Welcome To: ODDS
The principal behind the new ODDS Burning Fuse is still the same, finding a flat stock that has gotten too compressed. But, from there the rules have changed. I've added a proprietary filter I created called the ODDS Volatility Compression Ratio. When this filter hits an extreme low, the moving averages have converged to the point the asset is EXTREMELY COMPRESSED! Then I apply another proprietary filter I created called FOV, or Fishback Option Value. These changes have brought the number of trades to a level where nearly any investor can participate. Even better, the average return per trade has increased! So you can make more money per trade, and most investors can participate in all recommended trades!
Also, even though I've been teaching options trading and developing analysis services for many years, I never tire of getting questions from traders. Whether they're novices with questions about how to get started, or professionals who are looking for a way to enhance their own trading systems, the questions people ask have helped me improve my teaching and my services. As you get started with ODDS Burning Fuse, I encourage you to let me know if you have questions about the service or the recommendations. Now that you're on board, I thought you might benefit from hearing some of the most commonly asked questions about this service, along with detailed instructions on how to use the service.
- What types of strategies do you recommend in ODDS Burning Fuse?
- How do you identify your trades? Do you buy options on stocks that you're interested in?
- How much money do I need to make ODDS Burning Fuse trades?
- What does a new recommendation look like?
- What do I do if I can't get filled on a trade at your recommended price?
- Can I implement portions of the recommendations separately with these trades? For instance, can I buy the call part of the straddle recommendation separately from the put part?
- Can I place my exit instructions when I place my entry order?
- After receiving a recommendation, how long should I continue trying to be filled on a trade?
- If I get filled on the recommendation, what do I do next?
- What type of exit instructions do you give? What system do you follow for getting out of a position?
- How do I follow the Open Positions table?
- What should I do on expiration Friday, if any of my expiring options are in-the-money?
- Why would I place a straddle trade when it has such a low probability of winning?
- What is the typical duration of a trade?
- What money management rules do you follow to set up your own options portfolio?
- How many trades are typically open at any one time?
- What is the guarantee for ODDS Burning Fuse?
- Can I implement the ODDS Burning Fuse recommendations with an online brokerage?
- What should I look for in a broker?
- Where can I get more background information on options to help me understand the basics?
- If I have login problems, who do I contact?
- What filters do you have in place to prevent entering a trade on an otherwise compressed stock?
- What if I still have questions regarding the ODDS Burning Fuse service?
Q. What types of strategies do you recommend in ODDS Burning Fuse?
A. With ODDS Burning Fuse, I generally recommend one type of trade: high profit trades with explosive potential. With high profit trades, I use the simplest strategy available: straddle purchases. The reason is because these types of trades let us profit from volatility without having to predict which direction the stock will take. With a straddle, we're buying a call and a put that have the same strike price and the same expiration month. On a rare occasion, I may recommend a different type of high profit trade, but for the most part, your high profit trades will fall into the straddle category.
With a straddle trade, you normally make money on one option, and lose money on the other. The goal is to make more than you lose. For instance, let's say you buy a call for 1 and a put for 1. Your total cost—your net debit—is 2. The way you make money is where the stock makes a big move.
Let's say the stock falls pretty hard. The call falls in price, dropping to zero. But the put goes to 4! In this instance, even though you've lost on the call side, the gain in the put more than makes up for the loss. In fact, the total return is a 100% gain: invest 2 to make 4.
If the stock rises, the call gains value while the put loses. If the stock rises enough, gains in the call more than offset any losses in the put, generating a profit for the entire position.
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Q. What if I still have questions regarding the ODDS Burning Fuse service?
A. One of the benefits of the ODDS Burning Fuse service is that I have a highly trained staff to help you with any questions you have about how to act on my advice and recommendations. They don't just answer the phones to take address corrections. They also trade. I encourage you to take advantage of this service by calling the Technical Support Hotline at 859-224-4424, or by sending an email to email@example.com. The support staff will help you with any additional questions that you may have.
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Q. How do you identify your trades? Do you buy options on stocks that you're interested in?
