Web’s Weekly Roundup April 25, 2015 Presenter: Web Begole

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Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast Analysis of /TF (Russell 2000 Futures) and forecast Analysis of /CL (Crude Oil Futures) and forecast Beta & Delta Hedging a Portfolio or Positions

/ES Futures (S&P 500) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: Notable Pattern: Breaking to new all time highs this week. Depending on how much volume steps in at these levels we may start May above value and continue higher. Forecast: For the year we can see a massive consolidation pattern but testing the highs. If rally continues into May, I don’t see much resistance until 2180.

/TF Futures (Russell 2000) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: pts Notable Pattern: Not seeing the beastly strength in /TF vs the other indexes anymore. Some convergence is in play. Forecast: At the moment, looking to start May inside of Value with downside support coming in around 1248.

/CL Futures (Crude Oil) YTD Opening Price: Current Price: High: Low: O/C Change: -0.74pts H/L Range: 14.04pts Notable Pattern: We’ve broken well out of value for March and finally broken above the consolidation pattern for the year. The bounce around monthly Vas puts in nice bottom pattern. Forecast: Further upside towards 66. Support in May at 53.

Looking Ahead Overall: Earnings season has really given the market a reason to break higher. A lot of earnings expectations were lowered into this season leading many companies to beat estimates handily. Notably the /TF is starting to weaken as the others strengthen. Is the market no longer concerned with a rate hike? Or is it just distracted by better than expected earnings? Crude looks technically to me like a bottom is in – at least for now – with the dollar index starting to pull further back and large speculators leaving the strength of the dollar and entering bullish on commodities.

Beta Weighting & Delta-Hedging a Portfolio A bit about hedging: Why would I want to hedge my positions? – Unknown reactions to major news events: FOMC Major Elections Earnings FDA Announcements How much do I want to hedge? – I have an overall outlook on the market which is what I’ve built my portfolio around, all I’m looking for is some protection against the unknown So I don’t particularly want to hedge 1:1, I want to maintain participation in my portfolio doing what I believe it will do. So maybe I want to hedge 0.5:1 or maybe less, maybe more, it’s up to me and my concern. If I’m worried enough, cash is always its own position! – Maybe I’m going on vacation, I don’t want to worry about my portfolio or what may happen but I don’t want to close out to cash while I’m gone either. In this case I may do something closer to 1:1 but with proper participation taken into account In all of these cases, using option strategies to hedge my positions allows me to manage how much hedging I do and how much participation I allow. 8

Beta Weighting & Delta-Hedging a Portfolio With the VIX reasonably low these days, and the market making new highs, it is a good time to be looking at protecting risk across a portfolio. (Because this means insurance is “cheap”) Beta: A beta of 1 means that the stock's price tends to move with the broader market (in tandem percentage moves). A beta greater than 1 indicates that the security's price tends to be more volatile than the market, and a beta less than 1 means it tends to be less volatile than the market. Notably: Beta may also be negative in relation to the broader market. Meaning this underlying is inversely correlated to the market (ex: VIX or TLT). The same rules as above apply just in negative terms. Beta Weighting a portfolio is looking at the overall positions (weighted by notional values) and determining its relative volatility vs. a corresponding instrument (typically the SPX or SPY). Active traders may have an ever changing mix of short and long positions in their portfolio including short or long positions on inversely correlated instruments. ToS lets us Beta Weight our portfolio to discover the delta weight of our positions vs. what ever we’d like. And thus be able to put on option strategies that may be useful in neutralizing overall portfolio risk. Lacking ToS there are websites (like finviz.com) to discover the Beta of a position. But getting into calculating what that means in terms of option position beta is a headache (to put it mildly). What we’ll talk about today is looking at beta weighting a portfolio, and ways to go about hedging an overall portfolio. 9

Beta Weighting & Delta-Hedging a Portfolio Some options (pardon the pun): Buy protective puts – With the VIX at considerably low levels, I can go out and simply buy puts on the SPY or SPX to manage my overall portfolio risk (assuming my portfolio is net long). This costs money any way one cuts it. And depending on how much I spend on insurance (how far out of the money or how far out in time I buy the puts) I may or may not make use of the protection I’m buying. Buy protective put verticals (buy a nearer the money put, sell a further out of the money put) – This lessens the amount I’m spending on insurance but also places a cap on how much protection I get in any black-swan massive downturn in the market. However, the wider the vertical the more participation I will have (and thus the more I must spend on the protection) Sell call verticals to purchase protective puts or put verticals (ie: Limited Risk Reversal) – This lessens the cost of insurance further (perhaps to zero) but does put a cost on me if the market continues to go in my portfolios direction. – BUT because I have a credit position as part of the strategy, I have some management options throughout – allowing me to roll down the call spread if the market turns down, and lower my up-side risk should the market recover. – Also, should the market not move at all, if I can put this on for zero cost or manage it to a zero cost I can have the insurance for free. 10

Beta Weighting & Delta-Hedging a Portfolio With all of these options, the most critical is the choice of the underlying on which I am playing these strategies. – Ex: If I am worried about the whole market turning down, I’ll protect my portfolio in some method using the SPY or SPX – Ex: If I am worried about earnings season with many positions in tech stocks (AAPL, FB, TWTR, IBM, CSCO, ALTR, BRCM, etc) I may use something like XLK. – Ex: If I am worried about unknown FDA announcements and have a lot of bio-tech stocks (BIIB, BMY, AKRX, GILD, PFE, etc) I may use something like BIB. The next most aspect is knowing how much exposure I have (how many deltas long/short) in relation to that underlying. – For this, ToS Beta Weighting is very handy. The last aspect is knowing how much notional value I have at risk and in which direction. Failing having ToS to help with my portfolio, I can simply look at the notional value of my portfolio or underlying and in a general sense (preferably eye-balling the Beta correlation) put on some fraction of protection in monetary terms. Ex: If I have a $100k portfolio and the SPX is at 2000, how many shares (deltas) of SPX do I want to control for protection? 100shares at 2000 = $200,000 50shares at 2000 = $100,000 So maybe I want 50 short deltas of SPX for 1:1 protection (but buying out of the money puts is not only cheaper but I can lessen my delta hedge to 0.5:1 or less/more which will turn into a 1:1 if the market turns down sharply. 11

Other Notes Dynamics of Rolling the Credit Call Spread: Selling the Jan /2375 Call Spread I receive $1, in credit. Risk is $10,000 - $1965 = $8035 is my risk. As either time passes or the market goes down, the value of this spread will also go down. Say that both happen and the spread is now worth $ my P&L on this spread is +$1, If the market moves down 100 points (theoretically:) The 2175/2275 Call Spread is marking $1965 now. So if I buy back the 2275/2375 Call Spread it will cost me $965 If I then sell the 2175/2275 Call Spread I receive $1965. Net I will receive $1,000. If I add this to the original credit received I now have this Risk profile: Risk is now $10,000 - $ $1000 Therefore Risk is $

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