OPTIONS TRADING BUSINESS PLAN

ASG – OPTIONS TRADING BUSINESS PLAN
11-14-03



PURPOSE

To conduct a personal stock market investment business, primarily trading Stock Options that will generate earnings to increase financial independence and grow the estate.

OBJECTIVES

Learn effective stock option trading techniques.
Organize and commence an Options Trading Business.
Achieve an average monthly profit of 20% on the trading account.
Operate the business with a trading account of $100,000, in the near future.

GOALS

Complete paper trading by January 31, 2004.
Commence real trading on or before Feb. 1, 2004, initially with a $ 20,000 account, progressively increasing it to $100,000 from trading profits and added cash, if necessary, as experience and performance warrants – target date is Feb. 1, 2005.
Attain targeted monthly profit starting on Feb. 1, 2004.
Learning essential trading techniques completed, with periodic advanced training to continue.
Develop & implement a Business Plan - substantially completed with implementation 11-24-03, with ongoing upgrades and review annually.


STRATEGIES & PROCEDURES

(It is important for success to adhere to these Strategies & Procedures with discipline)

Analysis

The procedure for analyzing acceptability of a stock and its options is as follows, in descending order. If at any point the criteria is not met, that stock is deleted from further consideration:

OptionHunter (OH) is used to search for Options that meet specific criteria. In Schedule A is a description of the customized settings in OH. The search results are copied and pasted as shown in Schedule B-pg 1, for evaluation using the Analysis Worksheet in Schedule C. In addition, optionable stocks are obtained for consideration from other sources, such as those listed under “Search Sources” in the Resources section of this Plan

The Stocks and Options, sourced as above, are then subjected to the evaluation process described below.



The Stock/Option Analysis Worksheet (Schedule C) is completed during the following evaluation process.

Stock volume must be 500K or more daily for, at least, each of the past 10 days.

Stock is checked on OME Charts for the Short, Mid & Long Term, and must meet Fresh cross, good Angle, Separation & Timing criteria.

Stock is checked on BigCharts, using Technical analysis, incl. Bollinger Bands, 2 MA (5 &10 day), RSI, MacD, Momentum, Slow Stochastics and Volume, requiring multiple (3 or more) confirmations, particularly 5 & 10 day MA cross-over, RSI, MacD and Momentum. See sample in Schedule B-pg 2.

On the selected stocks, in OME Charts the Option chains are reviewed for selection of suitable Long Call/Puts, based on the Option Selection Strategies outlined below, and when appropriate for a Long Straddle or Calendar Spread.


Option Selection Strategies


Options are to be selected on the following basis:

(a) Type of option: Primarily a Long Call or Put, or when appropriate a Long Straddle or Calendar Spread,
(b) Type of trade: Swing (1-4 days), Intermediate (1-4 weeks) and Position (1-4 months,
(c) Open Interest, at least 500, preferred 1,000 +
(d) Delta - .70 to 1.00, preferred – .75 to .85, and .60+ for Position Option,
(e) Intrinsic Value > Time Value,
(f) In-the-money Option, preferred 2 strikes ITM,
(g) Spread – generally, no more than 0.20

An Option must have trading volume on, at least, 90% of the days during the prior 2 weeks. Go to OptionsXpress/Quotes/Quote Detail/Historical Quotes or Optionetics/Platinum/Historical Option Data for the daily volume information. See examples in Schedule E.

3. Upon selection of an Option for trading, the purchase and target prices are determined, using a Risk-Reward Ratio of 1 to 2, progressing to 1 to 3, when experience justifies it.







MANAGEMENT

Purchase Strategies and Procedures:

1. A purchase order is placed, if timing and pricing is suitable, after observing the trading activity and trend in the underlying stock and the specific Option after the first 1 to 2 hours (note significance in Schedule F-pg 4) of the trading day, using streaming charts in Money.net or OptionsXpress.com. See examples in Schedule F-pgs 1, 2 & 3.
2. Allocate to each trade no more than approx. 5% of the total initial capital in the Options trading account, adjusting the % on a basis relative to the size of the trading account so that it would be approx. 2% when the account stands at $100,000.
3. Place only Limit Orders at the Bid or between Bid/Ask price, unless the indicators justify the Ask price.
4. Set a Stop-loss at –50% on paper only. The alternative below is under review:

Stop Loss – Alternative (source: OME, courtesy Doug Fraser)

Take the total of stock price highs for the last 10 trading days and subtract total of stock price lows for the same period, divide by 10, multiply the result by the Delta, next multiply by 1.3, 1.4 or 1.5 depending on risk tolerance. Subtract the resulting number from the Bid price on the option to arrive at the Stop-Loss.