A. Picking options and picking stocks are totally different functions. With stocks, you are pretty much guessing which direction the stock price will go, which means that you usually need to analyze the company's business fundamentals to make that prediction. With options, that's not the case. In fact, you don't even need to know the business of the company you're trading. My primary focus in selecting options trades for you is an asset's current volatility relative to its historical volatility. So what does that mean? Let me share an analogy to explain why this is such a powerful way to trade.
Let's assume it is October in Chicago. You know it's not going to be 110 degrees. You also know it's not going to be –30 degrees. The temperature should be about 45 to 60 degrees. You can make that forecast because that is what the temperature in Chicago during October has been historically. This type of temperature analysis is identical to the analysis of historical volatility. (Historical volatility is simply the volatility that the underlying asset has experienced in the past.) Like temperature, volatility has what is called a central tendency. When temperatures get unseasonably cold, they tend to rise back to the seasonal norm. When temperatures get unseasonably warm, they tend to drop. Volatility behaves in a similar fashion. When it gets too low it rises, and when it gets too high it drops.
The point of this illustration is this: When volatility is hitting unprecedented, low levels, you have to ask yourself, "Is the calm weather last forever?" You know that it doesn't, and neither does the opposite extreme. When volatility is extremely high, it tends to drop. When it is extremely low, it tends to rise. By putting this concept to work for us, we're able to make money on an investment's fluctuations without worrying about direction.
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Q. How much money do I need to make ODDS Burning Fuse trades?
A. While there really is no set minimum that you need in order to trade (other than the minimum your broker charges to open an account), it is best to have enough money to be able to place several trades. You don't want to have everything tied up in one or two positions. In general, the high-profit positions I've been recommending in Burning Fuse have ranged from $70 to $4,710 per contract with the median size position costing less than $365. The majority of the profits are available even if you restrict your trading to recommendations costing less than $500 per contract. So you don't have to spend a bloody fortune to trade these options. At that price point, a $10,000 account will allow you to place several trades while still keeping enough liquidity for new opportunities that come along.
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Q. What does a new recommendation look like?
A. We want you to be prepared, so we're providing you with an image from a recent report.
As you can see, the date of the report is at the top: 2015-10-30. Please note that we display the date in database format. There is nothing difficult about database format. First, we show the year, then the month, then the day. In this particular instance, the year is 2015, the month is 10, and the day is 30. So the date is October 30, 2015.
Below the date, we have a table showing the trade. In this particular instance, we have only one trade: a straddle trade on iRobot Corporation (ticker symbol: IRBT). To the right of the ticker symbol we have the stock price as of the close the prior trading day. IRBT closed at 30.19 the prior trading day.
Next we have the "green lights". These are color-coded graphical displays of the various factor ratings that determine whether or not we should take a trade. Because this recommendation service only takes the "best of the best" trades, you will only see green lights. [Our computer systems also find trades with red and yellow lights, but they will not be given as a "best of the best" trade, but will be displayed under the area where the "best of the best" trades are given, as a separate link for the potential trades. Just like a stop light, if you see yellow, that means caution and if you see red, that means stop. This list is for your own use and no follow up or guidance will be given. These are not precise recommendations and have not met the "best of the best" all green criteria.]
After the green lights, we have the actual trade:
Buy the 2015-12-18 30 call and buy the 2015-12-18 30 put for a net debit of 2.70
Let's look at this in detail.
The first word is "Buy". That's pretty self-explanatory; we're buying the option.
Next comes the options series: 2015-12-18. Remember, dates are in database format, so the date is December 18, 2015. That is the third Friday of December. Monthly options stop trading at the close on the third Friday of every month. So these options are the normal December monthly options. [There are also weekly and quarterly options, and LEAPS.]
Next comes the strike price: In this instance, the strike is 30. That is followed by the option type: call.
So that's the first option in our strategy. Let's look at the next component: buy the 2015-12-18 30 put.
That tells us that second part of the strategy is to buy an option. The series is the normal December 2015 options, the strike price is 30, and the option type is a put.
