Web’s Weekly Roundup Putting Long Stock To Work July 11, 2015 Presenter: Web Begole

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Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast (NEUTRAL TO BEARISH TO ?!!??!!??!?!) Analysis of /DX (US Dollar Futures) and forecast (BEARISH) Analysis of /6E (Euro-Dollar Futures) and forecast (BULLISH) Analysis of /ZB (30-Year Bond Futures) and forecast (NEUTRAL TO BULLISH) Analysis of /CL (Crude Futures) and forecast (BEARISH) Putting Long Stock To Work in Volatile Markets

/ES Futures (S&P 500) YTD 2015 Opening Price: 2038.25 Current Price: 2070.50 High: 2125 Low: 1953.5 O/C Change: +32.25pts (+1.58%) H/L Range: 171.50 Notable Pattern: Last week I called for a move down to 2041.25… we’ve stayed between that target and bottom of value all week in a MASSIVE chop-fest. The market has become more short by Friday than they were last week with big money just slightly longer. Forecast: It’s all about Greece and China now. We could continue in the same pattern of chop. Outside of the same range as this week, I can only provide an upside target of 2098.25 and downside of 2023.75. Else we stay in the same range….

/DX Futures (USDollar Index) YTD 2015 Opening Price: 92.005 Current Price: 95.975 High: 101.23 Low: 91.995 O/C Change: +3.97pts (+4.31%) H/L Range: 9.235pts Notable Pattern: As mentioned last week, I don’t trust any rally in the USD. We were unable to reach the first venom line of 97.69 and the overall market including big money is VERY short. Forecast: Regardless of what happens outside of the US, I believe we’ll see 94.83 in due time. Upside resistance remains at 96.605.

/6E Futures (Euro Futures) YTD 2015 Opening Price: 1.2124 Current Price: 1.1163 High: 1.2127 Low: 1.0477 O/C Change: -0.0961pts H/L Range: 0.165pts Notable Pattern: Breaking back into value for July, having touched the point of control. Overall market is short the Euro but not as short here as in the USD. Forecast: Having touched the POC, I believe there’s a strong chance we see 1.1358 in due time. Support remains at 1.115

/ZB Futures (30-Year Bonds) YTD 2015 Opening Price: 157’21 Current Price: 149’15 High: 165’11 Low: 147’11 O/C Change: -8’06 H/L Range: 18’00 Notable Pattern: Having fallen back from the third venom line above, we’ve touched the bottom of value for July. Big money is very short while the rest of the market maintains a long position. Forecast: I expect a mild recovery to 150’17 before any decisive movement away which could be in either direction.

/CL Futures (Crude) YTD 2015 Opening Price: 59.51 Current Price: 52.82 High: 60.86 Low: 46.82 O/C Change: -6.69 (-11.24%) H/L Range: 14.04 Notable Pattern: Having fallen away from July’s value on the open of the month, only small money is buying down here. Big money went to their shortest position in 20days on Friday. Forecast: I expect to see a decline to 49.01 this week with possible upside movement if shocked to 55.25.

Looking Ahead Overall: Most of last weeks predictions played out perfectly this week. (Except the Bonds and the Euro grew a bit weaker than expected) It is very hard to make predictions now with a new month starting next week as well as (perhaps) some decision out of the Euro Zone. Either next week will be a repeat of this week with little lasting movement, or the Euro could take a massive move lower below value and get the other markets to move with it.

