Daily Q&A With Mike Messier

Question:
Yesterday in Mark’s article on VTUS he said he was Long VTUS. But it isn’t in his Trading Account. What was his entry? What is his Stop Loss?

Question:
When I received the announcement regarding PSDV, on Nov 3, I set a sell limit order for my 3000 PSDV shares at 4.74. Unfortunately, I did not make sure that I exited my position prior to the PDUFA data of 11/12. Should I simply exit my position? Or, is it worth holding on to at this point. I am still holding on to 1500 shares of AMRN. This stock has had problems. Do you think it is still worth holding?

Question:
What is the stop/loss for ALXA

This Weeks Catalyst Calendar Summary

Cost of New Subscriptions Increasing June 1st

$OPTR Maintaining a Steady Upward Trend into FDA Decision

Written by Bill Rusnak. With Optimer Pharmaceuticals, Inc. (NASDAQ:OPTR) set to receive news from the FDA on the 30th about the use of DIFICID (fidaxomicin), it is worth taking a look at the technical status of the stock. In February, Mark and I were both bullish on this stock, despite our different analyses. Check that article out here. For a couple of weeks, the stock teetered within a range between 11.50 and 12.50. At the very end of March, the stock was at the lowest of its range and immediately bounced off 12.00, gapping up to new highs the next day. Since then, OPTR has cooled to retest its new trend line and has once again made new highs.

That was where OPTR has been, now it is time discuss where it is and where it could be going. As mentioned in a recent article, the general opinion is that DIFICID has a very likely possibility for being approved. (Article and options strategy here). Initially, the last leg within the current trend has been accompanied by slightly lower momentum than what was seen at the beginning of April, but that is obvious even without looking at a MACD oscillator (gap up explosions tend to be blatant indicators of strong momentum). In addition, OPTR is back to a resistance area, as can be seen on the weekly chart below. Above that, 15.00 is the next logical target, which would likely be broken upon approval. If one were to imagine the current channel extending itself (upper end is the pink line above), s/he could estimate OPTR’s upward target to be about 15.50-16.00 (which is close to calculated price in the aforementioned article).

Below the current price, the chart as been overwhelmed by an onslaught of levels created by the turbulence between 10.00 and 15.00 over the past two years. The big areas that stand out are 8.00 and just below 6.00.  Look for OPTR to head to those levels if the company is slapped with a CRL. As always, it would be wise to assess your risk/reward at such high prices, regardless of what the FDA’s decision may be.

On a lighter note: After a discussion with an MD/MBA candidate from my medical school, who revealed he was a BioRunUp subscriber, I felt obliged to do a write up on this particular stock, which had come up during our conversation.  Apparently BioRunUp is getting very popular!

Disclosure: No Positions

Bill Rusnak is a medical student, as well as an experienced trader in the futures, foreign exchange (forex), and stock markets.  He primary focuses on the technical aspect of trading, finding buy and sell opportunities during promising moments within a stock’s (or any other instrument’s) current trend.  His strategy is based upon Wyckoff principles and momentum indicators.  Follow him on Twitter (wjrusnak), to keep up with his articles about biotech stocks and get updates about his performance in the futures and forex markets.

$BDSI BioDelivery Sciences Aiming for Three Pivotal Clinical Trials in 2011

What a Week, and What a Month!

For Non-Subscribers of BioRunUp.com

Introducing the Updated Mobile Application

This Week’s Catalyst Calendar Summary – 3/18/11

AMRN

Amarin

Price:
$7.18

Market
Cap: $853

Marine
study met all efficacy and safety endpoints in November 2010 plus no
LDL elevation in patients with very high TG (over 500). The last
patient visit completed for ANCHOR study (high TGs 200-500 plus on
statins) with top-line results expected 2^nd
quarter of 2011. AMRN expects to submit NDA based on Marine trial
results 3^rd
quarter of 2011 and may include ANCHOR trial data with initial NDA
filing.

CIGX

Star
Scientific

Price:
$3.64

Market
Cap: $435

Second
MRTP filed by CIGX on 6/18/10 with FDA, draft guidance for 360-day
review period for potential decision by 6/13/11 (estimate for
potential FDA decision or update during 1^st
half of 2011). On
2/19/10, submitted MRTP with FDA, draft guidance for a 360-day review
period for expected FDA decision by 2/14/11 (estimate for potential
FDA decision or update during 1^st
half of 2011).

ARIA

Ariad
Pharma

Price:
$6.37

Market
Cap: $833

On
1/18/11, announced pivotal Phase 3 SUCCEED trial met primary
endpoints for patients with metastatic soft-tissue or bone sarcomas
with stat significant 3.1 week survival (PFS) improvement. The trial
remains active with follow-up for additional data on secondary
endpoints, partner MRK expects to file for regulatory approval in
2011 (2^nd
half of 2011 estimate), ARIA exercised co-promotion option on
3/18/11.

CTIC

Cell
Therapeutics

Price:
$0.34

Market
Cap: $302

On
3/14/11, announced co-development agreement with Chroma Therapeutics,
expects to begin pivotal trail during 4^th
quarter of 2011 for patients with relapsed or refractory acute
myeloid leukemia (AML).

CRMD

CorMedix

Price:
$1.80

Market
Cap: $20

Expects
to begin pivotal study (medical device / PMA) during 1^st
half of 2011 to prevent central venous catheter infection and
clotting in hemo-dialysis and filed IDE for FDA clearance to begin
study during 4^th
quarter 2010. They began CE Mark (Europe) application process during
4^th
quarter 2010 and expects to launch in EU by year-end 2011 subject to
receiving CE Mark.

RGEN

Repligen

Price:
$3.53

Market
Cap: $109

On
Monday, reported co-primary endpoints met in Phase 3 trial to improve
magnetic resonance imaging (MRI) of the pancreas. RGEN plans to
request FDA meeting to review results and discuss NDA filing with
mid-2011 estimate for update.

TSPT

Transcept
Pharma

Price:
$7.95

Market
Cap: $107

On
Monday, began trial for treatment of obsessive compulsive disorder
(OCD) patients with inadequate response to first-line treatments.
They expect to enroll approximately 150 patients with results
expected mid-2012.

AEGR

Aegerion
Pharma

Price:
$14.85

Market
Cap: $262

The
combined efficacy and safety trial is fully enrolled for Homozygous
Familial Hypercholesterol-emia (HoFH). 23 patients are remaining in
trial and have completed efficacy portion. AEGR expects to complete
safety phase 2^nd
half 2011 and is expected to start pivotal trial 2^nd
half of 201 for potential NDA filing in 2011. FDA has given Orphan
Drug status for familial chylomicron-emia (FC).

BNVI

Bionovo

Price:
$0.62

Market
Cap: $152

BNVI
expects to begin dosing patients in Phase 3 study by early 3^rd
quarter 2011 (July estimate) with five data safety monitoring board
reviews expected over course of trial. They are expected to complete
patient enrollment during 2^nd
quarter 2012 and report data by end of 4^th
quarter 2012, will conduct 28-day study in 40 patients at higher
doses planned for later studies and non-clinical toxicology study by
early 2^nd
quarter 2011.

LCI

Lannett

Price:
$5.44

Market
Cap: $154

On
2/1/11, announced FDA will conduct pre-approval inspection (PAI) as
part of NDA review (previous inspections in January, February &
September 2010), FDA indicated it will approve NDA and two other
pending generic ANDA’s after successful PAI. LCI expects the FDA to
conclude PAI by this Friday for estimated FDA decision by mid-April
based on CEO guidance from this Tuesday.

FCSC

Fibrocell
Science

Price:
$0.78

Market
Cap: $16

On
Wednesday, announced submission of final study report to FDA for
completed six-month histology study as required in DEC 2009 CRL. In
JAN 2011 FDA accepted response to CRL with Class 2 six-month review
and PDUFA action goal date of 6/22/11, they are seeking approval for
the treatment of moderate to severe nasolabial folds and wrinkles.

ULU

Uluru

Price:
$0.06

Market
Cap: $5

On
Wednesday, announced FDA 510(k) submission to expand product label to
include the management and mitigation of pain based on clinical trial
results in skin graft donor sites for burn victims, estimated FDA
decision during 4^th
quarter 2011.

If $PLX has further downside….

Friday was a rather eventful day for anyone involved with Protalix BioTherapeutics, Inc. (AMEX:PLX). The stock opened at 6.70, down over 2.5 points from yesterday’s close of 9.36 on news of a Complete Response Letter (CRL) from the FDA regarding its New Drug Application for taliglucerase alfa. The drug is intended to be used for the treatment of Gaucher disease. The letter addressed concerns of the Chemistry, Manufacturing, and Controls (CMC), as well as clinical issues including data from the switchover (from imiglucerase) trial.

Early in the day, the stock was sold intensely, trading as low as 6.20 at one point. Gradually buyers trickled in, slowly pushing the stock to its high of the day (7.68) at around 1:00p.m. est. The stock remained hot all day, as shown by a volume of over 7 million shares. PLX closed near its highs at 7.61. This leaves the stock just below the resistance created from the action during the middle of 2009.

Other analysts have downgraded the stock and set a new price point of 6.00. This seems logical since that will put it at the bottom of the range created from the middle of 2009 until the last past week.  However, if the 6.00 does not provide the support that analysts are calling for, I think 4.00 would be the next logical price target. Today’s recovery definitely suggests that buyers liked the 6.00 area, but most of us know well enough that a test of support is very likely.

On a daily chart, PLX has been knocked way out of its current trend and daily signals will probably be meaningless until prices can settle at a new valuation area. The MACD has been even further oversold… who would have guessed? Now that traders have the weekend to reevaluate their stance on the worth of the company, next week’s price action should be a little more indicative of where the stock will trade in the next few months.

On February 7th, I seemed to hit the nail on the head with my article about PLX hitting resistance as that ended up being the most recent high. The next few days after that, the stock dropped straight the 9.00 support zone. Until then, I was bullish on the stock, writing about each dip to the trend line. Take a look back through the older BioRunUp articles to see exactly what I was looking at along the way up.

Personally, I held March 7.50 puts through the decision, but with volatility factored into the price, the nearly 30% drop didn’t offer me any profit on the options. Nothing is worse than being right and not profiting at all. Let it be a lesson learned on pricing options! I will continue to hold the puts for the next week or two in expectation that the 6.00 support will not hold.

Disclosure: Holding PLX March 7.50 Puts

Bill Rusnak is a medical student, as well as an experienced trader in the futures, foreign exchange (forex), and stock markets.  He primary focuses on the technical aspect of trading, finding buy and sell opportunities during promising moments within a stock’s (or any other instrument’s) current trend.  His strategy is based upon Wyckoff principles and momentum indicators.  Visit his site, tradebyprice.com, or follow him on Twitter (wjrusnak), to keep up with his articles about biotech stocks and get updates about his performance in the futures and forex markets.

Join BioRunUp this Week and Save 40%

Five Tips for Better BioTech Trading

Clinical Catalyst, Government Contract Provide Upside Potential for Novavax (NASDAQ:NVAX)

Written by Mike Havrilla. Novavax (NASDAQ:NVAX) is a vaccine developer based upon its virus-like particle (VLP) technology platform that utilizes insect cells rather than chicken eggs or mammalian cells. NVAX has two potential upside catalysts before year-end, including expected Phase 2 results for a flu vaccine study in Mexico and a possible government contract award for pandemic flu preparedness / manufacturing.