Because the word "and" appears in-between the two option components of the strategy, the recommendation is to buy both the call and the put at the same time. Also note that the strike price of both options is the same: 30.
The simultaneous purchase of a call and a put with the same strike price is called a straddle purchase. And because we're buying both options, there is a net debit to our account if we're filled on the trade.
Note that we provide you with a net debit amount for the trade: 2.70. We aren't really interested in the price of the two options individually. We are only interested in the net cost of buying both options together. That debit amount is called a "limit". You want to pay 2.70 or less for the straddle.
It's important to realize that the limit may be different from the closing ask price of the options. In this particular instance, the ask price for the straddle was 2.30, while our limit was 2.70. We were happy to pay 0.40 less than the current net debit were were asking for, which is the maximum we want to pay.
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Q. What do I do if I can't get filled on a trade at your recommended price?
A. You should never accept a price worse than the limit price I recommend. When placing your trade, it is critical that you place a limit order on the recommended maximum. By not doing so, you increase your risk, reduce your probability of profit and reduce the size of your potential gain. In every way, you are adversely impacted. There will be times when we don't get filled on a trade, but it's still not worth entering at a price worse than what I recommend. If you overpay for options and get out at the same price as other customers, you could suffer a loss while they might profit. And if you accept a lower credit (you pay a debit when you enter a straddle, and receive a credit when you exit), they could make money while you lose. Don't let that happen.
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Q. Can I implement portions of the recommendations separately with these trades? For instance, can I buy the call part of the straddle recommendation separately from the put part?
A. This is something you definitely want to avoid. By placing the order separately, you risk two things. First, you risk getting filled at a worse price, which will adversely change your probability of profit and worsen your risk and reward potential. Second, you risk getting filled on one portion and not the other, which gives you a different position altogether and puts you in a position where you can only profit if the trade moves in one direction.
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Q. Can I place my exit instructions when I place my entry order?
A. No. If you give exit instructions to your broker at the same time that you place your initial order, you put yourself at risk. Even if your broker can't fill you on the entry portion of your option order, your exit instructions may still be executed. That could leave you with stock or a short position you don't want.
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Q. After receiving a recommendation, how long should I continue trying to be filled on a trade?
A. The recommendations are good for one day only. Do not try to enter the position after the U.S. market closes. Recommendations are provided at 8:30 a.m. Eastern Time before the market opens so that you can act on them immediately. Because options move so quickly, it's important to take action right away so that you have the best chances of getting filled. On the other hand, there are times when you can't get filled right away, which is why you should try to fill the order by the end of the day. I do not suggest continuing beyond the day's close, as market conditions may have changed too much after that time. If you do not get filled on the recommendation, make sure the order is canceled by the end of the day and wait for my next recommendation. If you use a "day order", the end-of-day cancellation happens automatically.
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Q. If I get filled on the recommendation, what do I do next?
A. One of the nice things about this service is that I do all of the work for you. If a new recommendation is filled, I will always follow up with exit instructions that you can give your broker. That way, when the options move, you will know exactly which price point should trigger you to exit. From time-to-time, I may also send a Special Alert email to remind you to check the OPEN page for updated instructions, but we do not do this all of the time. That is why it is VITAL to log in and check the OPEN positions page every trading day.
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Q. What type of exit instructions do you give? What system do you follow for getting out of a position?
A. I always tell people that it's important to treat trading like a business—you need to have an action plan and a contingency plan. My motto is that I hate to lose. We can't avoid losing, but we can mitigate the risk. For that reason, I've got a pretty strict contingency plan for how to get out of losing positions and how to lock in profits when we're winning.
The important thing to remember about exiting is that I have a plan, and I'm always looking out for you. Every day you'll see my updated exit instructions on the Open Positions table of your Burning Fuse broadcast.
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Q. How do I follow the Open Positions table?
A. The Open Positions table gives you a quick reference to follow-up instructions for the trades I've recommended in previous weeks.
