Web’s Weekly Roundup March 28, 2015 Presenter: Web Begole

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Web’s Weekly Roundup -- March 28, 2015 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 Analysis of /DX (US Dollar Futures) and forecast Pumping Iron: Establishing and Managing Iron Condors How Implied Volatility Works… A synthetic example Iron Condor (XYZ) An example Iron Condor based on reality (KO) Q&A Time

/ES Futures (S&P 500) YTD Opening Price: Current Price: High: Low: O/C Change: -2.75pts H/L Range: Notable Pattern: Resistance at top of March POC, now trading at March’s value area low. Forecast: I can’t help but think the topping pattern continues. At the moment we’re looking to open April below value, which will be the first time since October. Timing of interest rate hikes continues to pressure the market.

/TF Futures (Russell 2000) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: pts Notable Pattern: Unlike the /ES, /NQ, /YM, The Russell had strength above value through much of March. Forecast: Can go either way from here at the top of March’s value area. Looking into April I expect support at 1210 and resistance at 1240 but either one of those can break easily.

/CL Futures (Crude Futures) YTD Opening Price: Current Price: High: Low: O/C Change: -8.29pts H/L Range: 14.04pts Notable Pattern: Rejected March value area low. Forecast: Expect lower support to come in at 47 for the time being. Upside resistance sits at The dollar regaining strength, and the news from Yemen fading, Crude will return to supply glut pressures.

/DX Futures (US Dollar Index) -- Last time we looked…. March 17 th 7 Opening Price: Current Price: High: Low: O/C Change: +9.74pts H/L Range: 9.235pts Notable Pattern: Above monthly value areas the entire year. Opening the year on the lows, closing this week on the highs. Forecast: I expect 101 to be a short term top based on the yearly value area chart.

/DX Futures (US Dollar Index) YTD Opening Price: Current Price: High: Low: O/C Change: +6.04pts H/L Range: 9.235pts Notable Pattern: Still above monthly value but pulled back from the top of R4. Forecast: For April, I expect support at 96.5 and resistance at 99.88… barring any news. We were here… FOMC Day…

Looking Ahead Overall: Things are starting to look weak, with only the Small Caps seeing any strength. A large sell-off on Wednesday was followed by modest movement the rest of the week. We could be in for some choppy indecisive movement through next week, being a shortened holiday week. With that…. Let’s discuss making money from stocks that don’t move….

Pumping Iron – Establishing & Managing Iron Condors Iron Condor: A limited-risk, limited-reward, non-directional (delta neutral) option strategy with the ability to manage the probability of profit. It consists of selling an out of the money strangle (put & call combination) and buying a further out of the money strangle for protection. Another way to think of it is as selling a put spread and selling a call spread. Using the option chain delta greek, a trader can establish the probability of profit from this trade. P&L Increases over time as the stock stays within the designated range, reaching maximum profit at expiration. 10

Pumping Iron – Establishing & Managing Iron Condors Let’s visualize Implied Volatility Premium In Out of the Money Options: We will focus simply on option premium as it relates to the amount of time remaining prior to expiration 11 At The Money Calls & Puts Out of The Money Calls Out of The Money Puts Option Premium Curve Deltas Main XYZ Price Time Deltas Second Deltas Third

Pumping Iron – Establishing & Managing Iron Condors Let’s visualize Implied Volatility Premium In Out of the Money Options: We will focus simply on option premium as it relates to the amount of time remaining prior to expiration 12 At The Money Calls & Puts Out of The Money Calls Out of The Money Puts Option Premium Curve Deltas XYZ Price Price

Pumping Iron – Establishing & Managing Iron Condors An Iron Condor is a delta neutral option play that expects the price of an underlying to stay within a certain range. Selling an Out of the Money Put Spread as well as Selling an Out of the Money Call Spread. Example: $100 I sell the 80/85 Put Spread I sell the 115/120 Call Spread If XYZ Expires between I keep the credit received. My maximum risk is the width of the spreads ($5) minus the credit received. Using the deltas of an option chain, we can make a determination about the underlying’s expected movement. Delta is the change of the value of the option based on the change of the underlying. Example: An option with a delta of.20 will increase/decrease in value by $0.20 for every $1 move in the underlying. In addition, Delta can be used as a measurement of probability (the deltas value) Example: An option with a delta of.20 has a 20% chance of expiring In The Money In addition, Delta can also be roughly used as a measurement of the probability of a touch (double the delta) Example: An option with a delta of.20 has a 40% chance of being in the money at some point before expiration. Knowing that the spreads have a double % chance of a touch over the life-time of the option play, the question is: How do I manage an Iron Condor when the price has gone against me? 13

