OPTIONiQ Methodology

Intelligence Quotient or IQ is a score that was derived from several different tests designed to assess the intelligence of a human being. Here at OPTIONiQ we have developed several different tests (i.e. algorithms) to assess the intelligence of entering and exiting individual option trades on a daily basis.

The primary OPTIONiQ Trading System is based upon an option trading strategy known as a short strangle. A short strangle involves selling an out-of-the-money call option and an out-of-the-money put option on the same underlying asset with the same expiration date. To manage risk, the options are written far out-of-the-money so that the chances of the market price reaching the sold call or put boundary, by expiration date, are greatly reduced.*

OPTIONiQ uses algorithms to determine what strike prices to sell and when to sell them. Every time we enter a trade we want the lowest probability of trade risk that we can get while still maintaining a proper targeted rate of return. After running these algorithms our trading system shows several trades that have the lowest probabilities of risk. We call this probability of risk the "P-Factor". These trades are presented to each client on a daily basis. We recommend only entering trades that have less than a 10% risk of failure. This means that on the day the trade is set, there is greater than a 90% probability of the market price closing below the sold call or above the sold put strike price by expiration date. That means there is a great likelihood that the market price will not breach the sold boundaries during the lifecycle of the trade and we will collect the trades premium as profit. These P-Factor calculations are a key part of managing the risk within the trade.**

See the example listed below. (E-Mini S&P 500 example)

Methodology

* There is a substantial risk of loss associated with trading futures and options on futures.

** No representation is being made that users of the methodology will or are likely to realize profits or avoid losses on a certain percentage of trades.

Once an OPTIONiQ trade is entered the seller of the option is obligated to pay the buyer of the option a certain amount of money for every point that the underlying asset trades beyond the sold call or sold put boundaries. For this reason, option sellers never want the options market price to break through their sold options. OPTIONiQ calculates and reports the P-Factors for the sold puts and calls on a daily basis. The P-Factors will fluctuate each day after the trade is set depending on the underlying asset's daily movement. As long as the trade's P-Factors stay below 40 the trade may be maintained. However, if the P-Factors ever reach a reading of 40 or more, the OPTIONiQ Trading System recommends exiting the trade before the market breaks through one of the sold boundaries.

See example listed below. (E-Mini S&P 500 example)

Methodology

In this particular example the market price has moved much closer to the sold call position throughout the duration of the trade. On this day, a 40 P-Factor reading has been reached on the call side of the trade. This means that according to our proprietary P-Factor, the market price has a 40% probability of finishing above our sold call position by expiration date. Additionally, it means that the market price has a 60% probability of finishing below the sold call at expiration. At this point, the reward to risk balance is no longer in our favor, and so, according to our rules, we recommend exiting the trade. By simply monitoring the P-Factors of both the sold call and put at the end of each trading day, a trader can identify which trades should be maintained and which trades should be exited early.

Although the P-Factor report comes out at the end of each day, there are extreme circumstances where the P-Factor would not be useful; for example, September 11th or the market crash in 1987. When something dramatic like this happens the market typically overreacts and large swings can take place. At these times the P-Factor would be useless because the market moved so quickly that there was not time to react. In response to this, OPTIONiQ has developed risk reduction strategies to protect against unlimited risk. For each trade, clients can hedge their sold option positions by purchasing options at precisely calculated levels. For every option that is sold OPTIONiQ suggests purchasing a corresponding risk-limiting option. By purchasing these protective options above and below each sold call and put, a trader can limit his/her market exposure in the event of a severe or sudden move in the market.

Due to an individual's varying investment objectives, OPTIONiQ has developed three protective strategies with varying risk profiles.