In the left column you'll see the date in a database format (year-month-day) if the trade is already filled, or Pending if it is recommended that same day, followed by the ticker symbol, then the actual trade. The trade shows the expiration date, along with the straddle's strike price, along with the two parts of the straddle – the call and the put.
Next comes our fill price which we get from actual trading results and time and sales data. If it says Pending, that means it is the same trade being recommended that day and a fill has not been confirmed yet.
To the right of the fill price is the current closing bid for the straddle, followed by the stock's most recent closing price.
That is followed the most important information in the table – the "Instruction" column. This is where I will tell you exactly what actions you need to take with the positions we're holding. In each case, I will give you very specific instructions whether you should hold, sell, or buy another option with a different strike price (selling one option and buying another with a different strike price is known as "rolling up" or "rolling down"). Below is a screen shot of what you might see when looking at the Open Position table when there's only the current new trade showing as pending:
In this example, we have a new trade recommendation: a straddle on IRBT.
In the snapshot above, we show the IRBT straddle. There are two things to note: First, the fill price and the trade date are shown Pending. As soon as a recommendation is made, it shows up in the open position table with Pending as the trade date and the fill price. If no subscribers are able to get filled, then we'll remove the trade from this table. If any subscribers are able to get filled, then we'll show the proper fill price and the trade date as we show in the snapshot below:
First you see the date the trade was recommended, which is 2015-10-30. Next, the stock symbol which is IRBT, followed by the straddle recommendation: buy the December 30 straddle at 2.70, followed by the fill price: 2.30, followed by the current bid on the straddle: 2.30, followed by the current stock price: 30.19, followed by any instructions we might issue. In this case, there are no instructions, so simply hold the position.
In situations where no subscribers are able to get filled on a new position, I do not follow it on the Open Positions table, and it will not be part of my track record. If you ever find a situation where we do not include a position but you are filled on your trade, please let us know and we will add it to our model portfolio and begin tracking the trade and issuing follow-up instructions, provided all entry instructions were followed.
Finally, a word about the Instruction column. This is where I'll tell what to do with your open positions. Realizing that no option trade has a certainty of profit, we've got to be prepared to handle any losers. Here is where you'll find exit instructions for a situation like that. For instance, I might tell you to "Sell all options now".
Of course, this is also where you'll find instructions on how to take profits when they do occur. Let's say we're holding a straddle and the stock has gone up a lot, so the call option is worth a lot, but the put is worthless. The exit instructions would be "Sell your call now, allow the put to expire." Be CERTAIN you log in and check the Open Positions page each trading day for updates.
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Q. What should I do on expiration Friday, if any of my expiring options are in-the-money?
A. ALWAYS exit any expiring options that are in-the-money before the close of the markets that day, which is 4:00 pm Eastern Time!
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Q. Why would I place a straddle trade when it has such a low probability of winning?
A. As the name of the strategy implies, high profit trades are all about making a lot of money on a single trade. The combinations that I recommend have very high, unlimited profit potential. However, as with any investment, the greater the potential reward, the lower the probability. With these trades, we are not going to win every single time; we will have some losing trades, which is why it's important to spread your investments across several positions. But the benefit is that when we win, the rewards are so high that they more than offset the losses. In fact, my track record shows that while we may only win 49.3% of the time, the size of the average winner has been much greater than the size of the average loser. That risk/reward edge turns out to be the difference maker. It's what causes our overall track record to be so profitable.
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Q. What is the typical duration of a trade?
A. We look for option trades whose expiration date is anywhere from 36 days to 63 days in the future. That does not mean we remain in the trade that long. Sometimes we close out a position prior to expiration.
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Q. What money management rules do you follow to set up your own options portfolio?
A. The only tried and true rule that I follow when setting up my portfolio is to stay diversified. I don't recommend a model portfolio, or choose options based on different sectors. However, I do advise that you never invest more than 10% of your trading portfolio in one position. You don't want to overcommit in one position and miss out on other opportunities that come out afterwards. If you like to stay active and want to have the opportunity to invest in all of our new trades, you'll want to keep each invested amount even smaller than 10%.
