; "If you don't read the
news, you're uninformed. If you do read the news you're misinformed".
Stopping Volume - Stopping the Momentum
Another way to identify the end of a bear market is when prices start to resist
further down moves. This is why this indicator is called Stopping Volume as
the professional traders are absorbing all the selling from the retail traders.
Stopping volume is identified as a down bar on very high volume closing on
the highs or the middle. This type of bar shows that buying must have
entered. If the close of the bar occurred on the lows then we need to wait for
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the next bar, and if the next bar is up, closing on the highs, this will confirm
the buying and show that there is strength entering the market. When
stopping volume occurs, we'll normally see the pricing action trend sideways
and this shows that professional traders have in fact stepped in and started
accumulating from weak holders. After stopping volume has appeared, any
low volume test that appears is a sign of strength.
Figure 47: Stopping Volume
How to Know When a Stock Has Reached a Market Top
It's very important whilst you are in a trade to identify when a stock has
reached its top. This is usually on good news which will prompt the retail
traders to stay in their positions and/or add to their positions. What the retail
traders do not know is that there is going to be a change in behavior in the
market. At TradeGuider, we recommend caution when reading news feeds.
News can be manufactured and it can manipulate the action of the masses.
Professional traders are often well aware of a particular piece of news in
advance before it's released to the public. Making money is a very serious
business and professional traders have a number of methods and contacts at
their disposal to glean commercially sensitive information for the benefit of
trading large blocks. In the set of VSA indicators, there are ways to know
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when a market has reached its top and there are two VSA indicators which
show the strongest signs of weakness, the buying climax and the end of a
rising market.
Buying Climax
A Buying Climax is a widespread up bar on very high volume, but the price
does not respond upwards. This rapid up move will be accompanied by good
news and this will certainly cloud your judgment and you will be thinking
that the stock should push up higher. Following the Buying Climax, you will
see higher prices tested on much lower volume and you will normally see
upthrusts and no demand bars confirming the weakness.
The Buying Climax that occurred in the stock Disney (DIS) was on a positive
news announcement as they posted better than expected earnings results with
their earnings per share rising by 55%. With this news, you would think that
higher prices are inevitable and on that day, there was a ultra-high volume on
a widespread up bar, closing in the middle of the range. The news that is
presented would lock in traders at higher prices, but in reality, it's bad news
for these traders. Most often you will see traders relax on this news and they
will not be covering their poor trading positions. There will also be traders
who would enter a short position only to be shaken out of their trades.
Figure 48: Buying climax on Disney (DIS)
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End of a Rising Market
The End of a Rising Market signal is one of the strongest signals in the VSA
family. The End of a Rising Market occurs after a period of rising prices and
is normally on good news. The retail traders are buying in a frenzy and this is
a great opportunity for professional traders to sell to them. The End of a
Rising Market is an up bar on high volume usually closing off the highs. If
the spread of the bar is into fresh new highs, then this is weakness. We may
see pricing action climb higher but it will be on much lower volume.
The chart below is the gold chart and I stated that back in 2010 Goldman
Sachs released a statement that gold was to go above $2,000 an ounce. There
would have been a frenzy of buying by the retail traders and that's what
the professional traders wanted, there was good news released and that's the
perfect opportunity for the professional traders to start selling. By February
2011 the VSA signal End of a Rising Market appeared and you can see prices
dropped and retested the highs on much lower volume. From that
price behavior, we can clearly see that there was a change in behavior,
weakness, which started back in 2010 and the End of a Rising Market
indicator confirmed the weakness.
Figure 49: End of a Rising Market in Gold
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There are two books that I recommend for you to read that were written by
my mentors Gavin Holmes and the late Tom Williams, the inventor of
Volume Spread Analysis. The first book “Trading in the Shadow of the Smart
Money”, written by Gavin Homes goes into more depth on how the financial
markets are manipulated and how you can trade in harmony with
professional traders. Another book is “Master the Markets”, written by Tom
Williams. These two gentlemen opened my eyes to how the financial markets
really work and their books are a must read if you wish to master the markets.
You can find out more about these and other books by going to
http://www.tradeguider.com/books.asp
COVERED CALL / VSA STOCK SELECTION

CRITERIA
“We’ve all had dreams and goals one stage of our life but very few people
start to live those because obviously, obstacles come up, somebody stabs you
in the back, something doesn’t work out, and the frustration for most people
becomes overwhelming. Then there is also just the fear, there’s the fear of
failure, there’s the fear of getting your hopes up again. You have to get your
hopes up; you are going to be disappointed so often in life. Disappointment
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can be turned into drive or it can destroy you.
Everybody is afraid at some level that they’re not enough in some context.
Not smart enough, not pretty enough, not strong enough, not rich enough, not
funny enough. You may not be feeling that right now in your life, but we all
feel that.
What’s an area in your life right now that you really want to improve, what’s
an area that really important to improve. If your body’s great, how about
your career, if your career’s great how about your relationships, intimate
one especially, or your kids, or your relationship with your creator, the
spiritual side of your life, or is it your finance?. Doing affirmations is not
going to change your life, you have to go see where the weeds are and pull
them out. My point is simple, you got to see what the problem is but you can’t
make it so horrific that you just give up.
Who you spend time with is who you become and getting yourself in
proximity with people who are succeeding, even if you have to work for free
for somebody, getting into the environment around them, it rubs off on you.
You begin to think like they think, you begin to see what the opportunities
are.
Our bodies are a reflection of our physical standards, they are not a
reflection of our desires. Most people have a desire for more energy, or a
better body or a stronger body, or fit body. We don’t get our goals, we get
our musts. Your income right now is the result of your standards as well. It’s
not the industry and it’s not the economy.” – Tony Robbins
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In this section, I am going to show you how to select a stock as
a candidate for the covered call strategy. We'll implement the VSA principles
that were taught in the last chapter into our analysis and I will also show you
how quick and easy it is to search for strong stocks in any market using the
TradeGuider End of Day (EOD) Proprietary Software and then having those
stocks scanned on a continual basis alerting you to a potential trade setup
using VSA Smart Center Pro.
Stock Selection Criteria
When it comes to selecting a stock as a candidate for the covered call

strategy, the following criteria will give you the highest probability of
success. I will be focusing on stocks from the U.S. markets because as far as
I'm concerned, U.S. options give you a higher rate of return than any other
market around the world. The simple fact is that the U.S. market makes up of
over 40% of the world financial markets, meaning that the total value of the
exchanges in the U.S. is over $28 Billion.
Trading options, the expected ROI of options can range anywhere between 3-
9% on a monthly basis, comparing the U.S. market to the Australian market,
trading options will yield you a return of 1-2%. Where you decide to invest is
up to you but make sure before investing in options that you understand the
rules. Rules governing the exercise of options and other attributes can vary
from country to country and between different exchanges.
Rule #1: Strength in the background

