WOW15– Trading Bear Put Spread Host: Georgio Stoev, Product Manager Guest: Patrice Henault, Head of Futures & Listed Options December 9, 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 15 The Bear Put Spread Market Review Bear Put Spread Risk Management of a Bear Put Spread Position Netflix Bear Put Spread Example Apple Bear Put Spread Example

Bear Put Spread What are Bear Put Spreads? The Bear Put Spread is employed when you think that the price of the underlying asset will go down moderatley in the near-term Why trade a Bear Put Spread? By shorting the out-of-the-money put you reduce the cost of establishing the bearish position but forgo the change of making a large profit if the underlying plummets The Bear put spread is also known as Debit Put Spread as one pays a premium when entering the trade How to place the trade? Buy ATM Put & Sell OTM Put When to trade the Bear Put Spread? The Bear Put Spread are better used in the retracement wave of a bullish trend using fibonacci retracement to place the Short Strike But it can be use with chart pattern as well for bearish movement.

Risk Management of a Bear Put Spread Invest no more than 2% of your account value, e.g. $50,000 risk $1000 on any given trade Understand your risk/reward profile at expiry: Maximum Risk and Maximum Loss Your maximum risk is limited to the premium you pay Maximum loss occurs when price of underlying >= Strike Price of Long Put Maximum Profit Max Profit = Strike Price of Long Put – Strike Price of Short Put – Premium Paid Max profit acheived when price of Underlying <= Strike Price of Short Put Breakeven Point = Strike Price of Long Put – Premium Paid

Netflix Bear Put Spread Example After a nice ride from 78.90 (on May 4) to a high of 129.29 (on Aug 5) Netflix is now toppish and Stochastics and RSI are giving us a selling signal. We also have an RSI bearish divergence. Let's buy the Aug 15 (Expiry 21 Aug) 120/110 Put Spread to play a correction to 110.04 (38.2% of retracement of 78.90/129.29). Management and risk description Entry: Buy Aug15 120/110 Put spread at $2.70 => Buy Aug15 120 Put at $3.50 &  Sell Aug15 110 Put at $0.80 Maximum Profit at expiry is limited Maximum profit at expiry achieved when underlying price =< short strike price At expiry maximum profit  = Long Strike Price minus Short Strike Price minus Premium Paid = 120 -110 – 2.70 = 7.30 Return on Investment if the market close at or below 110 at expiry = Profit/Premium Paid X 100 = 7.30/2.70 X 100 = 270.40% Maximum Loss Maximum loss is limited to premium paid. maximum loss is $2.70 Break even point at expiry = Long Strike – Premium Paid = 120 – 2.70 = 117.30

Netflix Bear Put Spread Example The August 15 120/110 Put spread on Netflix we bought on August 11 expires today. Let's take our profit. Management and risk description Entry: Sell back Aug15 120/110 Put Spread (we bought at 2.70 on August 11) at 8.30 => Sell back Aug15 120 Put at 13.10 & Buy back Aug15 110 Put at 4.80 Profit is:  Exit Price – Entry Price 8.30 – 2.70 5.60 Return on investment = Profit/Premium X 100 = 5.60/2.70 X 100 = 207 percent

Apple Bear Put Spread Example On the 11 December Apple broke through the trend of support of a daily triangle and the 10 & 20 days moving average were giving us a selling signal. Management and risk description Entry: Buy the Jan16 110/105 Put Spread at 1.92 => Buy the Jan16 110 Put at 4.35 & Sell the Jan16 105 Put at 2.43 Maximum Profit at expiry is limited Maximum profit at expiry achieved when underlying price =< short strike price At expiry maximum profit  = Long Strike Price minus Short Strike Price minus Premium Paid = 110 -105 – 1.92 = 3.08 Return on Investment if the market closes at or below $110 at expiry = Profit/Premium Paid X 100 = 3.08/1.92 X 100 = 160% Maximum Loss Maximum loss is limited to premium paid. maximum loss is $1.92 Break even point at expiry = Long Strike – Premium Paid = 120 – 2.70 = 117.30

Apple Bear Put Spread Example On the January 11th Apple start to bounce back. Stochastics and RSI are giving us the signal to take profit and sell back the Put Spread. Management and risk description Entry: Sell back the Jan16 110/105 Put Spread at 4.23 => Sell back the Jan16 110 Put at 12.24 & Buy back the Jan16 105 Put at 8.01 Profit is: Exit Price – Entry Price 4.23 – 1.92 = 2.31 Return on Investment: = Profit/Premium X 100 = 2.31/1.92 X 100 = 120%

Bear Put Spread Summary Outlook: Bearish on the underlying with a view that the stock will go down moderatly during the term of the options In general buy a one-month spread (Long ATM/Short OTM) If you think you’ll have a sharp move for the next 2 weeks you can buy a 2 weeks strike slightly OTM. As you are buying a Put Spread you don’t pay margin you just pay a premium upfront. Your maximum loss at expiry will be no more than the premium paid. You can sell back your Put Spread anytime before expiry. When should investor’s exit the position? Idealy at price target or when technical indicators become oversold. Always sell back the Put Spread before expiration. I like to use a Bear Put in retracement wave because it is easy to define your strike price.

Questions? PHE@saxobank.com GEOS@saxobank.com References: http://www.optionseducation.org/strategies_advanced_concepts/strategies/bear_put_spr ead.html https://www.tradingfloor.com/topics/optionslab https://www.tradingfloor.com/traders/georgio-stoev https://www.tradingfloor.com/traders/patrice-henault