Hello Traders!

My name is Mike Rykse and I am the Options Specialist at NetPicks. I have been an
active trader in the markets since 2002 and have traded just about every market
available (stock, options, futures, forex, bonds). Without a doubt, my favorite area of the
market is trading options and that is where I have seen the most success in my own
trading.

I have personally developed numerous options trading systems and educational

In working with thousands of traders over the years, I have learned some tricks of the
trade that I want to share with you that can make a big difference in your trading results
over time. Trading can be difficult but having a specific tool set in place can help you
become a successful trader right away.

Like any successful business, the traders that see the most success are the ones that
stay disciplined to a plan. Whether you are trading full time or part time you need to
treat this as a business. This means having a plan in place that will guide you every
day. A big part of that plan is knowing the markets that you trade like the back of your
hand.

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In this eBook I will share one of my favorite income generating strategies that you
can use in just 8 minutes each day and with as little as $60 of capital per trade.

If you have any questions that I can help with as you work through this training, please
feel free to contact me directly. You will find my direct contact info below. We look
forward to hearing from you.

Happy Trading!

Mike Rykse
Options Specialist
Mike@netpicks.com
269-978-0971
www.netpicks.com

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Why are we all attracted to trading the options markets?

While we could all come up with a dozen reasons that drive us on a personal basis, the
bottom line for all traders is we want to make money!

The good news is trading options can lead to very large profits, using very little capital,
and in just minutes each day.

How do we do it?

In this eBook I am going to outline one of my favorite strategies that I use to create a
consistent source of income from the options markets. You will walk away with an exact
action plan that you can use immediately.

The key to successful trading is to have a defined system in place that guides all of your
decisions. Without a system in place, you are left trading off of emotion and hoping the
trades work out.

At NetPicks we are big believers in having a rule set for our entry and exits on every
trade that we take ahead of time. This way we are basing our trading decisions off
numbers and statistics. That doesn’t mean we won’t ever have losing trades. With any
system you will always have winners, losers, and break-even trades. However, knowing
that the numbers are in our favor long term if we execute the system correctly allows us
to trade with way more confidence.

To help you get a system in place, we are going to share one of our favorite options
strategies that has produced really consistent returns for us over the years.

Let’s dive in to take a look at how it works.

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How do we identify price extremes?

Before we jump into the criteria of this powerful strategy, we need to talk about how
price action is the basis for this trade type. You will find that stocks like to move in a
stair step fashion. Price will move higher, lower, and sideways over time. This can lead
to trending markets at times that will result in overbought and oversold conditions.

The million-dollar question for options traders is knowing when a market is hitting an
overbought or oversold extreme which could lead to a change in market direction. As
we will show next, there are ways that we can identify these extremes using statistics.

One of the secret weapons that many options traders overlook is the Bell Curve. If you
have ever taken a statistics class in the past, you have heard the Bell Curve being
discussed. While it can be applied in many different areas, the Bell Curve can be
especially helpful in the trading world. It will tell us the probability of an event outcome
falling within a certain range. Essentially it will tell us how often the movement of a stock
or ETF will stay inside of a defined range and how often we will see the big directional
moves.

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When looking at the Bell Curve above you will see the dark blue center section of the
curve. This section is telling us 68.2% of all occurrences are going to fall inside of this
range around the midline. 34.1% of all occurrences will fall between the midline and the
1 Standard Deviation line on the upside and 34.1% of all occurrences between the
midline and the 1 standard deviation line on the downside. When applied to stocks
and ETF’s we will see that price will fall inside of this dark blue range 68.2% of the
time.

As we start to go farther out on the curve to one standard deviation, two standard
deviations, three standard deviations, that's telling us that we still have the tail risk of a
big directional move happening. There's still a chance of an outlier move happening,
either on the upside or the downside.

If we go out 1 standard deviation on the upside or downside you will find that only
13.6% of all occurrences fall between the 1 and 2 standard deviation lines. This is more
interesting to me because once we see a stock price hit a 1 standard deviation move
(on the upside or downside) then I know the chances of that move continuing are
getting slim. That doesn’t mean price has to stall out, but it does favor either a
slowdown or even a reversal in the opposite direction.

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If we go out 2 standard deviation on the upside or downside, you will find that only 2.1%
of all occurrences fall in these ranges (see screen shot below). This is even more
interesting to me as once we see a stock price hit a 2 standard deviation move (on the
upside or downside) then we know that only 2.1% of all occurrences fall outside of this
range.