Before you start investing in a stock, it's very important to study the
background of the chart. When retail traders look at the chart, they look at the
right side of the chart and base their analysis on what is currently happening
and usually get caught out. What I and many professional traders do is look at
the left side of the chart and we’ll look up to 500 daily bars. We want to see if
there is strength in the background. Recall I stated that strength appears on
down bars with Ultra-High volume, where the bar either closes in the middle
or high of the price range, the upper 50% of the bar. We also need to see that
there is buying occurring, professional traders absorbing the selling with the
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next bar an up bar.
The different VSA indicators to look out for that are signs of strength are as
follows:
Potential Climatic Action

Stopping Volume
Selling Climax
Bag Holding
Two Bar or Bottom Reversal
Shakeout
Climatic Action
We can clearly see on the chart below of GLW there is climatic action. We
have a wide spread down bar closing on the highs. The next bar was down
which meant there was a bit more supply present. Price drove down further
then we were faced with another climatic bar which pushed below the low
price of the previous climatic bar. This would have fooled the retail trader to
go short and we see price closing on the highs, a great sign that buyers are
present. This also was on ultra-high volume. The next bar was up, which
confirmed the buying and we see price get pushed upwards. My trigger point
was placed on the high of the first climatic bar so now we wait patiently for
price to cross above this point. Price does break above and then we wait for a
confirmed test to prompt us to go long. As always price comes back to retest
the area of ultra-high volume.
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Figure 50: Climatic action bars appear as prices are falling
Shakeout
The chart below is of the stock Home Depot (HD) and we can see there was a
shakeout performed by the professional traders.
The professional traders want to buy at lower prices, so they shake out the
traders who are already long. We can see very high volume is present so all
we wait for is a test after the shakeout which was confirmed and gives us a
signal to go long.
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Figure 51: Test After A Shakeout
When you are faced with these indicators it does not mean to enter a position.
You can say this is a telegram from the professional traders alerting you that
there may be a change in behavior in the stock that you are analyzing. You
will normally witness that there is Ultra-High volume when those indicators
appear and 99% of the time areas of high volume get tested and when they
are tested, it's usually on much lower volume. When there is a test back into
the area of high volume, you can be confident that higher prices are likely to
occur. That still does not give us the green light to enter a trade. We still need
to wait for.....
Rule #2: Stock in an uptrend and/or performing better than the parent
index.
There is a saying in the financial markets that "The trend is your friend". This
is very true and it's the one rule that you need to obey if you want to be
successful in the markets. Placing a trade against a trend will most likely
have you making donations to the market on a regular basis, it’s going to
hurt. Let's say you go to a lake nearby and you want to go for a swim. You
enter the water and there is a current and you decide to swim against the
current. How hard is it going to be for you to make any progress? It's going to
be quite hard against the current, perhaps you won't make any progress at all.
When you swim with the current, it makes it so much easier for you to make
progress. That's how it is in the financial markets, when we trade in harmony
with the trend there is a higher probability of a successful trade.
Preferably, when we trade the covered call strategy we analyze 3 different

timeframes, weekly, daily and 4 hour. The highest probability setups are
when all timeframes are trending upwards. At a minimum we'll like to see the
daily, and the 4-hour chart trending up and we'll look to taking our entries on
the 4-hour chart. In the TradeGuider EOD software, it contains the diamond
trending system which you can clearly see when the stock is trending up,
trending down or consolidating.
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Figure 52: Diamond Trending System
If you are looking for the highest probability setups, then you need to look for
stocks that are performing better than the parent index. To do this manually
will take you a lot of time, but the TradeGuider EOD software can search any
stocks which are a part of the index, comparing them against this index and
providing a list of the top ten weakest and strongest stocks and it will take
you just minutes to get these results. Below is a scan that I performed on the
S&P500 stocks. On the left-hand side, you can see the list of the strong and
weak stocks. To the left of the chart, the stock, SWKS is shown. You can see
two instruments overlapping on the same chart. One is the stock, SWKS and
the faint colored instrument is the S&P500 index. As you can see the stock
SWKS is performing better than the index and it's these types of stocks which
will give us a higher probability of a successful trade.
It doesn't mean to start investing in the stock right away, you still need to
perform your analysis on the stock, such as, are there any sign of weakness
appearing. Sign of weakness may have appeared but it may be still
performing better than the index. It takes time for a stock to change its
behavior but you can clearly see if there is going to be a change
in behavior by the ultra-high volume on an up bar. If there are no signs of
weakness in the background, then you will need to look for confirmed signs
of strength in the stock before it becomes a trading candidate.
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Figure 53: Strong and Weak Stocks Compared to the Index
Rule #3: Confirmed Tests or No Supply
After we see major signs of weakness we know there may be a high

probability of a change in behavior. The pricing action creates a saucer shape
continually testing to check for sellers. If there are no sellers the price will
tend to move higher. No supply bars are bars that are narrow spread down
bars on low volume which signifies a lack of selling. Again, when we see a
test or no supply occurring, we need to see them occur the majority of the
time above our trigger point and this is where we get our high probability
setups.
Rule #4: No earnings announcement
This is a very important rule that you must abide by. When there are
earnings announcements, it's not very clear what is going to happen. Is the
company going to exceed market expectations or is it going to miss
expectations? It's a very volatile time around any earnings announcement
and you must steer clear and sit on the sidelines. You don't want to be in a
position where you are in a profit and the next moment you are in a losing
position because the stock missed earnings expectations and the stock
plummeted 30%. It's best to remain on the sidelines and be patient and let this
time of volatility pass and then look for trading opportunities.
Below is the chart of the company Whirlpool which had an
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earnings announcement. The shares of Whirlpool fell more than 10 percent
after the appliance maker missed a third-quarter earnings forecast.
Figure 54: Whirlpool Earnings Announcement Miss
Rule #5: High liquidity