VLPs are genetically engineered to resemble live viruses, but do not have ability to replicate and the Company’s products in development include vaccines against pandemic influenza (including H5N1 and H1N1 pandemic strains), seasonal influenza, Respiratory Syncytial Virus (RSV) and Varicella Zoster Virus (shingles virus).

Advantages of the VLP technology platform include the ability to construct a manufacturing facility at one-fourth the cost in one-half the time compared to egg-based vaccine production facilities, which average over $150 million for a 100 million dose egg-based facility, $600 million for a 50 million dose mammalian cell culture facility, and 4-5 years before launching into commercial production. NVAX projects that a VLP vaccine plant (75-100 million dose capacity) could be built in 24 months for $35-40 million.

Other advantages of the VLP manufacturing process include the ability to create an H5N1 influenza vaccine within 12 weeks of knowing the genetic sequence of a target flu strain without the need of live viruses or vaccine adjuvants (added to some vaccines to increase the body’s immune response). In December 2007, NVAX partnered with GE Healthcare (NYSE:GE) to co-market a pandemic flu vaccine production solution that can be quickly scaled up on demand.

NVAX reported positive safety data and immune responses on all 1,000 subjects in the first part of a Phase 2 study (ClinicalTrials.gov ID NCT01072799) of its 2009 H1N1 VLP flu vaccine while the second stage of this study is ongoing with 3,500 additional subjects (safety portion) and results expected by year-end 2010 to support the potential registration of this flu vaccine in Mexico.

Some examples of acquisitions in the vaccine space [click here for HavRx Vaccines Index] include Pfizer (PFE) / Wyeth deal (vaccines cited as key factor in this deal), AstraZeneca (NYSE:AZN) MedImmune, Novartis (NYSE:NVS) / Chiron, and most recently Johnson & Johnson (NYSE:JNJ) / Crucell (NASDAQ:CRXL)…the following is a link to an article that I published on Seeking Alpha in January 2009 identifying CRXL as a likely acquisition candidate in the vaccine space => Crucell: Great Chance of a Buyout

In September 2009, NVAX submitted proposal in response to US RFP solicitation number HHS BARDA-09-32 for the advanced development of recombinant influenza vaccines in a US based manufacturing facility >> Health / Human Services (HHS) determined the BARDA proposal to provide recombinant influenza vaccines and manufacturing capabilities for pandemic preparedness is in the competitive range for award of an advanced development contract with an award possible this year (no definitive deadline exists) in a projected range of $25-100 million.

On 10/13/10, SIGA Technologies (NASDAQ:SIGA) announced the award of a contract to deliver 1.7 million courses of its smallpox antiviral for the Strategic National Stockpile, with a base contract value of $500 million. On 7/20/10, AVI BioPharma (NASDAQ:AVII) announced that it was awarded a new contract for up to $291 million total with the U.S. Department of Defense Chemical and Biological Defense Program for the advanced development of its hemorrhagic fever virus therapeutic candidates.

In April 2010, NVAX reported Phase 2 results in older adults (60 / older) from a dose-ranging study comparing its trivalent seasonal influenza VLP vaccine with a commercially available inactivated trivalent influenza vaccine (TIV) >> results indicated that NVAX vaccine was both safe and immunogenic against the 2009-2010 seasonal influenza virus strains in older adults. A confirmatory Phase 2b study is expected to begin next year to evaluate the Company’s VLP seasonal flu vaccine in older adults.

The Center for Disease Control and Prevention (CDC) has indicated that currently approved seasonal influenza vaccines have shown to be only 30% to 70% effective in preventing hospitalization for pneumonia and influenza in older adults >> NVAX believes its trivalent seasonal influenza VLP vaccine has the potential to address this unmet medical need 

NVAX ended 6/30/10 with $26.7 million in cash / investments and received net proceeds of $13.5 million from the sale of its common stock at an average price of $2.24 per share for the period of 6/30/10 through 8/5/10 (with 25 million shares authorized for sale as part of a market issuance sales agreement). The Company has 107 million shares of common stock outstanding as of 7/31/10 and is scheduled to report 3Q10 financial results on 11/5/10.

Based upon the range of consensus analyst stock price targets (six analysts, $4-11 range, $6 average price target) and the one-year stock chart (range $1.92-4.10, average approx. $2.50), my short-term (three-month) price target for NVAX is $3-4 based upon achieving positive results in the ongoing Phase 2 study in Mexico with additional upside possible ($4-6) based upon the potential award of a HHS / BARDA contract for domestic flu vaccine manufacturing / pandemic preparedness at or near the upper projected range of $100 million.

Disclosure: Long NVAX

Amarin (NASDAQ:AMRN) Investors Await Results from a Pair of Pivotal Studies

Written by Mike Havrilla. Amarin Corp. (NASDAQ:AMRN) is developing AMR101 (Ethyl-EPA) as a prescription-grade omega-3 fatty acid with the same active component as EPADEL, which has been marketed over 10 years by Mochida Pharma (MCPMF.PK) (TYO:4534) in Japan with annual sales of approximately US$370 million. The Company presented earlier this afternoon at the Oppenheimer Annual Healthcare Conference, although no changes were announced to the expected time frame for clinical trial results.

Other comments made during the presentation today highlighted that LOVAZA currently has an annual sales run rate of over $1 billion in the US and $400 million outside the US (i.e. the current monthly sales rate * 12 months = annual run rate of sales vs. trailing 12-month sales figures). Also, AMRN plans to pursue a multi-supplier strategy for AMR101 vs. Glaxo, which utilizes a single supplier for LOVAZA. With regard to patent / intellectual property (IP), AMRN expects at least 7.5-8 years of US marketing exclusivity (which is calculated from the time of FDA approval) based on its status as a New Chemical Entity (NCE) in this country, despite the long history of use in Japan.

AMR101 is prescription grade, ultra-pure (>96%) ethyl ester of an omega-3 fatty acid known as eicosapentaenoic acid (ethyl-EPA) that has been studied in more than 1,000 patients as part of double-blind, placebo-controlled studies that include over 100 patients studied for over 1 year. In addition, Ethyl-EPA is differentiated from Glaxo’s (NYSE:GSK) $1 billion dollar product LOVAZA (omega-3-acid ethyl esters) in the key areas outlined below.

- no fishy smell / taste or GI side effects such as “fish burps” => potential for better patient compliance along with expected dosing of just two capsules per day vs. four capsules per day for LOVAZA

- lacks Ethyl-DHA omega-3 fatty acid component, which raises bad cholesterol (LDL) levels => LOVAZA (465mg Ethyl-EPA + 375mg Ethyl-DHA + 160mg addt’l fatty acids / esters) vs. AMR101 (> 960mg Ethyl-EPA + addt’l fatty acids approx. 30mg)

- potential to address a much larger patient population compared to LOVAZA, which is approved only for patients with triglyceride levels greater than 500 mg/dL => an estimated 3.8 million US adults over age 20 with TG levels greater than 500 vs. an estimated 36 million people w/ TG levels of 200-499 (ANCHOR study, potential indication for Ethyl-EPA)

On 8/10/10, AMRN reported that the MARINE study (very high TGs > 500) was fully enrolled (229 pts) with top-line results expected in approx. 6 months (mid-February 2011 estimate) while the ANCHOR study (high TGs 200-500 plus on statins w/ two or more lipid disorders) is estimated to complete patient enrollment by early 2011 with results to be reported later in 2011.

In addition, a five-year cardiovascular events outcome study conducted in Japan in over 18,000 patients receiving statins for elevated cholesterol demonstrated that EPADEL treatment added to statins vs. statins alone resulted in a statistically and clinically significant 19% reduction in cumulative cardiovascular events (e.g. heart attacks) over a five-year period. AMRN plans to conduct a Phase 3b outcomes study (which would be funded by a partner and is not required for a NDA filing) as a continuation of the ANCHOR study in patients on statin therapy with mixed dyslipidemia (i.e. two or more lipid disorders such as elevated LDL and TGs). If successful, the outcomes study would allow for an expanded label for AMR101 and larger commercial opportunity.

Amarin is fully funded through a potential NDA filing in 2012 with partnership discussions ongoing (14 confidential disclosure agreements or CDAs currently pending) and likely to be completed after both of the pivotal trial results are announced and prior to FDA approval. It is important to note that both of the pivotal Phase 3 studies (MARINE / ANCHOR) are being conducted under SPA agreements with the FDA without the need for Phase 2 studies for patients with elevated TGs, supported by over 10 years of use in Japan and previous studies conducted by Amarin for a variety of neurological conditions that provided proof-of-concept data for lowering TGs – the previous testing by AMRN is also important with regard to the completed preclinical / toxicology data that has already been generated.

Looking at the financials, Amarin is fully funded through a potential NDA filing and ended 2Q10 on 6/30/10 with $37.6 million in cash, no debt, and approximately 100 million shares of common stock outstanding. On a fully diluted basis, Amarin has about 149 million shares of common stock, which includes 8.8 million options outstanding with an average exercise price of $2.44 and 40.2 million warrants outstanding at an average exercise price of $1.76.

Top shareholders of AMRN include Abingworth (17%), Sofinnova (17%, including 3.4M shares purchased at approx. $2.85 in August 2010), and OrbiMed (10%) with the first two venture capital firms participating in re-capitalization of the Company last year. Below are the key takeaways supporting a bullish outlook for AMRN…

- an under the radar opportunity with little research analyst coverage and largely unknown by Wall Street

- targeting an enormous market opportunity that encompasses cardiovascular disease and the evolving recognition of the need to treat triglycerides, which has the potential to become a multi-billion market opportunity similar in scope and size to statin drugs such as the world’s top selling drug Lipitor that is about to face generic competition

- many potential big pharma suitors, including obvious names such as Glaxo, given the potential threat to their billion dollar drug LOVAZA (which is being heavily marketed including television commercials), which is currently the only FDA-approved prescription omega-3 fatty acid product and Pfizer (NYSE:PFE), which will soon face generic competition for Lipitor and may look for another potential blockbuster drug in the area of cardiovascular disease

- the Company’s Chairman, Joseph Zakrzewski, joined the Board in 2010 and previously served as COO of Reliant Pharma, which successfully developed LOVAZA and was purchased by Glaxo for $1.7 billion in November 2007

- pivotal Phase 3 program expected to conclude by mid-2011 to support planned NDA filing by 2012, including initial Phase 3 MARINE study results in early 2011

The 52-week stock price range for AMRN is $0.93-3.45 and the six consensus analyst price target estimates include a range of $2.60-7.00 with an average price target of $5 per share. The pivotal study data is the major downside risk at this point and while it seems unlikely to fail vs. placebo in both studies; the data will be compared to LOVAZA published results so ideally want to see better results for Ethyl-EPA, primarily observing no treatment-related increase in bad cholesterol (LDL) at a cut-off range of +6% as agreed upon with FDA in the SPA for the ANCHOR study.