While it’s possible that the stock continues to move in that direction, the odds favor a
slow down or even a reversal in the other direction. Using the right options strategy,
which we will talk about later in this book, will allow us to take advantage of this
extreme.

If we go out 3 standard deviations on the upside or downside you will find that only 0.1%
of all occurrences fall outside of this range (see screen shot below). This price extreme
grabs my attention as once we see a stock price hit a 3 standard deviation move (on the
upside or downside) then we know that only 0.1% of all occurrences fall outside of this
range. While it’s possible that the stock continues to move in that direction, you will

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typically see a stock reverse pretty quickly from this extreme. Using the right options
strategy, which we will talk about later in this book, will allow us to take advantage of
this extreme.

In the current market that we are working with, where this market moving higher every
day, there are many stocks and ETF’s that are at two or three standard deviation moves
on the upside. What that's telling me is if we start to go out two or three standard
deviations, there's only a 2% chance or less, of that event happening. When we see that
type of price action it can influence what type of options strategies we use going forward
with our trades. We can use the statistics to increase our results over time.

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Standard Deviation Channels

Now that we have laid the groundwork for how Standard Deviation works, is there
an easy way to apply this on a stock chart? One of my favorite indicators to use on
my stock/ETF charts is the Standard Deviation Channel. We can take the extreme
levels from the previous section and let the Standard Deviation Channels quickly
identify the extremes for us.

Most broker platforms will offer the Standard Deviation Channels as a default indicator.
I’m going to show you how to set it up in the Thinkorswim platform.

Chart Setup Process

1. This strategy can be used on any time frame, but I like to use it on the 195-
minute chart which will give you 2 candles each day.

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2. Place 3 Standard Deviation Channels on your chart.

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3. Settings for the 3 Standard Deviation Channels
a. First channel should be set to a 1 Standard Deviation move. The Length
input can be set to either 180 or 360. I like to set this channel to a dotted
yellow line. Make sure the Middle Line is set to a solid white line.

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b. Second channel should be set to a 2 Standard Deviation move. The
Length input can be set to either 180 or 360. I like to set this channel to a
solid red line. Make sure the Middle Line is set to a solid white line.

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c. Third channel should be set to a 3 Standard Deviation move. The Length
input can be set to either 180 or 360. I like to set this channel to a solid
white line. Make sure the Middle Line is set to a solid white line.

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4. Add the 9 period Exponential Moving Average to the chart.

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Final Chart Setup Example:

Now that we have the chart setup with the indicators mentioned above, we can
start to talk about how we use this chart to identify the trades.

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Trade Setup Criteria

As mentioned earlier, with this strategy we are looking to identify overbought and
oversold extremes. There are very specific criteria that I look for when identifying these
trades. There are 2 key areas that I look for as opportunities for new trades. I want to
look for stocks or ETF’s that are either between a 1-2 Standard Deviation Channel
move (Between the dotted yellow channel and the sold red channel) or between a 2-3
Standard Deviation Channel move (Between the solid red channel and the solid white
channel).

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1-2 Standard Deviation Setup

Let’s talk about the 1-2 Standard Deviation channel move first. The minimum criteria
that I need to see for a valid trade is for 3 out of the past 5 price candles closing
between the 1 and 2 Standard Deviation Channels.

Once I see this happen, it identifies a price extreme forming. This doesn’t mean price
has to stall out and reverse immediately, but it does mean a continuation move in that
direction will become more difficult. This is due to the fact that only 13.6% of all
occurrences fall outside of a 1 Standard Deviation move (See earlier discussion on the
Bell Curve).

These extremes can happen on the upside or the downside.

When we see these overbought extremes on the upside, I’m looking to place a neutral
to bearish trade that would benefit from either a period of sideways consolidation or a
reversal to the downside.

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When we see these oversold extremes on the downside, I’m looking to place a neutral
to bullish trade that would benefit from either a period of sideways consolidation or a
reversal to the upside.

With the 1-2 Standard Deviation Extremes I like to go into trades with 50% of my
normal position size.

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2-3 Standard Deviation Setup

Next let’s talk about the 2-3 Standard Deviation channel moves. The minimum criteria
that I need to see for a valid trade is for at least 1 candle closing between the 2 and 3
Standard Deviation Channels. If you get more than 1 candle closing between the 2 and
3 Standard Deviation Channels that is even a stronger signal.