When it comes to investing in a stock using the covered call strategy or for
any strategy for that matter, you need to invest in stocks that have high
liquidity. High liquidity means that a stock has a lot of buyers and sellers and
you will be able to get out of the position quickly and easily. The way
to recognize a stock that has high liquidity is the difference between the bid
and ask price, the spread. The narrower the spread the more liquid the stock
is. The spread between the bid and ask price should be between 1-15c.
Anything more than this, I would think twice about investing in the stock.
If you had a $1.00 spread between the bid and ask price for a a stock that you
purchased, remember you purchase the stock at the ask price, if you wanted
to sell the stock right away for whatever reason, you will sell it at the bid
price. If you bought the stock at $30.00 and the sell price is $29.00, that is the
best price you will receive for the stock, so you will immediately be in a loss.
The option table below shows the bid and ask price for the stock MDCO and
as you can see here, if you buy the $35.00 call option at $6.60, to sell the
option back you will only receive $3.00 which means you have suffered a
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$3.60 loss. For you to be in a profit the bid price will need to go above the
ask price and that would need to be a sizable move in the underlying stock.
Whereas if the spread is only 5c, the underlying stock will need to move a
much smaller amount before you are in profit.
Figure 55: MDCO Option Table Courtesy OptionsXpress http://www.optionsxpress.com
Rule #6: No pharmaceutical stocks
This is one of my golden rules which will save you a lot of heartaches. You
should not invest in pharmaceutical stocks as they can be very volatile and
there is a lot of uncertainty around them. Not only do you have to keep an eye
out for their earnings announcements, you also need to keep an eye out for
any drugs that they are bringing out into the market. These drugs must be
trialed and approved by the FDA and if the FDA does not approve these
drugs, then the stock can drop by 40-50% in value and you don't want to be in
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that position. In saying that, they could move that amount in your favor.
You may argue that pharmaceutical stocks options pay handsome premiums.
They pay handsome premiums because of the uncertainty surrounding the
stock. The higher the uncertainty, the higher the premiums for the options of
the underlying stock. The same goes for earnings announcements because
there is so much uncertainty the premiums are normally higher, but as the
uncertainty subsides the premiums are reduced dramatically.
Rule #7: No Dividend Announcement

Do not place a trade in a stock when the stock is to go ex-dividend in the
current month. A stock going ex-dividend means that it will likely drop by at
least the value of the dividend amount and it may affect our position, such as
it could cause our position not to be exercised. As the stock price may have
dropped below our strike price, we may have to hold onto the stock for
longer.
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The Real Thing – NVDA Trade
Let’s go through a real trade which occurred on the 5th December 2016. This
stock has been in an uptrend since December 2015. It’s a company that
creates graphics cards for computers. It’s one of the best uptrends I have seen
in quite some time. These are the sorts of stocks that I look out for, making a
series of higher highs and higher lows. Let’s go through our checklist to see
if we can take a position with this stock.
√ Strength in the background
What prompted me to look at this stock even though it been in an uptrend for
quite some time, was the continued strength. Many traders and investors will
start thinking that the trend is going to end and that it should start turning
around soon. If there is strength in the background and the “Smart Money”
are willing to absorb the selling, this will continue to go up.
Figure 56: Strength in the background NVDA
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The chart above shows us a gap up in price on a bar that closes on the high
with ultra-high volume. It was marked with a VSA indicator; Two-Bar
Reversal. This is a sign of strength when it appears in an uptrend. More
importantly what prompted me to get more excited was what occurred two
bars after the Two-Bar reversal. This bar is similar to a test bar. There was no
VSA indicator assigned to it but on this bar, prices were marked down and it
closed just off the highs of the day, and it’s small range bar. The most
important thing was the volume, it was very low, indicating that there is no
interest in lower prices.
√ The stock in an uptrend and performing better than the index
The two images below show the daily and weekly charts for NVDA and you
can clearly see that both are in an uptrend, the diamond trending system is
green for both timeframes. NVDA was also stronger than the overall index in
my stock scan.
Figure 57: Daily chart of NVDA
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Figure 58: Weekly Chart of NVDA
√ Confirmed Tests or No Supply
The low volume bar small spread bar that occurred after the two-bar reversal,
enabled the stock to rally around $7.00 but the up move was losing
momentum as the price action mushroomed over with small spread bars. The
majority of the time, areas of ultra-high volume get tested and it occurred this
time with a VSA principle, the Shakeout. The Shakeout is a maneuver by the
“Smart Money” to catch stops, so that they can buy low and continue the
rally.
Even though the rule is to wait for confirmed Tests or No Supply bars, the
Shakeout was just as good, as it was testing back into the area of ultra-high
volume. I waited for confirmation of the Shakeout bar, as the following bar
has to be an up bar. An up bar is a bar that closes higher than the close of the
previous bar. The next bar was an up bar which prompted me to start
positioning myself into the trade.
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√ No earnings announcement
If there is an earnings announcement in the current expiration month
(December 2016), we do not take a position in the stock. How do we find
when a company has an earnings announcement? There are numerous
websites where you can gain this information but the website that I use is
nasdaq.com. Below is the website of nasdaq.com, the earnings announcement
for NVDA is Feb 15, 2017. I will be taking a position for the December 2016
option contracts, so the earnings announcement falls outside the options
expiration date.
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Figure 59: Earnings announcement on nasdaq.com
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√ High liquidity
Taking a position in the Covered Call strategy, we require the stock and
options to be highly liquid, a lot of buyers and sellers. High liquidity stocks
and options depend on the spread of the bid and ask price. Ideally the spread
needs to be less than 15 cents. The NVDA options table below shows that the
spread between the bid and ask price is 5 cents which is ideal for our trade.
Figure 60: NVDA Options Table December 2016
√ No pharmaceutical stocks
NVDA operates in the technology sector and not the pharmaceutical sector.
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√ No Dividend Announcement
If the stock goes ex-dividend in the current options expiration month we do
not take a position. We can find this information on the nasdaq.com website.
The ex-dividend date was back on 23rd November 2016 so this falls outside
the December 2016 options expiration.
Figure 61: Dividend Announcements nasdaq.com
Placing the Trade