Putting Long Stock Positions To Work In Volatile Markets Covered Calls Cashless Collars Cashless Limited Risk Reversals Back Ratio Spreads

Putting Long Stock Positions To Work What do I mean by “Putting Long Stock To Work?” If I have a long stock position, there may be reasons to hold on to it in the long term: - Long term growth - Dividend income - Capital gains avoidance - Margin provision - Etc. But I don’t necessarily want it to just sit there, especially if it is going down in a volatile market. I can still put it to work to bring in income or simply reduce the original cost basis of the shares. One very important aspect of having long stock, is the margin relief of selling calls against it (a covered call). I can sell calls against my position (at 1x call per 100x shares) with no buying-power reduction. This is how I can put the long stock to work for me in both directions. We’ll discuss some methods today: - Covered Calls for modest income - Cashless Collars for free downside protection - Cashless Limited Risk Reversals for free downside protection with limited upside risk - Back Ratio Spreads for amplifying profits or creating residual income in an upturn in the long stock

Putting Long Stock Positions To Work For the examples today, we’ll consider that I have a long stock position in AAPL. And a trade placed on Monday this week, AAPL closes at 126. I own 1000 shares of AAPL at a cost basis of 75. I bought back at the beginning of 2014. Initial investment of $75,000 and current market value of $126,000. I use my AAPL stock in my margin account to give myself buying power, and given the current market I am concerned that AAPL could continue lower. What can I do? Well, I know that I can sell calls against my position. I can be short up to 10 calls against my stock position without any buying power reduction. In fact, my buying power will increase by the amount of credit received from selling them. Because I’m selling premium, I want: - to hit the best time to capture theta decay on the sold calls, this will be around 45days to expiration as shown in the graph below. - to be using out of the money calls so that I have a chance to still profit on the stock position therefore I will be using the August 130 calls. Source: tastytrade.com “Comparing P/L and Theta Efficiency on Different Trade Durations”

Putting Long Stock Positions To Work Example #1: Covered Call On Monday, AAPL is trading at 126 Out of worry, I sell August 130 calls. 10x for $2.37 @August Expiration Stock Price Stock Position Call Position Net Position 123 $123,000 $2370 $125,370 124 $124,000 $126,370 125 $125,000 $127,370 126 $126,000 $128,370 127 $127,000 $129,370 128 $128,000 $130,370 129 $129,000 $131,370 130 $130,000 $132,370 131 $131,000 $1370 132 $132,000 $370 133 $133,000 -$630 134 $134,000 -$1630 135 $135,000 -$2630 August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28 Stock Price Stock Position Covered Call Position Net Position 123.28 $123,280 $570 $123,830

Putting Long Stock Positions To Work Example #2: Cashless Collar On Monday, AAPL is trading at 126 Out of worry, I sell August 130 calls. 10x for $2.37 and purchase 10x 120 Puts with the money. I receive a net credit of $0.33x10 @August Expiration Stock Price Stock Position Cashless Collar Position Net Position 118 $118,000 $2,333 $120,333 119 $119,000 $1,333 120 $120,000 $333 121 $121,000 $121,333 122 $122,000 $122,333 123 $123,000 $123,333 124 $124,000 $124,333 125 $125,000 $125,333 126 $126,000 $126,333 127 $127,000 $127,333 128 $128,000 $128,333 129 $129,000 $129,333 130 $130,000 $130,333 131 $131,000 -$777 $130,233 132 $132,000 -$1777 August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position Cashless Collar Position Net Position 123.28 $123,280 $1330 $124,610

Putting Long Stock Positions To Work Example #3: Cashless Limited Risk Reversal On Monday, AAPL is trading at 126 Out of worry, I sell August 125/130 10x call spreads for $2.25 and purchase 10x 120 Puts with the money. I receive a net credit of $0.21x10 @August Expiration Stock Price Stock Position LRR Collar Position Net Position 118 $118,000 $2,210 $120,210 119 $119,000 $1,210 120 $120,000 $210 121 $121,000 $121,210 122 $122,000 $122,210 123 $123,000 $123,210 124 $124,000 $124,210 125 $125,000 $125,210 126 $126,000 -$790 127 $127,000 -$1,790 128 $128,000 -$2,790 129 $129,000 -$3,790 130 $130,000 -$4,790 131 $131,000 $126,210 132 $132,000 $127,210 August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position Cashless LRR Position Net Position 123.28 $123,280 $1330 $124,610

