37 QUICKFIRE LESSONS IN TRADING OPTIONS

10 years of trading experience compacted into easy to digest lessons

By Gavin McMaster


37 QUICKFIRE LESSONS IN TRADING OPTIONS
By Gavin McMaster
Copyright 2014 IQ Financial Services, LLC. All Rights Reserved
The information provided in this book is for general informational and educational purposes only.
None of the information provided in this webinar is to be considered financial advice. All stocks and
options and trading strategies discussed are for educational purposes only and do not constitute a
recommendation to buy, sell, or hold. Options trading, and particularly options selling, involves a
high degree of risk. You should consult your financial advisor before making any financial decisions.
The material in this guide may include information, products, or services by third parties. Third party
materials are comprised of the products and opinions expressed by their owners. As such, I do not
assume responsibility or liability for any third party material or opinions.
No part of this publication shall be reproduced, transmitted, or sold in whole, or in part in any form,
without the prior written consent of the author. All trademarks and registered trademarks appearing in
this guide are the property of their respective owners.
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Dedication

This ebook is dedicated to the readers of Options Trading IQ. Thank you for continuing to
motivate me to provide high quality resources.

Your Free Gift

As a way of saying thanks for your purchase, Im offering a free report thats exclusive to my readers.
The strategy were about to discuss relies heavily on understanding how volatility affects option
prices and combination trades. Thats why I wrote: Volatility Trading Made Easy Effective
Strategies For Surviving Severe Market Swings.
This lengthy PDF (over 7,500 words) contains some of the most crucial information Ive learned in
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Preface

The concept for this book came after a lively coaching session where I was literally peppered with
questions for over an hour. When reflecting on the session afterwards, it dawned on me that most
students ask the same or similar questions. They like to pick my brain and most are looking for
detailed answers on certain strategies or topics, but it is the little tips and tricks that often provide the
most aha moments.
These little nuggets take only 2 minutes to explain but can have a significant impact on your trading
results. Ive put together 37 of these nuggets that are innate to me after 10 years of trading but may not
have crossed your mind.
This book should only take an hour or two to read, but I think you will find it well worth the time.
I hope you enjoy the book, and please remember to leave a review.
Contact me anytime at info@optionstradingiq.com.
Heres to your success.
Gavin McMaster
Table of Contents

Preface
Table of Contents
1. Learn Greek
2. Pay Attention To Greek Ratios
3. Know Your Earnings Dates
4. Don't Over-Adjust
5. Slippage Adds Up
6. High Vol Stocks Are High Vol For A Reason
7. Use The Right Broker
8. Never Use Market Orders
9. Check Your Order Before Hitting Transmit
10. Use Day Orders Rather Than GTC Order
11. Understand The Limitations Of Stop Limit Orders
12. Know When Your Options Expire And How Settlement Works
13. Avoid Illiquid Options
14. VXX Is Not For Buy And Hold
15. Be Aware Of Gamma Risk
16. Commissions Add Up
17. Be Aware Of Early Assignment
18. Know Your Volatility Indexes
19. Learn The Major Candlestick Patterns
20. Learn Fibonacci Ratios
21. Use An Economic Calendar
22. Be Consistent
23. Paper Trade For 6 Months
24. Divergence Is A Powerful Indicator
25. Seek Help
26. Have A Plan
27. Stay Level-Headed At All Times
28. Keep A Trading Journal And Trading Log
29. Know Your Exit Plan Before You Enter Any Trade
30. Have A Trading Plan For Every Strategy
31. Always Improve
32. Trading Is Lonely - Find A Buddy
33. Dont Tick Watch
34. The Market Can Move Further And Faster Than You Think
35. Check Your Ego At The Door
36. Volatility Is Your Edge
37. Above All, Enjoy What You Do!
Final Words From Gav
Review Request
More Kindle eBooks From Gav
Other Recommended Reading
About The Author

1. Learn Greek

An understanding of the Greeks is essential for successful option trading. The five main Greeks are
delta, vega, theta, gamma, and rho.
Delta is the amount an option price is expected to move based on a $1 change in the underlying stock.
Calls have positive delta, meaning they will increase in value if the stock rises. Puts have negative
delta and will decrease in value if the stock rises. Calls will have a delta between 0 and 100, and
puts will have a delta between 0 and -100. Deep out-of-the-money options have a delta near zero, at-
the-money options have a delta around +/-50, and deep in-the-money options have a delta near 100 or
-100.
Vega is the amount that call and put prices will change, in theory, for a corresponding one-point
change in implied volatility.
As implied volatility increases, the value of options will increase. This is good for option buyers and
bad for option sellers. An increase in implied volatility suggests an increased range of potential
movement for the stock. If your vega exposure is +200, your position will increase in value by
approximately $200 for each 1% rise in implied volatility.
Theta is the amount the price of calls and puts will decrease for a one-day change in the time to
expiration.
Theta is also referred to as time decay. Options are a decaying asset, and each day that passes will
see an options price decrease (all other things being equal). Option sellers try to take advantage of
this time decay, whereas time decay works against option buyers.
The rate of time decay speeds up as an option approaches expiry. For this reason, selling weekly
options has become a popular strategy. Just be aware of the risks!
Gamma is the rate that delta will change based on a $1 change in the stock price. So if delta is the
speed at which option prices change, you can think of gamma as the acceleration.
Gamma is sometimes difficult for beginner traders to understand, but in short if youre an option
buyer, you are long gamma, and you want the stock to make a big move. If youre an option seller, you
are short gamma, and you want the stock to stay steady.
Rho is the amount an option value will change based on a one percentage point change in interest
rates.
Rho is the least important of the five Greeks. You really only need to think about rho if you are
trading longer term options like LEAPS. If interest rates go up, option prices will go up due to the
new higher cost of carry.
2. Pay Attention To Greek Ratios
Now that you know how important the Greeks are in options trading, you should start monitoring them
on every trade.
Each option strategy will have different Greek characteristics. For example, one on my bread and
butter trades is a 30 day iron condor on RUT. Usually I set my short strikes around delta 10.
Without even looking, I know that my delta will be roughly neutral, my vega will be around -400, and
my theta will be around +100.
Once you start trading a strategy consistently like I have with the 30 day RUT condor, you start to
notice that certain relationships hold true.
In my example above, you can see my vega/theta ratio is around 4 to 1. This is around the maximum
ratio I want to take on an iron condor trade, otherwise the vega begins to be the dominant factor in the
trade.
This vega/theta ratio is a pretty good rule of thumb for any income trade.
The other ratio I like to keep a close eye on is the delta/theta ratio. Option income trades are typically
delta neutral; as such, you do not want your delta to become too high as a percentage of theta.
Otherwise, you are taking on too much of a directional exposure.
Once your delta reaches more than 25% of your theta, it's time to think about adjusting the position.
Keep an eye on your Greek ratios, and I guarantee your trading will improve.
3. Know Your Earnings Dates

