WOW16 – Using spreads to generate cash inflow (Part II Bull Put) Host: Georgio Stoev, Product Manager November 15, 2018

Important Information - Saxo Bank Educational Purposes: The material is provided for informational and educational purposes only and no information contained herein constitutes a solicitation for the purpose of purchase or sale of any commodity, security or investment, nor should it serve as the basis for any investment decision. The Saxo Bank Group does not guarantee the accuracy or completeness of any information or analysis supplied. The Saxo Bank Group accepts no responsibility or liability for the contents of any other site, whether linked to this site or not, or any consequences from your acting upon the contents of another site. No Guarantee: The contents of this publication should not be construed as an express or implied promise, guarantee or implication by the Saxo Bank Group that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Neither Saxo Bank A/S or its officers, employees, representatives, agents or independent contractors are in such capacities financial adviser. Saxo Bank A/S does not provide investment or financial advice or make investment recommendations. Trading Involves Risk: Trading options can be very speculative and may result in losses as well as profits. You should carefully consider your financial situation and consult your financial advisors as to the suitability of your situation prior to making any investment or entering into any transactions. This disclaimer is subject to Saxo Bank Group's Full Disclaimer available at www.saxobank.com/disclaimer.

Week 16 (Cash Inflow- Part II) Review of the markets/watchlist What is a Bull Put spread? Setting up a vertical put spread Review and Considerations

Market Review SPY -5% YTD while VIX is up 10% (2/2/2016), dubious language from FED XLE (– 8.16%) low oil prices continue to put pressure on oil exporters GLD 4.5% has a relatively good year and investors are betting the streak will continue TLT 6% Long-term rates are falling and prices on bonds back up BOJ just devalued the Yen by going negative rates and Nikkei is down 6.3% European markets continue to see inflow of QE stimulus with EFA down 6.6% Emerging markets led by Brazil (EWZ), China (FXI), Russia (RSX) also struggling Review your stock portfolios, tighten stop losses and raise some cash. Use options strategies such as cover writes, protective puts and collars to partially or fully hedge your portfolio

How to approach the current market? “As January goes so goes the year” ( January Barometer) the statistic does not imply that 2016 would be a down year, so follow at your own peril May want to avoid falling into the trap of “timing the market” Cut down on the speculative, directional strategies Instead distant yourself from the volatility with your strike price selection, i.e. credit spreads OTM strikes. Work more with vertical spreads and covered calls as they allow you to limit potential directional risk, the decay, volatility and manage your capital more efficiently Allocate no more than 10% to options of your overall account value Focus more on capital preservation Adhere to strict money management rules, at all times

Review of Strategies

What is a Bull Put Spread A bull put is a type of a vertical spread (credit spread) Which involves a short put option and long put option Same expiration Same underlying Example: Short 1 March 16 SBUX 57.5 put Long 1 March 16 SBUX 55 put The strategy is always a credit spread Higher strike price always brings more premium than lower

Bull Put Spread (Example) Sell 1 SBUX March 16 57.5 Put at $1 Buy 1 SBUX March 16 55 Put at $0.60 Net Credit (0.40) Stock Price at $60.69 $58 $57.5 $57 $56.50 $55 $54.50 57.5 Put Profit/(Loss) Stock Price $1 $0.50 $(0) $(1.50) ($2) ($0.60) $(0.60) $(0.10) $0.40 ($0.10) ($2.10) 55 Profit/(Loss) Combined Profit/(Loss) ($2.10)

Bull Put Spread (Example)

At Expiration (Possible Scenarios) Sell 1 SBUX March 16 57.5 Put at $1 Buy 1 SBUX March 16 55 Put at $0.60 Scenario 1 – SBUX rallies from current levels of $60.69 to $66 in the next 30 days Scenario 2 – SBUX stays at current levels of $60.69 Scenario 3 – SBUX falls moderately and closes at $57 at expiration Scenario 4 – SBUX sells off and closes at $54 at expiration

Strategy Considerations Market Posture – investors with bullish or neutral short-term outlook The selection on your strike prices will depend on your market assumption, i.e. selling ATM options vs. selling OTM Best candidates could be stocks or ETFs that have declined recently 5%-10% but that could rebound over the next 20-30 days A decline in the underlying price will increase the demand for put options, which will increase the premium The short vertical put spread will generate cash flow when the underlying price is above the higher strike or OTM at expiration If both legs expire OTM investors collect the whole credit The strategy must be established as two separate legs in the Saxo Trader It is a defined risk strategy with maximum gain (credit) and maximum loss

Strategy Considerations (cont’d) Look for $0.25-$0.30 cents on a dollar wide spread, account for brokerage fees and commissions It is inevitable that not all trade will work in your favor, when this happens we sometimes could make an adjustment and play defense Know the risk/reward of the trade With defined risk strategies we are comfortable taking maximum loss If more than 10 DTE, leave it – duration is in your favor If less than 10 DTE, you could roll if you have the same directional assumption You could roll a spread if your short strike is ITM/ATM and the long is OTM Roll down and out, i.e. April 52.5/50 and only for a credit ( this is buying you duration) Trade small and trade around maximum risk (1% or 2% of account value)

Questions GEOS@saxobank.com https://www.tradingfloor.com/topics/optionslab Please join us next time as we explained diagonal spreads with special guest Shawn Howell, Managing Partner at ProMarket Advisors LLC