Pumping Iron – Establishing & Managing Iron Condors For me, when it comes to managing any option strategy/position, I have this 1 solitary rule: I WILL NEVER SPEND MONEY TO MANAGE AN OPTION POSITION. But I will gladly accept money to manage my risk or increase my reward…. 14

Pumping Iron – Establishing & Managing Iron Condors Let’s look at a hypothetical example: XYZ, currently trading at Some Liberties in the example: Fake stock, fake option chain – a little too “perfect” Time is not a factor in this, there is no time decay. The straddle is pricing an expected move of +/-$4.46 IE: Either $45.50 or $54.50 at expiration. I could build my Iron Condor outside of that expected move… IE: Sell the 43/44 Put Spread and the 56/57 Call Spread for $0.10 each My max reward is $0.20 and my max risk is $ % Probability of Profit Or I could build my Iron Condor a bit more inside of the expected move and plan to manage it. Ex: Sell the 45/46 Put Spread and the 54/55 Call Spread for $0.20 each My max reward is $0.40 and my max risk is $ % Probability of Profit As seen above, Iron Condors have a very high probability of profit, but an often low reward compared to risk. So what can I do? Call DeltaCall MarkStrikePut MarkPut Delta 1.00$ $ $ $ $ $ $ $ $7.9544$ $5.7545$ $4.9046$ $4.2047$ $3.4548$ $2.8249$ $2.2350$ $1.7251$ $1.3052$ $0.9653$ $0.7054$ $0.5055$ $0.3556$ $0.2557$ $0.1758$ $0.1259$ $0.0860$17.45

Pumping Iron – Establishing & Managing Iron Condors 16 Call DeltaCall MarkStrikePut MarkPut Delta 1.00$ $ $ $ $ $ $ $ $7.9544$ $5.7545$ $4.9046$ $4.2047$ $3.4548$ $2.8249$ $2.2350$ $1.7251$ $1.3052$ $0.9653$ $0.7054$ $0.5055$ $0.3556$ $0.2557$ $0.1758$ $0.1259$ $0.0860$17.45 Every trade is Risk/Reward, if I amplify one side, I will amplify the other. How can we amplify risk? A) Widen the spreads. What is the key importance in an iron condor is that the price stays between the short strikes, not necessarily the width of the spreads though they define my risk. By selling 3-strike wide spreads I can get something that looks like: Sell the 41/44 Put Spread Sell the 56/59 Call Spread for $0.23/each Max reward is $0.46, max risk is $ % Probability of Profit B) Tighten the width between the short strikes. By selling something closer to inside the expected move, I take on more risk and therefore gain more reward. Ex: Sell the 44/47 Put Spread Sell the 53/56 Call Spread for $0.61/each Max reward is $1.22, max risk is $ % Probability of Profit

Pumping Iron – Establishing & Managing Iron Condors 17 Call DeltaCall MarkStrikePut MarkPut Delta 1.00$ $ $ $ $ $ $ $ $7.9544$ $5.7545$ $4.9046$ $4.2047$ $3.4548$ $2.8249$ $2.2350$ $1.7251$ $1.3052$ $0.9653$ $0.7054$ $0.5055$ $0.3556$ $0.2557$ $0.1758$ $0.1259$ $0.0860$17.45 I choose to sell the 44/47/53/56 Iron Condor This means: I am selling the 47 $0.96 I am buying the 44 $0.35 I am selling the 53 $0.96 I am buying the 56 $0.35 Net Credit: $1.22 Net Risk: $1.78 The deltas work as following: By selling the 47 Put, I am long.32 Deltas By buying the 44 Put, I am short.15 Deltas By selling the 53 Call, I am short.32 Deltas By buying the 56 Call, I am long.15 Deltas My delta exposure is: 0.00 Deltas. But I must pay attention that the.32 delta exposure of the short strikes means that the underlying has a 64% chance of touching both of these price levels (47 & 53) prior to expiration. When this happens, one side of the condor will mark as a loss, the other side will mark as a profit. We can put this in our favor!