My short-term (3-6 month) price target for AMRN is $5-6 per share with $10-12 possible longer term (9-12+ months) based on achieving successful results (i.e. not only meeting primary endpoints vs. placebo in study, but improving upon LOVAZA – especially in terms of not raising bad cholesterol levels as efficacy in lowering triglycerides should be comparable) in both pivotal studies to support broader label compared to LOVAZA and potential for fully diluted (150 million shares) valuations of $1.5-2 billion based on Glaxo’s acquisition of Reliant Pharma and the current global sales of LOVAZA ($1 billion).

Other bullish factors for AMRN include less likelihood of a sell on the news reaction with positive MARINE study results because the pivotal ANCHOR study data will follow later in 2011 (which has the potential to support larger patient population) and the ongoing potential for a partnership or acquisition if the pivotal trials are successful. I am expecting both pivotal studies will be successful since AMR101 is a prescription grade omega-3 fatty acid with a well defined mode of action and the lack of a DHA fatty acid component should translate into a improved product compared to LOVAZA with the potential to address a much larger patient population without increasing bad cholesterol levels (LDL neutral).

Disclosure: Long AMRN

$NVAX Novavax on Track to Report Potential Upside Catalysts by Year-End

Written by Mike Havrilla. Earlier today, Novavax (NASDAQ:NVAX) reported its quarterly financial results along with an update on the recently completed Phase 2 flu vaccine clinical trial in Mexico and the status of a potential BARDA government contract award for pandemic flu vaccine manufacturing / preparedness. Click here for my overview article on NVAX, which was published earlier this week.

- reported a net loss of $10.4 million (M) vs. $7.5M in the year-ago period => increase in net loss due to higher R&D spending ($7.9M vs. $5.3M) for the development of the Company’s virus-like particle (VLP) flu vaccine candidates

- ended 9/30/10 with $36.9M in cash / equivalents vs. $43M at year-end 2009 => funds at least one year of planned operations / R&D and does not account for potential BARDA contract award

- ended 6/30/10 with $26.7 million in cash / investments and received net proceeds of $13.5 million from the sale of its common stock at an average price of $2.24 per share for the period of 6/30/10 through 8/5/10 based on an at the market (ATM) sales agreement for shares of its common stock w/ up to 25M shares authorized

- approx. 10M of the 25M authorized shares of NVAX common stock have been sold to meet funding needs ahead of the potential BARDA contract award, which would be utilized to fund the entire US pivotal clinical development program thru a potential BLA filing for season / pandemic VLP influenza vaccines that would be conducted during next flu season (fall 2011)

- submitted its final revisions to its proposal to HHS BARDA to provide recombinant influenza vaccines and manufacturing capabilities for pandemic preparedness and awaits final decision

- has received a key U.S. patent covering the use of influenza gene sequences for high-yield production of influenza VLP vaccines to protect against current and future seasonal and pandemic influenza strains

- on 11/4/10, announced approx. $978,000 received in grants under the Internal Revenue Service’s Qualifying Therapeutic Discovery Project => plans to utilize funds to support development of VLP vaccine candidates for pandemic / seasonal influenza, respiratory syncytial virus (RSV), and varicella-zoster virus (shingles virus)

- Respiratory Syncytial Virus Fusion Protein (RSV-F) Vaccine: In Sep. 2010, filed IND for FDA clearance to conduct Phase I study and expects written response by mid-NOV (11/15/10 estimate) from FDA regarding chemistry / manufacturing (CMC) concern cited in clinical hold to begin study, potential for Phase I data by mid-2011 if CMC issue resolved by early 2011 to begin study

- 2009 H1N1 influenza (Flu) VLP (virus-like particle) Vaccine: On 11/5/10, reported completion of six-month safety evaluation in 3500 subjects enrolled in second stage of study in Mexico with no serious vaccine related safety issues, final clinical study report expected by year-end 2010, previously reported positive safety / immune response data in initial 1000 subjects in first stage of this study

Disclosure: Long NVAX

[Cash Flow Trader] Trade Alert

There are new trade recommendations today for short positions to help hedge our current long positions.

Stock Portfolio
Buy PSQ Short Nasdaq Index
Buy RWM Short Small Cap Index

Option Portfolio
Buy XLB Dec 11 45 put

Come Join Me for Lunch in Seattle on Friday, September 16.

Come join me for lunch for the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in Seattle on Friday, September 16, 2011. A three course lunch will be followed by a 30 minute PowerPoint presentation and a one hour question and answer period.

I’ll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $225.

I’ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at a downtown Seattle venue that will be emailed to you with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

Weekly Income Trader Alert for SPX

Hi Members,

I hope you are having a great week.

Before placing a trade it’s very important to quickly review key market components. Take a look below for this week’s analysis:

Today’s date: 07/21/2011
Options expiration date: 07/22/2011
Number of days until expiration: 1
Market sentiment (based on MA 200): Price above MA 200
Market sentiment (based on MA 50): Price above MA 50
Current VIX price: Proprietary VIX indicator is Bullish
Fundamental and general notes: Market is up. Oil price and Gold are high. Europe, Jobs and economy are the issues. Earning season. Market short prognosis: Bullish Low.

SPX Chart and Indicators

Current OEX Price: 1340.0
5% Out of Money Call: 1407.0
5% Out of Money Put: 1273.0
Closest support for puts: 1335, 1320, 1300
Closest resistance for calls: 1350, 1365

Based upon this information, here are the trades that i am looking to make today:

IMPORTANT: As you can see the trade is given as a limit order. This means that you need to enter the trade as a “sell to open” limit order. If you get a fill on this order than you will need to follow the exit criteria outlined below. If you do not get a fill, your order will be automatically canceled at the end of the day, and you should look out for my next day’s email with my new entry alert. Please keep in mind that, occasionally, you may only get filled on 1 leg of the trade at a time. This means that you will be looking to enter only the other leg during subsequent days.

You can enter these trades ONLY if you currently don’t have an open short position for this index’s option that was entered earlier this week. For example, if you are currently short a put on the SPX don’t enter a new put simply look at the call alert and vice versa.

Please, keep in mind, because margin requirements for your open positions changing with the market dynamics, you should ALWAYS have reserve cash in your account and never to fully margin it out.

This Week’s Trade

Sell Put or Call: PUT CALL
Option to Trade: -SPX110722P1280 -SPX110722P1370
Strike Price: 1280 1370
Expiration Date: 07/22/2011 07/22/2011
Action: Sell to Open Sell to Open
Time order is in force: Good for a Day Good for a Day
Limit Order Price: 0.20 0.10

Exit Criteria

In most cases the options you sell will expire worthless at the end of each week. However there will be occasions where you will need to exit your positions before expiration based on your cutoff rules. If I will be manually closing one of my positions I will send out an alert. However, you should be clearly aware of your risk and money management rules and be ready to close your trade if necessary.

To review here are my rules (please review the quick start guide and the strategy guide for more info on cutoff rules).

I will exit the positions once the price of the option sold exceeds 5 times the original premium I collected.

I will exit the position if my open loss on any position grows to more than 4% of my account.

I will close all trades and stop trading if i have a draw down of over 25% on my account.

Please pay careful attention to your exit criteria, and risk management rules in order to minimize issues.

Thanks and happy trading!

-Mikhail Borisov

European Style Homeland Security.

The English are feeling the pinch in relation to recent events in Libya, and have therefore raised their security level from “Miffed” to “Peeved.” Soon, though, security levels may be raised yet again to “Irritated” or even “A Bit Cross.” The English have not been “A Bit Cross” since the blitz in 1940, when tea supplies nearly ran out. Terrorists have been re-categorized from “Tiresome” to “A Bloody Nuisance.” The last time the British issued a “Bloody Nuisance” warning level was in 1588, when threatened by the Spanish Armada.

The Scots have raised their threat level from “Pissed Off” to “Let’s get the
Bastards.” They don’t have any other levels. This is the reason they have been
used on the front line of the British army for the last 300 years.

The French government announced yesterday that it has raised its terror alert level from “Run” to “Hide.” The only two higher levels in France are “Collaborate” and “Surrender.” The rise was precipitated by a recent fire that destroyed France ‘s white flag factory, effectively paralyzing the country’s military capability.

Italy has increased the alert level from “Shout Loudly and Excitedly” to
“Elaborate Military Posturing.” Two more levels remain: “Ineffective Combat
Operations” and “Change Sides.”

The Germans have increased their alert state from “Disdainful Arrogance” to
“Dress in Uniform and Sing Marching Songs.” They also have two higher levels:

“Invade a Neighbor” and “Lose.”

Belgians, on the other hand, are all on holiday as usual; the only threat they
are worried about is NATO pulling out of Brussels.

The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

Australia , meanwhile, has raised its security level from “No worries” to
“She’ll be alright, Mate.” Two more escalation levels remain: “Crikey! I think
we’ll need to cancel the barbie this weekend!” and “The barbie is canceled.” So
far no situation has ever warranted use of the final escalation level.

– John Cleese – British writer, actor and tall person.

Quick Start Guide

Drawback of Other Trading Systems

Technical analysis aims to predict the market based on past price action. This is very hard to do because past performance is not an indication of future results. And you are forecasting the market based on lagging indicators. Also unforeseen events specific to the world economy, companies, currencies and commodities can have a drastic effect on the price of a trading instrument that cannot be reflected based on indicators or historic price patterns on chart.

Although fundamental analysis can be effective you are dealing with a great amount of competition from professional. Investment bank analysts and hedge fund managers with a high level of professional experience knowledge, connection and money behind them are performing the same analysis constantly and beating you to the punch. By the time you are ready to make a trade based on fundamental analysis the analysis is usually already priced in.

Why Mikhail Borisov’s Weekly Options works?

Mikhail Borisov’s Weekly Options hardly relies on fundamental and technical analysis at all. In fact if you traded Mikhail Borisov’s Weekly Options without any analysis there is a very good chance that you would still be successful with it. Mikhail Borisov’s Weekly Options works because it uses a basic mathematical concept strategy that is taken advantage of through the use of options in the markets.

A few key reasons why Mikhail Borisov’s Weekly Options works that are addressed below. Although all of them may not make sense now they will become extremely clear throughout the duration of this text:

Reason 1: Normal distribution of data

According to a basic statistical principle a stock is most likely to end up at its current price after any amount of time. For this reason 95% of all options purchased expire worthless. This will make more sense later but this is a key pillar on which this system stands.

Binomial distribution of a stock price:

Reason 2: Options loose premium at an accelerated rate near expiration

Although options will be discussed in much greater detail throughout this text, one key pillar of Mikhail Borisov’s Weekly Options is that options lose value over time especially when they are about to expire.

An option is a tradable contract that gives the owner a right to buy or sell the underlying instrument at a specific price. The buyer of the option will pay a premium for it and the seller will receive a premium. The key to remember here is that the premium will lose value as the option’s expiration date draws near.

If this does not make sense now don’t worry it will make sense later

Reason 3: Mutual fund managers, hedge fund managers and program traders may be required to hedge their portfolios with options without any expectation to ever profit from it.

Many traders and investors who are long or short biased protect their portfolios with options. A long biased investor will purchase a protective put and a short biased investor will purchase a protective call. These investors are perfectly content with these options expiring worthless. In a zero sum game this creates an opportunity for a smart options trader to benefit from this.