Going through the checklist we have met all the criteria for this trade, so now
it’s time to get into the trade. The stock price at the time of entry (5th
December 2016) was $91.40. I elected to sell a December 2016 $92 Call
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Option for $2.29 and buy a December 2016 $88.50 Put Option at $1.11.
An Out-of-the-Money Call Option was sold and with the strength in the
background that I was witnessing, I could have sold a further Out-of-the-
Money Call Option, such as a $95.50 Call Option, but I opted for more
upfront premium, than capital gain. This is the choice that you need to make
when positioning yourself into a trade.
Figure 62: NVDA Options Table December 2016
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The Trade Figures
Stock price entry: $91.40
Sell December 2016 $92 Call Option: $2.29
Buy December 2016 $88.50 Put Option: $1.11
Break-even: ($91.40 - $2.29 + $1.11) = $90.22
My insurance policy was at the agreed price of $88.50, not matter how far the
stock drops I will be able sell my shares for $88.50.
Insurance Coverage
Formula: (Break Even - Put Strike Price) / Stock Purchase Price
$90.22 - $88.50 / $91.40
$1.72 / $91.40 = 0.0188 * 100 = 1.88% risk
Insurance coverage: 100 – 1.88 = 98.11%
By 16th December 2016 the stock closed at $100.41, I had agreed to sell my
shares for $92.00.
Profit
Profit = Exercise Price - Break-even Price
$92.00 – 90.22 = $1.78
% Profit = 1.78 / 90.22 = 1.97%
I entered the trade on the 5th December 2016 and exited on the 16th December
2016, an 11-day trade and my return was 1.97%. If we look at annualizing
our return, potentially we can make over 45%. Understanding how to read a
chart using Volume Spread Analysis will more often than not place you on
the right side of the trade. It’s going to take time and dedication but if you
have the belief in yourself and the strategy that you are implementing, you
will make it in the markets.
There are other options strategies that you can utilize to capture a much
bigger return, these are much higher risk and in a future book I will write
about these strategies.
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9
HOW TO FIND TRADING CANDIDATES USING

THE TRADEGUIDER END OF DAY SOFTWARE
“Most people don’t work on their dreams why? They stop growing, they stop
working on themselves, they stop stretching, they stop pushing themselves.
Most people have done all they are going to do. They raise a family, they
earn a living and then they die. But people who are running towards their
dream, life has a special kind of meaning.
You are going to incur a lot of disappointment, a lot of failure, a lot of pain, a
lot of setbacks, a lot of defeats, but in the process of doing that, you will
discover some things about yourself that you don’t know right now. What
you’ll realize is, is that you are more powerful that you can ever begin to
imagine. Align yourself with people that can encourage you, that can
empower you, people that you can learn from, people that you can grow
from. Look at your life and look at where you want to go. Don’t worry about
your circumstances. Don’t worry about your age. It’s time now. If you want
to make this your decade, you have to start saying yes to your life, yes to your
dreams, yes to your unfolding future, yes to your potential. As opposed to
saying no.” – Les Brown
Recall rule #2 in our stock selection criteria is to find a stock that is performing
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better than the parent index. We do this is because we have a higher probability of a
successful trade. In this chapter I am going into detail on how to use the
TradeGuider End of Day (EOD) software to find trading candidates. Without this
software, it will take you countless hours to find good trading candidates and I will
show you how you can do this in a matter of minutes.
The TradeGuider EOD requires a separate data feed to work successfully, either
Metastock or realtimedata.com. The difference between these two data feeds is that
Metastock provides data from exchanges around the world, whereas
realtimedata.com only supplies U.S. data. I recommend using the Metastock data
feed and at the end of this chapter I will show you how you can receive 2 months’
complimentary data when you sign up for the TradeGuider EOD software.
I will run through the example using the Metastock data. When you have the
Metastock data setup, every day you will be required to download the data through
the Metastock downloader software. This software is supplied to you when you
subscribe to the Metastock service. The Downloader software will prompt you for
which exchanges you would like to download the data for, (you can only download
the data that you have paid for). You can easily chop and change which data you’d
like to download, but when you have setup your download you will rarely change it.
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Figure 63: Metastock Downloader software
When you have downloaded the data, you can view the charts in the TradeGuider
software by adding Metastock watch lists. You may add as many watch lists to the
software as you wish. To add a watch list simply click on the “+”. You will be
prompted to select a data directory folder. To remove a watch list simply select the
watch list and click on the “-”.
Once a watch list is selected, all the symbols that belong to that list are displayed in
the symbols section. By clicking on the symbol, you will view that chart. By default,
the daily chart is displayed. You may view the daily, weekly, or monthly charts.
Scanning Stocks
Let’s go ahead and scan stocks to find trading candidates. Firstly, we need to create a
new scan profile. Simply select the “Scanners” menu and click on “Stock Scanner”.
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Figure 64: TradeGuider EOD - New Scan Profile
The above dialogue box will display, select “Scan Metastock files” and click on
[NEXT].
The next dialogue is the “Choosing the Comparison Index”. This is the index
that the stocks will be scanned against. If we are scanning the ASX 200
stocks, we’ll need to choose the appropriate index i.e. ASX 200 index. By
clicking on the [LOAD INDEX] button, navigate to the Metastock data and
the indices are normally found under “Indices and Indicators” / “Asian
indices” folder. Once selected, you will see a chart of the index appear in the
platform. Click on [NEXT] to move onto the next step.
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Figure 65: TradeGuider EOD - Comparison Index
The next step is to select the scan date. You may select any date but usually
the latest date will suffice. To select a new date simply click on the left and
right arrows to select the appropriate month.
Figure 66: TradeGuider EOD - Scan Date
The next step, select a list of stocks to scan. You may select a complete folder
of stocks or select a few stocks. For this example, I have select all stocks in
the ASX 200. Click on [NEXT] to move to the next step.
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Figure 67: TradeGuider EOD - Stock List
The next step we select the percentage change of the price moves. You can
have a value between 0.1% to 9.99%. I usually just leave this at 1.25%, the
default. Click on “Next” when you have set your value.
Figure 68: TradeGuider EOD - Percentage Change
The next step is to select the number of reference points. By default, we’ll
leave this at two points. Click on [NEXT] to progress to the next screen.
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Figure 69: TradeGuider EOD - Reference Points
Lastly, we name the scan to a name of our choice. By doing this we can
reference the scan in the future and update it. Clicking on [DONE] will begin
the scan.
Figure 70: TradeGuider EOD - Scanning Stocks
Once the scan is complete you will notice on the left-hand side of the
platform a list of ten strong stocks and ten weak stocks. I have selected
Fortescue Metals (FMG) and as we can see it’s performing better than the
index. This stock is clearly in an uptrend. To consider an entry, we’ll look for
low volume tests or no supply confirmed indicators, this occurs when there is
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a retracement in price. If there are no Ultra-high volume bars, this stock
would be a good candidate for a potential long trade.
Figure 71: Top ten weak and strong stocks
With the TradeGuider EOD software, you may also search for a specific
indicators, through the indicator search. If there are specific indicators that
you look out for such as “Bag Holding” or “End of a Rising Market”, all you
are required to do is enter the VSA number on the currently opened chart and
the software will find the indicator for you.
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**TradeGuider EOD Software Special
Offer**
As readers of my book, I have a special offer to help you get started with
trading the Covered Call strategy. The TradeGuider EOD software normally
retails for USD $999.00. You may own this software for half price of USD
$495.00. You will also receive 2 months’ complimentary access to the
Metastock data feed. You will also receive a mentorship course so that you
can learn how to trade with the VSA principles.
Go to www.TradeGuider.com/supercharge
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10
TRADING PLAN
“Don’t let this year be like last. If last year was great, still don’t let it be that
way, raise the standard. If your life is perfect and extraordinary, you know
darn well that you are not going to be happy unless you keep on making it
better. That’s what makes us feel alive. It’s not what we get that makes us
happy, it’s who we become and what we are able to give because we become
more.” – Tony Robbins
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When you are starting a business, what is the first thing you
must have before you perform any single transaction… A
business plan. As described by Wikipedia, a business plan
is as follows:
A business plan is a formal statement of your business
goals, reasons they are attainable, and plans for reaching
them. It may also contain background information about
the organization or team attempting to reach those goals.
Trading should be approached like a business. The majority
of retail traders approach trading like a hobby, there is no
planning performed, they take random setups and just act
on hunches or tips that a taxi driver may have given them.
When you start getting tips for a stock from a taxi driver,
you know then it’s time to get out. By that time the
professional traders have made their profits and are selling.
A trading plan is a plan that clearly details every aspect of
your trading. It should highlight such things as, why you
are trading, your goals for trading when you will get into a
trade and more importantly when you will get out of a
trade.
I have supplied you with my Covered Calls trading plan.
This is to be used as a guide to show you what a trading
plan should contain. Every trader is different having
different reasons why they are trading and their own
defined setups to enter and exit a trade. You need to set up
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a trading plan that is suitable to you.
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Trading Plan of Danny Younes
Trading Plan Created on: 17/11/2014
Review Trading Plan on: 17/1/2017
Pre-Market Daily Routine

