Webs Weekly Roundup March 7 2015 Twitter Market

Web’s Weekly Roundup March 7, 2015 Twitter: @Market. Webs Presenter: Web Begole

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Web’s Weekly Roundup -- March 7, 2015 • Analysis of /ES (S&P 500 Futures) and forecast • Analysis of /ZB (S&P 500 Futures) and forecast • Analysis of /CL (Crude Futures) and forecast • Analysis of /GC (Gold Futures) and forecast • Analysis of /6 E (Euro Futures) and forecast • Analysis of /DX (Euro Futures) and forecast • Establishment of Limited Risk Reversals – The method • Q&A Time

/ES Futures (S&P 500) YTD 2015 Opening Price: 2055. 00 Current Price: 2072. 25 High: 2117. 75 Low: 1970. 25 O/C Change: +20. 25 pts H/L Range: 147. 50 Notable Pattern: Resistance at top of March value, heading towards value area low (2046. 50) Forecast: Support at 2046. 50. A break below 2034 could lead to further selling with support coming in at 1982. 50. 4

/ZB Futures (30 Year Bonds) YTD 2015 Opening Price: 159’ 05 Current Price: 155’ 20 High: 166’ 22 Low: 154’ 27 O/C Change: -4’ 15 H/L Range: 11’ 27 Notable Pattern: Below value through Feb, breaking hard below value end of this week. Forecast: Next downside target 151’ 08 with a longer term downside target of 141. 5

/CL Futures (Crude Oil) YTD 2015 Opening Price: 54. 65 Current Price: 49. 78 High: 56. 00 Low: 44. 39 O/C Change: -4. 87 pts H/L Range: 11. 61 pts Notable Pattern: Chop. Still has not exited the gravity of the long term trendline. Notably has also not broken it. February Forecast: A brief pop to 53 could happen at any time as /CL will want to explore March value area. A break below 48. 39 could see a return to the trendline at 46. 50. 6

/GC Futures (Gold) YTD 2015 Opening Price: 1185. 40 Current Price: 1168. 20 High: 1309. 20 Low: 1162. 90 O/C Change: -17. 20 pts H/L Range: 146. 30 Notable Pattern: End of week breaking below March value area. Notably also below all trendlines. Forecast: Nearterm downside target is 1135 with a longer term downside target in the 1080 s. All contingent on continued strength in the dollar index. 7

/6 E Futures (Euro/USD) YTD 2015 Opening Price: 1. 211 Current Price: 1. 0847 High: 1. 2113 Low: 1. 084 O/C Change: -0. 1263 H/L Range: 0. 1273 Notable Pattern: Has essentially stayed below every monthly value area for the year. Forecast: Next support in March comes in at 1. 07. For the year, the next support is at 1. 065. Dollar Parity expected before December. 8

/DX Futures (US Dollar Index) YTD 2015 Opening Price: 90. 81 Current Price: 97. 755 High: 97. 755 Low: 90. 80 O/C Change: +6. 945 H/L Range: 16. 955 pts Notable Pattern: Above monthly value areas the entire year. Opening the year on the lows, closing this week on the highs. Forecast: Next upside target 98. 1. We may see weakness at this level. If not, 99. 73 will be the longer target. 9

Looking Ahead • Overall: • The strength of the /DX is king throughout the market. As the /DX strengthens, more speculation enters the market about interest rate increases as well as weakening of all commodity futures. • Not much on the horizon next week for news except jobs numbers. Speculation will be king.

Establishing Limited Risk Reversals – The Method • • • Exploration of “Risk” The options market is an efficient market. The ability to arbitrage options has diminished to near an impossibility. As such, the options market lives by one rule: Risk & Reward are directly proportional. – I mean this in terms of a single “strategy”, I’m not particularly talking about the number of lots placed or the amount of money invested. – Buying a $5 scratcher ticket has a higher reward potential than a $1. The more scratchers the more chances to win. (Each ticket is its own random system) – Risking more on an options play has a higher reward potential than risking less. However, multiplying the number of lots does not increase the chances to win. (Each lot plays by the same random system, the same underlying) Therefore to maximize risk should equate to maximizing reward. The underlying price movement over time is still the chance taken. When establishing a limited risk reversal (with limited risk and unlimited reward) we are as close as possible to breaking this efficient market rule, or are we? Risk comes in many forms: – Price movement of the underlying – Monetary – Management – Loss mitigation – Involuntary Assignment With limited risk reversals, we are limiting monetary risk, but we can still maximize the risk (and subsequently the reward) in the play by manipulating the other forms of risk. 11

Establishing Limited Risk Reversals – The Method • • • When establishing limited risk reversals – what are things I am looking at? ~$0. 00 = (Credit. Spread)-N*(Long. Option) My criteria for the Credit Spread: – No more than $500 risk or thereabouts • Typically this means I’m looking to sell spreads that are no more than 5 pts wide, or 2 x of 2. 5 pt wide, or 5 x of 1 pt wide. – Maximum reward desired. • I want to own as many long options as possible. – Total debit on the trade should not exceed $0. 05 • I will pay higher if I am putting fewer spreads on – if I am only selling 1 x 5 pt wide spread, I may pay more. The more I pay the more I add to my risk. Things I look at: – Time frame of the trade – Short? (earnings) Long? (swing) – Implied Volatility of the stock – Some are more expensive than others – Theta decay as well as premium. – How far out of the money can I sell a spread to get me a reasonable multiple of opposite long options? Concessions I make: – I will sell a spread to gain 1 x long option if I have to, but prefer multiples. – If I have to, I will sell a put spread to buy a call spread, but this is last resort. Bonuses I look for: – If I have reason to believe actual volatility will exceed implied volatility, I can benefit. 12