Once I see this happen, it identifies a price extreme forming. This doesn’t mean price
has to stall our and reverse immediately but it does mean a continuation move in that
direction will become more difficult. This is due to the fact that only 2.1% of all
occurrences fall outside of a 2 Standard Deviation move (See earlier discussion on the
Bell Curve).

These extremes can happen on the upside or the downside.

When we see these overbought extremes on the upside, I’m looking to place a neutral
to bearish trade that would benefit from either a period of sideways consolidation or a
reversal to the downside.

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When we see these oversold extremes on the downside, I’m looking to place a neutral
to bullish trade that would benefit from either a period of sideways consolidation or a
reversal to the upside.

With the 2-3 Standard Deviation Extremes I like to go into trades with 100% of my
normal position size.

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How do we take these setups with options?

This chart pattern is ideal for using a vertical spread as our desired options strategy.
Specifically, we are looking to sell a credit spread.

Why not just buy a long call or long put?

While offering big profit potential, buying long calls and puts only gives you 1 way of
making money on the trade. You have to see the stock move in your favor, and it has to
do so quickly in order to make money. I love using long calls and puts in certain cases,
but it has to be a very active market where we are seeing quick moves back and forth.

On the other hand, if we take a look at selling a credit spread, we can put ourselves in a
trade where we have 5 ways of making money on the trade. It will give us a lower profit
potential but also a much higher chance of success when compared to buying a call or
put option. With multiple ways of making money on a credit spread, we don't need
everything to like up perfectly like we do when we buy an option.

Credit spreads can be used for both bullish and bearish trades. Let’s talk about a
neutral to bullish trade first. We are going to place the trade by selling a put
vertical spread.

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Bullish: Selling A Put Spread

In many cases using Put Options means we are looking for a move to the downside. In
this case, selling a Put Spread will actually leave us with a bullish position. We will still
have profit potential to the upside but with defined profit potential and defined risk.

Instead of being the buyer of an option, we're becoming the seller of an option. Once we
walk through an example, you'll see why that can be so powerful.

For our example, we will use Dollar Tree (Symbol: DLTR). Looking at the chart of
DLTR below, we can see 3 out of 5 candles close between the 1 and 2 standard
deviation channels. In addition, we also had numerous candles close between the 2 and
3 standard deviation channels. This had us looking at an oversold extreme where only
2.1% of all occurrences fall outside of this range on the downside.

We were looking for a period of sideways consolidation or even a reversal higher. Once
price moved above the 8 EMA we saw the chop kick in. This was enough for us to make
money on our short call spread.

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In most cases, we like to use the options that have 20-40 days left to expiration as
they typically have more volume and open interest. This will make it easier for us to
get in and out of the trades quickly and at good prices and will also give us enough time
for our outlook to play out. In this example, we used the Dec 27 weekly options that had
24 days left to expiration.

When selling a Vertical Spread, the whole goal of the trade is for the options to get as
cheap as possible. The cheaper the options get the more profit we will have since we
will be able to buy the spread back cheaper than what we sold it for to open the trade.

With this in mind, we like to use Out of the Money options that have a low probability of
closing In the Money. We want to sell a spread where we can collect between 30-
40% of the width of the strikes. For example, if we are looking at a $2 wide-spread we
would like to sell the spread for between $.60-$.80.

Looking at the DLTR trade page, we decided to sell the 87/85 put spread. This had
us selling the 87 put for $1.50 and at the same time we bought the 85 put for $.90 to
make sure we are in a risk defined trade. In total, we will collect $.60 or $60 per spread
($1.50-$.90).
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The $60 we collect when selling the spread was the most we could have made on
the trade. We were risking $140 per spread to put the trade on. The max risk is
calculated by taking the difference between the strikes ($2) minus the $.60 credit that
we received for selling the spread.

This left us with a risk to reward ratio of between 2:1 and 3:1. While this doesn’t seem
attractive initially, we are ok with the ratio since we have 5 different ways of making
money on the trade.

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Our breakeven point on this trade was at $86.40. This was calculated by taking our
short strike (87 put) and subtracting the $.60 credit that we received for putting on the
trade. We didn’t care if DLTR moved up, down, or sideways as long as price closed
above $86.40 over the next 24 days, we made money on the trade. We also made
money for each day that we hold the trade from the time decay adding up as well as
from volatility decreasing. This gave us 5 different ways of making money on the
trade.