I will abide by the following routine on a daily basis before I begin trading:
1. Wake up and I am immediately grateful
2. Tell myself that it’s going to be an awesome day
3. Meditate
4. Exercise
5. Login to forexfactory.com and look for high impact news
6. Assess the markets and look for strong stocks using the
TradeGuider End of Day software. Look for instruments that
are in trend alignment in at least two out of three timeframes
i.e. Daily and 4 Hour
7. Assess current trades that I have open positions in.
1. My Objectives, Goals & Purpose
I always trade using my trading plan and I will adhere to it at all times.
I will evaluate the success of my trading plan by keeping a trading journal.
By adhering to my trading plan, I will increase my chances of being a
successful trader.
Personal Goals
I want to live a purpose driven life and associate with like-
minded people who have the same aspiration that I do.
To have a great relationship with my wife, Georgette and my
kids; Nicholas, Jacob and Joshua.
I want to motivate other retail traders to be successful in this
endeavor.
Trading Goals
To travel around the world educating investors on how to
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successfully invest in the financial markets.
To manage an institutional hedge fund.
To continually increase my returns on a yearly basis.
I will continually show the retail investor that the financial
markets are manipulated.
Rules Reason
My trading plan forms part of my My trading plan is a guidance for
overall trading system and should be behavior when placing and exiting
clearly focused on my purpose for trades and should contain what I
investing in the share market. need to have in place to increase my
chances of success.
If I do not follow my trading plan I Trading is a business and you can
will increase the risks of my trading only test the success of it if you
and will not be able to evaluate my follow it completely.
trading plan effectively.
My view of the stock is until options The ideal outcome is to be exercised
expiry of the particular covered call on expiry, as that is when I will
strategy, which I am choosing to receive my optimum profit.
write.
I will use a set of rules based on I recognize that although we can
Wyckoff/Volume Spread Analysis to predict some market events, the price
determine the market behavior in of the stock is unpredictable.
any one position.
Utilizing PUT options, as insurance We cap our potential loss using put
with a covered call position is part of options, which provides us the
the strategy I am using. opportunity to sell the stock at a
specific price, irrespective of price
movement. Although there is a
premium associated with this, there
is a significant minimization of risk
to my trading capital.
I will use a set of rules based on I recognize that although we can
Wyckoff/Volume spread analysis to predict some market events, the price
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determine my actions as needed in of the stock is unpredictable. Using
any one position. changes in market sentiment and
adhering to some simple
fundamental rules provides me with
the best chance of the trade going in
the direction I desire.
2. Trading as a business
Trading is a business so it should be treated as such. To become a
competent trader, I MUST abide and understand the following rules:
Rules Reason
Trading is not all about the money, it It’s normal to be emotionally
about executing good trades attached to money and when we
lose it, we always want it back. It’s
the fear of losing money and
retaliating to the markets and
entering poorly executed trades that
would end up losing money. First
and foremost, I need to work on
executing good trades as specified
in my trading plan and once I do
that the money will flow.
Do my homework and believe in I must be committed to improving
myself my trading by spending hours and
hours at beating at my craft. Most
importantly I must have the belief in
myself and my trading strategies.
Document my emotions (what I am I must monitor how I feel whilst I
doing while I am trading) am in a trade. I must not let my
emotions take control of me, I must
discipline my emotions. Either I
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write down in my journal or I record
myself whilst I am in a trade.
Next trade has a 50/50 chance of No matter what the setup is or what
winning success rate the strategy I am
trading, the very next trade that I
place ALWAYS has a 50/50 chance
of being a successful trade.
Markets only care about prices, The market doesn’t care about me
buyers, and sellers. Don’t get and why I am trading, it only cares
attached to money. about prices, buyers, and sellers. I
should not think about how much I
should make in the markets; I
should only be concerned about
executing my trades correctly.
Don’t chase the market I will never ever chase the market as
I will likely get burnt. I will wait for
the markets to come to me.
Learn how to redefine my trading I must define my risk and accept it.
activities in such a way that I truly I must follow my risk management
accept the risk, and I am no longer rules and if I don’t follow it I run
afraid the risk of losing a large portion of
my account.
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3. Risk & Money Management
It’s very important to have a clearly laid out risk management plan because
the aim of trading is to be in the game for as long as you can and if my risk
management plan is not sound it will be game over for me very quickly.
Rules Reason
My attitude to risk can be summed Not following my risk management
up as being risk averse and always rules will be detrimental to my
seeking to minimize risk wherever trading and it will lead me to an
possible. I will achieve this by emotional rollercoaster causing me
adhering strictly to the risk to place poorly conceived trades.
management regime contained in
this section of my trading plan.
My risk per trade that I enter will be It’s very important to preserve my
no more than 10% of my total capital, limiting the amount of risk to
position. For each trade, I will no more than 10%. A maximum of
identify my ideal point to sell a call four trades at any one time will keep
option. The total number of trades me emotionally stable.
that I will have at any one time for
the Covered Call strategy is not
more than four.
With the covered call strategy, I will A put option is my insurance policy
always buy a put option as soon as I and will cap my losses if the trade
enter the trade. The put option will goes against me. The put option will
be purchased up to a maximum of cost me money and reduce my
four strike price Out-of-the-Money. profits slightly but it’s a cost of
doing business.
If there is a significant drop in the Is it worth staying in a trade when
price of the stock of more than 20% the stock has dropped more than
then the PUT option is to be 20%? I will bite the bullet and
exercised at the end of the contract exercise my put option and move
period. onto the next trade. I will only stay
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in the trade if there is a confirmed
change in behavior and there are
Signs of strength VSA indicators.
If I plan to stay in a covered call Rolling out my PUT option out for
position for another month I must another month ensures that I still
roll my PUT option out to the have protection. I will never leave
following month or I could go out my position without insurance after
further but this will be my own expiry in case of a fundamental
judgment. event, which could drive the market
down.
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4. Position Exit / Capital Protection
I know that an exit is equally if not more important than an entry in meeting