A quarterly earnings announcement is always a big deal for a stock. Quite often the stock will
experience a huge movement after releasing earnings. It is very difficult to predict the direction and
magnitude of the move that a stock will experience. You might get lucky occasionally, but over the
long haul, it is very tough (unless you have inside information of course).
Some option traders make their living around trading earnings results. Personally, I dont like the
volatility and risks associated with it.
In any case, no matter what type of option strategy you are trading, you should be aware of the
earnings date of your stock. Realize that there is the potential for a huge move and plan accordingly.
Some people may prefer to close the trade out before earnings, others might choose to hedge some of
the risk, while others may decide to gamble on the result.
Here are some interesting stats on AAPL stock following earnings announcements since 2000:
- Maximum Gain % : 12.68
- Maximum Loss % : -13.26
- Average Gain % if Winner : 5.26
- Average Loss % if Loser : -5.19
- Average Gain % / Average Loss % : 1.01
- Average Absolute Change % : 5.23
As you can see, it is really important to know your earnings date to prevent being blindsided by a
huge move.
4. Don't Over-Adjust

A term that gets thrown around a lot in option trading circles is Adjustments. When will you adjust?
How will you adjust? What are your adjustment rules?
While its important to have a plan and know in advance how to adjust a trade, it is equally important
not to over-adjust. Commissions add up, which is one reason why over-adjusting is a bad idea.
The other reason is that if you adjust too often, you are likely to be subjected to the dreaded whipsaw.
Lets say you have a delta neutral iron condor, and the market starts dropping. Your delta is getting
out of line, so you adjust and bring it back to delta neutral. Now, as soon as youve adjusted, the
market turns right back around and starts rallying again. By adjusting and getting back to delta neutral,
you have effectively locked in a loss, and now the market is moving back against you the other way.
Its important not to let a position get out of control, and you need to adhere to solid risk management
principles, but sometimes you need the market to move against your position before it will start
coming back your way.
When adjusting, dont completely cut your exposure. Reducing it by 25-50% can be a good way to cut
your risk while still maintaining exposure in case the market comes back your way.
5. Slippage Adds Up

Following on from the previous topic is the concept of slippage. Whenever you enter an option trade,
there is a bid/ask spread that you need to be aware of. For some stocks this is very high, for others it
is low.
When trading SPY for example, there is a very low spread between the bid price (the price at which
market makers are willing to buy) and the ask price (the price at which market makers are willing to
sell) as it is the most liquid instrument in the market.
Spreads on SPY are typically only $0.01, so you are not giving up much to get into a trade on SPY.
SPX, on the other hand, has spreads that can run as high as $1.00 to $1.50. Keep in mind that a $0.01
spread on SPY is equivalent to $0.10 on SPX.
Chances are you are not going to get filled at the exact mid-point. This is known as slippage and is a
cost that can really start to add up, particularly if you are adjusting too often.
Every time you enter, exit, or adjust a position, you will suffer from slippage to some degree. Its
important to minimize that slippage as much as possible. If you are trading complex option spreads,
you may have multiple legs and will be suffering slippage on each one every time you trade.
Take an iron condor trader who is trading 40 lot spreads. E.g.
Date: July 31st 2013,
Current Price: $1052
Trade Details: Iron Condor
Buy 40 RUT Aug 15th $980 puts @ $1.45
Sell 40 RUT Aug 15th $1000 puts @ $2.45
Sell 40 RUT Aug 15th $1090 calls @ $1.25
Buy 40 RUT Aug 15th $1110 calls @ $0.35
Premium: $1,900 Net Credit
Lets say this trader enters this as two trades, a bull put spread and a bear call spread. Due to the
bid/ask spread, he suffers $0.10 slippage on each trade. Multiply that by 40 contracts, and the trader
is starting off $800 behind the 8-ball from the word go! Dont forget he will suffer slippage any time
he adjusts or when he exits, and you can see how slippage can quickly add up!
In order to reduce slippage, trade instruments with tight bid/ask spreads and dont force trades. Put in
your order around the mid-point, and then wait for 15 minutes or so to see if it gets filled. Rushing
trades is a surefire way to suffer from slippage.
6. High Vol Stocks Are High Vol For A Reason

Novice option traders can sometimes succumb to getting sucked into trading high volatility stocks.
After all, if a stock like TSLA is trading with implied volatility of 80%, you can place an iron condor
on the stock and place your short strikes a significant distance from the current price. This may look
attractive at first, but you should be aware that high volatility stocks are high volatility for a reason.
Stocks like TSLA and TWTR can have massive daily moves, and its not uncommon for them to move
4-5% in a day. That sort of move can wreak havoc on a delta neutral income trade.
By all means, trade these stocks as they can provide some fantastic opportunities, just be aware that
your daily P&L might also fluctuate wildly.
If you are new to option trading, then the safer choice is to stick to indexes like SPX, RUT, and NDX
or slightly less volatile stocks. Trust me, youll sleep better at night.
To learn more about trading volatility, you can check out my ebook Bullsh*t Free Guide to Option
Volatility.
7. Use The Right Broker

You cant expect to succeed at option trading if you dont use the right broker. As option traders, we
need to have an option-friendly broker. This is a broker who either specializes in options or
considers option traders a very important customer base.
By using an option-friendly broker you will get:
- Better commissions
- Better margin requirements
- Better prices on your orders
- Better software/platforms to trade on
- And better education
The only two brokers I recommend are Thinkorswim and Interactive Brokers. I definitely advise
against using E-Trade.
There are a lot of brokers out there these days, so there is no excuse for not having a good options
broker. Getting good fill prices and good commission rates are really important factors for your
success.
Here are some other important considerations when choosing a broker:
-You should be paying close to $1 per contract; anything more than that and you are getting
ripped off.
-Can you trade from your smartphone?
-Does the broker offer seminars or classes on how to use their software and how to trade
various option strategies?
With huge technological advances in recent years, there really is no excuse for using a substandard
broker.
8. Never Use Market Orders