Putting Long Stock Positions To Work Example #3a: Adjusted Cashless Limited Risk Reversal On Monday, AAPL is trading at 126 Out of worry, I sell August 125/130 10x call spreads for $2.25 and purchase 10x 120 Puts with the money. I receive a net credit of $0.21x10 @August Expiration EOD Friday July 10, AAPL @ 123.28, Aug 125/130 Call Spreads @ $1.80, Aug 120 Put @ 3.30 Stock Price Stock Position Adjusted LRR Collar Position Net Position 115 $115,000 $8,010 $123,010 116 $116,000 $6,510 $122,510 117 $117,000 $5,010 $122,010 118 $118,000 $3,510 $121,510 119 $119,000 $2,010 $121,010 120 $120,000 $510 $120,510 121 $121,000 122 $122,000 123 $123,000 $123,510 124 $124,000 $124,510 125 $125,000 $125,510 126 $126,000 -$490 127 $127,000 -$1,490 128 $128,000 -$2,490 129 $129,000 -$3,490 Stock Price Stock Position Cashless LRR Position Net Position 123.28 $123,280 $1330 $124,610 Say I decide AAPL is definitely going down, and I want more downside protection, I can sell the upside calls (the 130s) to purchase more of the 120 puts. At the EOD Friday, the 130 Calls are marking 1.80 and the 120 puts are marking 3.30. I decide to sell all 10x 130 calls and purchase 5x 120 puts, I take in an additional credit of $300. Now I am short 10x 125 August Calls And long 15x 120 August Puts

Putting Long Stock Positions To Work Comparison of these Protective Positions @August Expiration Stock Price Stock Position Covered Call Cashless Collar LRR Collar Adjusted 115 $115,000 $2370 $5,333 $5,210 $8,010 116 $116,000 $4,333 $4,210 $6,510 117 $117,000 $3,333 $3,210 $5,010 118 $118,000 $2,333 $2,210 $3,510 119 $119,000 $1,333 $1,210 $2,010 120 $120,000 $333 $210 $510 121 $121,000 122 $122,000 123 $123,000 124 $124,000 125 $125,000 126 $126,000 -$790 -$490 127 $127,000 -$1,790 -$1,490 128 $128,000 -$2,790 -$2,490 129 $129,000 -$3,790 -$3,490 130 $130,000 -$4,790 -$4,490 131 $131,000 $1370 -$777 -$5,490 132 $132,000 $370 -$1,777 -$6,490 133 $133,000 -$630 -$2,777 -$7,490 134 $134,000 -$1630 -$3,777 -$8,490 135 $135,000 -$2630 -$4,777 -$9,490 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position Position Net Position Covered Call $123,280 $570 $123,830 Cashless Collar $1330 $124,610 Cashless LRR Adjusted Cashless LRR $1630 $124,910

Putting Long Stock Positions To Work For the fun of it, lets say I went in the money and positioned everything 1 strike down (ie: $5 down) @August Expiration Stock Price Stock Position Covered Call Cashless Collar LRR Collar Adjusted 115 $115,000 $4,620 $10,520 $6,160 $11,460 116 $116,000 $8,520 $5,160 $9,460 117 $117,000 $6,520 $4,160 $7,460 118 $118,000 $4,520 $3,160 $5,460 119 $119,000 $2,520 $2,160 $3,460 120 $120,000 $520 $1,160 $1,460 121 $121,000 $160 $460 122 $122,000 -$840 -$540 123 $123,000 -$1,840 -$1,540 124 $124,000 -$2,840 -$2,540 125 $125,000 -$3,840 -$3,540 126 $126,000 $3,620 -$480 -$4,540 127 $127,000 $2,620 -$1,480 -$5,540 128 $128,000 $1,620 -$2,480 -$6,540 129 $129,000 $620 -$3,480 -$7,540 130 $130,000 -$380 -$4,480 -$8,540 131 $131,000 -$1,380 -$5,480 -$9,540 132 $132,000 -$2,380 -$6,480 -$10,540 133 $133,000 -$3,380 -$7,480 -$11,540 134 $134,000 -$4,380 -$8,480 -$12,540 135 $135,000 -$5,380 -$9,480 -$13,540 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position Position Net Position Covered Call 10x125c $123,280 $1,020 $124,300 Cashless Collar 2x 120p/125c $2,980 $126,260 Cashless LRR 10x 120c/125c 10x120 $1,760 $125,040 Adjusted Cashless LRR 10x120c 20x120p $2,060 $125,440