Reason 4: By making your own market you can consistently be ahead of the competition over a sustained period of time

Mikhail Borisov’s Weekly Options is designed for you to enter trades on limit orders that are placed between the ask and the bid of an option price.

By getting into an option trade at a better price than available you are putting the odds at your favor over long period of time.

Mikhail Borisov’s Weekly Options Required Instruments

Trading Options

Options are derivative instruments that are traded on an exchange. An option gives the owner the right to buy or sell the underlying instrument at a particular price. Options are traded on various instruments such as individual stocks, futures, Forex, and indexes. Options will be covered in much greater detail in the full strategy guide, however here are some basics.

There are 2 basic types of options a call option and a put option.

• Call – A call option give the owner the right to purchase the underlying instrument at the options strike price any time before expiration. As an options trader you would buy a call option if you think the price of the underlying instrument will go up. If the underlying instrument goes up in price than the owner can purchase the instrument at the lower strike price and sell it on the open market. If the underlying instrument does not go up in price above the options strike price than the option will expire worthless.

• Put – A put option gives the owner the right to sell the underlying instrument at the option’s strike price. As an options trader your buy a put option if you think the price of the underlying will go down. If the underlying instrument goes down in price below the strike price you could buy the instrument at market value and sell it at the strike price thus locking in your profit.

Most options are not exercised until their expiration date and are simply bought and sold. Options on indexes are never exercised they are simply settled in cash. Option trading is a zero sum game for every winner there is a loser. Traders can create a plethora of strategies to suit their style and requirements

Options are can be in 3 possible scenarios: in the money, at the money and out of the money.

• At the money – an option is at the money when the strike price and the market price of the underlying are the same.

• Out of the money – an option is out of the money when it cannot be yet exercised at a profit. For a call option this means that the strike price is above the market price and for a put option this means that the strike price of the put is below the market price of the underlying.

• In the money – an option is in the money when it can be exercised with a profit. For a call option this means that the strike price is below the market price of the underlying. And for a put option this means that the strike price is above the market price of the underlying.

Options have both a theoretical value and a market value.

The market value of an option consists of 2 key components: the intrinsic value and the time value. The intrinsic value of an option is the difference between the strike price and the price of the underlying for an in the money option. For example if you have a $45 call option on a $50 stock than the intrinsic value is $5. If you have a $50 put on a $45 stock than the intrinsic value is also $5. The time value is the premium that you pay to have an option. Before the day of expiration a $45 call on a $50 stock will cost more than just $5. It may cost $6. In this case $5 will be the intrinsic value and $1 will be the time value. An option that is out of the money does not have any intrinsic value at all, it simply has time value.

Time value is determined on the open market by options traders and is dependent on the theoretical value of the option. The theoretical value of an option is determined by the following: price of the underlying security, strike price, time until expiration, volatility, dividend/risk free interest rate.

Options are typically traded in contracts. For stock options each contract controls 100 shares of the security. For example if you purchase 1 contract of a $3 option with a strike price of $40 for a stock you will pay $300 plus commissions to control 100 shares of the stock. So your buying power with the option is $4000. If the stock grows to $45 by expiration, then your profit is $200. This is calculated by subtracting the option premium from the difference between the market price and the strike price of the option ($5-$3) and multiplying times the 100 shares that the contract controls.

Premium Collection

Options can be sold instead of bought. When you sell an option you collect the options premium at the begging of the transaction. Unlike buying an option when you sell an option you have an obligation instead of a right.

When you sell a call option you now have an obligation to the buyer to sell him the underlying at the option’s strike price on or before expiration. If you sell a put option then you have an obligation to buy the instrument at the strike price on or before expiration.

If you sell a $55 call on a $50 stock you collect a premium which is the time value of the option. However is the stock goes up to $60 than you have to buy the stock at $60 and sell it to the owner of the option at $55. So you would lose $5 minus the premium that you collected for selling the option.

If you sell a $45 put option on a $50 stock you will collect a premium which is the time value of the option. If the stock goes down to $40 than you would have to buy the stock at $45 from the owner of the owner of the option. This way you would be buying a $40 stock at $45 thus losing $5 minus the premium of the option that you collected at the sale.

You would sell a call option if you believe that the price of the underlying instrument will either go down, stay the same, or at least not go up so much that it will reach the options strike price plus the premium that you collected. Although your profit is limited to the premium that you collect when selling a call option there are more possible outcomes of the price of the underlying instrument that would leave you with profit.

Here is the profitability graph of shorting a call option:

If you sell a put option your profit is limited to the premium that you collect. However you will retain your profit if the underlying instrument either goes up, stays the same or at least does not go down as far as the strike price minus the premium that you collected. Once again when selling a put your upside is limited to the premium but there are more possible price occurrences that will be profitable for you.

Here is the profitability graph of being short a put:

Options can be sold at the money, in the money or out of the money. The Mikhail Borisov’s Weekly Options strategy focuses on selling out of the money options on indexes in a specific strategic way.

When you sell a put and a call option at the same time that are out of the money that is called being short a strangle. When you are short a strangle you simply need the price of the underlying to stay in a specific range. As long as the underlying instrument does not go above the call price or below the put price you will retain both the call and the put premium that you collected during the sale of the options.

Here is the profitability graph of a short strangle:

The Mikhail Borisov’s Weekly Options system strategically sells out of the money weekly options and credit spreads on indexes in a profitable way. There are specific benefits to doing this that are described in the subsequent section.

Benefits of Selling Options

There are a number of benefits to selling options. Here are 3 key ones:

• 95% of options expire worthless because of normal distribution

Due to the principle of normal distribution the price of a tradable instrument is most likely to end up exactly where it initially was at any moment in the future. That is not to say that the price will not move but it has the highest probability of ending up where it started. For example if you purchase a $100 stock it is most likely to end up at $100 at any given point in the future. It can end up at $150 or at $50 but it is most likely to end up at $100. And to take this one step further it is more likely to end up closer to $100 than further away.

There is a very slight long biased to this, in what’s called a log-normal distribution with options. This is because the market has an upward tendency and growth is unlimited but decline is limited to zero. However for the sake of Mikhail Borisov’s Weekly Options system we will assume a regular normal distribution which can be depicted in a basic bell shaped curve. This is illustrated below:

If you look at the statistics over 90% of out of the money options expire worthless. This means that the price of the underlying never reaches the strike price. One primary reason for this is the rule of the normal distribution of data. By selling out of the money options you are making a bet that goes along with this mathematical principle.

• Time is on your side because the options you sell lose value over time.

When you are selling out of the money options people are purchasing them in hope that the out of the money strike price will be crossed by the underlying instrument which will cause the options to become in the money and generate the buyer a profit. This means that the option’s price is based on time till expiration. The more time until expiration the higher the price of the option. The less time until expiration the lower the price. As the option’s expiration draws near the options price starts to fall at an accelerated rate. This is because it becomes significantly less likely statistically that the strike price will be reached. Based on this you can see that time is on your side with Mikhail Borisov’s Weekly Options system, you sell the option and the time value gets smaller and smaller as the options expiration date draws near. This is particularly effective with weekly options which are used in Mikhail Borisov’s Weekly Options system.

• Program traders and portfolio managers are required to buy options as protection for their long or short biased portfolios with no intention of them being profitable which works to your advantage in a zero sum game.

Many hedge fund managers and institutions have portfolios of stocks. Usually these portfolios are long or short biased. In order to protect themselves from catastrophic risk they purchase protective options on indexes. If they are afraid of an extreme down move they will purchase a protective put and if they are afraid of an extreme up move they will purchase a protective call. In many cases they simply do it to show their investors that they have some protection on the portfolio. The puts and calls that they buy are so far out of the money that they are extremely unlikely to ever be executed and the institutional traders know it. With Mikhail Borisov’s Weekly Options system we try to take advantage of this. Because there is demand for these options we sell them and collect the premium knowing very well that it is extremely unlikely that the price of the underlying will ever reach the strike price.

Benefits of Weekly Options

Weekly options are relatively new. Because of this there is a higher chance of inefficiencies that can be taken advantage of by savvy traders. Regular options have expiration dates every month, while weekly options have an expiration date every Friday.

Having an expiration date weekly allows the trader to collect premium 4.5 times per month instead of once per month. When this is combined with the accelerated decay of time value near the expiration date, premium collection of weekly options becomes a very effective strategy when done correctly.

In addition to higher profitability using weekly options mitigates your exposure due to the shorter time till expiration. With Mikhail Borisov’s Weekly Options system you are selling options only 2-3 days away from expiration. This leaves you exposed to unpredictable price movements of the underlying instrument for only a couple of days.

With Mikhail Borisov’s Weekly Options system you are also entering your trade using limit orders. By doing this you are making the market on your trades instead of taking the market. Doing this over a long amount of time puts the odds in your favor slightly. By using weekly options instead of regular options you can make your market 4.5 times every month instead of once. This is another slight edge that Mikhail Borisov’s Weekly Options strategy with weekly options provides you in a zero sum game.

Mikhail Borisov’s Weekly Options Account Type and Risk Management

The Mikhail Borisov’s Weekly Options system primarily sells options on major indexes and futures. These include the following:

OEX – S&P 100 index

IWM – I Shares for the Russell 2000 index fund

ES – E-Mini futures for the S&P 500 (Not all brokers will have this available, but you don’t have to use it so that should not stop you)

In order to achieve success with Mikhail Borisov’s Weekly Options system you will need to set up a margin account with an options broker with at least $5,000. Although you will likely experience better success with an account with $10,000 or more.

Some commonly used options brokers are OptionsXpress, Fidelity, Interactive Brokers, and Options House. When you set up your account you will need to confirm with the broker that your account is set up so that you can write/sell naked calls and puts or at least enter into condor spreads. In many cases the broker will need to approve your account for marginable status. This is typically based on your experience. The brokerage will ask questions on your application about your level of trading experience. The brokers are required to ask but they cannot and do not check the accuracy of your answers. If they see that your answers show that you have enough experience they will ask for you to sign an additional risk disclosure.

Here is a breakdown of the major brokerages and their minimum requirements to set up and account to sell options.

When selling options on indexes or index futures you will need to put up margin for every contract that you sell. Since you are selling naked options with limited protection the margin is calculated based on various parameters such as market volatility, time till option expiration, and how far away out of the money your option is. One the best instruments to sell options on for Mikhail Borisov’s Weekly Options system is the S&P 100 index called OEX. Based on the rules of Mikhail Borisov’s Weekly Options system, the ball park figure for the margin requirement to sell 1 contract of a weekly option on OEX is $5000.

Suggested Risk Management Exposure

For the sake of this text we will assume that you are using at least $10,000 in your account to trade Mikhail Borisov’s Weekly Options strategy.

Based on Mikhail Borisov’s Weekly Options strategy rules you can sell:

– Regular – 1 contract for every $7,000 in your account

– Aggressive – 1 contract for every $5,000 in your account

Suggested Risk Management Cutoffs

Since Mikhail Borisov’s Weekly Options system is very accurate in most cases the options that you sell will simply expire worthless and allow for you to collect the entire premium that you generated when you sold the options. However in rare cases you will need to take a loss by buying back the option that you sold at a higher price. In order to prevent major losses that will offset your wins you must have predetermined cutoffs in place.