Never, ever, use a market order. Its like taking money from your wallet and just handing it over to the
market makers. There really isnt any easier money for them. The only time I would ever consider
using a market order is if I was trading SPY where the bid/ask spread is $0.01.
If youre trading popular vehicles such as RUT, SPX, AAPL, and GOOG the bid/ask spread can be as
high as $1.50. Always use a limit order somewhere near the mid-point of the spread and see if the
market comes to you. If not, slowly increase your order by $0.05 at a time until you are filled.
Sometimes it pays to place your limit order just below the mid-point and leave it there for five to ten
minutes. With regular market gyrations, you will usually get filled.
When markets are fast moving, you occasionally need to get out of a bad position quickly. I would
still never use a market order. Lets say there is a spread of $4.00 - $5.00. You could enter a sell
order at $4.20 and likely be filled instantly. It may be $0.30 below the mid-point, but you are still
$0.20 per contract better off than if you used a market order.
9. Check Your Order Before Hitting Transmit
It may seem obvious, but I bet most traders have entered a sell order when they meant to do a buy
order. Ill admit that I have done it a couple of times. The first time, I realized pretty quickly and was
able to reverse the position with only minimal impact. The second time, it actually worked in my
favor to the tune of about $400! But it could have easily been the other way round.
However, since making those errors, I am now extra careful and double check everything before I hit
submit. When I am trading a large number of contracts, I also like to put in a test order of one or two
contracts to see where the fill prices are and to make sure everything goes as expected.
Especially when markets are moving fast, make sure you double check your orders before hitting
submit.
10. Use Day Orders Rather Than GTC Order
Occasionally, you might look at an option trade and think, If only that were trading $0.50 lower, I
would get in. You then set up a good til cancelled (GTC) order and leave it, hoping that over the
next few days your order might get filled.
A few days pass and you forget about your order that is still live in the market. Next thing you know,
your company reports a terrible earnings number, and the stock tanks.
All of a sudden, that put option you wanted to sell for $1.50 doesnt look so attractive. You check
your account and see that you were filled at $1.50 and the put is now trading at $4.50, leaving you
with a whopping great loss.
Its always safer to use day orders; you can always input the same order again the next day.
11. Understand The Limitations Of Stop Limit Orders

Stop loss orders are a great idea. They work quite well for stocks when there is a tight bid/ask
spread. However, it gets a little trickier with options.
Using a standard stop loss order, you can get filled at well off your trigger price. This is where a
stop-limit order comes in.
The idea is that your order goes live once a certain condition is met, but you determine a limit price
that you are willing to close it for. Your stop order can now only be filled at the trigger price or
better. Fantastic, right? No more slippage.
The issue here is that if the market is plunging, there may not be enough demand at your stop limit
price. The market then continues to fall with you still in your position. Your stop-limit order is still
live, but its unlikely to get filled now that the market has moved beyond your limit price.
This is not to say you cannot use stop-limit orders, but you should be aware that in situations where
the market makes a sudden big move, you may not be filled on your protective stop if you specified
stop-limit rather than the plain vanilla stop order.
12. Know When Your Options Expire And How Settlement Works

The last day for trading American style options is Friday at 4:15pm. These options then settle on
Saturday, and any stocks that have been assigned to you will be placed into your account.
The last day for trading European style options is Thursday at 4:15pm. These options then settle on
Friday morning and are cash settled.
Even though European options settle on Friday morning, the settlement price is not based on the
opening price of the index. The calculation for the index is based on the opening price of each
individual component of the index. Most stocks open at the bell, but there will always be laggards
based on a number of reasons. For example, if specific news on a security is pending, the stock
prices opening will be delayed.
Therefore, there can be a large variance in the settlement value and the closing index value on
Thursday.
The table below illustrates this point:
Click Here For a Larger Image
You can see that if you were short the 3060 July calls in NDX, you might have been forgiven for
thinking these options were fine and about to expire worthless. However, as you can see, the index
settlement value was 3077.82, so you would have been in for a very nasty surprise if you were not
aware of how and when the settlement value is calculated.
13. Avoid Illiquid Options
Everyone has his or her favorite stocks, and as you gain knowledge of option trading, you will be
inclined to trade options on your favorites. However, before you jump in feet first, its important to
understand how liquidity, or lack thereof, can impact your trading results.
The stocks of household name companies will generally have pretty good liquidity which results in a
tight bid/ask spread. However, that may not be the case for the options on those stocks. If a stock has
illiquid options, there are not as many buyers and sellers active in those options. That means it can be
harder to get filled on your orders, and you are likely to suffer more slippage than if you traded liquid
options.
At-the-money options usually have the most liquidity as do options that are closer to expiry. Options
with one month to expiry will have far greater liquidity than options with six or twelve months to
expiry.
Before opening a new option trade, take a look at the daily volume of the strikes you are trading and
also the open interest. You want to see open interest at least 50 times the number of contracts you are
trading. So if you are trading 10 contracts, the minimum open interest should be 500. If its not, then
look elsewhere.
14. VXX Is Not For Buy And Hold

If youve read my book on option volatility, youll be well aware of the historical performance of
some of the volatility Exchange Traded Notes, including VXX.
VXX is not designed as a buy and hold investment; its designed to be used as a very short-term
volatility hedge. Anyone holding this ETN for more than a day or two needs to have their head
examined.
Just take a look at the split adjusted performance of VXX since inception. Now thats a product that I
wouldnt mind selling short!!
Click Here For a Larger Image
VXX has been split a number of times; it didnt actually start trading at 6693. However, any way you
look at it the performance has been absolutely dire for anyone who has held this for the long term.
From 6693, VXX has now dropped down to 42.70 for a fabulous return of -99.36%.
The reason VXX has performed so badly is due to the cost of rolling the futures to maintain a constant
maturity date. To understand you need to understand a little about contango and backwardation. If
youre interested in the details, you can read more here.
15. Be Aware Of Gamma Risk

