web’s weekly roundup january 31, 2015 twitter: @marketwebs presenter: web begole

Web’s Weekly RoundupJanuary 31, 2015

Twitter: @MarketWebs

Presenter: Web Begole

Web’s Weekly Roundup -- Saturday January 31, 2015

• Past week’s events

• Analysis of /ES (S&P 500 Futures) and forecast

• Introduction to Options and Double Bullish/Bearish (aka: Risk Reversal) Option Strategies

• Q&A Time

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment. No trades are recommendations or advice and we cannot be sued for losses of capital. All trades are for educational purposes only. Contact your broker or RAI for execution, margin, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on www.optionhacker.com and www.keeneonthemarket.com

RISK DISCLAIMER

Overall Market this Past Week

• Most Significant:

• Durable Goods -3.4% vs. exp +0.3%

• New Home Sales +481K vs exp 452K

• FOMC Announcement of further patience

• Jobless claims lowest since April 2000

• GDP +2.6% vs exp +3.2%

• Less Significant:

• Crude inventories +8.9m barrels, increased OPEC output, /CL short covering Friday

/ES Futures (S&P 500) Week of Jan 26 – Jan 30

5

Opening Price: 2035.00Closing Price: 1989.75

High: 2054.75Low: 1982.00

O/C Change: -45.25ptsH/L Range: 72.75pts

Notable Pattern:Closed week at the lows.

Next Week Forecast:If /ES breaks below 1987.50 it could drop as low as 1936.Upside looks limited to 2034.25.

/ES Futures (S&P 500) Month of January, 2015

6

Opening Price: 2055.00Current Price: 1989.75

High: 2067.25Low: 1970.25

O/C Change: -65.25ptsH/L Range: 97pts

Notable Pattern:Choppy topping pattern.Closed the month near lows and below value for February

February Forecast:Expect upside resistance at 1997.50 and potential lows near 1915.

/ES Futures (S&P 500) YTD 2015

7

Opening Price: 2055.00Current Price: 1989.75

High: 2067.25Low: 1970.25

O/C Change: -65.25ptsH/L Range: 97pts

Notable Pattern:Looking above value for the year and rejecting, expect entrance into value in the near term.

Forecast:If /ES declines into value in February, the/ES has an 80% chance of touching 1833 in the first half of 2015.

Looking Ahead

• Overall:

• /ES is still fighting against the beginning of a bear market, but given this past week,

capitulation may be forthcoming.

• /CL is continuing to chop around the 15 year trendline, ending the week above the line for

the first time all week.

• /GC has had a pullback earlier this week and is furthering its upside potential buoyed by

weakness in the US and global markets.

Introduction to Double Bullish Option Strategies

• I want to get long XYZ. • It is trading for $100/share

• What are my options???

9


• Imagine a casino where the player writes the rules.• The player wants to play blackjack for free, as the following:

– If the player Busts, the player pays the house an agreed amount– If the player beats the dealer, the player wins an acceptable amount– If the player gets blackjack, the player wins the jackpot!– If the player neither busts nor beats the dealer, the play is free!

• The house agrees, but insists that the player takes at least 1 hit per play (the unknown risk)• Would you play?• How can we use options to create our own rules (like the game above)?

10


• I could buy a 1lot of the stock (100 shares). • I spend $10,000.00 to buy the stock• A stock can Go UP, DOWN, or STAY the same.• Max Risk: $10,000. Max Reward: Unlimited.• Out of Pocket Investment: $10,000.00 Cash.

11

$100

+Profits

-Losses

$50 $150


• OR I could use options!

• BUYING A CALL: Gives me the right (but not the obligation) to BUY the underlying stock at a given strike price before or on expiration. (“I may call the stock away from someone else at the agreed price”)

• BUYING A PUT: Gives me the right (but not the obligation) to SELL the underlying stock at a given strike price before or on expiration. (“I may put the stock on to someone else at the agreed price”)

• Buying a right provides the trader with an ASSET that can go up or down in value and be sold or exercised at his/her discretion later.

• SELLING A CALL: Obliges me to SELL the underlying stock at a given strike price on or before expiration if assigned. (“The stock may be called away from me”)

• SELLING A PUT: Obliges me to BUY the underlying stock at a given strike price on or before expiration if assigned. (“The stock may be put on to me”)

• Selling a right provides me with a LIABILITY that can go up or down in value and either be exercised by the opposite party (I am “assigned”) or be bought back later to remove the liability.