Pumping Iron – Establishing & Managing Iron Condors 18 Call DeltaCall MarkStrikePut MarkPut Delta.85$ $ $7.9541$ $5.7542$ $4.9043$ $4.2044$ $3.4545$ $2.8246$ $2.2347$ $1.7248$ $1.3049$ $0.9650$ $0.7051$ $0.5052$ $0.3553$ $0.2554$ $0.1755$ $0.1256$ $0.0857$ From Establishment: Net Credit: $1.22 Net Risk: $1.78 Say immediately, price moves to my short put. The put spread is now worth $1.27 The call spread is now worth $0.23 Value of the condor is now $1.50 but I sold it for $1.22 I am marking a loss. What can I do? I can roll the call spread down in strikes. This means I buy back the call spread for $0.26 (I received $0.61 initially) and sell another call spread for more… There is now a 64% chance the price will touch 50 before expiration, and less chance further out… So I decide to roll down to the 51/54 call spread. I buy back the 53/56 call spread for $0.23, I sell the 51/54 call spread for $0.45. I receive a net credit of $0.22 By receiving a credit of $0.22: I increase my maximum reward to $1.44 I reduce my original risk to: $1.56

Pumping Iron – Establishing & Managing Iron Condors 19 New Position: Net Credit: $1.44 Net Risk: $1.56 Say immediately, price moves to Woops. The put spread is marking $0.23 The new call spread is marking $1.73 The condor is marking $1.96 and I have it on for a $1.44 credit. Yet again I’m marking a loss of $0.52 What can I do? Say I’m freaked… I must stay calm. A) I can roll up the put spread to create an Iron Butterfly I buy back the 44/47 Spread for $0.23 I sell the 48/51 Put spread for $0.80 I collect $0.57 bringing my net risk down to $0.99 but I need the stock to expire at 51 for max profit. B) I can invert my position and lock in a loss, but the smallest possible loss. I buy back the 44/47 Spread for $0.23 I sell the 51/54 Put Spread for $1.52 I collect $1.29 bringing my max risk to $0.27 At this point I reduce my max loss by half but lock it in, it is impossible for me to lose any more than $0.27 and impossible for me to make any money. Say I did option B, let’s look….. Net Credit: $2.73 Net Risk: $0.27 Call DeltaCall MarkStrikePut MarkPut Delta $ $ $ $ $ $ $ $ $7.9547$ $5.7548$ $4.9049$ $4.2050$ $3.4551$ $2.8252$ $2.2353$ $1.7254$ $1.3055$ $0.9656$ $0.7057$ $0.5058$ $0.3559$ $0.2560$

Pumping Iron – Establishing & Managing Iron Condors 20 New Position: Net Credit: $2.73 Net Risk: $0.27 I still have on two credit spreads, but in this case they are both in the money… It is a fact that I cannot lose any more than $0.27 on this position. Can I keep my max profit of $2.73? No. Under no circumstances will that be the case. The maximum reward now is $0.00 Let’s look at pricing on expiration… Call DeltaCall MarkStrikePut MarkPut Delta 1.00$ $ $ $ $ $ $ $ $7.9547$ $5.7548$ $4.9049$ $4.2050$ $3.4551$ $2.8252$ $2.2353$ $1.7254$ $1.3055$ $0.9656$ $0.7057$ $0.5058$ $0.3559$ $0.2560$ Call MarkStrikePut Mark $5.0048$0.00 $4.0049$0.00 $3.0050$0.00 $2.0051$0.00 $1.0052$ $ $1.00 $0.0055$2.00 $0.0056$3.00 $0.0057$4.00 Regardless of where the price expires, I will need to spend $3.00 to close the position.