Monitoring:

These activities are directed towards risk management and profit enhancement.

Once a decision is made to purchase a selected Option, the required information is entered in the Open Trades Worksheet (Schedule D-pg 1), an Excel spreadsheet. Particular information in this Worksheet, i.e. Stop, Target Price, Resistance, Support, Exit Date & Earnings Date, is used in monitoring the trading activity of the Option, using the following resources:

1. OME Charts for any sell signals
2. BigCharts for any technical sell signals
3. Trades are entered in a portfolio, for intra-day monitoring, in either OptionsXpress.com/Quotes/Streaming/Launch Streaming Quotes, or in Money.net/Streaming Real Time Portfolio. See examples in Schedule F-pgs 1, 2 & 3. Intra-day technical charts are especially useful for Swing trading in terms of timing & pricing for entry and exit of a trade.
4. Trades are entered in a portfolio, for periodic monitoring, in Optionetics.com/My Portfolio. See example in Schedule G.
5. Maintain Trading Calendar – earnings & events info – update daily.

Monitor the market trend & Institutional activity in the market.

Monitor Institutional activity in the underlying stock.


Exit Strategy:

Close a position when the OME and Technical charts, including intra-day charts, show a significant change in trend and give a sell signal to minimize losses and maximize profits. Otherwise, keep the trade open to optimize the profit.

Close a position when the option price reaches the Stop-loss set for that option.

Exit trade, in any event, 30 DTE.


Administrative:

For ease of access and efficiency, the regularly used websites are organized on the Desktop into folders, as seen in Schedule H, i.e. Options, Stocks Search, Stocks Analysis, Market Info, Online Brokers, Stock Exchanges, Oil & Gas, Currencies, & Portfolio.

When a stock and its option(s) pass the analysis tests and the option selection criteria, a copy of the relevant OH search results, OME & technical charts and historical data is pasted in a Word document, as shown in Schedule B-pgs 1, 2, 3 & 4. This record is saved in a computer file for review, current and future, and is erased after one month. This Schedule is saved in a page size of either 25% or 50%, for thumbnail view, which is enlarged to 100% or 150% for detailed viewing.

When a trade is closed, its row in the Open Trades Worksheet (Schedule D-pg 1) is copied and pasted in the appropriate row of the Closed Trades Record (Schedule D-pg 2), and it is deleted in the above Worksheet. Column’s A to G plus N & O are identical in both documents. Data in column’s H to M is deleted and applicable entries are recorded in these columns in the Closed Trades Record.

Resources:

Search Sources:

1. OptionHunter
2. OptionsHotline
3. Stockscores
4. CNBC
5. Optionetics – Platinum
6. WallStreetCity – ProSearch
7. Clearstation



Trading Resources:

1. Technical Analysis: BigCharts – Java chart
2. Streaming Quotes & Portfolios: Money.net, OptionsXpress
3. Streaming Charts, incl. Intraday: Money.net, OptionsXpress
4. Paper trading: OptionsXpress
5. Market & Sector tracker: Money.net, Smartmoney & NASDAQ
6. Option Search: OptionHunter, Optionetics – Platinum
7. Option Ranking: Optionetics – Platinum
8. Stock Ranking: Optionetics-Platinum, WallStreetCity- ProSearch
9. Pre-market & Post-market trading information: NASDAQ
10. Historical daily price & volume for stocks & options: Optionetics- Platinum, OptionsXpress
11. Portfolio management: Optionetics

Other Resources, under review:

Tactical Trading System
Investors Business Daily – CANSLIM Research
Real Sentiment Reports – whispernumber.com
Poweropt.com

Watch Lists:

Selected stocks & options
Indexes – financial (DJI, SPX, NASDAQ)
Index traded shares – QQQ, SPDR
Oil & Gas Royalty Trusts
Commodities – Gold, Oil & Gas
Currencies – CDN/US$


Education:

OME – OptionChat (Tues.-Fri live 4 hrs. daily)
OME – Group/ Messages & Files
OME – GlobalTecTalk-Newsletter/Archives
OME – Seminars
Optionetics –Website
Optionetics – Seminars
Options Group Meetings and email/phone contact with members.