12


• I could BUY a 100 Call (the At-The-Money Call).• I spend $150.00 to buy the call (marking $1.50)• A stock can Go UP, DOWN, or STAY the same.• Max Risk: $150.00. Max Reward: Unlimited.• Out of Pocket Investment: $150.00 Cash.

13

Max Loss: $150.00

Other Risks:- Volatility Crush- Time Decay

$100

+Profits

-Losses

$50 $150


• I could SELL a 100 Put (the At-The-Money Put).• I Receive $150.00 to sell the put (marking $1.50)• A stock can Go UP, DOWN, or STAY the same.• Max Risk: $10,000 (stock goes to zero). Max Reward: $150.00.• Out of Pocket Credit: $150.00 Cash.

14

Other Risks & Benefits:- Could get assigned

long shares of stock at $100/share when the market price is below $100/share

- Volatility & Time Decay work in trader’s favor

Max Reward: $150.00

$100

+Profits

-Losses

$50 $150


• I could BUY a Call Spread (Buy the 100 Call (marking $1.50), Sell the 101 Call (marking $1.25))• I pay $25.00 to buy the Call Spread (marking $0.25) • [I spend $1.50 for the 100 Call, I receive $1.25 for the 101 Call, so I have a net cost of $0.25]• Max Risk: $25.00. Max Reward: $75.00.• Out of Pocket Expense: $25.00 Cash.

Max Loss: $25.00

Max Reward: $75.00

Other Risks & Benefits: - Risk: Stock must expire above $100.25 for

profits after initial investment- Benefit: Protection from volatility and time

decay.- Benefit: No assignment risk from trade going

against trader

$100

+Profits

-Losses

$50 $150


• I could SELL a Put Spread (Sell the 100 Put (marking $1.50), Buy the 99 Put (marking $1.25))• I receive $25.00 to sell the Put Spread (marking $0.25) • [I receive $1.50 for the 100 Put, I spend $1.25 for the 99 Put, so I have a net receipt of $0.25]• Max Risk: $75.00. Max Reward: $25.00.• Out of Pocket Credit: $25.00 Cash.

Max Loss: $75.00

Max Reward: $25.00

Other Risks & Benefits: - Risk: Stock must expire above $100.00 for

profits- Benefit: Protection from volatility and time

decay.- Benefit: Receive credit for putting trade on.- Risk: Assignment risk from trade going

against trader

$100

+Profits

-Losses

$50 $150


Strategy P&L Graph Risk Reward Risk:Reward Notes

Buy Stock Inf. (DOWN)

Inf. (UP)

Inf:inf Large capital outlay.

Buy Call 1(DOWN or STAYS)

Inf.(UP)

1:inf Small capital outlay. Subject to decay.

Sell Put Inf.(DOWN)

1(UP or STAYS)

Inf:1 Small capital receipt. Unlimited Risk.

Buy Call Spread

1(DOWN orSTAYS)

~3(UP)

1:3 Small capital outlay. Limited reward.

Sell Put Spread

~3(DOWN)

1(UP or STAYS)

3:1 Small capital income. Limited reward.



Buy Stock Inf. (DOWN)

Inf. (UP)

Inf:inf Large capital outlay.


Inf.(UP)


Sell Put Spread

~3(DOWN)

1(UP or STAYS)


I want this! ? Limited(DOWN)

Infinite(UP)

Lim.:Inf. No risk if stock stays the same. Unlimited reward.Limited Risk.

• I want Limited downside risk and Unlimited upside potential• I want to lose Nothing if the stock doesn’t move at all.• So, I want a combination of strategies……………..




Inf.(UP)


Sell Put Spread

~3(DOWN)

1(UP or STAYS)


• I like the unlimited reward of buying a call. • I like the income and volatility/time-decay protection from selling a Put Spread (if the

stock doesn’t move, I still make money)• Selling a put spread gives me an income. If I can take that income (credit) and put it

towards buying a Call so that the cost of the Call is near $0.00, the call is no longer subject to decay.

• I can create an option spread where my risk is limited and my reward is unlimited.• If I can put this spread on for a credit or for $0.00, I am putting the play on for free, I only

have to pay out of pocket if the stock moves against my position.


• EXAMPLE (The Double Bullish Strategy):• I SELL the XYZ 99/100 Put Spread for a Credit of $0.25. I BUY the XYZ 105 Call for a Debit of $0.25.

• My net cost is $0.00 to put this play on. • My maximum risk is $1.00/1lot ($100/1lot)• My maximum reward is Unlimited. • I am not subject to Volatility nor Time Decay.