The Mikhail Borisov’s Weekly Options system historically showed an accuracy of over 98%. Because of the high accuracy you must be prepared for the fact that your losses will be bigger than your wins. Although a loss will occur only 1 out of 50 times it will wipe out 3-4 of your previous wins. You must be prepared for that and treat it as something expected.

There are two basic hard cutoff rules to Mikhail Borisov’s Weekly Options system:

3% hard stop – if sold contract value grows to more than 3% of account balance exit the trade.

Example: if you have $10,000 and you sell 1 put contract for $150. If the value of the contract grows to $450 (giving you a $300 loss), then you should exit the trade immediately.

This tactic is based on a simple risk management concept where you don’t want to lose more than a certain percentage of your account on any single trade.

RRR hard stop – If the value of the option that you sold grows to more than 5 times of selling price exit trade.

Example: If you have $10,000 in your account and you sell 1 put contract for $100 exit the trade immediately if the value of the contract that you sold grows to $500. This will limit your reward risk ratio to 1:4.

The key to this rule is that you must have a hard reward risk ratio in place so that you losses don’t wipe out the majority of your gains.

Strategy Guide

Trading Options

Options are derivative instruments that are traded on an exchange. An option gives the owner the right to buy or sell the underlying instrument at a particular price. Options are traded on various instruments such as individual stocks, futures, Forex, and indexes. Options will be covered in much greater detail in subsequent sections of this text, however here are some basics.

There are 2 basic types of options a call option and a put option.

•       Call – A call option give the owner the right to purchase the underlying instrument at the options strike price any time before expiration. As an options trader you would buy a call option if you think the price of the underlying instrument will go up. If the underlying instrument goes up in price than the owner can purchase the instrument at the lower strike price and sell it on the open market. If the underlying instrument does not go up in price above the options strike price than the option will expire worthless.

•       Put – A put option gives the owner the right to sell the underlying instrument at the option’s strike price. As an options trader your buy a put option if you think the price of the underlying will go down. If the underlying instrument goes down in price below the strike price you could buy the instrument at market value and sell it at the strike price thus locking in your profit.

Most options are not exercised until expiration date and are simply bought and sold. Options on indexes are never exercised they are simply settled in cash. Option trading is a zero sum game for every winner there is a loser. Traders can create a plethora of strategies to suit their style and requirements

Options are can be in 3 possible scenarios: in the money, at the money and out of the money.

• At the money – an option is at the money when the strike price and the market price of the underlying are the same.

• Out of the money – an option is out of the money when it cannot be yet exercised at a profit. For a call option this means that the strike price is above the market price and for a put option this means that the strike price of the put is below the market price of the underlying.

• In the money – an option is in the money when it can be exercised with a profit. For a call option this means that the strike price is below the market price of the underlying. And for a put option this means that the strike price is above the market price of the underlying.

Options have both a theoretical value and a market value.

The market value of an option consists of 2 key components: the intrinsic value and the time value. The intrinsic value of an option is the difference between the strike price and the price of the underlying for an in the money option. For example if you have a $45 call option on a $50 stock than the intrinsic value is $5. If you have a $50 put on a $45 stock than the intrinsic value is also $5. The time value is the premium that you pay to have an option. Before the day of expiration a $45 call on a $50 stock will cost more than just $5. It may cost $6. In this case $5 will be the intrinsic value and $1 will be the time value. An option that is out of the money does not have any intrinsic value at all, it simply has time value.

Time value is determined on the open market by options traders and is dependent on the theoretical value of the option. The theoretical value of an option is determined by the following: price of the underlying security, strike price, time until expiration, volatility, dividend/risk free interest rate.

Options are typically traded in contracts. For stock options each contract controls 100 shares of the security. For example if you purchase 1 contract of a $3 option with a strike price of $40 for a stock you will pay $300 plus commissions to control 100 shares of the stock. So your buying power with the option is $4000. If the stock grows to $45 by expiration, then your profit is $200. This is calculated by subtracting the option premium from the difference between the market price and the strike price of the option ($5-$3) and multiplying times the 100 shares that the contract controls.

Here is an example of how a contract works:

Option Quotes

Every underlying instrument has many options available at various strike prices and expiration dates. These options are quoted in an option chain.

Here is an example of an actual option chain on the OEX index:

Here is a simplified example of an option chain:

Premium Collection

Options can be sold instead of bought. When you sell an option you collect the options premium at the begging of the transaction. Unlike buying an option when you sell an option you have an obligation instead of a right.

When you sell a call option you now have an obligation to the buyer to sell him the underlying at the option’s strike price on or before expiration. If you sell a put option then you have an obligation to buy the instrument at the strike price on or before expiration.

If you sell a $55 call on a $50 stock you collect a premium which is the time value of the option. However is the stock goes up to $60 than you have to buy the stock the stock at $60 and sell it to the owner of the option at $55. So you would lose $5 minus the premium that you collected for selling the option.

If you sell a $45 put option on a $50 stock you will collect a premium which is the time value of the option.  If the stock goes down to $40 than you would have to buy the stock at $45 from the owner of the owner of the option. This way you would be buying a $40 stock at $45 thus losing $5 minus the premium of the option that you collected at the sale.

You would sell a call option if you believe that the price of the underlying instrument will either go down, stay the same, or at least not go up so much that it will reach the options strike price plus the premium that you collected. Although your profit is limited to the premium that you collect when selling a call option there are more possible outcomes of the price of the underlying instrument that would leave you with profit.

Here is the profitability graph of shorting a call option with strike price $65 and premium $15:

If you sell a put option your profit is limited to the premium that you collect. However you will retain your profit if the underlying instrument either goes up, stays the same or at least does not go down as far as the strike price minus the premium that you collected. Once again when selling a put your upside is limited to the premium but there are more possible price occurrences that will be profitable for you.

Here is the profitability graph of being short a put:

Options can be sold at the money, in the money or out of the money. The OSS strategy focuses on selling out of the money options on indexes in a specific strategic way.

When you sell a put and a call option at the same time that are out of the money that is called being short a strangle. When you are short a strangle you simply need the price of the underlying to stay in a specific range. As long as the underlying instrument does not go above the call price or below the put price you will retain both the call and the put premium that you collected during the sale of the options.

Here is the profitability graph of a short strangle:

The OSS system strategically sells out of the money weekly options and credit spreads on indexes in a profitable way. There are specific benefits to doing this that are described in the subsequent section.

Benefits of Selling Options

There are a number of benefits to selling options. Here are 3 key ones:

•       95% of options expire worthless because of normal distribution

Due to the principle of normal distribution the price of a tradable instrument is most likely to end up exactly where it initially was at any moment in the future. That is not to say that the price will not move but it has the highest probability of ending up where it started. For example if you purchase a $100 stock it is most likely to end up at $100 at any given point in the future. It can end up at $150 or at $50 but it is most likely to end up at $100. And to take this one step further it is more likely to end up closer to $100 than further away.

There is a very slight long biased to this, in what’s called a log-normal distribution with options. This is because the market has an upward tendency and growth is unlimited but decline is limited to zero. However for the sake of OSS system we will assume a regular normal distribution which can be depicted in a basic bell shaped curve. This is illustrated below:

If you look at the statistics over 90% of out of the money options expire worthless. This means that the price of the underlying never reaches the strike price. One primary reason for this is the rule of the normal distribution of data. By selling out of the money options you are making a bet that goes along with this mathematical principle.

•       Time is on your side because the options you sell lose value over time.

When you are selling out of the money options people are purchasing them in hope that the out of the money strike price will be crossed by the underlying instrument which will cause the options to become in the money and generate the buyer a profit. This means that the option’s price is based on time till expiration. The more time until expiration, the higher the price of the option. The less time till expiration the lower the price. As the options expiration draws near the options price starts to fall at an accelerated rate. This is because it becomes significantly less likely statistically that the strike price will be reached. Based on this you can see that time is on your side with the OSS system, you sell the option and the time value gets smaller and smaller as the options expiration date draws near. This is particularly effective with weekly options which are used in the OSS system.

•       Program traders and portfolio managers are required to buy options as protection for their long or short biased portfolios with no intention of them being profitable which works to your advantage in a zero sum game.

Many hedge fund managers and institutions have portfolios of stocks. Usually these portfolios are long or short biased. In order to protect themselves from catastrophic risk they purchase protective options on indexes. If they are afraid of an extreme down move they will purchase a protective put and if they are afraid of an extreme up move they will purchase a protective call. In many cases they simply do it to show their investors that they have some protection on the portfolio. The puts and calls that they buy are so far out of the money that they are extremely unlikely to ever be executed and the institutional traders know it. With the OSS system we try to take advantage of this. Because there is demand for these options we sell them and collect the premium knowing very well that it is extremely unlikely that the price of the underlying will ever reach the strike price.

Types of Options

There are a few different types of options that are available to be traded. Although the basic concepts hold true for all of them, there are some minor subtle differences.

Before we go over each type of options it is important to point out that a buyer of options has not logical reason to exercise the option unless it’s in the money.

American options – With American Options the buyer has the right to exercise the option at any time. American options expire every third Friday of the month. Buyers typically never exercise the options they simply trade them on the open market. However the ability to exercise the option early is priced into the option’s premium which makes the options more expensive.

European options – With the European options the buyer can only exercise the option at expiration. As with American options the traders usually settle the options or trade them instead of exercising them. These options expire on the last trading day of the month.

Weekly options – Weekly options are American options that expire on a weekly basis rather than on a monthly basis. Weekly options expire every Friday.

Benefits of Weekly Options

Weekly options are relatively new. Because of this there is a higher chance of inefficiencies that can be taken advantage of by savvy traders. Regular options have expiration dates every month, while weekly options have an expiration date every Friday.

Having an expiration date weekly allows the trader to collect premium 4.5 times per month instead of once per month. When this is combined with the accelerated decay of time value near the expiration date premium collection of weekly options becomes a very effective strategy when done correctly.

In addition to higher profitability using weekly options mitigates your exposure due to the shorter time till expiration. With the OSS system you are selling options only 2-3 days away from expiration. This leaves you exposed to unpredictable price movements of the underlying instrument for only a couple of days.

With the OSS system you are also entering your trade using limit orders. By doing this you are making the market on your trades instead of taking the market. Doing this over a long amount of time puts the odds in your favor slightly. By using weekly options instead of regular options you can make your market 4.5 times every month instead of once. This is another slight edge that the OSS strategy with weekly options provides you in a zero sum game.

OSS Returns

Highlights

In order to be effective a trading system must have an edge. This means that the system has to be profitable over a statistically significant number of trades. Mathematically you will need to calculate the expectancy of a system in order to determine its profitability.

The formula for expectancy if very simple:

(avg profit) (% winning trades) – (avg loss) (%losing trades) = Expectancy

Although past performance is not always indicative of future results, this simple calculation will tell you what you can expect from an average trade of your trading system. In order to be effective a system will need to have either a higher % of winning trades than losing trades or a higher average profit than average loss. Preferably you want both of these conditions to be true.