Putting Long Stock Positions To Work Example #4: Back Ratio – Profit Amplification On Monday, AAPL is trading at 126 Looking to amplify the upside, I sell 20x August 130 calls and buy 10x 125 calls for a net credit of 10x$0.12 @August Expiration August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Stock Price Stock Position Back Ratio OTM Position Net Position 123 $123,000 $120 $123,120 124 $124,000 $124,120 125 $125,000 $125,120 126 $126,000 $1,120 $127,120 127 $127,000 $2,120 $129,120 128 $128,000 $3,120 $131,120 129 $129,000 $4,120 $133,120 130 $130,000 $5,120 $135,120 131 $131,000 $135,210 132 $132,000 133 $133,000 134 $134,000 135 $135,000 136 $136,000 -$880 137 $137,000 -$1,880 Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28 Stock Price Stock Position OTM Back Ratio Position Net Position 123.28 $123,280 $120 $123,400

Putting Long Stock Positions To Work Example #5: Back Ratio – Profit Amplification --- in the money On Monday, AAPL is trading at 126 Looking to amplify the upside, I sell 20x August 125 calls and buy 10x 120 calls for a net credit of 10x$1.42 @August Expiration August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Stock Price Stock Position Back Ratio ITM Position Net Position 119 $119,000 $1,420 $120,420 120 $120,000 $121,420 121 $121,000 $2,420 $123,420 122 $122,000 $3,420 $125,420 123 $123,000 $4,420 $127,400 124 $124,000 $5,420 $129,400 125 $125,000 $6,420 $131,420 126 $126,000 127 $127,000 128 $128,000 129 $129,000 130 $130,000 131 $131,000 $420 132 $132,000 -$580 Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position ITM Back Ratio Position Net Position 123.28 $123,280 $520 $123,800

Putting Long Stock Positions To Work Example #6: Back Ratio – Profit Amplification – The short Back Ratio On Monday, AAPL is trading at 126 Looking to amplify the upside, I sell 10x August 130 calls and buy 20x 135 calls for a net credit of 10x$0.25 @August Expiration Stock Price Stock Position OTM Short Back Ratio Net Position 129 $129,000 $250 $129,250 130 $130,000 $130,250 131 $131,000 -$750 132 $132,000 -$1,750 133 $133,000 -$2,750 134 $134,000 -$3,750 135 $135,000 -$4,750 136 $136,000 $132,250 137 $137,000 $134,250 138 $138,000 $136,250 139 $139,000 $138,250 140 $140,000 $140,250 141 $141,000 $1,250 $142,250 142 $142,000 $2,250 $144,250 143 $143,000 $3,250 $146,250 August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position OTM Short Back Ratio Position Net Position 123.28 $123,280 $90 $123,370

Putting Long Stock Positions To Work Example #7: Back Ratio – Profit Amplification – The ITM short Back Ratio On Monday, AAPL is trading at 126 Looking to amplify the upside, I sell 10x August 125 calls and buy 20x 130 calls for a net debit of 10x$0.12 @August Expiration Stock Price Stock Position ITM Short Back Ratio Net Position 124 $124,000 -$120 $123,880 125 $125,000 $124,880 126 $126,000 -$1,120 127 $127,000 -$2,120 128 $128,000 -$3,120 129 $129,000 -$4,120 130 $130,000 -$5,120 131 $131,000 $126,880 132 $132,000 $128,880 133 $133,000 $130,880 134 $134,000 $132,880 135 $135,000 $134,880 136 $136,000 $880 $136,880 137 $137,000 $1,880 $138,880 138 $138,000 $2,880 $140,880 August Option Chain Monday July 6th (AAPL @ 126) August Option Chain Friday July 10th (AAPL @ 123.28) Call Mark Strike Put Mark 16.40 110 0.47 11.85 115 0.99 7.82 120 2.04 4.62 125 3.92 2.37 130 6.75 1.06 135 10.47 0.44 140 14.87 0.18 145 19.62 Call Mark Strike Put Mark 14.07 110 0.92 9.85 115 1.77 6.30 120 3.30 3.60 125 5.65 1.80 130 8.92 0.82 135 12.87 0.35 140 17.45 0.15 145 22.25 EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position ITM Short Back Ratio Position Net Position 123.28 $123,280 -$120 $123,370

Putting Long Stock Positions To Work @August Expiration Stock Price Stock Position OTM Back Ratio ITM Back Ratio OTM Short Back Ratio ITM Short Back Ratio 119 $119,000 $120 $1,420 $250 -$120 120 $120,000 121 $121,000 $2,420 122 $122,000 $3,420 123 $123,000 $4,420 124 $124,000 $5,420 125 $125,000 $6,420 126 $126,000 $1,120 -$1,120 127 $127,000 $2,120 -$2,120 128 $128,000 $3,120 -$3,120 129 $129,000 $4,120 -$4,120 130 $130,000 $5,120 -$5,120 131 $131,000 $420 -$750 132 $132,000 -$580 -$1,750 133 $133,000 -$1,580 -$2,750 134 $134,000 -$2,580 -$3,750 135 $135,000 -$3,580 -$4,750 136 $136,000 -$880 -$4,580 $880 137 $137,000 -$1,880 -$5,580 $1,880 138 $138,000 -$2,880 -$6,580 $2,880 139 $139,000 -$3,880 -$7,580 $3,880 140 $140,000 -$4,880 -$8,580 $4,880 141 $141,000 -$5,880 -$9,580 $1,250 $5,880 142 $142,000 -$6,880 -$10,580 $2,250 $6,880 Comparison of these Profit Amplifcation Positions EOD Friday July 10, AAPL @ 123.28, Stock Price Stock Position Position Net Position OTM Back Ratio $123,280 $120 $123,400 ITM Back Ratio $520 $123,800 OTM Short Back Ratio $90 $123,370 ITM Short Back Ratio -$120 $123,160

Putting Long Stock Positions To Work Recap: The ability to sell calls against a long stock position actually allows us to do far more than simple covered calls. However, diligent management is required to keep things in line and the intention of the option position in check with price movement. Based on my feeling about the stock, this is how I would look to employ the strategies: Bullish with potential downside: Covered Call Bullish with mild upside: Long Back Ratio Bullish with strong upside: Short Back Ratio Bearish with potential upside: Cashless LRR Bearish with mild downside: Cashless Collar Bearish with strong downside: Adjusted Cashless LRR Management of these positions: If things go according to plan, what I like to do is aim to sell half of my long options to finance buying back ALL of the short options. This could happen at any moment during the course of the position, but it removes the risk of the trade. If the underlying goes up unexpectedly far into my short collar position, I do have the ability to roll out the short call (buying back the near term short calls, selling the same strike further out in time, I can do this for free or possibly for a credit but the risk remains) but I may not be able to take the long puts with me. Then I am into a defensive mode and looking for the stock to dip far enough below the new short calls that I can buy them back at a reasonable price – or have the stock expire below them at the new expiration. The other thing I must keep in mind is Ex-Dividend dates. If I have short calls that are in the money, the simplest thing I can check is the mark price of the opposing put. If the opposing put’s mark price is Less than the forthcoming dividend payment, I will look to roll out the calls into a further dated option chain to avoid assignment of the calls.

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