Even though we were bullish on DLTR, price could have moved $2.40 lower against us,
and we would still have made money on the Short Put Spread. This takes much of the
pressure off needing to be perfect on the timing and the direction of the trade. We can
be dead wrong on direction and still make money. When we start to put all these factors
in our favor, it is why we are willing to risk two to make one.

Make sure when you sell vertical spreads, that you are trading liquid products as it can
have a big impact on our P/L. For example, if we couldn’t get filled on DLTR at $.60 and
adjusted the order price down to $.50 it would have cost us $.10. We go from having
$60 of potential profit down to $50. That's a big difference. Giving up $.10 per trade can
add up to big number after dozens of trades over the course of a year. Whenever we're
selling a spread, we want to collect as much as we can right up front.

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Bearish: Selling A Call Spread

Now let’s take a look at selling a Call Spread. For our example, we will use Tesla
(Symbol: TSLA). Looking at the chart of TSLA below, we can see 3 out of 5 candles
close between the 1 and 2 standard deviation channels. This had us looking at an
overbought extreme where only 13.6% of all occurrences fall outside of this range on
the upside.

We were looking for a period of sideways consolidation or even a reversal lower. Once
price moved below the 8 EMA we saw the chop kick in. This was enough for us to make
money on our short call spread.

In most cases, we like to use the options that have 20-40 days left to expiration as
they typically have more volume and open interest. This will make it easier for us to
get in and out of the trades quickly and at good prices and will also give us enough time
for our outlook to play out.

In this example, we used the Dec 6 weekly options that had 25 days left to expiration.

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When selling a Vertical Spread, the whole goal of the trade is for the options to get as
cheap as possible. The cheaper the options get, the more profit we will have since we
will be able to buy the spread back cheaper than what we sold it for to open the trade.

With this in mind, we like to use Out of the Money options that have a low probability of
closing In the Money. We want to sell a spread where we can collect between 30-
40% of the width of the strikes. For example, if we are looking at a $5 wide-spread we
would like to sell the spread for between $1.50-$2.00.

Looking at the TSLA trade page, we decided to sell the 355/360 call spread. This
had us selling the 355 call for $9.95 and at the same time we bought the 360 call for
$8.20 to make sure we are in a risk defined trade. In total, we will collect $1.75 or $175
per spread ($9.95-$8.20).

The $175 we collect when selling the spread was the most we could have made
on the trade. We were risking $325 per spread to put the trade on. The max risk is
calculated by taking the difference between the strikes ($5) minus the $1.75 credit that
we received for selling the spread.

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This left us with a risk to reward ration of between 2:1 and 3:1. While this doesn’t seem
attractive initially, we are ok with the ratio since we have 5 different ways of making
money on the trade.

Our breakeven point on this trade was at $356.75. This was calculated by taking our
short strike (355 call) and adding the $1.75 credit that we received for putting on the
trade. We didn’t care if TSLA moved up, down, or sideways as long as price closed
below $356.75 over the next 25 days, we made money on the trade. We also made
money for each day that we hold the trade from the time decay adding up as well as
from volatility decreasing. This gave us 5 different ways of making money on the
trade.

Even though we were bearish on TSLA, price could have moved $11.09 higher against
us, and we would still have made money on the Short Call Spread. This takes much of
the pressure off needing to be perfect on the timing and the direction of the trade. We
can be dead wrong on direction and still make money. When we start to put all these
factors in our favor, it is why we are willing to risk two to make one.

Make sure when you sell vertical spreads, that you are trading liquid products as it can
have a big impact on our P/L. For example, if we couldn’t get filled on TSLA at $1.75
and adjusted the order price down to $1.60 it would have cost us $.15. We go from
having $175 of potential profit down to $160. That's a big difference. Giving up $.15 per
trade can add up to big number after dozens of trades over the course of a year.
Whenever we're selling a spread, we want to collect as much as we can right up front.

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Vertical Spread Trade Management

When selling Vertical Spreads using our criteria, we don’t have a defined stop and
target stock price in place ahead of time. We have rules that guide how we manage the
trades from start to finish but they are rules based on the value of the options and not
the stock price.

First, we have the option to hold these trades to expiration. If it goes to expiration and
stays above or below our breakeven point (above our breakeven point on the short put
spreads and below our breakeven point on the short call spreads), then we can then
keep the entire premium that was collected and take the full profit.

Credit Spread Trade Management Options

1. Hold the trade to expiration. If the options close out of the money you
get to keep the full profit.
2. Close the trade out when you can buy the spread back and keep 50-75%
of what you collected when opening the trade. This is our preferred
method.