With the OSS system only one of the conditions is true but it is extremely true. In fact the OSS system has an accuracy of over 98%. When there is such a high accuracy you don’t necessarily have to have a higher average profit per trade than average loss per trade.

The difference between the average profit per trade and the average loss per trade is called the reward risk ratio. For example, if a system makes an average of $100 on every trade and loses $200 than the RRR is 1:2 . If a system makes $200 and loses $100 per trade than the RRR is 2:1.

When you combine the accuracy with the RRR you get system expectancy. Let’s look at a basic example. If a system makes an average profit of $100 on a trade and has an average loss of $300 on a trade and has an accuracy of 80% than it will have the following expectancy:

($100)(80%) – ($300)(20%) = $20. So the expectancy of the system is positive. With the oss system this goes further. The RRR is fairly low. It is 1:4. But the accuracy is 98%.

Because of the high accuracy the RRR can get very low yet still keep you profitable. Let’s look at just how extreme this can be with a simple formula.

(1)(98%) – (X)(2%) =  0

X = 49

This means that, with this high accuracy, theoretically as long as your average loss per trade is less than 49 times your  average profit you can theoretically still be profitable with the system.

However we are certainly not going to do that. The cutoff mechanisms in place with the OSS system mitigate your loss per trade to 4 times the average profit and thus give you a very strong edge and a very high chance to succeed with the trading system.

In order to have success with a system you must be prepared for losses as they are inevitable and your system must coincide with your personality. If you have the type of a personality where you are happy with many wins and can take a very occasional loss that will wipe out some of your wins you will have great success with the OSS system.

Here is just how successful the accuracy of the OSS System is:

Number of Trades

When you are properly running the OSS System you will be placing trades once a week usually between 4-2 days before the expiration of the weekly option. You will be selling both puts and calls. With this strategy the system will require you to make 10-12 trades per month. This should not take you more than 20 minutes per week to do.

Profitability

The OSS trading system is traded very conservatively by the developers. Although it is extremely unlikely that there will be a market move significant enough to cause a major loss, the developers put specific cutoffs in place in order to minimize the exposure to the market and potential risk. With a conservative approach you can expect to generate approximately a 25% annual return from the system and with an aggressive approach you can generate a 45% return. Here is the profitability recap of the system as it was traded by the developers:

Exposure

Another way to enhance the safety of a system is to mitigate its exposure. The OSS system does this by staying in trades for a very short period of time usually 4 days or less. In addition to this there are specific cutoff rules in place to control drawdown risk.

Here is a breakdown of the maximum drawdowns that the OSS system incurred historically:

OSS Strategy Breakdown

Selling Options

The OSS strategy is very simple and straight forward. After analyzing multiple approaches with various option spreads and expiration dates, the simplest approach also turned out to be the most profitable. The basic concept is that options are sold with the shortest duration till expiration as far as you can get out of the money while still collecting a premium.

This means that we are simply selling out of the money options naked with 2-4 days until expiration. The options are primarily sold on indexes and futures. Options are sold on the following underlying instruments:

OEX – S&P 100 index

IWM – I Shares for Russell 2000 index

ES – Mini Futures

Although selling options on multiple underlying instruments gives you a way to diversify, based on past performance and strategic calculation OEX seems to be the most effective underlying instrument to use with the OSS strategy.

Selling Approach

In order to maximize the effectiveness of the OSS system both puts and calls are sold. However, they are not sold at the same time as a spread. Instead each leg of the short strangle is sold separately. This allows for you to have more flexibility and to make the market on your orders. Selling both legs allows for you to get the maximum return on the margin that you put up. This is due to the fact that when you are short two legs of a strangle the brokers will only require for you to put up margin for only one leg. Typically this is the leg that has a higher margin requirement.  Logically this makes sense since the market can only make a drastic move in one direction at an expiration.

So for example if you are short a put and a call you are only putting up margin for one of them instead of both.  If you are selling 1 put contract for $20 and 1 call contract for $20, you are only putting up the $5000 margin for the put contract which allows for you to profit twice on the margin that you just put up. $40 on $5000 is a return of .8% with is better than .4% that you would make by just selling 1 leg.  Once you repeat this process 4.5 times in a month, you can generate 3.6% return per month for every $5000 in your account with 98% accuracy.

OEX Options strike price should be 4-8% away from the market price. By selling them this far away you give you self a high likelihood of the options expiring worthless while still collecting enough of a premium to make the system successful.

Order Entry

In order to maximize your success with the OSS system you want to enter your trades using limit orders. By entering your trades on limit orders you are essentially making your own market rather than taking the price that is offered to you. By doing this over an extended number of trades you are putting the odds in your favor by consistently entering at a better price than available. In some cases when the spread between the bid and the ask price for the option is small enough and there is a sufficient premium you can enter on market in order to get your trade executed. The idea is that you want to collect between $15-25 per contract for every $5,000 margin that you put up on both the call and the put that you sell.

When you enter the trade you are typically paying a commission of around $2 per contract. The nice thing is that when you exit the options expire worthless which saves you from paying commissions. The only time that you will need to pay the commissions is if you need to cut off your trade. This happens very rarely, less than 2% of your trade will require for you to actually get out of your position and pay a commission when doing so.

Here is an order entry screen which shows how you would enter your trade.

Entry Strategy

Here are the specific steps that you will take when entering your position:

1. Look at the option chain of your underlying instrument. In this case OEX, on Tuesday of each week. Here is what an option chain looks like:

Please keep in mind that the prices on the option chain are shown in price per option not price per contract. This means that a put price of .15 cents will give you $15 per contract which is (.15 X 100 options).

1. Determine your strike price range.

Typically you want the put to be more than 4% below the current market price and the call to be above 4% above the current market price. The idea is that you want to collect at least 15 cents for every individual option of $15 per contract. So you take the furthest available strike price that is will give you this premium. However, if this strike price is closer than 4% from the market price than you should not make the trade.

Another factor to keep in mind is that the closer you get to Friday the closer you can sell your options. So if you are selling the option at the end of the day on Wednesday or Thursday than you can sell a strike price that is slightly closer than 4% from the market price.

–      Example: If the market price for OEX is 500 than you should sell puts with strike prices less than 480 and calls with strike prices more than 520. As long as you can collect a premium of more than $15 per contract.

Because of the high demand for protective puts, puts will typically have a higher premium than calls. This will allow for you to collect higher premiums or sell further strike prices. If one of the legs is not available far enough away from the market price, then you must not enter that leg of your trade.

3. Place your entry order:

Once you determine the contracts that you want to sell you need to place your entry order. Your entry order is a ‘limit sell to open’ order.

The limit price should be between the bid and ask price for the option that you want to sell. If there is a sufficient bid price that is higher than .15 per option than you can sell at the bid as long as the spread is not too huge.

Your limit order should be good for the day.

Here is what the order entry screen should look like:

Typically you can pull up the order entry form right from the option chain by clicking on the bid price of the option that you want to sell.

1. Wait for your order to be filled.

Once your order is filled, you will receive confirmation from your broker. Usually one or both legs of your order will get filled depending on market movements of the day. If  one of your legs does not get filled look to adjust your order by switching your limit closer to the bid or moving to a different strike price.

If your order is not filled on Tuesday, you can try to enter the position on Wednesday and Thursday in order to give yourself a better chance of getting filled.

1. Wait for your options to expire on Friday.

If all goes well your options will expire on Friday. You will get to keep the premium that you collected and you will need to get ready to sell your options again next week.

Your strangle will expire worthless and be profitable to you as long as the underlying stays between the stroke prices of each of the options that you sell. Here is the profitability graph of a short strangle:

In case one of your cutoff parameters gets triggered you will get out of your trade before the Friday of the week. The cutoff parameters will be explained in subsequent sections of this text.

Supporting Analysis

It is very hard to predict the direction of the market with a high degree of accuracy. One advantage that options offer you is that you do not need to predict the exact direction of the market you simply need to predict a range of prices.

Based on the nature of the system, in most cases  you should still continue to sell both puts and calls on the underlying instrument regardless of all technical supporting analysis. When it comes to fundamental analysis the system should be put on hold if there is severe economic or political instability.

One way that technical analysis is used is to help you determine what strike prices and expiration dates to sell your options. In this section you will learn what technical studies to pay attention to and how to use them to get an extra edge with the OSS system.

Please keep in mind that neither technical nor fundamental analyses have a significant bearing on the performance of the system they only slightly put the odds more in your favor. The system can be very effective without doing any analysis at all.

Basic Technical Analysis

There are essential 3 basic technical studies that are used with the OSS system and 2 advanced studies.  The studies include support resistance, moving averages and Fibonacci levels. Explaining in detail how each of these works is a whole separate course. You can learn more about these tools by simply typing the phrase into your search engine and you will receive a countless number of articles and tutorials for free. For the sake of this text we will provide a brief description of each of the technical tools.

Support and Resistance

Support and resistance areas are key areas on a chart where the underlying instrument has difficulty breaking. These are areas where supply and demand essentially meet. For example, a price of a stock can go up to 50 and then not to break that level due to the fact that many traders want to sell at that level. This will make $50 a key resistance area.

Support areas are the opposite. A stock can historically fall to a certain area until traders step in and start buying. This will make that particular area a support zone.

The interesting thing about support and resistance areas is that they tend to repeat over time. This means that a previous support area has a fairly good chance of becoming a support area in the future and a previous resistance area has a fairly good chance of becoming a resistance area in the future. A lot of the time S/R areas will form around round numbers. Another key factor to take into consideration is that the older a support resistance area is and the more times that it has been tested by the underlying instrument the stronger it is. To get a deep level of understanding of support and resistance simply do an internet search and you will come up with countless articles on the subject.

Here is a graph of a resistance zone:

When it comes to the OSS system support and resistance areas can be used as an overall guideline. It is generally a good idea to sell options outside of these key S/R areas as the underlying instrument will usually test them instead of blowing through them most of the time. And by the time it is finished testing it most of the time your option will expire worthless.

The way to turn this to your advantage is by selling options closer to the market price of the underlying if there is a significant support and resistance are between the market price and the strike price. You can also sell options further from the price of the underlying if there is no support and resistance area between the market price and the strike price.

Moving Averages

A moving average is a way to smooth the price of a trading instrument so that a technical analyst can get a general idea of the direction without being distracted by day to day noise. To calculate a moving average you simply take the historic average price of a desired number of bars and plot it on the under a specific bar on the chart. Most free charting packages such as bigcharts.com will calculate this for you.  Below is an example of a 1 year OEX chart with the 200 period moving average plotted.

Many traders will use moving averages in a similar way as support and resistance zones. For example they will only trade long if a price of a stock is above the 200 day simple moving average and they will only trade short if a stock is below the 200 day moving average. Traders typically have specific moving averages that they pay attention to. The three basic ones are 200, 50 and 20 day simple moving averages.  The bigger the moving average, the more weight it holds. For example a 200 day moving average is less likely to be crossed than a 20 day moving average.

With the OSS system moving averages are used in a similar way as support and resistance. If a strike price is outside of one of the major moving averages then you can sell that option with greater confidence. If there is a major moving average between your strike price and the market price you can sell the option even if the strike price is slightly closer than 4% from the underlying.

If there are no major moving averages between the strike price and the market price of the underlying than you want to proceed with more caution.