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$99 $105

Max Loss: $100.00

$100

+Profits

-Losses

$50 $150


• EXAMPLE (The Double Bullish Strategy):• I SELL the XYZ 99/100 Put Spread for a Credit of $0.25. I BUY the XYZ 105 Call for a Debit of $0.25.

• A stock can Go UP, DOWN, or STAY the same.• If XYZ expires below 99, I lose $100.00• If XYZ expires between 100 - 105, I lose nothing. (I paid nothing!)• If XYZ expires above 105, I gain $100 per 1pt XYZ is trading above 105.• Prior to expiration, volatility can work in my favor creating unlimited profits even while XYZ trades below

105. I must be diligent to take advantage of this condition.

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$99 $105

Max Loss: $100.00

$100

+Profits

-Losses

$50 $150


Winning Example:• AMZN Earnings Play

• Thursday at 2:42pm EST, AMZN is trading around $308.50• I have a bullish bias into earnings. The measured move target (the implied

move) is +/- $24.30. So I have an upside target of $332.80• I place and get filled on the following order (1lot):

Sold the 325/330 Put Spread, Bought the 330 Call. Net Credit of $0.22(Bought the 325 Put marking $21.20, Sold the 330 Put marking $24.80, Bought the 330 Call marking $3.38) Max Risk: $478 ($500-$22)Max Reward: Unlimited. If AMZN expires Friday at 330 I keep the credit received.

• I am exposed to the equivalent of 100 shares of AMZN at 330 (~$33,000.00)


Winning Example:• AMZN Earnings Play

• After earnings, AMZN opens Friday at $346.14• At 9:52am EST on Friday, I sell the 330 Call for $17.15 ($1,715.00)• I let the Put Spread expire worthless, as AMZN never goes lower than $340.74

during the day.• I received a credit of $0.22 to put the trade on• I took the trade off for a credit of $17.15. • Total profits (minus commissions): $1,737.00


Losing Example:• AAPL Earnings Play

• Tuesday at 3:22pm EST, AAPL is trading around $110.50• I have a bearish bias into earnings. The measured move target (the implied

move) is +/- $7.38. So I have a downside target of $103.00• I place and get filled on the following order (3lot):

Sold the 110/112 Call Spread, Bought the 103 Put. Net Debit of $0.04/1lot(Sold the 110 Call marking $3.84, Bought the 112 Call marking $2.84, Bought the 103 Put marking $1.04) Max Risk: $612.00Max Reward: Unlimited. If AAPL expires Friday at 103 I only lose the $0.04/1lot I paid.

• I am exposed to the equivalent of 300 short shares of AAPL at 110 (~33,000.00)


Losing Example:• AAPL Earnings Play

• After earnings, AAPL opens Wednesday at $117.63• At 9:52am EST on Wednesday, I buy back the 110/112 Call Spread for

$1.95/1lot ($585.00)• I let the Put expire worthless, as AAPL never goes lower than $115.10 the rest

of the week and the put was marking very little value post earnings.• I paid a debit of $0.04 to put the trade on• I took the trade off for a debit of $1.95/1lot. • Total loss (minus commissions): $597.00 (Max Risk of the trade was $612)• No matter how high AAPL went, I could not lose any more than $612.• If I had simply shorted 300 shares of AAPL into earnings, I would have

been down ~$2100.00 on Wednesday’s open and more throughout the week.


• Recap:• Options can be used to limit risk.• Naked long options are subject to volatility and time decay.• Naked short options are subject to unlimited risk and assignment.• Spreads can be used to mitigate these risks• A cunning mix of spreads and options can be used to create ones own rules

for a trade.• Selling a put spread and buying a call creates wonderful risk/reward situations

– defining one’s risk at entry and creating unlimited reward– or the opposite to get short: selling a call spread and buying a put

• Most option strategies use spreads in different formats. It is beneficial for an options trader to understand spreads as a second nature.

• To manage risk, a trader must understand for themselves how to manage options strategies.

Q & A With Web

Follow me on Twitter:@MarketWebs

Live YouTube channel with /ESLevels and Market InternalsEvery Day the Market is OpenFrom 9am EST – 5:15pm EST

Other videos include a further discussion of value area and a demystification of the “VooDoo Lines”

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web’s weekly roundup january 31, 2015 twitter: @marketwebs presenter: web begole

Documents

futures trading

week forecast

es futures sp

options trading

closed week

risk disclaimer slide

opening price

pts notable pattern