my trading purpose and this should be not based on the current profit/loss
position of the stock but rather the market sentiment for the following
month. Every time I am holding a Covered Call position for an additional
month, I am making the decision that this is the optimum stock to have my
capital invested in.
Rules Reason
Being exercised is the optimum The Covered Call strategy is taught
trading outcome. as a cash flow strategy and this
means I have achieved my purpose
in this particular position.
If the stock drops significantly I will Decisions on exit MUST be made on
“roll down” my position to protect price action and on market sentiment
my capital until the end of the of the stock. It is part of investing
expiration period. I will decide prior that some positions will be right to
to entry at which price point or VSA exit even if it involves taking a small
indicator this action will take place loss. I do have an additional strategy
and the roll down of the call option with an intra-month roll down in my
will be set “At” or close to the toolbox to optimize protection. If
money (strike) for the same this is used it’s important to
expiration period recognize that I am changing my
view of the position from one of
generating cash flow to that of
capital protection.
If there is no recovery in the stock If the stock is not going to recover
i.e. the diamond trending system is then there is no point in remaining in
trending down, then the whole the trade, and if the diamond
position should be exited. trending system is red on multiple
timeframes then the sentiment of the
stock has changed and I should exit.
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If there are significant personal If you’re not in a place to make good
circumstances that may impact on investment decisions, this is a major
my decision in my life e.g. ill-health threat to capital in the short term.
or stressful circumstances, I will Better to have the capital ready to
either exit all positions immediately invest again when it’s the right time
or roll down the positions to deep-in- to enter the market.
the-money (ITM) call options with
the intention of being exercised at
expiry (the latter I must be in a
position to check on expiry day).
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5. Technical Entry
Volume Spread Analysis is recognizing when there is a change in behavior,
professional money entering the market, and identifying optimum price
points of entry and exit.
Rules Reason
Retest fails after a break of If the pricing action is in an uptrend
resistance in a clearly defined and a break of resistance occurs, that
uptrend. is a level where we may have
professional money entering the
market. I need to confirm this by a
retest fail. If the retest fails to break
down through the resistance area,
then that confirms absorption
volume and stock is likely to rally.
The VSA Diamond trending system Having trend alignment on multiple
to be trending up, green, on a timeframes gives you a higher
minimum of 2-timeframes; Daily probability that the trend will
and 4 hours. Ideally, I would like to continue.
see trend alignment on Weekly,
Daily and 4 hours.
I will only enter a position if the I am entering a stock and options
liquidity of the stock/option is high. position and I recognize options
liquidity (how commonly they are
traded) is a key factor in determining
spread (the difference between the
bid and ask price) should be a part of
the decision-making process. The
wider the spread the more likely this
will impact on my expected profit
margins.
The VSA Indicators that will allow When these indicators appear on
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me to identify a change in behavior either the Weekly, Daily or 4-Hour
in the markets is: charts, this is a sign that professional
SOS 137 Potential Climatic Action money is entering the markets. This
SOS 74 Potential Climatic Action is not a sign for me to enter the
SOS 57 Two Bar Reversal market, I need to wait for the
SOS 45 Shakeout trending system to align to the
SOS 36 Bag Holding upside.
SOS 83 Potential Selling Climax
SOS 99 Reversal Over Two Bars
SOS 135 Stopping Volume
When the high probability VSA Waiting for the price to break above
indicators appear, I will set my the trigger point allows time for the
trigger point and this is the area that diamond trending system to align to
I will look for SOS indicators to the upside and hence will provide me
enter a position with higher probability setups.
Once pricing action has broken Tests occur because professional
above the trigger point, I will look money is checking to see if there are
for SOS VSA indicators such as further sellers in the market. A test is
Tests or No Supply on low volume successful when there is low volume
to enter a position. Once these and the close of the test is in the
indicators appear I will wait for middle to high of the range. This
confirmation with the next bar being gives us our higher probability setup
an up bar for an up move in the stock.
No Supply tells us that there are no
more sellers in the market and that
price is likely to progress upwards.
If pricing action is currently in an Trend channels highlight areas
uptrend within a trend channel, and where pricing action is oversold and
there are no obvious signs of these areas are where I may find
weakness, I will look to enter the high probability setups
market at the bottom if there is
decreasing volume testing the lower
trend channel and a confirmed Sign
of Strength indicator.
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The indicators that I will look out for
are:
SOS 30 Test in a rising market
SOS 99 Reversal over two bars
SOS 199 & 198 No Supply
SOS 134 No Supply / Test
SOS 96, 116, 146 Test
SOS 198 No Supply
154
6. Fundamental Entry
Fundamental analysis is looking at the potential impact of economic
(external) and company (internal) events that may impact the price of the
stock.
Rules Reason
I will always know the business of I will know the type of national and
any company in which I am international economic events and
considering a trade entry. circumstances which are likely to
impact on my stock.
I will avoid stocks that are due to go Call option premium is decreased as
ex-dividend within the first month of there is an expected price drop in the
my planned trade. premium as the stock hits the ex-
dividend date. Stocks are more
unpredictable after the ex-dividend
date.
A spread of 15c or less between the I am entering a stock and options
bid/ask of the call option is position and I recognize options
desirable. liquidity (how commonly they are
traded) is the key factor in
determining the spread (the
difference between the bid and ask
price) should be a part of my
decision-making process. The wider
the spread the more likely this will
impact on my expected profit
margins.
Becoming aware of the underlying National and international economic
short-term market conditions should and geopolitical events and
be a learning goal of mine moving announcements have a significant
forward. I may choose to enter a impact on the market sentiment
smaller position than I would have which over 75% of stocks mirror the
155
otherwise done if entry criteria are direction of the overall index
met or I may choose not to open a (S&P500). Major market moving
new position if there is a big announcements include US non-farm
economic event imminent. payrolls (monthly employment), and
GDP figures as examples.
I will avoid stocks with an earnings When companies report earnings,
announcement in the current there are often wild price swings,
expiration period. which are risks that do not serve me
in my investing.
156
7. Option Position Entry
I know that I can choose where to place my options