However, our initial target is between 50% and 75% of our maximum profit
potential. For example, if I collect $.60 to sell the DLTR put spread then I will look to
close it out when I can buy it back for .15-.30. That would allow me to keep between
50% and 75% of the premium collected to put the trade on.

The thought process behind closing the trade out with 50-75% of max profit is we can
book that profit ahead of time and avoid the increased Gamma the closer we get to
expiration. Gamma refers to how quickly the options will react to changes in stock price.

We don’t want to have a trade that's moving well in our favor for the first 20 days of the
trade and then 5 days before expiration it turns around and moves against us. We could
potentially go from a nice profit to an immediate loss. Instead, I would rather book the
partial profit and free up the capital for the next trade.

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Daily Routine

At the start of the book I mentioned this is a strategy that can be used in 8 minutes each
day. Here is a snapshot of how we do this on a daily basis.

Ideally, I like to do my prep work before the market opens at 9:30 a.m. eastern. I
typically will do this early in the morning before my day gets too busy. Since we are
swing trading, the market doesn’t need to be open to do our prep work.

1. I start by going through my entire watch list of stocks/ETF’s that I like to trade.
This is typically 30-40 markets that I have found have good volatility and good
liquidity in the options (See sample Watch List at the end of the book). I use the
same chart setup that we discussed earlier in the book on each stock and ETF
on my list.

When analyzing the charts, I look for the overbought or oversold conditions
identified by the Standard Deviation Channels on the charts. I will go through my
watch list and write down each name that is at an extreme. This doesn’t
guarantee that I will find a trade on these overbought/oversold markets. I next
have to go over to the trade page to see of the options meet my entry criteria.

2. Next, I take the list of stocks and ETF’s that are showing overbought and
oversold extremes with the Standard Deviation channels and I go over to the
trade page in my broker platform to see if I can structure a credit spread that
meets my criteria.

Earlier in the book, we talked about structuring the trade using options that have
20-40 days left to expiration. This could mean we are using weekly or monthly
options depending on market conditions.

We will take a look at selling an out of the money vertical spread where I can
collect between 30-40% of the width of the strikes. For example, if I’m selling a
100/102 call spread then I want to collect between $.60-$.80 when placing the
trade. If I can’t find a trade that will allow me to collect between 30-40% of the
width of the strikes, then I will pass on the trade.

3. Once I put a trade on, I can immediately place a closing order to buy the spread
back when I can keep 50-75% of my max profit potential (the premium collected
when placing the trade). For example, If I sell the spread for $.80 then I would
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 create my closing order to buy the spread back for $.20. The $.20 would give me
75% of my max profit potential on the trade.

Placing the closing orders ahead of time will reduce the amount of time that it
takes to track and manage the trades on a daily basis.

4. I do need to come back at some point during the trading day after the market
opens to place my new trade orders and also make any adjustments to my
closing orders. The nice part about most brokers having mobile apps is we can
place and manage our trades from anywhere we have a cell phone/internet
connection.

The reason we are able to do the routine in 8 minutes a day is in most cases 75% of
your watch list will not be at overbought or oversold extremes. Don’t try and force a
trade if it’s not there on the chart. I typically look for between 5-10 new trades each
week if possible. You can certainly adjust that number to fit your account size.

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Watch List

The strategy talked about in this book can be used on any stock or ETF. The chart
patterns and options criteria are universal. However, we have found a specific list of
stocks and ETF’s that have worked really well for us. These names have proven track
records of good movement back and forth along with good liquidity in the options
making it easy for us to get in and out of trades at good prices. I have included those
names below.

Keep in mind you don’t need to go through each of these stocks and ETF’s on a
daily basis. You will notice there are a number of correlated markets on the list. In
most cases having a list of 20-35 stocks/ETF’s to look at on a daily basis will keep
you plenty busy.

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35
Conclusion

Whether you have been trading options for years, or brand new to options all together,
there is tremendous opportunity in these markets as long as you stay disciplined to a
trading system. In this book, we have outlined one of my favorite strategies that has
allowed me trade for a living for the last dozen years.

Review the material and follow the criteria that was laid out for finding and managing the
trades and you will be well on your way to generating a great source of income. If you
have any questions, feel free to contact me directly. We look forward to hearing from
you. Happy Trading!

Mike Rykse
Options Specialist
Mike@netpicks.com
269-978-0971
www.netpicks.com

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