Gamma is the ugly step child of option Greeks. You know, the one that gets left in the corner and no
one pays any attention to it? The problem is that step child is going to cause you some real headaches
unless you give it the attention it deserves and take the time to understand it.
Gamma represents the amount that an options delta will change given a 1 point move in the
underlying stock. Trades with a high gamma will see rapid changes to their delta. Gamma is higher
for shorter dated options which is why the last week of an options life is known as gamma week.
Gamma is the reason so many novices get crushed when trading weekly options. They start out with a
perfectly delta neutral iron condor, but then as soon as the price moves, their delta gets way out of
line.
Trades like butterflies and calendars that have a steep point in the middle of their profit graph will
have high gamma.
If you have negative gamma, you want the stock to not move around much, and if you have positive
gamma you want large movements in the price of the stock.
Gamma scalping is a popular strategy with market makers, but it requires a lot of capital and a very
good understanding of the options markets.
You can read more about gamma as well as follow along with my gamma scalping case study here.
16. Commissions Add Up
How much you pay in commissions and trading fees is a major factor that impacts your bottom line as
a trader. If youre not paying attention, these costs can quickly add up, especially if you are trading
commission intensive strategies such as iron condors.
Iron condors are one of my favorite strategies and the fundamental building block for a lot of
professional traders. However, each time you enter a trade, you are trading 4 separate option chains,
and most brokers will charge a trading fee for each. If you are trading a large number of contracts,
those fees can be significant. Remember that you will incur fees on entry, exit, and any adjustments.
Assuming you are trading a 10 lot iron condor, thats 40 contracts on entry and exit, plus adjustments.
Every broker will have a different commission structure. You want to make sure you are getting a
good deal. Interactive Brokers and Thinkorswim are the two best brokers, and they provide great
value for the money. Optionshouse is a very cheap broker, but they dont offer the same service as the
other two and their platform is not as good.
If you are paying much more than $1 per contract, you are getting ripped off.
17. Be Aware Of Early Assignment
If youve never had an short option exercised early, I can tell you it is not a fun experience. It has
happened to me only once, thankfully it wasnt disastrous, but I had an email from a novice trader
once who let a call credit spread get too close to the money. He ended up getting assigned on the short
calls and lost around 90% of his account! Consider yourself warned!
My experience was with a butterfly trade on SPY. I should have been aware that the ETF was going
ex-dividend shortly, but I ended up being assigned on the short calls which left me short 200 shares
and long one in-the-money and one out-of-the-money option. Thankfully I only lost a few hundred
dollars on that one, but it was still a painful lesson.
Just remember that ANY time you are short an American style option, you are at risk of being
exercised. It is most likely to happen if your option is in-the-money. After all, why would a buyer
exercise an option to buy a stock for more than he or she could buy it directly in the market?
When an option holds time premium, it generally makes sense for the option owner to sell the option
in the marketplace rather than exercise the option. The exception is when a stock is about to go ex-
dividend. If the dividend is larger than the time premium left in the call, it may make sense for a call
option owner to exercise the option, become the owner of the stock at record date, and receive the
dividend. Make sure you keep an eye on your dividend dates when trading American style options,
particularly as you get close to expiry when time premium is diminishing.
18. Know Your Volatility Indexes

When people talk about market volatility, they are generally referring to the broader market, and the
most common measure is VIX. This is referred to as the Fear Index due to its characteristic of gauging
future price volatility (high volatility often signals financial crisis).
However, volatility of the instrument you are trading could be slightly different. For example,
Nasdaq, Russell 2000, and Dow Jones volatility will all be different from the S&P 500 (the index on
which VIX is based).
Below is a list of some of the major volatility indexes provided by the CBOE. Note that they now
have volatility indexes on some major stocks too!
VIX S&P 500 Volatility Index
VXST Short-term Volatility Index
VXV 3-Month Volatility Index
VXAZN Equity VIX on Amazon
VXAPL Equity VIX on Apple
VXGS Equity VIX on Goldman Sachs
VXGOG Equity VIX on Google
VXIBM Equity VIX on IBM
EVZ Euro Currency Volatility Index
GVZ Gold ETF Volatility Index
OVX Crude Oil ETF Volatility Index
VXEEM Emerging Markets ETF Volatility Index
VXSLV Silver ETF Volatility Index
VXFXI China ETF Volatility Index
VXGDX Gold Miners ETF Volatility Index
VXEWZ Brazil ETF Volatility Index
VXXLE Energy Sector Volatility Index
VXD Dow Jones Volatility Index
RVX Russell 200 Volatility Index
VXN Nasdaq 100 Volatility Index
19. Learn The Major Candlestick Patterns

Whether you put any trust in technical analysis or not, it can be worthwhile to at least be aware of
some of the major candlestick patterns. Try not to become overwhelmed by the sheer number of
patterns. With complicated names such as Harami, Doji, and Shaven Bottom (really??), its easy to
become exhausted trying to master this subject.
There are many candlestick patterns, but only a few are actually worth knowing. Here are some of the
most important candlestick patterns that will help you with your options trading.
Its important to note that you really need to use these candlestick patterns in conjunction with other
forms of technical analysis. If you notice a bullish pattern, is the chart oversold on the daily
timeframe? Where are the moving averages? When you spot a candlestick pattern, and 1-2 other forms
of technical analysis agree with your hypothesis, you can give more weight to the pattern.
These are 7 patterns that I have found to be the most useful and reliable:
ENGULFING PATTERNS
This pattern consists of two candles. The first day is a narrow range candle that closes down for the
day. The second day is a wide range candle that "engulfs" the body of the first candle and closes near
the top of the range. The buyers have overwhelmed the sellers. Buyers are ready to take control of
this stock! The opposite is true for a bearish engulfing candle.
HAMMER PATTERNS
Bullish hammers are reversal patterns. If you see a bullish hammer in a downtrend, it is a sign that
buyers have taken the momentum away from the sellers.
DOJI
Dojis are commonly referred to candlestick patterns. The stock opens up and goes nowhere
throughout the day and closes right at or near the opening price. Quite simply, it represents indecision
and causes traders to question the current trend. This can often trigger reversals in the opposite
direction.
You can download a useful resource that contains over 40 candlestick patterns from this link.
20. Learn Fibonacci Ratios