Fibonacci

Fibonacci levels are very similar to support and resistance. They are key pivot levels in the market that are developed by mathematical figures. Fibonacci levels can be determined on most charting packages by using a Fibonacci tool and dragging it from a low to a high of a previous trend of an instrument.

It is a bit too complicated to get into details of how Fibonacci works but just like with all technical instrument some basic research will provide you with more than enough information on how to use the tool.

Fibonacci levels can be used with the OSS system in the same way as support and resistance and moving averages. If there is a key Fibonacci level between the options strike price and the market price of the underlying then you can sell the option slightly closer if there is no key level then you want to proceed with caution.

2/3 Rule

Since there are 3 basic technical studies that can be used to provide you with general guidance with the system it can be a good idea to use them all together for extreme confirmation.

If all 3 or at least 2 out of the 3 studies are showing an upward biased, basically with major support and moving averages below than you may want to sell the put closer and sell the call much further or not even sell it at all to be careful.

Conversely if all 3 or at least 2 out of 3 studies are showing a downward bias with major resistance levels and moving averages above the market price of the underlying than you may want to sell the call closer and be more careful with the put.

Proprietary Technical Studies

In addition to the basic technical studies you can use other technical studies that can provide you with an extra edge when trading the OSS system. These advanced studies can be used in the same way as the basic studies. Please keep in mind that just like with the basic technical studies the advanced studies should only be used as a guideline rather than a signal for trade entry. The system should work perfectly without the advanced studies but using them can give the system an extra edge.

VIX Study

VIX is a volatility index on the S&P 500. It measures the volatility of the S&P 500 index. The 100 stocks that make up the OEX are part of the S&P 500 index also. Therefore there is a fairly strong correlation between OEX and VIX. Because of this VIX can be used as an indicator to the price movements of OEX.

For the sake of the OSS we use the VIX index relative to its 10 day moving average. If the VIX is above its 10 day moving average than the OEX has a long bias and you can sell put options slightly closer and call options slightly further away.

If the VIX is below the 10 day moving average than the OEX has a short bias and you would want to sell the call options slightly closer and the put options slightly further away.

Your Proprietary Indicators

Additionally to the VIX technical studies it is highly likely that you have your own favorite technical tools and indicators that you may like to use. You can do so, as long as you follow the general rule. Don’t make drastic decisions by selling options extremely close or not selling them at all based on technical studies. The OSS system does not work like that. Instead you can use technical studies to slightly vary your strike prices or expiration dates as mentioned with the studies above.

Fundamental Analysis

Fundamental analysis is a great way to trade the markets. With fundamental analysis you would look at economic data, news and market sentiment rather than historic price movements. Although fundamental analysis can be a great way to trade it takes a lot of time to perform the fundamental studies necessary to make appropriate trading decisions.

With the OSS system fundamental analysis plays a minor role however it cannot be overlooked. Here are the 2 basic ways that fundamental analysis is used with the OSS System:

Follow major political and economic news

If there is major political or economic instability or turmoil then you would want to stop trading the OSS system until the dust settles. If there is minor instability or turmoil that may affect the US economy then you will want to proceed with extreme caution.

Trade with caution during earning announcement periods:

During the first 2 weeks of January, April, July and October a great deal of companies that are in the S& P 500 and 100 come out with their earnings reports. During this time the OEX and other indexes are likely to make drastic moves.

During the periods mentioned above it is a good idea to proceed with extreme caution and sell options with a shorter time until expiration and a further strike price. You don’t have to stop trading the OSS system during these times. However you want to proceed with extreme caution as drastic market movements are more likely to occur during these periods.

OSS Risk Parameters

Margin

Margin allows you leverage the equity in your account to control a larger amount of shares/contracts than your balance allows. Options are sold on margin. Each contract sold requires for you to put up a % of your account as margin. Margin is calculated based on proprietary method by the exchange and brokers. The proprietary formula is based on: volatility, and option strike price. You only put up margin for 1 leg of your strangle since the market can only make a drastic move in one direction at a time the brokers will not charge you margin for both legs of your strangle.

Here are some examples of margin requirements based on the OSS recommended distance (4-10%)

Reward Risk Ratio

In the “return recap” section it was noted that the OSS system has extremely high accuracy. In fact the accuracy is over 98%. The OSS system has very consistent positive expectancy due to the high accuracy but the reward risk ratio is low. This means that the losing trades are going to be larger than the winning trades.

This is perfectly ok because there are so many winning trades. But you have to be mentally prepared for the fact that one losing trade may take out the profits from 3-4 of your winning trades. The key to success is to use proper risk management and continue trading after a losing trade since the system has a very high accuracy.

Based on the cutoff rules you will be required to exit your trade once the premium of the option that you sold grows to 5 times the selling price. This means that if you sold an option for $100 and it grows to $500 than you have to exit your trade. This way your profit is $100 and your loss is $400 ($500 buyback price minus the $100 that you originally collected). Therefore the worst possible reward risk ratio that you will have with this system is 1:4. However please keep in mind that the premium of the option that you sell will very rarely ever grow to five times the selling premium.

Trade Cutoff Principles

Cutoff rules

–      3% hard stop – if sold contract value grows to more than 3% of account balance exit trade.

The key to success with any trading system is to limit the maximum loss on any one single trade. In addition to the system’s cutoff rule there should be a universal cutoff rule that is based on the % of your account. 3% is a good number to use however you can modify this number to your risk appetite and account balance. The key to success is to stick with this rule and not to break it.

It is highly recommended though that you never risk more than 5% of your account on any 1 single trade.

Example:

If you have a $10000 account cut your trade as soon as you open loss on 1 single position exceeds $300. So if you sold and option contract for $100 and the price goes to $400 than you want o cut your trade because you have a $300 or 3% loss.

–      4X hard stop – If sold option premium grows to more than 5X of selling price exit trade

As discussed in the previous section you want to control your reward risk ration so no single trade wipes out your account. Based on live testing the max OSS cutoff reward risk ration is 1:4. This means that no trade should lose more than 4 times the maximum gain.

If the premium of the option that you sold grows to 5 times the selling premium your reward risk ration is not 4:1 and you want to exit the trade. This way you will have a few trades that will have rather large losses compared to your winners. However you will not have the massive losses that can wipe out your entire account because you cut your trade off in time.

If either of the above mentioned scenarios occurs than you need to cut the trade before expiration.

Expiration Day

Expiration day scenarios

There are basically 2 scenarios that can happen at expiration:

Scenario 1: Options sold are out of the money or at the money and expire worthless.

This scenario is fairly straight forward as the options will now expire worthless, this will free up your margin and you can be ready for next week trading.

Scenario 2: Options sold are in the money

If your cutoff criterion has not been triggered then you will have to pay the difference between the strike price and the current market price minus premium collected. Once this difference is paid, your margin will free up. You may take a small loss however now you can get ready for next week trading

Rolling Out

If your cutoff criteria have not been hit then you can roll your trade out until the next expiration period. Here is how you would do this:

If your option is in the money and you believe that the underlying is overextended and should retrace you can do the following:

–      Buy the option back at current market price (you will lose on this)

–      Sell next week’s option at a similar or closer strike price (this allows you to recoup your loss by placing a higher premium into your account because of the time value of the other option)

This theory is based on the technical concepts that all big moves are followed by a pull back. Be careful with this approach because then you are moving away from premium collections and are now trying to forecast the market which moves from the essence of the OSS strategy. However, if properly used, because of the reversion to the mean nature of the market the rolling out strategy can be very effective.

Boost your return by using T-Bills as margin.

As you know, using every edge matters in the zero sum game of derivative trading. One nice aspect of a premium collection strategy is that both cash and T-bills can be used as margin. By purchasing T-bills you will be able to receive the small percent return that the T-bills offer you and still collect the premium on your margin by selling options.

Usually when using T-bills as margin you will receive a very slight haircut on your margin buying power. However because T-bills are so close to cash this haircut is outweighed by the interest that you will collect from the T-bills.

At the time of the writing of this text T-Bills are paying between 1-2% per year. If there is a way to get this money for free, why not?

Most brokers will allow you to do this and it is called marginable collateral.

OSS Money Management

Selling Options

Some may say that option selling has a negative connotation because of the unlimited risk and the limited reward. The OSS system takes this into consideration and uses strict risk and money management strategies to remove as much risk as possible from selling options. All margined trading has risk however when proper risk control is used the risk level can be brought down substantially. For this reason the OSS system has very low drawdowns.

OSS Risk and Money Management Strategies

Mitigate exposure – Selling weekly options sold between Tuesday and Thursday limits exposure to 2-4 days

When selling options the longer you are short an option contract the more risk you have. For this reason the goal with the OSS system is to be short options for as short of a time as possible. With the OSS system options are typically sold between 2 and 4 days from expiration. The closer to expiration day you sell the options the less exposure risk you will have. You must weight this with the fact that the closer you get to expiration the less premium you will collect. As discussed earlier, the time value decays exponentially when you get toward an options expiration date so this works for you once you have sold your option. However if you wait too long to sell it and get too close to the expiration date there may be no premium at all. With the OSS system, the key is to hit the sweet spot between 2 and 4 days where there is still a premium of at least 15 cents per option and your strike price is at least 4% away from the market price.

Aggregate Portfolio Stop Loss – close all positions when drawdown for the portfolio exceeds 25% and reevaluate your approach.

All systems will have a live cycle. Market inefficiencies come and go and systems get stronger or weaker over time. For this reason you must have an aggregate portfolio stop loss with any system. To keep things clean it is strongly recommended that you trade each system that you have in its own separate account. So it would behoove you to create a separate account for the OSS system. Unless of course you want to sell options to add to your wining trades to another successful strategy that you may be running.

If you are running the OSS system in a separate account it is very easy to keep an aggregate portfolio stop loss. Simply pick a predetermined time. It could be daily, weekly or monthly. The more frequently you track this the more protection you will have. Once you pick your time simply calculate the total equity in your account and the % change from the previous high tracking point.

Once you start tracking this, determine the maximum account drawdown that you are willing to withstand. It is preferable that this number is smaller than 25%. Now you have a predetermined aggregate account drawdown during which you will stop trading and reevaluate your strategy. Using this will eliminate a lot of second guessing and emotional trading.

Here is an example of an aggregate portfolio stop loss table. With a max cutoff of 25%

Trade options on indexes – this eliminates security specific risk

Many company stocks have made huge moves in a matter of minutes. A drastic piece of news or an unexpected earnings announcement can send a stock soaring or plummeting before you know it. For this reason the OSS system is solely focused on indexes rather than individual stocks.

Indexes are comprised of hundreds and sometimes thousands of individual stocks. If one single stock makes a drastic move it will be balanced out by the other stocks in the index.  Therefore by using indexes the OSS system gets an additional level of diversification and protection.

In order to diversify further it may behoove you to use multiple indexes if your account balance allows. For example you can sell options on the OEX which is large cap stocks and IWM which is the Russell 2000. You can also try select sector ETF’s or futures if you have good knowledge about the industries and the price movement of the underlying.

Use risk management system

This text already went into great depths with regard to risk management which consists of 2 key cutoff rules.