Establishing Limited Risk Reversals – The Method • Manipulating Credit Spread Risks • Risk evaluation by spread size (same monetary risk): • The 5 pt Spread (Least Risk / Least Reward): – Pros: • Small number of contracts, large amount of credit • Underlying has a 5 pt range to come in at less than full loss – Cons: • The least amount of potential credit. • The 2. 5 pt Spread (Mid Risk / Mid Reward): – Pros: • Underlying has a 2. 5 pt range to come in at less than full loss • Can put this on twice leading to more total credit – Cons: • Not able to provide the most potential credit. • The 1 pt Spread (Highest Risk / Highest Reward): – Pros: • By putting this on five times, I receive the most amount of total credit – Cons: • Underlying only has a 1 pt range of less than full loss potential • The largest number of contracts to put on 13

Establishing Limited Risk Reversals – The Method • Manipulating Credit Spread Risks • Risk evaluation by spread placement (same monetary risk): • Fully Out of the Money (Least Risk / Least Reward): – Pros: • Least chance of loss on the credit spread. • All extrinsic premium, so theta decay works highly in my favor – Cons: • The least amount of potential credit. • Straddling At the Money (Mid Risk / Mid Reward) [Short option in the money, long option out of the money]: – Pros: • High potential credit. • Theta decay occurs fastest in this location. • Underlying only needs to move in my direction a small amount to make spread fully out of the money and subject to theta decay. – Cons: • Higher potential loss on the credit spread as the underlying only needs to move against me a little to make the play a loser. • Fully In the Money (Highest Risk / Highest Reward): – Pros: • Highest potential credit. – Cons: • Underlying needs to move in my direction for theta decay to work in my favor. • Assignment risk possibility from on-set • Highest potential loss on the credit spread, if the underlying does not move, I lose on the trade. 14

Establishing Limited Risk Reversals – The Method • Manipulating Credit Spread Risks • Risk evaluation by option-chain (time) placement (same monetary risk): • Furthest term (ex: two months out) (Least Risk / Least Reward): – Pros: • More time to mitigate losses as credit spread maintains premium. • More credit to be received as premium is higher. – Cons: • Theta decay will take time to work in my favor • Long options are more expensive so I have to go further out of the money • Mid term (ex: 1 month out) (Mid Risk / Mid Reward): – Pros: • High potential credit. • Theta decay occurs fast at this time. • I maintain time to mitigate loss as premium remains in spread. – Cons: • Long options remain expensive and I need to look further out of the money (but not as far) • Nearest term (ex: expiring same week) (Highest Risk / Highest Reward): – Pros: • Long options at their cheapest. • Theta decay occurs fastest, in a matter of days. • I have a best sense of the underlying potential movement. – Cons: • Premium leaves the spread quickly, so my management potential is at its minimum 15

Establishing Limited Risk Reversals – The Method • Manipulating Long Option Rewards • The reward multiple – Buying multiple long options increases my reward and allows me to manage risk by selling partial long options to buy back the credit spreads before expiration. • In the money long options: – Expensive and typically require an in the money credit spread to buy – Because of expense, typically can only buy one – Less susceptible to theta decay as intrinsic value remains • At the money long options: – Expensive and thus typically can only buy one, limiting reward multiple and management possibility. – Underlying doesn’t have to move as much to turn them in the money, reducing theta decay and increasing delta exposure • Out of the money long options: – Ability to buy multiples – Susceptible to theta decay – Underlying must move further for these to become in the money • Low IV Bonus: With low implied volatility, I can buy nearer the money options at multiples, the best reward potential available. 16

Establishing Limited Risk Reversals – The Method • • • When establishing limited risk reversals – what are things I am looking at? ~$0. 00 = (Credit. Spread)-N*(Long. Option) My criteria for the Credit Spread: – No more than $500 risk or thereabouts • Typically this means I’m looking to sell spreads that are no more than 5 pts wide, or 2 x of 2. 5 pt wide, or 5 x of 1 pt wide. – Maximum risk / reward desired. • I want to own as many long options as possible, this means maximizing my risks on the credit spread. – Total debit on the trade should not exceed $0. 05 • I will pay higher if I am putting fewer spreads on – if I am only selling 1 x 5 pt wide spread, I may pay more. The more I pay the more I add to my risk. Things I look at: – Time frame of the trade – Short? (earnings) Long? (swing) – Implied Volatility of the stock – Some are more expensive than others – Theta decay as well as premium. – How far out of the money can I sell a spread to get me a reasonable multiple of opposite long options? Concessions I make: – I will sell a spread to gain 1 x long option if I have to, but prefer multiples. – If I have to, I will sell a put spread to buy a call spread, but this is last resort. Bonuses I look for: – If I have reason to believe actual volatility will exceed implied volatility, I can benefit. 17

Establishing Limited Risk Reversals – The Method • • • • Some examples: Low implied volatility, good rewards available. CSCO KO FNSR JDSU High implied volatility, less rewards available. PCLN TSLA NFLX AMZN SPY Middle of the road: AAPL BABA 18

Q & A With Web Follow me on Twitter: @Market. Webs Live You. Tube channel with /ES Levels and Market Internals Every Day the Market is Open From 9 am EST – 5: 15 pm EST Other videos include a further discussion of value area and a demystification of the “Voo. Doo Lines” Search You. Tube for Market. Webs and Look for this icon: