Web’s Weekly Roundup February 14, 2015 Presenter: Web Begole

Web’s Weekly Roundup -- Saturday January 31, 2015 Past week’s events Analysis of /ES (S&P 500 Futures) and forecast Analysis of /CL (Crude Futures) and forecast Analysis of /GC (Gold Futures) and forecast Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. Q&A Time Giving away 3 copies of the ToS Earnings Study!

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Overall Market this Past Week Most Significant: New all time highs. Greece – Lots of back and forth this week on good/bad news. Final news of cash Greek govt. cash surplus lead to all time market highs. Consumer Sentiment – 93.6 vs exp largest miss on record. Low gas prices not increasing sentiment as expected. Less Significant: Baltic Dry Index at record lows. Saudi Arabia comes out with statement saying “Oil has found a bottom.” changing their tone.

/ES Futures (S&P 500) Week of Feb 9 – Feb 13 5 Opening Price: Closing Price: High: Low: O/C Change: pts H/L Range: Notable Pattern: Well above value for next week as price discovery has not found sellers yet. Closed on all-time highs. Next Week Forecast: Support at Expected range: Further new all time highs expected next week.

/ES Futures (S&P 500) Month of February, Opening Price: Current Price: High: Low: O/C Change: +103pts H/L Range: pts Notable Pattern: Having broken above value last week, this week price continued to the upside reaching R2. Out of topping pattern formed in January. February Forecast: Pullbacks expected to be limited to should bull-market continue. Further upside has in the cards.

/ES Futures (S&P 500) YTD Opening Price: Current Price: High: Low: O/C Change: +38.5pts H/L Range: pts Notable Pattern: Having closed (barely) above the 2091 arachnid level, /ES looks to continue higher with square in its sights. Forecast: Technically bullish, fundamentally cautious. Blow-off top could be seen with a quick rise to the 2179 level before a sharp decline potentially to 1830’s by mid-year.

/CL Futures (Crude Oil) YTD Opening Price: Current Price: High: Low: O/C Change: -0.98pts H/L Range: 10.66pts Notable Pattern: Feb spent above value. POC has been lowered this week, /CL is poised for large breakout. Forecast: Expecting upside resistance at in Feb and during the first quarter of 2015.

/GC Futures (Gold) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: pts Notable Pattern: Broken below value for Feb. POC migrated lower, a break above 1275 could bring large push to upside. Forecast: Expecting 1216 to act as support. If /GC can break above 1230 look for upside return to 1275 this month.

Looking Ahead Overall: /ES has fought against becoming a bear market. My outlook remains cautious as I worry about a blow off top – happening far too quickly. This could happen next week as it will be a shortened holiday week and volume will be lighter than usual. /CL has consolidated bringing the POC lower for the month, a sharp upward trend is expected. If inventory numbers show a draw down at any point, rally is expected. /GC needs more of a bid before a bull market takes off. Seems to struggle with Greek news. Caution next week: Low volume expected on shortened holiday week.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. Earnings Plays 50/50. Even if one knew the results ahead of time, who knows how the market will react? But what’s the best way to go about playing earnings for the best risk vs. reward? Directionally? Neutrally? Let’s look at: – CSCO – Naked earnings play. – KO – Protective earnings play. – Something for next week…. 11

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Idea 12 Long Reasons: Cloud bullish. Recent long signal with entrance into value for Feb. Large rally after last earnings. Short Reasons: Above average selloff after earnings beat. Down 17 quarters vs. up only 13 over the past 30.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Idea 13 Long Reasons: Broke above weekly value Tuesday, continued trend in afterhours. Short Reasons: Sell off during the trading day just prior to earnings. Decision (LONG): I am going on the assumption that Wednesday’s move was a showing of the hand.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Execution 14 Market Maker Move: +/- $1.23 I am leaning long, therefore I expect CSCO to move to ~29.30 tomorrow. ( ) What are my options? 1)Long Call Options 2)Call Vertical 3)Butterfly at 29 4)28-30 Iron Condor 5)Iron Butterfly 6)Limited Risk Reversal 7)Etc…

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Execution 15 Given that CSCO has an above average tendency to sell off after earnings beats, I want protection. So I want to play this to the long side using further dated options. If it moves up it will have a tendency to continue for about 3 days at least. Therefore I choose a March Limited Risk Reversal (Super Bull)

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Execution 16 Given the options skew and the time I put this on (around 2:30pm EST): I sell 5 of the March 28/29 Put Spreads And spend the credit to buy 35 of the March 30 Calls. Buy Mar 28 Put: 1.33 Sell Mar 29 Put: 2.03 Net Credit: 0.70/1lot 5x = 3.50 Buy Mar 30 Call: x = 3.50 Net Cost: $0.00

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Culmination 17 Result position: +35 Mar 30 Calls -5 Mar 29 Puts +5 Mar 28 Puts Result Cost: $0.00 Result Risk: $ Result Reward: Inf. Stock moves Thursday to P&L: +$1, What do I do?

