| What is RLS? | RUT settlement is based on an index that trades under the symbol RLS [CBOE]. The RLS is described as the RUT Flex Opening Exercise Settlement. |
| On Which period do we draw the Fib? | On a 9 months period from where we are |
| Is there any shares traded on the RUT? | There is no shared traded on the RUT. Only cash is traded |
| What is a System Trade | It is a Trade with clearly defined rules and no judgment |
| What is a vertical spread? | It is an option strategy making a trade with 2 contracts at the same time |
| What are we doing with the 2 (or more) contract of a vertical spread | One is bought and one is sold |
| When we Sell a vertical spread, what happens? | There is an inflow of money into our account, therefore is it a credit, hence the term Credit Spread |
| How do you create an income from the Credit Spread? | You sell an option contract closer to "the money" than the one you are buying |
| For how much are we at risk when doing a credit spread? | We are at risk for the difference of the strike price we sold and the strike price we bought. |
| When we Sell a Vertical Spread, what do we create? | We create a Credit Spread |
| Explain the hedge in the vertical spread? | The contract the we sell (short) is hedged by the contract that we bought (long) |
| What is the Spread? | It is the difference between the 2 Strike prices |
| How much capital do we need to do a Credit Spread? | We need to have the Spread amount x number of contract x 100 (AKA: risk capital or capital requirements) |
| What actions are we taking when we do a BULL Put spread (BPS) | Sell to Open the higher number / strike price
Buy to Open the lover number / strike price |
| What actions are we taking when we do a BEAR Call spread (BCS)? | Sell to Open the lower number
Buy to Open the higher number |
| What happens when you SELL a PUT? | You are OBLIGATED to BUY SHARES at the STRIKE PRICE you SOLD |
| What happens when you BUY a PUT? | You have the RIGHT to SELL SHARES at the STRIKE PRICE you BOUGHT (you force someone to buy your shares as this was the deal) |
| When do we do a BPS (Bull Put Spread)? | When the price is expected to rise (bullish trend) |
| What happens when you SELL a CALL? | You are OBLIGATED to SELL SHARES at the STRIKE PRICE you SOLD |
| What happens when you BUY a CALL? | You have the RIGHT to BUY the SHARES at the Strike Price you BOUGHT |
| When do we do a BCS? | When we expect the price to be bearish |
| What is the Net Credit? | It is the difference between the money I received from selling the Put (I got the credit / cash in my account) and the money I am spending to buy a Put (I use some of the credit money I just received for that) = Net Credit |
| What is the Risk Capital? | The difference between the 2 strike price x number of contract x 100 |
| What do the initials TIF stand for? | Time in Force (i.e for the day) |
| What are the 4 possible outcomes of a CS (credit spread) trade? | 1. The Short strike and the Long Strike expires OTM (out of the money)
2. We close the 2 positions before expiration date with a minimal loss (max 30%)
3. The Short strike expires ITM (in the money) and the Long Strike expires OTM
4. The Short strike and the Long Strike expire ITM |
| What are the implications if the Short strike and the Long Strike expires OTM (out of the money) | Non - prefect trade and we keep the premium |
| What are the implications if we close the 2 positions before expiration date with a minimal loss (max 30%) | If the BTC debit (buy = debit for me) is higher than the STC credit I will get from selling, then we lose money up to 30% maximum (ideally) |
| What are the implications if the Short strike expires ITM (in the money) and the Long Strike expires OTM | We get assigned the shares of the contract at contract price (as agreed). We need to pay for that
we can sell the very same shares at current market price (as per second contract we did)
This will results in a loss since agreed price is higher (ITM) than current market price |
| What are the implications if The Short strike and the Long Strike expire ITM? | We loose our entire RC (Risk Capital) because we are obligated to buy 100% of the shares at the agreed price and when we use our right to sell, we do but there is still a difference, which will be our maximum loss |
| What are the 2 things the Credit Spread Strategy limits? | 1. The Capital you need to invest