Pumping Iron – Establishing & Managing Iron Condors 21 So let’s rewind… Current Position: Net Credit: $1.44 Net Risk: $1.56 Say price is at 53 now... Woops. The put spread is marking $0.23 The new call spread is marking $1.73 The condor is marking $1.96 and I have it on for a $1.44 credit. Yet again I’m marking a loss of $0.52 What can I do? We looked at mitigating losses, but lets look at keeping some possibility of winning…. A) I can roll up the put spread to create an Iron Butterfly I buy back the 44/47 Spread for $0.23 I sell the 48/51 Put spread for $0.80 I collect $0.57 bringing my net risk down to $0.99 but I need the stock to expire at 51 for max profit. Say I did option A, let’s look….. Net Credit: $2.01 Net Risk: $0.99 Call DeltaCall MarkStrikePut MarkPut Delta $ $ $ $ $ $ $ $ $7.9547$ $5.7548$ $4.9049$ $4.2050$ $3.4551$ $2.8252$ $2.2353$ $1.7254$ $1.3055$ $0.9656$ $0.7057$ $0.5058$ $0.3559$ $0.2560$

Pumping Iron – Establishing & Managing Iron Condors 22 New Position: Net Credit: $2.01 Net Risk: $0.99 Now I have an Iron Butterfly wrapped around 51, if the stock expires at 51, I keep $2.01 credit for the trade. But notably, if the stock expires anywhere between I break even on the trade! Anywhere in the 4pt range (49-53) I can make money. Outside of that range, I can not lose any more than $0.99 Let’s look at pricing on expiration… Call DeltaCall MarkStrikePut MarkPut Delta 1.00$ $ $ $ $ $ $ $ $7.9547$ $5.7548$ $4.9049$ $4.2050$ $3.4551$ $2.8252$ $2.2353$ $1.7254$ $1.3055$ $0.9656$ $0.7057$ $0.5058$ $0.3559$ $0.2560$ Call MarkStrikePut Mark $5.0048$0.00 $4.0049$0.00 $3.0050$0.00 $2.0051$0.00 $1.0052$ $ $1.00 $0.0055$2.00 $0.0056$3.00 $0.0057$4.00 In this case, I must pay $2.00 to get back my short 51 call. If the stock is at 51, The short options are worth nothing. If the stock is above 54 my long call protects me and limits risk to $0.99

Pumping Iron – Establishing & Managing Iron Condors 23 Let’s review the position history: Sold the 44/47/53/56 Iron Condor for $1.22 (Max Reward: $1.22, Max Risk: $1.78) Rolled to the 44/47/51/54 Iron Condor for $0.22 (Max Reward: $1.44, Max Risk: $1.56) Rolled to the 48/51/54 Iron Butterfly for $0.57 (Max Reward: $2.01, Max Risk: $0.99) Ending with an Iron Butterfly I have a ranges at expiration: 51 – If the stock expires here I make my maximum profit If the stock expires within that range I can make a profit or – If the stock expires within either of those ranges I take less than maximum loss. Below 48 or Above 54 – If the stock expires outside these prices I take the full loss of $0.99 (better than $1.78)

Pumping Iron – Establishing & Managing Iron Condors Alright, a real world example… KO Friday, February 27 th, 2015, End Of Day (KO closes at 43.30) 24 Call DeltaCall MarkStrikePut MarkPut Delta.85$ $ $9.3734$ $8.5735$ $7.4736$ $6.3237$ $5.3238$ $4.3239$ $3.3740$ $2.3141$ $1.6242$ $1.0243$ $0.6044$ $0.3445$ $0.2146$ $0.1547$ $0.0848$ $0.0449$ $0.0450$ $0.0655$ $0.0160$ April Option Chain (49 DTE) The straddle is pricing an expected move of +/-$1.97 IE: Either $41 or $45 at expiration. I want to widen the spreads but given that this stock doesn’t have a very high implied volatility to begin with, I think a 2pt spread is better than a 3pt. (Because going with 3pts doesn’t net me much higher reward than a 2pt, while increasing risk by 50%) So I’m going to do this: Selling the 39/41 Put Spread (for $0.20) and the 45/47 Call Spread (for $0.19) Net credit of $0.39 Max Reward: $0.39Max Risk: $1.61 Let’s move forward a week…