The Fibonacci sequence is a series of numbers first identified by Leonardo Fibonacci in the thirteenth
century. The actual numbers are not as important as the relationship, or ratios, between the numbers in
the series.
The Fibonacci numbers are as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144. Etc.
Those that are mathematically minded might have noticed that the sequence of numbers is simply the
sum of the preceding two numbers.
A distinctive feature of the Fibonacci sequence is that each number is approximately 1.618 times
more than the preceding number. This phenomenon continues no matter where on the sequence the
number falls. This fact is one of the building blocks of the common ratios used in Fibonacci trading.
Fibonacci ratios occur many times in nature. This video explains it better than I can in case youre
interested.
In trading, Fibonacci ratios are used to identify potential reversal levels. The most popular Fibonacci
Retracements are 61.8% and 38.2%, but others can be used as well. When used in conjunction with
other technical indicators, they can provide powerful trade setups.
Whether you believe the mathematics behind it or not, the fact is that a lot of traders watch these
ratios, so there is potential for the Fibonacci retracement levels to provide support on a pullback or
resistance on a bounce.
Below you can see a one hour chart of AAPL. Notice how the stock briefly found support at each of
the Fibonacci levels. The Golden Ratio of 61.8% provided a good opportunity for a short-term
tradable bounce.
Image Credit: http://niftychartsandpatterns.blogspot.in/
Click Here For a Larger Image
21. Use An Economic Calendar
Every weekend I check an economic calendar that shows the important data releases over the next
week. Bloomberg has a great calendar, which is the one I use.
Checking the calendar allows me to plan out my trading for the next week. For example, if I see the
Fed announcement is set for Wednesday, I might hold off on initiating any new trades until after then.
The market can experience some pretty wild swings straight after Fed announcements.
There are also a lot of key data releases at the start of each month. Jobs data comes out on the first
Friday of each month, and ISM Manufacturing data is released on the first business day of the month.
Other important data releases that can move the market are GDP, weekly jobless claims, and
consumer sentiment. Here is an example of the weekly economic calendar from Bloomberg.
Click Here For a Larger Image
22. Be Consistent
They say consistency is the key to success and that is true of options trading as well. When you figure
out the type of trader you want to be, its important to stick to your game plan.
If you decide you want to trade iron condors, then stick to it. Dont chop and change strategies. Trade
your iron condors every month. Also try to trade a select group of stocks or indexes. After a while
you will start to understand how they behave and how their options behave.
My bread and butter trade is a 10 delta iron condor on RUT. I know it like the back of my hand, and I
know how it performs in almost any market environment. I know exactly how I am going to adjust the
trade given certain circumstances.
This gives me an advantage over traders who have to sit there for an hour while trying to figure out
what they are going to do while their trade moves against them.
How else can you apply consistency to your trading? Here are some examples:
Set aside 30 minutes each week to write in your trading journal. Note down your trades for the week,
how the market behaved, and how that affected your positions AND your emotions.
You can apply consistency to your trading decisions. I.e. Follow your trading plan at all times!
Set aside certain times each day/week to perform certain tasks related to your trading.
Those are just a few ideas, but Im sure you can think of some more.

23. Paper Trade For 6 Months
Lets be honest, paper trading is F-ing boring, but it can also save you from blowing up when you are
just starting out or when you are trying a new strategy.
Personally, I find I learn a lot quicker when I have skin in the game, and of course its much more
exciting. But, if youre looking for excitement, go to Vegas. Youll probably be better off in the long
run. You might drop a few hundred dollars in Vegas, but if you dont know what youre doing with
options, you can easily drop tens of thousands of dollars in a remarkably short amount of time.
Treat your trading like a business; do not flippantly throw money into trades without doing the
appropriate research, analysis, and testing. That means paper trading for at least 3-6 months before
committing live capital.

24. Divergence Is A Powerful Indicator

Divergence is something that I frequently look for in my trading. The premise is that when a new high
or low in a security is not confirmed by an indicator (I prefer RSI and slow stochastics), it indicates a
potential trend reversal. For example, a bullish divergence occurs when the price makes a LOWER
low, but the indicator makes a HIGHER low. This shows that the downside momentum is slowing,
even though prices are continuing to make new lows, and a trend reversal may be imminent. Bearish
divergences occur when prices make a HIGHER high, but the indicator makes a LOWER high.
You can see some examples of divergence in the charts located here or go directly to
www.optionstradingiq.com/divergence2