2. The Capital at risk |
| For the Credit Spread Strategy, is the Risk Capital and the capital required to do the trade the same thing? | yes |
| Do I need to physically invest capital in the credit spread? | Only if my short strike or both my short and long strike are ITM at the DTE. |
| What is the Rick Capital (RC)? (2 things) | 1) The difference from the Long strike and the Short strike
2) The maximum you can loose |
| What is the Russell 2000 made of? | It is made of 2,000 small cap companies |
| What is the RUT often used for? | To benchmark / see the trend of mutual funds trading small to mid-sized cap companies |
| What are the 2 DTE (date to expiration) available for our RUT system trade? | 27 or 34 DTE only for this specific system trade |
| What is a Put Option? | A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame. |
| What is a Call Option? | Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. |
| What is the RUT System trade formula | Floor - 90 - 10 - 48 - 11 - 20 |
| What does FLOOR means in the RUT System trade formula? | we must be 3% at least 2 floors
we prefer 3 floors |
| What does 90 means in the RUT System trade formula? | Probability OTM is 90% or higher |
| What does 10 means in the RUT System trade formula? | Delta must be .10or lover
(ignore the negative, which is there because we are on the PUT side) |
| What does 48 means in the RUT System trade formula? | 48% ARORC (annualized return on risks capital)
Not lower and not necessarily higher |
| What does 11 means in the RUT System trade formula? | Our short strike needs to be >= 11% from the money when adjusted for time (45 days) |
| What does 20 means in the RUT System trade formula? | The Kelly formula (K%) needs to be >= 20% |
| What is the Delta? | It is the mount that the Premium change for every $1 change in the underline price |
| What is Probability OTM? | The probability that a given strike price will expire out of the money |
| How to calculate the Risk Capital (RC)? | Risk Capital = Spread - Net Credit |
| How to calculate the Return on Risk Capital (RORC)? | RORC = Net Credit / RC |
| How to calculate the Multiplier? | Multiplier = 365 / DTE (days to expiration) |
| How to calculate the Annualized Return on Risk Capital (ARORC)? | ARORC = RORC x Multiplier |
| Which 5 data points do you need to calculate your ARORC? | The Spread
The Net Credit (NC)
The Risk Capital (RC)
The Return on Risk Capital (RORC)
The Multiplier |
| What is the Net Credit (second answer)? | The difference between the Short strike MARK number and the Long strike MARK number |
| What does OKW stands for? | OKW = Option Kelly Workbook |
| What does 11% means in the RUT System trade formula (2nd answer)? | It means the Short strike needs to be 11% away from the money on a 45 days trade
We take 45 days a a fix number as our trades are either 27 or 34 days |
| What is the Kelly formula? | It is a mathematical formula used to calculate :
1) Is the bet going to make enough money for the risk that is being taken
2) how much to bet for that particular trade |
| Why are we using the Kelly formula as Rulers? | We use the Kelly formula to measure if the net credit we are receiving is worth the Risk Capital (RC) we are using based on the probabilities of success |
| How many types of Monthly Option there is? | 2 Types
1. American Style
2. European Style |
| What is the characteristic of the American Style Monthly Option? | 1) Expire on the 3rd Friday of the month
2) Are settled by shares changing hands for CASH
3) Can be assigned at any time for any reasons
4) Settles after the close on Friday expiration day |
| What is being traded on the Monthly American style option | ETF, Mutual Funds, and Equities (Vanguard, SPY, Apple) |
| What is being traded on the Monthly European Style? | The Indexes (RUT, SPX, NDX...) |
| What is the characteristic of the European Style Monthly Option? | 1) Expire on the Thursday BEFORE the 3rd Friday of the month
2) Are settled by CASH exchange ONLY as Indexes DO NOT have shares
3) Can only be assigned by the buyer are expiration (not at any time)
4) Settled by mid day on Friday, following the Thursday expiration |
| What at the 2 rules to exit the RUT trade? | 1) if probability OTM is below 70%
2) if Price of the RUT is less then 3% away from the short strike on the FINAL THURSDAY (short strike x 1.03) |
| What is the SPY | It is an ETF, which mimic the SPX - S&P 500 |
