Web’s Weekly Roundup & Why Manage Your Own Money August 8, 2015 Presenter: Web Begole

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Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast (NEUTRAL TO BEARISH) Quick look at some goings on in /YM (Dow Futures) (BEARISH) Analysis of /CL (Crude Futures) and forecast (BEARISH) A quick anecdote on managing your own money. Some time for some questions

/ES Futures (S&P 500) YTD Opening Price: Current Price: High: Low: O/C Change: pts (+1.68%) H/L Range: Notable Pattern: On Friday we touched and bounced off the bottom of value for the month. The /ES remains the strongest of the big 4. Most money is short all the indexes except /YM where participants have been near 100% long for the past 20 days. /YM is the weakest of the big 4 and looks to go lower which could lead to a very heavy and disconcerting liquidation break, taking the other 3 with it. Forecast: The /ES is a market that isn’t going to break without a fight. I’m looking for weakness down to , but could see strength back to 2125 as easily.

/YM Futures (DOW) YTD Disadvantaged Sellers (Liquidation Breaks) Price moving down

/CL Futures (Crude) YTD Opening Price: Current Price: High: Low: 43.7 O/C Change: (-26.85%) H/L Range: Notable Pattern: We spent the entire week trading below a trendline established in December of 1999 that has not been broken in the past 15 years until now. Market participants went 90% net long last week as we bounced a little off the trend line, the strength didn’t hold and this week we saw the liquidation break. Forecast: A slight breather pause as the market collects its thoughts on oil. And then expect further downside to Disadvantaged Sellers (Liquidation Breaks) Price moving down

Looking Ahead Overall: Much to the chagrin of our live trade room, I currently have my bear cap firmly stapled to my forehead. What I’m seeing in the /YM futures is likely the most concerning of all – how have they gotten themselves so long in the weakest index?? Crude… well… I don’t believe we’ve seen the bottom yet. My furthest out prediction has an un-adjusted price mark of ~$13/barrel which is such a shocking number to me I can’t possibly consider that as a prediction target.

Managing Your Own Money The value of learning about options for yourself Even if you’re a buy-and-hold investor 8

Managing Your Own Money A story An investor has a buy-and-hold portfolio handled by their RIA and is looking at their account in mid-July. Not being an avid watcher of CNBC or Bloomberg nor an active trader, all they’re noticing is that some of their stocks that have always been performers are moving down. They call their RIA and ask what they can do to mitigate this, and the suggestion is “How about buying some TLT?” But this investor isn’t looking to add money to an account that currently is declining in value. Having heard a little from a friend about managing long stock positions, the investor asks their RIA to establish a collar on just one of their stocks (XOM) just to see how these collars work. The RIA advises that if the stock were to run up, they’d be selling their stock at the short call price, but if the investor is okay with that he’ll do it. The investor says okay but let’s be sure it would be a good price. The RIA says, we can do that. How much are you willing to spend on the collar? The investor says they didn’t want to spend anything but if they must, they’d be willing to spend up to $500 for the insurance. The RIA says, great, I’m sure we can do this. The investor has 1000 shares of XOM and on July 16 th XOM is trading at The RIA sells 10x October 90 Calls for $0.25 and buys 10x October 75 Puts for $0.59 Net cost of the collar is $340 (not including commissions) The RIA explains that this position means on October’s expiration: If XOM is trading above 90, all of their shares will be sold at 90 for a total value of $90,000 If XOM is trading below 75, they have the right to sell their shares at 75 for a total value of $75,000 or sell the puts to collect the difference. If XOM is treading between 75 and 90, the collar will be worthless and the investor has lost $340 for the needless protection. 9

Managing Your Own Money On August 4 th (about 3-weeks later) XOM is trading at The investor looks at their account and sees that while their XOM stock is down, their collar is up in value! The October 90 Calls that were sold for 0.25 are now marking 0.06 The October 75 Puts that were bought for 0.59 are now marking 2.17 The collar is now worth $2,110. (Net gain of = $1,771) The investor calls their RIA and says “This is great, what do we do?” The RIA says we can buy back the October 90 calls for very little and take that up-side risk off the table. We could also roll the calls down. You could also sell the puts now for a nice profit but you would be losing your downside protection. What would you like to do? The investor says “Um… what should I do?” The RIA comes back with “Well XOM is an historically strong stock, and there’s a lot of talk that oil has bottomed, so I think XOM is going to continue going up, but if it doesn’t you’ve got your protection here. So I think just buying back the calls and letting the rest ride is the ideal.” The investor says “Okay, do that then…” The RIA buys back the October Calls for 0.05 the next day. Total cost of the collar/protection is now $340+$50 = $390 + commissions. On October Expiration If XOM is below 75 then the shares can be sold at 75 for a net value of $75,000 or the puts can be sold to collect the difference. If XOM is above 75 then the protection is worthless. The investor may wonder, come October, what happened to that $2k they were seeing back at the beginning of August; or more to the point – why they spent $390 to sell their XOM stock at a lower price than it is now (though they’ll remember it was insurance for some comfort). What if the investor knew options better? What could they have done? Was there an option their RIA didn’t bother to think about? 10

Managing Your Own Money The clever investor The investor doesn’t want to cap their XOM stock if it does recover from this down move, if oil has indeed bottomed. So what could they do with their position? Well the clever investor understands that options decay quicker the closer they are to expiration, also that the stock has less time to move nearer to expiration. And that they don’t want to have spent the money on needless insurance. So the clever investor tells their RIA to buy back the October 90 Calls and sell the September 70 Puts (marking $0.50) The RIA does so, buying back the Oct 90 Calls for $0.05 and selling the Sept 70 Puts for $0.50 for a net credit of $450 The collar now has an initial cost of $340-$450 = -$90 The position still has a value of $2,110 but now the net gain is ($2111-(-$90) = $2,201) Now the investor has a calendar of Short Sept 70 Puts, Long October 75 Puts If XOM is trading below 70 on September expiration the calendar is worth $5,000+remaining premium in October If XOM is trading above 70 on September expiration the September puts roll off worthless and the remaining October 75 Put is worth what ever they are marking at. The remaining protection in October is therefore kept not only for free but for $90 credit which more than covers commissions. Additionally, if XOM recovers between now and September expiration, the September puts may be able to be bought back also for $0.05 at some point and perhaps the October 90 Calls could be sold again to bring in more credit (since the 75 Puts would be worth less again) 11

Managing Your Own Money Obviously the clever investor has things figured out a bit better than the RIA… This is one of the many advantages the retail trader has today, platforms that provide all the information they need to manage their portfolio to the best of its potential. But it takes time to learn these things, to understand how options their greeks and strategies all work, and to be able to think through the potential outcomes of every trade or adjustment placed. It’s not likely the RIA never thought of doing this, it’s just simple to understand that they don’t have time to sit on the phone with every one of their clients and explain complex option strategies. Nor do they have the interest in the relatively-active monitoring of a position/portfolio that is needed for maximizing gains this way. Not to mention, if their clients started to understand all these strategies themselves, RIAs just may wind up out of a job. All this to say…. Take the time, learn options! 12

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