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. CSCO - Culmination 18 Given that I have Strike Calls on, I look to take risk off and buy back the credit put spread using some of the calls. Friday around 2pm, On one ticket, I buy back all 5 of the 28/29 Put Spreads and sell 5 of the Calls to pay for it. Sell 5x 28 Puts: 0.23 & Buy 5x 29 Puts: 0.54 == Cost: $155 Sell 5x 30 Calls: 0.37 == Credit: $185 Net Credit: $ x CSCO March 30 Calls remain in my account for free.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO – Idea (Note: I am long Stock in KO) 19 Long Reasons: 50/50 earnings reaction. Short Reasons: Cloud bearish. 50/50 earnings reaction. Below value for Feb. Short signal below value.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO – Idea (Note: I am long Stock in KO) 20 Long Reasons: None. Short Reasons: Below value for the week. Decision (SHORT): I am going on the assumption that below value for Feb and for the week leads to short position. I need to protect my stock.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO - Execution 21 Market Maker Move: +/- $1.13 I am leaning short, therefore I expect KO to move to ~40 tomorrow. ( ) What are my options? 1)Long Put Options 2)Put Vertical 3)Butterfly at 40 4)40-42 Iron Condor 5)Iron Butterfly 6)Limited Risk Reversal 7)Etc…

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO - Execution 22 I decide to put on a limited risk reversal. I sell the 42/43 Call Spread. I sell the 42 Call: 0.43 I buy the 43 Call: 0.27 Net Credit: $0.16 I buy the 39 Put: 0.15 Net Credit: $0.01/1lot I do this 40 times (I have 4000 shares) I have downside protection. Max Cost: -0.01/1lot (ie: I receive $40.00 to put this protection on 40 times.) Max Risk: $4,000 (or is it?) Ex. If KO tanks after earnings, my P&L is: – stock move + $4,000 per point below 39. Ex. If KO rallies after earnings (above 43), my P&L is: -$4,000 + stock move

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO - Execution 23 Resulting position: +40x 43 Call -40x 42 Call +40x 39 Put Net Credit: $40.00 Max Risk: $4,000 Max Reward: A) $156, (KO can only go to zero, therefore max reward is $3,900x40). But stock losses are capped below 39! B)Unlimited (If stock goes up indefinitely, $4k loss is a drop in the bucket) What if KO stays between 39 and 42 by Feb 20 th (expiration)? Well, it’s a scratch… Protection is put on for free, I keep my shares, and I move on!

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. KO - Culmination 24 KO jumps to 43 after earnings and declines the rest of the week to 42. I still have the position on as it expires next week (Feb 20). If KO expires next Friday above 42, what are my options? I don’t want to sell my stock position. I will roll out the 42 call to March for a credit and buy back the calls when the roll credit pays for me to do so. (If KO jumps above 43, I will sell the 43 calls for profit.)

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination. Something for next week: NOTE: I will never place an earnings trade until the last few hours before the event: – I want to center the measured move around the closing price just prior to the event, – AND new information can change my opinion at any time! CAR (Avis) SUNE (SunEdison) SCTY (Solar City) ACT (Activision) ANGI (Angie’s List) DTV (Direct TV) IMAX (IMAX) LINE (LINN Energy) PCLN (Priceline) WMT (Walmart) SIX (Six Flags) TRUE (True Car) MRVL (Marvell) FUEL (Rocket Fuel) 25

Trend Lines: Fundamentally Substantial or Self-fulfilling Prophecies? Recap: Earnings trades: 50/50? – Collecting the most information available will give the trader an edge. – Analysis of historical movements combined with the technical analysis of choice will lead to the most reasonable decisions. – As with any trade, if you cannot define your risk/reward before putting it on, think again. – If the trader is uncertain of a trade, why trade it? Do not force it! – There are no guarantees. – Risk management happens when the position is put on, not after!! Know how to manage a strategy before employing it. – Avoid not knowing what your P&L will be given a certain stock price. – Do not rely on others, everyone’s portfolio/trades are different! Every options strategy (earnings or not) has different optimal conditions/criteria. – Play around in paper trading until it becomes second nature. The trader must have tools he trusts more than his gut for successful, disciplined trading. – Avoid using tools beyond one’s comprehension.

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