Pumping Iron – Establishing & Managing Iron Condors KO Friday, March 6 th, 2015, End Of Day (KO closes at 41.52) 25 Call DeltaCall MarkStrikePut MarkPut Delta.96$8.5233$ $7.5234$ $6.5235$ $5.5236$ $4.5037$ $3.5238$ $2.5339$ $1.6740$ $1.0941$ $0.6442$ $0.3643$ $0.1944$ $0.1145$ $0.0846$ $0.0647$ $0.0448$ $0.0349$ $0.0250$ $0.0155$ $0.0160$ Position: Max Reward: $0.39Max Risk: $1.61 April Option Chain (42 DTE) The straddle is now pricing an expected move of +/-$1.55 IE: Either $40 or $43 at expiration. The Iron Condor is now marking $0.37 So I am up on the position $0.02! But the expected move has changed, now saying $43 is the max… So I decide to roll down the call spread… I buy back the 45/47 Spread for $0.05 I sell the 43/45 Call Spread for $0.25 I receive a net credit of $0.20 New position: Max Reward: $0.59Max Risk: $1.41 Let’s move forward a week…

Pumping Iron – Establishing & Managing Iron Condors KO Friday, March 13 th, 2015, End Of Day (KO closes at 39.91) 26 Call DeltaCall MarkStrikePut MarkPut Delta.96$7.0033$ $6.0234$ $5.0035$ $4.0736$ $3.1237$ $2.2538$ $1.4639$ $0.8640$ $0.4741$ $0.2442$ $0.1343$ $0.0844$ $0.0645$ $0.0446$ $0.0447$ $0.0348$ $0.0249$ $0.0250$ $0.0155$ $0.0160$20.07 Position: Max Reward: $0.59Max Risk: $1.41 April Option Chain (35 DTE) The straddle is now pricing an expected move of +/-$1.77 IE: Either $38 or $42 at expiration. The Iron Condor is now marking $1.06 So I am down on the position $0.47… The expected move has changed, now saying $42 is the max… So I decide to roll down the call spread again, but rolling 1pt only gives me 0.09… not enough. So time for the Iron Butterfly…. I buy back the 43/45 Spread for $0.06 I sell the 41/43 Call Spread for $0.34 I receive a net credit of $0.28 New position: Max Reward: $0.87Max Risk: $1.13 Let’s move forward a week…

Pumping Iron – Establishing & Managing Iron Condors KO Friday, March 20 th, 2015, End Of Day (KO closes at 40.65) 27 Call DeltaCall MarkStrikePut MarkPut Delta 1.00$7.6533$ $6.6734$ $5.7035$ $4.7036$ $3.7037$ $2.7338$ $1.8239$ $1.0340$ $0.4941$ $0.1942$ $0.0843$ $0.0444$ $0.0345$ $0.0346$ $0.0247$ $0.0248$ $0.0149$ $0.0150$ $0.0155$ $0.0160$ Position: Max Reward: $0.87Max Risk: $1.13 April Option Chain (28 DTE) The Iron Condor is now marking $1.10 So I am down on the position $0.23… As I’m already at the Iron Butterfly stage, the only management option I have now is to invert my position and lock in a loss. If I decided to do that, I could either roll up the put spread or roll down the call spread, it does not matter from a risk standpoint…. But Rolling the put spread to 41/43 nets me $0.89 credit and Rolling the call spread to 39/41 nets me $0.92 credit Rolling both to 40/42 nets me $0.93 credit That would result in a position like: Max Reward: $0.00Max Loss: (certain) $0.20 Instead, let’s leave it, and again: Let’s move forward a week…

Pumping Iron – Establishing & Managing Iron Condors KO Friday, March 27 th, 2015, End Of Day (KO closes at 40.08) 28 Call DeltaCall MarkStrikePut MarkPut Delta.94$7.1033$ $6.1034$ $5.1235$ $4.1236$ $3.1237$ $2.1738$ $1.3039$ $0.6240$ $0.2341$ $0.0842$ $0.0343$ $0.0344$ $0.0245$ $0.0146$ $0.0147$ $0.0148$ $0.0149$ $0.0150$ $0.0155$ $0.0160$19.95 Position: Max Reward: $0.87Max Risk: $1.13 April Option Chain (21 DTE) The Iron Condor is now marking $1.14 So I am down on the position $0.27… Again I’m already at the Iron Butterfly stage, the only management option I have now is to invert my position and lock in a loss. If I decided to do that, I could either roll up the put spread or roll down the call spread, it does not matter from a risk standpoint…. But Rolling the put spread to 41/43 nets me $0.86 credit and Rolling the call spread to 39/41 nets me $0.87 credit Rolling both to 40/42 nets me $0.87 credit That would result in a position like: Max Reward: $0.00Max Loss: (certain) $ Days of price movement remain, I’m not ready to lock in a loss just yet. The current straddle price expects a move of +/-$1.13 Ie: 41 or 39 at expiration Can I move to an Iron Butterfly around 40?