positions but these should be aligned with my trading
purpose and the strategy.
Rules Reason
I will sell an At-the-Money The Covered Call strategy
(ATM) or closest Out-of- is taught as a cash flow
the-Money (OTM) call strategy and therefore that
option on entering the is the purpose of the strike
stock position. price placement (with a
yield in excess of 3%) plus
the ability to capture
capital growth in the stock.
I will enter my put option This provides me with the
(for insurance) no less than risk capped with all the
10% below the current positions entered. I can
share price. choose to place the put
option at a lower strike
price. Although this will
reduce my potential return
it will increase my risk
protection.
157
8. Position Sizing
I recognize that position sizing will only preserve my

trading capital but can ultimately positively affect my
profit and my desired trading purpose. I position size
using the following set of rules:
Rules Reason
I will trade no more than Major market movements
a maximum of 4 open caused by macroeconomic
positions at any time events e.g. interest rates,
geopolitical
statements/events to affect
the whole market. Making
decisions across many
positions is difficult. The
maximum risk is no more
than 10% for any one
position.
I will commit no more Protects against company
than 20% of my trading risk from adverse events.
capital to any one trade.
158
9. After the trade
Rules Reason
At the end of the trading day, I will The only way to grow as a trader is
examine all my trades and ensure to journal all your trades,
that they are all recorded. I will documenting every aspect of your
annotate the charts of all my setups trade and look back over them. By
and record why I entered the trade doing this you will see if you are
and why I exited the trade. I will following your trading plan and you
also write down the emotions that I will quickly learn from your
had during the trade. I will also mistakes. Also documenting your
check that I executed my trades emotions so you notice how you feel
according to my trading plan. whilst in the trade will go a long way
to containing your emotions.
I will guard against overconfidence You need to ensure that your
and ensure that my attitude remains emotions are consistent. When on a
consistent. Check to see that I did winning streak, it’s very easy to
everything as well as I could. become cocky and you will be more
Remind myself that executing the likely to enter a poor trade. Contain
trade in accordance with my plan is your emotions because it’s very
more important than the outcome of important that you execute good
the trade. trades based on your trading plan.
I will devote 10 hours a week to Very important to keep up your
trading. I will also devote 2.5 hours knowledge of the markets up with
a week to educating myself on self-education and learn how other
trading by reading books and traders have mastered the markets.
watching educational videos.
159
11
THE FUTURE OF VSA
“What I like you to do right now, I want you to think about your dream and
envision it. I don’t know what that dream is that you have. I don’t care how
far-fetched it might appear to be. I don’t care how disappointing it might
have been, as you’ve been working toward that dream. Here’s what I know,
that dream that you are holding in your mind, that it’s possible. Some time
we can’t say that I can do that, but what we can say that it’s possible, that I
can have my dream. As we run toward it, as we work toward it day and day
out. Most people don’t work on their dreams why, they stop growing, they
stop working on themselves, they stop stretching, they stop pushing
themselves. These are not risk takers.
Most people have done all that they are ever going to do, they raise a family,
they earn a living and then they die. People who are running towards their
dream, life has a special kind of meaning. In the process of working on your
dream you will have a lot of pain, a lot of setbacks, a lot of disappointment, a
lot of defeats. In the process of doing that, you will discover some things
about yourself that you don’t know right now. What you’ll realize is that you
are more powerful than you can ever begin to imagine.
Align yourself with people that can encourage you, people that can empower
you, people that you can grow from, people that you can learn from. Look at
your life and look at where you want to go, don’t worry about your
circumstances, don’t worry about your age. You see it’s time now, if you
160
want to make this your decade you have to start saying yes to your life, start
saying yes to your dreams, yes to your unfolding future, yes to your potential.
Right now, the future is unfolding for you right now, your future is unlimited
for you right now, no one knows where you can go, we have the power to
change our personal history, changing the directions of our lives, changing
our thoughts, changing where we want to go, exploring new horizons. So, as
you begin to look at this decade and affirming this is your decade, as you set
goals that will make you stretch and bring out the best in you. As you begin to
remove the negative toxic people from your life. As you decide to take
chances in life.
That’s one of the things that’s very important. This god said that if you’re not
willing to risk, you cannot grow. If you cannot grow, you cannot become your
best. If you can’t become your best, then you cannot be happy. If you can’t be
happy, then what else is there.” – Les Brown
161
The biggest break-through in trading using the Wyckoff / Volume Spread
Analysis methodology has been made by TradeGuider. TradeGuider’s aim
was to simplify trading for their customers and allow them to find
opportunities quickly and easily and not just any opportunities, but only those
opportunities that will have a high probability of success. Allow me to
introduce to you the VSA Smart Center Pro which will take your trading to
the next level.
VSA Smart Center Pro was designed with the trader in mind, whether you are
an intraday trader or a swing trader you will be able to locate trades quickly
and easily. One of the ways I use the VSA Smart Center Pro is that it scans
multiple instruments in the Forex Market. Out of the instruments that I trade,
25 different currency pairs, (VSA Smart Center Pro can monitor hundreds of
instruments at one time), VSA Smart Center pro monitors these instruments
for me. Based on the settings that I have set, and you can customize the VSA
Smart Center Pro to suit your trading style. VSA Smart Center Pro will alert
me via an audible alert when an instrument is in trend alignment. Why do I
want the VSA Smart Center Pro to alert me when there is trend alignment in
an instrument? When you get trend alignment in multiple timeframes, these
instruments are more likely to give you higher probability setups. Like they
say in the trading world, the trend is your friend.
Once we have trend alignment, the VSA Smart Center Pro will alert me of a
VSA principle in the timeframe that it appears in. All that is required of me is
to go to the chart and look at the setup and if it fits into my trading style, then
I take the trade. Just think if you were searching for trade setups on 25
different currency pairs and looking through each of the timeframes, how
much time would you spend doing this?
162
Figure 72: VSA Smart Center Pro Panel
The image above is the VSA Smart Center Pro and you can see that I am
monitoring 9 instruments in this panel. It shows me the different timeframes
and how they are trending; red = downtrend, green = uptrend and grey =
consolidation. When an instrument is in trend alignment, (based on my
settings, that 60% of the timeframes need to be in trend alignment), an
audible alert will sound and the instrument will flash, black and white. Once I
click on the instrument it will show me whether it’s in an uptrend or
downtrend. If it’s in a downtrend the red box to the right will be checked, in
an uptrend the green box to the left will be checked.
163
Figure 73: VSA Smart Center Pro Trend Alignment
The image above is showing me that GBPUSD is in trend alignment to the