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Q. How many trades are typically open at any one time?
A. On average, the number of simultaneously open trades peaks around 4-5. There are, however, rare instances where that number climbs higher. From mid-August to mid-October of 2013, there were 26 trades open at one time. The average cost to do all 26 trades would have been no more than $400 per position, or a total of $11,000. For some of you that's good, and for others that's too many trades.
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Q. What is the guarantee for ODDS Burning Fuse?
A. If you the subscriber do not double your money within one year of your subscription start date, we will extend your subscription an extra year at no charge to you. Otherwise, there are NO REFUNDS. The one-year begins the day you order.
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Q. Can I implement the ODDS Burning Fuse recommendations with an online brokerage?
A. Yes, most online brokerage interfaces now give you the capability to enter all the necessary information to implement the trades correctly. Just make sure your online brokerage provides you the ability to enter your order with the correct data (i.e.: straddle/strangle/credit spread, which market and symbol, how many positions you want), emphasize the "net debit" amount (never pay more than the net debit or accept less than the minimum credit), and place as a "limit" order. These orders should go in as one combined trade. Do not 'leg in' separately, but do the combination as one trade for a limit as given.
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Q. What should I look for in a broker?
A. Whatever you do, don't put commissions at the top of the list of things to consider. While commissions are a factor, they should be at the bottom of the list. Here are the things that I consider to be most important when choosing a broker for your options account:
- Account size requirement. The minimum account size should be between $5,000 and $10,000 to trade option combinations and spreads. Some brokers have large minimums for option spreads and combinations. That's because they don't understand how options really work.
- Back-up systems. If the routine order placement system (like the Internet) goes out, how will you place your order? You don't want to get locked out of the market, or stuck in it. Make sure your broker has a back-up system in place.
- Experience. You should look for someone who has experience. You don't want to be on the phone having to teach your broker about options. You want someone who understands options and option combinations (like a straddle). This is true even for online brokers, because if the online system goes out, you'll be on the phone with a live broker as part of the back-up system.
- Limit orders on option combinations. Most online systems allow limit orders on option combinations. Your broker should be able to buy and sell option combinations, and place a price limit on the entire combination.
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Q. Where can I get more background information on options to help me understand the basics?
A. ODDS Burning Fuse is geared toward options traders who have a basic understanding of options. However, this service can certainly be used by novice options traders to gain a better understanding of options. If you need to enhance your knowledge of options, I suggest you check out my comprehensive educational course called What Are Options. More information about that course can be found HERE.
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Q. What filters do you have in place to prevent entering a trade on an otherwise compressed stock?
A. ODDS Burning Fuse uses filtering to catch data errors and fundamental reasons for the compression like a merger or takeover. We also filter out stocks that have low liquidity. Here is why, we don't always care if the options have low liquidity if we can get into the trade at the price we want. If the options are not liquid and we can't sell the option at the price we want, we can always exercise our options to exit. The problems with liquidity arise when the stock is not liquid. If we exercise a call option, we get shares at the strike price, but then we must sell those shares at the current market price to exit and claim profits. If the options are not liquid, we may find that nobody is willing to buy our shares at the currently listed price. Below is chart example of an illiquid stock, symbol FRSH.
The chart on the left is a tick chart of every trade for FRSH for the entire day. On the right you have a tick chart of SPY. SPY may be the most liquid ETF on the planet. The big difference between these two tick charts is that the one on the left covers the whole trading day. The one on the right covers only the last second of that same day. The more liquid the stock the easier it is to exit at a reasonable price when you want to exit. We do not want to do an option trade that gets us trapped in a stock position that we may not be able to exit.
Q. If I have login problems, who do I contact?
A. If you cannot access the ODDS Burning Fuse web site, please contact customer service at 859-224-4424. They will check to see that we have the correct login information for you, or if there is another issue causing the problem. Likewise, if you change your personal information, please contact us so that we can update your account and avoid causing a problem in service.
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