Pumping Iron – Establishing & Managing Iron Condors KO Friday, March 27 th, 2015, End Of Day (KO closes at 40.08) 29 Call DeltaCall MarkStrikePut MarkPut Delta.94$7.1033$ $6.1034$ $5.1235$ $4.1236$ $3.1237$ $2.1738$ $1.3039$ $0.6240$ $0.2341$ $0.0842$ $0.0343$ $0.0344$ $0.0245$ $0.0146$ $0.0147$ $0.0148$ $0.0149$ $0.0150$ $0.0155$ $0.0160$19.95 Position: Max Reward: $0.87Max Risk: $1.13 April Option Chain (21 DTE) Can I move to an Iron Butterfly around 40? Rolling the call spread to 40/42 credits me $0.34 Rolling the put spread to 38/40 costs me $0.51 Net cost: $0.17 Max Reward: $0.70Max Risk: $1.30 Not great, and against the rules!! So let’s just examine where we are in terms of expiration. Given the current straddle we have three options: 39, 40, 41

Pumping Iron – Establishing & Managing Iron Condors KO Hypothetical Expiration Friday, April 17 th, 2015, End Of Day 30 Call DeltaCall MarkStrikePut MarkPut Delta 1.00$1.0039$ $0.0040$ $0.0041$ $0.0042$ $0.0043$3.00 Position: Max Reward: $0.87Max Risk: $1.13 Given the current straddle we have three options at expiration: 39, 40, 41 KO Expiring at 40 means: The Iron Condor is worth $1.00 I lose $0.13 on the position. KO Expiring at 39 means: The Iron Condor is worth $2.00 I lose $1.13 on the position. KO Expiring at 41 means: The Iron Condor is worth $0.00 I keep $0.87 from the position. As can be seen, by leaving the position as is, there’s still risk on the table. But if the option market is correct in its expectations, I will only take a full loss in 1 of 3 possible scenarios. Given this, I don’t want to prematurely lock in losses. Call DeltaCall MarkStrikePut MarkPut Delta.00$0.0039$ $0.0040$ $0.0041$ $0.0042$ $0.0043$3.00 Call DeltaCall MarkStrikePut MarkPut Delta 1.00$2.0039$ $1.0040$ $0.0041$ $0.0042$ $0.0043$2.00

Pumping Iron – Establishing & Managing Iron Condors 31 Let’s review the position history: Sold the 39/41/45/47 Iron Condor on Feb 27 th for $0.39 (Max Reward: $0.39, Max Risk: $1.61) Rolled to the 39/41/43/45 Iron Condor on March 6 th for $0.20 (Max Reward: $0.59, Max Risk: $1.41) Roll to the 39/41/43 Iron Butterfly on March 13 th for $0.28 (Max Reward: $0.87, Max Risk: $1.13) Ending with an Iron Butterfly I have a ranges at expiration: 41 – If the stock expires here I make my maximum profit If the stock expires within that range I can make a profit or – If the stock expires within either of those ranges I take less than maximum loss. Below 39 or Above 43 – If the stock expires outside these prices I take the full loss of $1.13 (better than $1.61) Rules: -As with all trading, in this strategy your maximum risk is established at the onset of putting on the position. -I never risk more than I am willing to lose. -I will never add risk later by paying to manage the position(!). -I will make my own decisions about how much risk to maintain for the possibility of a profit, or when to lock in a loss and move on. -I will treat this strategy as a whole and not leg into/out of the strategy. Legging in and out of a strategy can lead to confusion down the line and can lead to an increase of risk and decrease of reward that can be difficult to track.

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