25. Seek Help

One of the biggest mistakes I made easrly on was trying to go it alone. I thought I was smart enough to
figure it out on my own. It took me probably 2-3 years longer than it should have to get to where I am
now, and that is really annoying when you think about all the extra time spent and opportunities
missed.
When I first started trading there werent many people online who were teaching this stuff. I learnt the
old fashioned way, by reading books! Sure you can learn a lot from books (and I hope you have from
mine!) but with advances in technology, getting a mentor has never been easier. You now have access
to some brilliant trading minds and can connect with them instantly via Twitter, Facebook, or their
websites.
There really is no reason to go it alone. Even if you decide not to pay for mentorship, there are lots of
free trading groups and people you can interact with online. Twitter and Stock Twits are two of the
best places to start.
26. Have A Plan
My mantra is Have a plan, trade your plan, and review your plan. Many traders think they dont
need a formal trading plan. Even worse, some just have one in their heads rather than writing it down.
Having a written trading plan takes the emotion out of the decision making process and allows you to
act rationally, even when the market is behaving irrationally. A good trading plan will contain entry,
exit, and adjustment rules as well as risk management guidelines. The trading plan can also list the
types of stocks you will be trading.
A trading plan is a constantly evolving thing as you continue to learn and test new ideas. You should
review your trading plan at least quarterly, and look at what worked and what didnt and then adjust it
accordingly.
The markets are also constantly evolving, so what worked in the past may not work in the future.
If you would like to see a sample trading plan, you can download one here.
27. Stay Level-Headed At All Times
The stock market is an emotional roller coaster and its important to stay level-headed. This is where
a good trading plan comes in, as it takes the emotion out of the decision making process. Make good
decisions and you are already ahead of the game.
Staying level-headed is a function of three things:
Having a good trading plan
Having good risk management
Being in control of your emotions
The last point is easier said than done, but if you can master the first two, the third one becomes a
whole lot easier all of a sudden.
28. Keep A Trading Journal And Trading Log
If you dont keep good records, how can you know what is working and what isnt? One thing I
recommend to all my coaching students is to start a trading journal and trading log. This way, after a
few months you will have a database of information that you can refer back to.
For example, any time I start a new trade, I create a log for that trade. I take screenshots of the trade
confirmation, the option Greeks, and the payoff diagram. Sometimes I will also take a screenshot of
the stock chart and the implied volatility levels. I also add a short paragraph about why Im entering
the trade, what my profit target and stop loss is, when I will adjust the trade, and any other relevant
risk parameters.
This helps me stick to my rules by formalizing what I will do in advance. It takes the decision making
out of the process.
Every 3 months, I go back and review my trades to see what worked and what didnt. Youll be
surprised at the little nuggets you will pick up, and your trading will improve vastly as a result.
You can view an example of one of my trade logs here or go directly to
http://www.optionstradingiq.com/april-2014-trades-rut-trapdoor/
If you would like to get a copy of some of the tools and spreadsheets that I use in my trading, please
visit http://www.optionstradingiq.com/free-tools.
29. Know Your Exit Plan Before You Enter Any Trade
There is a saying in real estate investing that you make your money on the way in, not the way out. I
think the opposite is true in the stock market and options trading in particular. Its not difficult to find
a good entry point for a trade. What is hard, however, is getting your exit correct. Exits are much
harder and receive much less attention than entries.
For this reason, traders would be wise to pay more attention to their exit strategies and find ways to
improve their efficiency and success in this area. The easiest way to improve your exits is to have
them planned out in advance. Taking the emotion out of the decision making process is always a good
idea.
Every time you open a new trade, have a plan for when, how, and why you are going to exit that
trade. That includes having a plan for if the trade goes your way or if it goes against you.
30. Have A Trading Plan For Every Strategy

Hopefully you are getting a familiar theme here about having a plan. Trading without a plan is like
going exploring without a map.
There are literally hundreds of option strategies available to traders. I dont recommend trying to
trade all of them or chopping and changing between strategies. What you need is 4-5 strategies that
you can use consistently and know intimately.
I recommend having an overall trading plan that determines things like strategy allocation and risk
management rules and then a more detailed trading plan for each individual strategy that you will be
using.
Include things such as:
Strategy Overview
Objectives
Instruments you will trade
Capital Allocation
Trading Style
Entry Guidelines
Adjustment Guidelines
Exit Guidelines
If you can put this together for your 4-5 key option strategies you will be doing better than most of the
retail traders out there. Over time you can start to add new strategies one at a time.
You can download my sample iron condor trading plan from here.
31. Always Improve
Just like professional athletes continue to push themselves and strive to get to the next level, so should
you as an option trader. Even after a decade of trading options, there are still things I am learning all
the time, and I know there are some things that I could know better.
You should be on the lookout for new strategies and techniques that can help you improve as a trader.
Try to network with other traders and mentors who have more experience than you and learn from
them. Different traders have different perspectives and ideas that you can potentially incorporate into
your trading plans.
Risk management is an area that you can always improve. Any new ideas that will help you avoid big
losses should always be investigated and tested.
32. Trading Is Lonely - Find A Buddy
Trading can be a lonely business, and sitting in front of a computer screen all day with no one to talk
to is not good for your mental health. Try to find some friends who are also interested in the stock
market and trading so that you can share strategies and bounce ideas off each other. It is always good
to have an objective ear to listen to your trading ideas when things are moving against you.
If you dont have any local friends who trade options, there are plenty of ways to connect with people
online these days. I have some great trading buddies whom I speak to on Twitter and others that I
have regular Skype calls with. Its a great way to leverage each others knowledge and trading ideas
and keep you on track.
33. Dont Tick Watch

Tick watching is a lot like addictive trading. Some people feel they always need to be doing
something, always being active, but thats not the case. There is no need to watch the market like a
hawk every day; the market will do whatever it wants and you staring at the screen will not change
anything. Get away from the screens every now and then, go for a walk or grab a bite to eat. The
market will still be there when you get back.
The other thing you can do is to set predetermined adjustment points and create alerts if your stock
hits those points. With mobile technology, there really isnt any need to be in front of a computer all
day. It will just lead to frustration and stress in the long run.

