Phil’s Lessons Learned….. Options are the wild west vs stocks - always, always, always use a limit order!!!! Options should be monitored closer than stocks or use/set stops/limits. Options are binary directional – get the direction right (profit) and wrong (loss). An Option contract represents 100sh of an underlying asset – this means leverage!!! Option prices swing quickly and dramatically. - Call Options will typically go up slower and down faster. - The same but opposite for Put Options Most Long Option purchases don’t make money – they should be considered either insurance/protection or lower, fixed cost direction bets (vs stock). Be happy you don’t use your life insurance… Folks rarely wait till expiration – they close out positions before expiration. Higher market Volatility and in particular Implied Volatility vs Historical (Statistical) Volatility in the underlying stock increase Option premium. - Try to buy Options during Lower Volatility (sideways, low volume) market conditions The last month of decay in option value is an exponential killer!!! - Close losing positions well before the last month begins - Provide some time to be right (~90 days/3-4 months out) A good rules of thumb is choose Options about 3-5% of the underlying asset price at 90 days/3-4 months out. Try not to let winners turn into losers – if not certain they will continue be profitable, then close and take the profit. Start thinking about selling when returns top 50%.

Example 1 Phil thinks in late Dec that early Jan will be volatile and may see a market drop. On Dec 24 he buys 1 insurance/protective SPY (S&P 500 Index) Put 12/24/2014 (SPY is at 208) Strike price 195 selected (about 7% correction) Expiration March 20 (std contract, 3 rd Fri of month, 3 months out) Premium $2.54 ($254) plus contract price $8.25 = $ Premium About 1.2% of SPY at 208 (low market volatility) On 1/6/2015 Phil sold to close Net proceeds = $ (92% profit in 2 wks) With close to a double, I chose to lock in the profit During this time the overall portfolio still net lost (I have several hundred shares overall – net long), but less due to the protective put. The Put helped!

Example 2 Phil now thinks in early Jan that there will be a 1-2 day pop and then more down, he thinks Jan will be volatile and may see a market drop On Jan 8 he buys 1 portfolio protective SPY (S&P 500 Index) Put 1/8/2015 (SPY is at 204) Strike price 195 selected (about 5% correction target) Expiration March 20 (std contract, 3 rd Fri of month, 2.5 months out) Premium $3.90 ($390) plus contract price $ 8.25 = $ Premium About 2% of SPY at 204 (moderate market volatility) On Jan 16 sold to close this Put The Premium/price was at $4.43 (net gain of $434.74, a 9% gain) During this time the overall market was sideways to down As I anticipated a positive move up – I decided to sell A modest 9% return over a week.

Example 3 Phil thinks that ONNN has behaved very well over the last month – in good and bad market conditions. He’s still concerned that ONN is at it’s recent high. Micron, another major semi also recently 2 nd Q warned. So, he will make a Bullish bet with Call Options vs stock. On Jan 12 he buys 2 ONNN Call Options 1/12/2015 (ONNN is at 10.4) (200sh - $2,080) Strike price 11 (about 6% move) Expiration Apr 17 (std contract, 3 rd Fri of month, 3 months out) Premium $0.55 ($110) plus 2 contracts price $9.25 = $ Premium About 5.7% (on the expensive side) Unlimited upside, downside risk capped at $ If I’m wrong & ON drops by $0.6 or more the Option trade loses less Could have also reduced my cost and capped my earnings by selling another higher strike call (a Bull Call spread) – but that is advanced Options trading. Lets keep it simple and see how this trade goes….

Example 3 Continued ON announced and soundly beat on earnings – yah! On Feb 6 sole 1 of 2 ONNN Call Options Premium was at $0.90 w/net proceeds of $81.74 A $22.11 (37%) gain over roughly 1 month During this time the overall market was sideways to up I anticipate an ongoing move up – decided to hold 1 of the Calls Time decay will become a factor though – will at most hold a few more wks Over this time On moved roughly $1.00 from $10.4 to $11.4 per sh Owning/selling the equivalent 100sh of stock ($1,040), net $86 (8% gain) Learnings: Options trading costs are expensive and must be considered – a high % of cost with lower priced Options! This example shows Options leverage - $59.63 initial investment w/an Option vs $1,040 with the 100sh stock – still made about the same amount with each trade.

Example 4 Phil thinks in late Jan that there will be a move back down, he also thinks market volatile will climb. On Jan 29 he buys 1 portfolio protective SPY (S&P 500 Index) Put to partially hedge the overall Portfolio. 1/29/2015 (SPY is at 202) Strike price 185 selected (about an 8% correction target) Expiration Apr 17 (std contract, 3 rd Fri of month, 2.5 months out) Premium $3.10 ($310) plus contract price $ 8.25 = $ Premium About 2% of SPY at 204 (moderate market volatility) On Feb 9 Premium/price is at $1.66 (a 48% loss on paper in 2 wks…) During this time the overall market was sideways to up, SPY is up at 204 My overall portfolio is up 1.8% YTD – but less due to this protection trade Time decay will become a factor – will at most hold a few more wks Learnings: Options can move quickly and must be watched (busy work week last week)! Protective Puts are like life insurance – be glad at times you don’t need em

Phil’s Options Training Running Total – YTD Realized/Paper Gains: SPY Put 1 - $240 R SPY Put 2 - $36 R ONNN Call 1 - $22 R ONNN Call 2 - $31 P Realized/Paper Losses: SPY Put 3 - $152 P