downside. All timeframes are trending. Now with it being checked it will
sniff for me when a VSA principle appears in any of the timeframes and it
will alert me via audible alert and show me on the timeframe the number of
the VSA principle.
164
Figure 74: VSA Smart Center Pro VSA Principle Identified
The main features of the VSA Smart Center Pro are:

ü Automatically scans, locates, and alerts the trader / investor to
the most important Wyckoff / VSA set ups, that are aligned with
trend
ü The Wyckoff / VSA SMART VSA Center Pro trading system can
monitor hundreds of charts in all markets in a singular moment.
ü The Wyckoff / VSA SMART VSA Center Pro trading system will
clearly identify congestion and will not send alerts, to keep you out of poor
trading conditions.
ü The Wyckoff / VSA SMART VSA Center Pro trading system can be
completely customized to your personal trading style, so is suitable for
165
scalp traders, swing traders and long term investment managers. The reason
for this, is it only works in the timeframes you set it in.
ü When an alert is triggered that has trend confirmation backing it up,

the software delivers an audible alert for that instrument.
ü The Wyckoff / VSA SMART VSA Center Pro trading system will
save you considerable time as it scans and locates the trades / investments
for you to take trades and invest as the markets unfold in real time or longer
term investment positions.
ü The Wyckoff / VSA SMART VSA Center Pro trading system

simplifies the trading process to make successful trading easier, by finding
key places where "Smart Money" are positioning their moves so you can
trade in harmony with them.
ü The Wyckoff / VSA SMART VSA Center Pro trading system works
intuitively in the background so you don't have to spend hours looking at
charts. The system does this automatically for you.
ü The Wyckoff / VSA SMART VSA Center Pro trading system results
in more trading candidates that can identify the key Wyckoff VSA
Principles that trigger trades based on hypodermic volume (which Wyckoff
explained was very important) followed by very low volume at the same
price level in the future. This is called a VSA Sequential trade setup, and is
used with the SMART VSA Center Pro Scanner to identify the best
Wyckoff trades that are setting up in the timeframes you're monitoring.
S: Scans multiple timeframes in multiple markets.

M: Monitors the alignment of the different trending and volume tools.
A: Alignment – Scan for timeframe and trend alignment.
R: Retracement levels identify entry points.
T: Trades triggered with scanned VSA Signals.
If you would like to know more or discuss your options with the VSA Smart
Center Pro you get in contact with me: danny@tradeguider.com. You can
also find out more information and watch a live trading webinar performed
166
by Gavin Holmes using the VSA Smart Center Pro to take live trades in the
market. Click on the following link
https://www.tradeguider.com/smart_package.asp to find out more.
167

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Supercharge Your Trading &

Investment Account Using Wyckoff /

1 How the Markets Really Work 14

To my amazing wife, Georgette and my three children Nicholas, Jacob

Foreword by Gavin Holmes, Author, “Trading in the Shadow of the Smart

Do you make money if the stock price goes up?

What if this was a long-term investment such as in your retirement account?

Figure 2: Stock chart of BHP

HOW MARKETS REALLY WORK

What Affects the Markets?

HOW, WHEN AND WHY MARKETS GO UP AND

So, who trades the markets?

NESTO: "Now according to someone else close to Citigroup's own probe of

BARTIROMO: "That is ridiculous, I mean this really sounds like market

According to Nesto, these are frequent occurrences, at least at the NASDAQ

Fundamental analysis is a way of looking at the market through economic,

Technical analysis tools try to predict price movement, by analyzing in

That would be a more successful approach if the market behaved

Fundamental analysis relies on research, whether it's researching an economy

Volume Spread Analysis lifts the fog, it identifies, when interpreted

WHAT ARE OPTIONS

The Option Basics

Call Option Right to Buy Obligation to Sell

Put Option Right to Sell Obligation to Buy

Strike Price or Exercise Price

If Trader A purchases 100 shares, (1 contract) of AAPL call option at

Likewise, with put options, if Trader A purchases 100 shares (1 contract) of

Option Market Price Intrinsic Value Time Value

105.00 Call 5.65 5.00 0.65

105.00 Put 0.60 0.00 0.60

110.00 Call 2.45 0.00 2.45

110.00 Put 2.40 0.00 2.40

115.00 Call 0.85 0.00 0.85

115.00 Put 5.75 5.00 0.75

Table 2: Breakdown of intrinsic value with AAPL trading at $110.00

Implied volatility is the major component of the premium making up the

In-The-Money (ITM) Options

Out-of-the-Money (OTM) Options

At-the-Money (ATM) or Near-the-Money (NTM) Options

In my experience, it's better to be an option seller of a decaying asset, rather

1. You have the opportunity for monthly cash-flow with higher

How to Read an Option Table

To reduce confusion, the exchanges typically determine strike prices based

Bid and Ask

THE KEY TO USING OPTIONS TO GENERATE A

The mechanics of the strategy

Selling Call Options on Disney (DIS)

Looking at the $109.00 strike price we can potentially receive an income of

Purchasing Shares at Wholesale

Our wholesale price = ($108.32 - $1.86) = $106.46

How About the 3-9% Return?

Selling Call Options on Southwestern Energy (SWN)

Figure 8: SWN Call Options December 2016. Courtesy OptionsXpress: http://www.optionsxpress.com

What if we Take the Capital Gain into Account?

Our DIS shares are exercised at $16.00

Capital Gain: $0.68 ($109.00 - $108.32) x 100 = $68.00

Southwestern Energy (SWN)

Our SWN shares are exercised at $10.00

Capital Gain: $0.25 ($10.00 - $9.75) x 100 = $25.00

Figure 9: USB Call Options February 2017. Courtesy OptionsXpress: http://www.optionsxpress.com

U.S. Bancorp (USB)

Our USB shares are exercised at $53.00

Capital Gain: $0.15 ($53.00 - $52.85) x 100 = $15.00