34. The Market Can Move Further And Faster Than You Think

Its amazing how market participants have short memories. Or maybe it is that the new generation of
investors and traders who never lived through the Great Depression or the Crash of 1987 doesnt
realize what markets are capable of. The fact of the matter is that markets can move further and faster
than you ever thought possible.
People said that the Crash of 1987 would never happen again, but then we had the flash crash where
the Dow dropped about 9% in a matter of minutes.
Market panics tend to happen every few years; certainly more often than people like to admit.
We haven't had a decent market panic for a few years now. The last one was a mini panic in 2012
which saw RUT drop 22% in 18 trading days.
One thing that I can guarantee is that this type of thing will happen again. Be prepared.
35. Check Your Ego At The Door
Ego is your worst enemy when it comes to trading as the markets have a funny way of humbling those
that get ahead of themselves. You need to realize that your next big loss is just around the corner. I
had a really good run from December 2012 to March 2013 where I made 32%. Shortly after, I had
one of my worst losses and was down 8% for the month of July 2013. I got too far ahead of myself
and let my ego dictate my trading.
Stocks had been on a nice run up, and I was shorting the Nasdaq based on the overbought technical
readings. My exposure was way too large and the next morning stocks gapped up 2% on some
positive economic news. That was a very painful experience, let me tell you.
Just remember that the market can move further and faster than you think is possible, so make sure you
are not on the wrong side of that move when it comes. Also, just because the market is overbought,
doesnt mean it cant get more overbought. Just check out this chart of GOOG for example.
36. Volatility Is Your Edge
Understanding volatility is the most crucial aspect of option trading. It is also the easiest way to gain
an edge over other market participants. Very few retail traders have a solid grasp of how to trade
volatility, so you can give yourself a leg up by gaining an intimate knowledge of this beast.
Volatility is an assets class and can be traded just like any other asset. There is a plethora of ways to
do this, some of which are outlined in my Bullsh*t Free Guide to Option Volatility, but to start with it
is best to keep it as simple as possible.
In terms of trading volatility, its the same as any other asset; buy low, sell high. When implied
volatility is low compared to historical levels, you want to buy volatility. When implied volatility is
high, you want to sell volatility. There is a lot more to it than that, but if you keep that basic premise
in mind, you will be a step ahead of the competition.
37. Above All, Enjoy What You Do!
Trading options can be a lonely business; you are stuck behind a computer screen with little to no
human interaction for the majority of the day. You really have to enjoy it to be able to last in the long
run. You will no doubt have tough times whether that is due to trading losses, dealing with the
isolation or dealing with the stress that comes from trading the markets. Like most things in life, if you
want to do this for a living, you need to have a passion for it in order to ride out the bumps in the
road.
A few tips that might help you deal with some of those tough times:
Focus on the long term benefits When you are stuck in a rut, try to focus on the long term
outcomes that you will achieve by putting in the hard yards now. Whatever difficulties you
are going through will pass, but the benefits in terms of experience and knowledge that you
are picking up will stay with you for a lifetime.
Remind yourself why you are doing this Think about why you got started in this caper
and revisit your goals.
Get away from your desk Some fresh air and time away from the flashing green and red
lights will do you a world of good.
Teach someone Teaching someone about options will make you feel confident in the
knowledge you have developed and rekindle your passion.
While these are some strategies for dealing with tough times, at the end of the day, you wont survive
long in this business if you dont enjoy it. Personally, I absolutely love trading options. Even when I
have losing trades, I still enjoy what I do. I love the challenge of trying to outsmart other market
participants. The money is just the way we keep score.
Remember, a wise man once said, Do what you love, and youll never work another day in your
life.
Final Words From Gav
Congratulations! If youve made it this far, youre well on your way to becoming a successful
butterfly spread trader. I put a lot of work into the book, and I REALLY hope it helps you in some
way. Here are a few final thoughts I would like to share with you.
YOU CAN DO THIS
Trading iron condors is not rocket science. You dont have to be some whiz at math or technical
analysis. Just start out by sticking to the basics and taking things slowly. Even the greatest traders had
to start at the beginning.
EVERYONE MAKES MISTAKES
Theres an old proverb (I think its Japanese, but dont quote me) that says, fall down seven times,
stand up eight. You will make mistakes along the way, I guarantee it. Ive made plenty. Ive been
trading for over 10 years and recently I entered a spread order as a Buy to Open rather than Sell to
Open. Before I realized my mistake I was down $600, then I had to pay commissions and slippage
just to get the positions back to what I wanted. All together it cost me nearly $1,000. So if you make a
mistake, dont fret about it. Get back up, brush yourself off, and dont make the same mistake again.
KISS KEEP IT SIMPLE STUPID
Honestly, dont try to overcomplicate or overthink things. Just keep it simple; sometimes the simplest
things are the ones that work the best.
DONT BE AFRAID TO ASK FOR HELP
Its a fabulous time to be alive; never in the history of mankind has communication been so
instantaneous and information so easily accessible. There are loads of traders out there who are
willing to help you. Im more than happy to help, so if you have any questions, please dont hesitate to
drop me a line.

Review Request
I hope after reading this book you have much more knowledge of option trading than you did when
you started.
If you enjoyed this book or if you found it useful, Id be very grateful if you would post a positive
review. Your support really does matter and it really does make a difference. I love hearing from my
readers; I read all of the reviews so I can get your feedback.
If youd like to leave a review, then all you need to do is go to the review section on the books
Amazon page http://amzn.to/1mGoMDr. Youll see a big button that says, Write a customer review
click that and youre good to go!
THANK YOU SO MUCH!
Thanks again, and I wish you nothing less than success!
Gavin McMaster
Link to books Amazon page:
http://amzn.to/1mGoMDr
More Kindle eBooks From Gav

Bullsh*t Free Guide to Iron Condors - Helping you avoid costly mistakes with this popular but
controversial option strategy.
http://amzn.to/13WZVNq
Excerpt From Bullsh*t Free Guide to Iron Condors
How To Handle A Low Volatility Environment
Low volatility environments can be especially risky for iron condor traders. High volatility always
comes after a period of low volatility, its a fact of life, but it can be brutal for iron condor traders.
When implied volatility is low, you might look at a standard iron condor set up and think Wow, this
short strike is only 5% out of the money, which seems way too close for my liking. Or maybe youre
not worried about that and enter the trade anyway. Shortly after, the stock drops 4% and all of a
sudden you have a very large loss and a position that will be very difficult to adjust and finish with a
profit.
Low volatility makes iron condor trades difficult to find and hazardous to trade. The high amount of
vega risk inherent in iron condors means that you are susceptible to sharp market moves, which is
exacerbated in periods of low volatility due to having to place your short strikes much closer to the
stock price.
How then should we handle a low volatility environment? Should we stop trading completely and
wait for volatility to shoot higher? Yes, that is one option, but probably not a very attractive option
for you. Traders dont like sitting on their hands doing nothing, and no trades means no income.
Luckily there is a way to continue to trade iron condors and decrease your vega risk. The solution is
called a mouse ear iron condor.
Mouse ear iron condors are basically a lower risk, lower return version of an iron condor. They may
look complicated to set up, but they are actually fairly easy, albeit a little commission intensive.
Mouse ears reduce your vega risk and also give you the potential to land in the profit zone and
achieve a much larger return.
This is what a mouse ear iron condor looks like:
Here is how the trade is set up:
Date: February 6, 2013
Strategy: Mouse Ear Iron Condor RUT
Current Price: $911
Trade Set Up:
Sell 10 RUT Mar 14th, 960 CALLS, Buy 10 RUT Mar 14th 980 CALLS for $1.00 ($100)
Sell 10 RUT Mar 14th, 840 PUTS, Buy 10 RUT Mar 14th 820 PUTS for $1.15 ($115)
Premium:
$2,150 (2.15 per spread) Net Credit for the iron condor.
Total Capital at Risk:
$17,850