Rule #1 – predetermine the maximum that you are willing to lose on 1 single trade and never exceed it.

Rule #2 – control your reward risk ratio by limiting your maximum loss relative to your maximum gain on each trade.

Most traders fail because of negative psychology and having these rigid rules in place will eliminate a lot of indecisions and bad decisions from your trading.

Minimize your margin calls by using only 70-80% of your account as margin when selling options

Margin calls are a scary word when you don’t know how to deal with margin. When you are selling naked options the brokers are trying to protect themselves from the possibility of the underlying making a move so drastic that you will not have enough money to settle with the option buyer. If this were to happen the broker would be left on the hook and would end up taking a loss. For this reason the brokers use advanced formulas to calculate the margin requirements for traders.

At the time of the writing of this text the approximate margin to sell 1 contract of OEX out of the money options with a strike between 4 and 8% away from the market price is roughly $5000. This margin requirement is subject to change and the broker has a right to ask you to add to your margin.

The margin requirement is based on a number of factors, some simple ones are market volatility, the price of the underlying relative to the strike price (aka alpha) , and time until expiration. The closer you get to expiration the more the margin requirement will drop. However, if the market price starts to get close the strike price or, if the volatility increases, your broker may require more margin. If you don’t have this margin in your account the broker will settle you out of the position with a loss.

Unfortunately there is no simple way to calculate margin. In fact the calculation will slightly vary from broker to broker. You can find out how much your broker will require based on the strike price of your option by simply calling your broker and going over this matter.

One good way to avoid margin calls is to not maximize your entire account when you write options. For example if you the margin requirement is $5000 to sell 1 contract than you should have $7000 in your account for every contract that you sell.

A rule of thumb is that you don’t want to use more than 75% of your account as margin. So if $5000 is required to sell 1 contract than you want to have at least $6700 in your account for every contract you sell. The way this is calculated is by dividing $5000 by 75%.

Sell 4-8% out of the money

Another way to mitigate the risk is to sell options that are far out of the money based on historic data. Although past performance does not guarantee future results, volatility seems to be a bit more predictable than price action. If you look at an index like the OEX historically 4% moves in under 4 days are extremely rare by selling options this far away from the market price you are solidifying the accuracy of your system.

If you decide to not sell options on the OEX and want to use another index or even a stock than you need to do diligent analysis in order to determine the maximum single day and weekly moves that the underlying makes and try to sell out of the money options at strike prices that are further away than these moves.

Please keep in mind that nothing is guaranteed and these drastic moves will happen for this reason you should use cutoffs and you should not margin out your account by more than 75%.

Reinvestment Rate

Deciding whether to leave your collected premium in your account or withdraw it is up to you. Each scenario has its positives and negatives.

•       Leaving your premium in your account will allow you to sell more contracts eventually.

If you are starting out with a small account than you may want to leave the collected premium in your account so that you can eventually grow your margin and sell more contract. Leaving some collected premium in your account will also provide you with a bit more cushion in case of margin calls. If a margin call happens you will have some cash available to add to your margin so that you don’t get closed out at a loss by your broker. Also as you know returns grow exponentially when you leave them in your account.

The drawback to reinvesting all of your profits is that you leave yourself exposed by putting your money at risk. If a position goes drastically against you it can cut into your account balance and you will end up giving back a lot of your gains. When it comes to trading psychology giving back your gains is a very big negative and can start a massive downward spiral.

•       If you withdraw your premium eventually you will only be risking your profits but it will take more time to grow your account.

The upside of withdrawing your premium is that you are securing your profits from any risk. Eventually you can get to the point where you are playing with the house’s money. Once this takes place this will be like renting out a house that you already paid off. You will be collecting premium on the premium that you already collected without any risk. That’s a great position to be in.

The downside to withdrawing your money of course is that it will take you longer to build up the equity in your account because you will not be compounding your profits.

In summary the decision whether to take your profits out or let them compound is up to you. Your goals and available risk capital should be taken into consideration.

Diversify by selling multiple strike prices

One way to regulate risk also it to sell options at various strike prices. For example, if you are selling put options on a $100 stock you can sell part of your position at $95 and part of your position at the $90 strike price. Of course you want to make sure that there is enough premium to do this. This way if the stock drops closer to $95 and you will have to cut off your trade you will still have the $90 puts that you don’t have to cut off.

Therefore if you have enough equity in your account you may want to protect your risk by selling options at various strike prices.

Bonus Section

How to Maximize Profits that are Generated by the System

The way OSS is traded by the developers is extremely conservative.  Options are quite a bit out of the money based on time until expiration. The exposure to the market is limited by selling weekly options only 2-4 days until expiration. And options are sold on indexes in order to mitigate alpha risk.

With this approach the system has generated an annual return between 20 and 30% with very small draw downs and extremely high accuracy. However, if you are looking for more aggressive returns there are ways to enhance the system.

Ways to Maximize your ROI

Sell options closer

By selling options closer than 4% you will increase the premium that you collect and thus increase your potential ROI. The issue is that you will be required to put up more margin for your trades and you are going to run into more scenarios where you are going to have to cut your trade off.

If you have a very good fundamental or technical system that can help you gage where the market is going then it may be a good idea to sell options closer in order to reap more premium. Another tactic that can be used here is rolling out if the option gets close to you strike price. This can be effective since the stock market typically reverts to the mean rather than just runs in one direction without stopping.

Sell options on individual stocks with higher premiums

Because indexes are comprised of multiple stocks there is a higher level of diversification and stability. An index is therefore less likely to make a huge move than one individual stock. For this reason the premiums on index options are smaller than the premiums on most stock options.

If you have a particular stock, select sector index, or even a futures contract that you like to trade you can use sell options using the OSS system on that particular underlying instrument. Of course do some historic analysis to find the maximum daily and weekly moves on these instruments so that you will not have to cutoff too frequently.

Writing options on more volatile instruments will increase you ROI, but at the same time it will increase your risk. When writing options on more volatile indexes or individual stocks it may be a good idea to use condors rather than straight up selling naked options. Condors will be described in greater detail in subsequent section of this text.

Increase cutoff amount to increase accuracy even further

The stock market in general typically reverts to the mean. This means that it doesn’t just uncontrollably run in one direction or another, it usually pulls back. There are of course exceptions to this and you never totally know what is going to happen in the future.

As we discussed earlier because of the extremely high accuracy of the OSS system you can have a very low reward risk ratio and still manage to be profitable. If you are looking to increase returns on the system than you can increase your cutoff point or simply roll out of positions that do not go your way.

By doing this you will have even fewer losses. However there is always the risk of the market going extremely against you and taking out a large chunk of your account because you did not cut of your trade in time.

When deciding whether to implement this tactic consider your available capital and how it relates to margin. If you are only margining out a small portion of your account on these trades than it my make sense because losing trades will not wipe out your entire account. However, if you are risking a larger portion of your account then you may want to be more careful.

Use condors to maximize return on margin and manage your risk

A condor is very similar to a strangle. When you sell a condor you are selling an option that is closer to the market price and than buying an option that is a bit further away. This way you maximum loss is limited to the distance between the closer strike price and the further strike price.

Here is an example. If the underlying is trading at $100 you can sell a $95 put and buy a $90 put. This way your maximum risk is only limited to $5 per share. An iron condor is when you make the trade in both direction of the underlying. So, with the same example as above, on a $100 stock you would sell a $105 call buy a $110 call and sell a $95 put and buy a $90 put.

Here is what you P/L graph would look like when you put on an iron condor:

Putting on a condor trade serves to key purposes:

When selling a condor you are limiting your risk because you are protected by the option that you purchased on the outside leg of your spread.

Because you are protected by the outside leg of your trade your margin requirement will be lower.

When putting on a condor your max margin requirement is the difference between the strike price of the option that you sold and the option that you bought minus the premium you collected. For example, when you sell a 45 put and buy a 40 put your margin requirement is 5 for each individual share. With some broker this requirement may be even less. Typically the margin required on condors is less than the margin requirement on naked options. Because your margin is lower you will be able to sell more contracts and increase your ROI.

As with anything else there is always a drawback and the drawback to condors is that the option you buy will decrease the premium that you collect on the option that you sell. If you keep the 4-8% rule of the OSS system, you simply will not be able to collect enough premium to make the system work. This is especially true because you will be paying commissions and spread on four trades now instead of two. There are however two ways around this. Sell condors with strike prices that are closer to the market price or sell condors with longer duration until expiration.

Selling the closer strike price allows you to collect bigger premium. The fact that you are protected by the option that you bought will lower your margin requirement and allow you to sell more contracts of the closer strike price. When doing so, you can sell strike prices 2-6% away from market price. Of course now you will need to keep a cut off for each side of the iron condor. This means if you sold an option contract for $100 and bought an option contract for $50 than your cutoff point is when the price of the condor grows to $250. This will keep you in line with the controlled 1:4 reward risk ratio. Please keep in mind that as the price of the option that you sold will grow, the price of the option that you bought will also grow and offset your loss on the option that you sold. However the closer an option is to the market price then the greater the effect that the underlying price will have on the option price.

Another way to get around the lower premium when using condors is to simply sell options with more time until expiration. Instead of 2-4 days you can try 3-7 days. There should be more premium for you to collect with this approach. However, you leave yourself a bit more exposed. Obviously keeping your eye on the trades and implementing your cutoff rules is essential to success with this.

Sell options with longer time till expiration

Prior to weekly options the OSS system was selling monthly options. These options expire once a month. One advantage to selling options with longer duration is that there is more premium to collect. You also don’t necessarily have to wait for these options to expire worthless because you can buy them back as the market makes a move. In fact you can buy these options back and sell other options again multiple times during a given month.

For example on a $50 stock:

•       If you sold a $45 put for $1 and the stock price goes to $55.

•       You buy back the put you sold for $.25

•       Then you sell a $50 put for $1 again.

This allows you to collect premium multiple times before the expiration date and generate a higher return. This also allows you to adjust your system based on the movements of the market.

For example, if you have a $100 stock and you sold a $90 put and a $110 call.

If the stock goes to $105 your $90 put will lose value quicker than your $110 call. Now you can buy back the $90 put for less than you paid for it and sell a $95 put at a higher premium before expiration. This allows for you to adjust you to adjust your system with the market.

The drawback to this of course is that you are leaving yourself exposed to the market for longer time and paying more transaction costs. Now, instead of paying spread and commissions only when you enter the trade you are paying spread and commissions when you enter and exit the trade.

Use OSS to enhance another system

You can sell options to add profitable trades to another system. If you have another system that you are using you can sell options to enhance its profitability. There are 2 ways to do this. If you have free margin available in your account you can sell options very close to expiration date to collect premium and boost your profits.

You can also use put options to enter long trades. If you need to buy a stock you can simply sell the put close to the market price. Once the price of the stock goes lower than your put price you will effectively be placed into your long position. For example, if you sell a $95 put on a $100 stock and the price drops below $95 you will have to buy the stock at $95. If your system required for you to enter on a limit order at $95, then you may as well collect the $2-3 premium of the option that you sold and actually to low down your entry price.

The key to using the OSS system to enhance another system is pay careful attention to your margin. Always check with your broker about your available margin and make sure that you have enough margin in your account to enter all of the trades that the system requires.