1. WOW16 – Using spreads to generate cash inflow (Part II Bull Put)
Host: Georgio Stoev, Product Manager
November 15, 2018

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3. Week 16 (Cash Inflow- Part II)
Review of the markets/watchlist
What is a Bull Put spread?
Setting up a vertical put spread
Review and Considerations

4. Market Review
SPY -5% YTD while VIX is up 10% (2/2/2016), dubious language from FED
XLE (– 8.16%) low oil prices continue to put pressure on oil exporters
GLD 4.5% has a relatively good year and investors are betting the streak will continue
TLT 6% Long-term rates are falling and prices on bonds back up
BOJ just devalued the Yen by going negative rates and Nikkei is down 6.3%
European markets continue to see inflow of QE stimulus with EFA down 6.6%
Emerging markets led by Brazil (EWZ), China (FXI), Russia (RSX) also struggling
Review your stock portfolios, tighten stop losses and raise some cash. Use options strategies such as cover writes, protective puts and collars to partially or fully hedge your portfolio

5. How to approach the current market?
“As January goes so goes the year” ( January Barometer) the statistic does not imply that would be a down year, so follow at your own peril
May want to avoid falling into the trap of “timing the market”
Cut down on the speculative, directional strategies
Instead distant yourself from the volatility with your strike price selection, i.e. credit spreads OTM strikes.
Work more with vertical spreads and covered calls as they allow you to limit potential directional risk, the decay, volatility and manage your capital more efficiently
Allocate no more than 10% to options of your overall account value
Focus more on capital preservation
Adhere to strict money management rules, at all times

6. Review of Strategies

7. What is a Bull Put Spread
A bull put is a type of a vertical spread (credit spread)
Which involves a short put option and long put option
Same expiration
Same underlying
Example: Short 1 March 16 SBUX 57.5 put
Long 1 March 16 SBUX 55 put
The strategy is always a credit spread
Higher strike price always brings more premium than lower

8. Bull Put Spread (Example)
Sell 1 SBUX March Put at $1 Buy 1 SBUX March Put at $0.60
Net Credit (0.40)
Stock Price at $60.69
$58
$57.5
$57
$56.50
$55
$54.50
57.5 Put Profit/(Loss)
Stock Price $1
$0.50
$(0)
$(1.50)
($2)
($0.60)
$(0.60)
$(0.10)
$0.40
($0.10)
($2.10)
55 Profit/(Loss)
Combined Profit/(Loss)
($2.10)

9. Bull Put Spread (Example)

10. At Expiration (Possible Scenarios)
Sell 1 SBUX March Put at $1
Buy 1 SBUX March Put at $0.60
Scenario 1 – SBUX rallies from current levels of $60.69 to $66 in the next 30 days
Scenario 2 – SBUX stays at current levels of $60.69
Scenario 3 – SBUX falls moderately and closes at $57 at expiration
Scenario 4 – SBUX sells off and closes at $54 at expiration

11. Strategy Considerations
Market Posture – investors with bullish or neutral short-term outlook
The selection on your strike prices will depend on your market assumption, i.e. selling ATM options vs. selling OTM
Best candidates could be stocks or ETFs that have declined recently 5%-10% but that could rebound over the next days
A decline in the underlying price will increase the demand for put options, which will increase the premium
The short vertical put spread will generate cash flow when the underlying price is above the higher strike or OTM at expiration
If both legs expire OTM investors collect the whole credit
The strategy must be established as two separate legs in the Saxo Trader
It is a defined risk strategy with maximum gain (credit) and maximum loss

12. Strategy Considerations (cont’d)
Look for $0.25-$0.30 cents on a dollar wide spread, account for brokerage fees and commissions
It is inevitable that not all trade will work in your favor, when this happens we sometimes could make an adjustment and play defense
Know the risk/reward of the trade
With defined risk strategies we are comfortable taking maximum loss
If more than 10 DTE, leave it – duration is in your favor
If less than 10 DTE, you could roll if you have the same directional assumption
You could roll a spread if your short strike is ITM/ATM and the long is OTM
Roll down and out, i.e. April 52.5/50 and only for a credit ( this is buying you duration)
Trade small and trade around maximum risk (1% or 2% of account value)

13. Questions GEOS@saxobank.com
Please join us next time as we explained diagonal spreads with special guest Shawn Howell, Managing Partner at ProMarket Advisors LLC