Now add the ears:
Buy 3 RUT Mar 14th, 950 CALLS, Sell 3 RUT Mar 14th 960 CALLS for $1.15 ($115)
Buy 3 RUT Mar 14th, 850 PUTS, Sell 3 RUT Mar 14th 840 PUTS for $0.85 ($85)
Premium:
-$600 (2.00 per spread) Net Debit for the ears.
$1,550 total premium received.
Total Capital at Risk:
$15,450
You can see above that I am basically adding a debit spread just in front of the iron condor strikes
which gives the payoff graph the appearance of having ears at the short strikes. Ive used a ratio of
3 debit spreads for every 10 iron condors, but you can play around with the numbers and see what
works for you. Im only using 10 point spreads for the debit spreads as opposed to 20 point spreads
for the condor which helps keep the costs down but also results in a narrower ear or profit zone.
Again, this is something that you can play around with to see what works.
Even though this strategy has a potential for a higher return if the underlying expires in the profit zone,
you should be aware that it will be fairly unlikely as the profit zone is quite small. The main benefit
of this variation is that you will fare better in the event of a sharp market move during the course of
your trade. You can see this via the different Greeks.
Standard Iron Condor
Below you see the setup for our iron condor. The delta is skewed a little to the downside as I was
slightly bearish at the time. Notice that the vega is -407.
Mouse Ear Iron Condor
Now, lets take a look at our mouse ear iron condor. Delta is still negative although slightly less so,
but vega is now -320 as opposed to -407. Thats a 21% lower vega exposure as opposed to the
standard iron condor.
So you can see that a mouse ear iron condor has a lower exposure to vega while also providing an
opportunity for extra profit if the stock closes within one of the ears at expiration.
<< Get your copy of Bullsh*t Free Guide to Iron Condors >>


Other Recommended Reading
There are a couple of books that I recommend, but it depends on what stage of your development you
are at. For beginners, who still feel they need to learn some of the basics of options trading, check out
the following books:
The Bible of Options Strategies Guy Cohen
How I Made $2,000,000 In The Stock Market Nicolas Darvas
Options Made Easy Guy Cohen
For those who have a good knowledge of options and want to take things to the next level, check out
these books:
Options As A Strategic Investment Lawrence McMillan
Option Volatility and Pricing Sheldon Natenberg
Trade Your Way to Financial Freedom Van Tharp
Definitely check out some of the above books - I guarantee you will not be disappointed.
About The Author

My name is Gavin McMaster, and Im originally from Melbourne, Australia. Currently I live with my
wife, Alex, and 2 children (Zoe and Jake) in Grand Cayman, which is where we have lived for the
past 10 years. Ive worked in the finance industry for over a decade and have been trading options
successfully for the last 10 years.
My interest in the stock market can be traced back to primary school. I cant remember the teacher or
which grade, but she told a fictional story which has always stuck with me. It was a typical stock
market tale of fear and greed, the two most powerful emotions in the financial markets. A stock trader
who bought a stock at $1 watched it climb all the way up past $1000, but he got greedy assuming he
would make more money. Of course, some bad news about the company came out and next thing you
know the stock was back to $1. This was a fictional story, but from that point on I was hooked. I
bought my first shares when I was 13 and have been trading ever since, although more heavily in the
last 10 years.
I started taking an interest in options in 2003 and have bought just about every book you can think of
on options trading. I also went back to school and completed my Masters in Applied Finance and
Investment in August 2009. Still, there is only so much you can learn from a book, and I have learnt so
much more from actually trading options.
My first experience trading options was buying some put options on an Australian retail stock. I had
no idea what I was doing and lost 100% on that trade. One of my next trades was even more
disastrous. I owned a small portfolio of Australian shares and decided to generate some income by
selling index call options. I had no idea at that stage about delta or how to calculate my overall
exposure in order to create an effective hedge. My portfolio was mostly low beta stocks, and I had
sold WAY too many index calls for my exposure. The market rallied, and my broker rang me that
night to tell me I had margin issues. Instead of just selling the positions and admitting defeat, I held on
for another day, and the market continued to rally. All of a sudden my account had a negative value,
and I didnt have enough money in my account to fund closing the positions. In the end, I had to
borrow money from my brother to cover the margin call. A very embarrassing experience, let me tell
you.
Ive come a long way since that time, and when I look back on some of the things I did when I was
starting out, it makes me cringe. Ive worked and studied incredibly hard and have had many more ups
and downs. Ive been mentored by some of the biggest names in the business Dan Sheridan, Tony
Sizemore, and John Locke.
With this ebook, I hope to share my experiences and help you avoid some of the mistakes I made
when I started out.
Table of Contents
Title page
Preface
Table of Contents
1. Learn Greek
2. Pay Attention To Greek Ratios
3. Know Your Earnings Dates
4. Don't Over-Adjust
5. Slippage Adds Up
6. High Vol Stocks Are High Vol For A Reason
7. Use The Right Broker
8. Never Use Market Orders
9. Check Your Order Before Hitting Transmit
10. Use Day Orders Rather Than GTC Order
11. Understand The Limitations Of Stop Limit Orders
12. Know When Your Options Expire And How Settlement Works
13. Avoid Illiquid Options
14. VXX Is Not For Buy And Hold
15. Be Aware Of Gamma Risk
16. Commissions Add Up
17. Be Aware Of Early Assignment
18. Know Your Volatility Indexes
19. Learn The Major Candlestick Patterns
20. Learn Fibonacci Ratios
21. Use An Economic Calendar
22. Be Consistent
23. Paper Trade For 6 Months
24. Divergence Is A Powerful Indicator
25. Seek Help
26. Have A Plan
27. Stay Level-Headed At All Times
28. Keep A Trading Journal And Trading Log
29. Know Your Exit Plan Before You Enter Any Trade
30. Have A Trading Plan For Every Strategy
31. Always Improve
32. Trading Is Lonely - Find A Buddy
33. Dont Tick Watch
34. The Market Can Move Further And Faster Than You Think
35. Check Your Ego At The Door
36. Volatility Is Your Edge
37. Above All, Enjoy What You Do!
Final Words From Gav
Review Request
More Kindle eBooks From Gav
Other Recommended Reading
About The Author