1. Web’s Weekly Roundup And Butterflies
May 16, 2015
Presenter: Web Begole

2. RISK DISCLAIMER
Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment. No trades are recommendations or advice and we cannot be sued for losses of capital. All trades are for educational purposes only. Contact your broker or RIA for execution, margin, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on and

3. Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast
Analysis of /DX (US Dollar Futures) and forecast
Analysis of /CL (Crude Oil Futures) and forecast
Analysis of /6E (Euro Futures) and forecast
Analysis of /GC (Gold Futures) and forecast
Butterflies: How they work and How to Manage

4. /ES Futures (S&P 500) YTD 2015 Opening Price: 2047.25
Current Price:
High:
Low:
O/C Change: pts
H/L Range:
Notable Pattern:
We’ve broken above the value area for May and reached the first resistance zone (the bottom of which at ).
Forecast:
We’ve touched the bottom of an upside trendline this week, but downside seems limited in the near term to If we break to new highs once again we will be outside of trendlines and in unknown territory. Upside targets 2130 & 2145.

5. /DX Futures (USDollar Index) YTD 2015
Opening Price:
Current Price:
High:
Low:
O/C Change: pts
H/L Range: pts
Notable Pattern: Continuing below all value areas since breaking down in April, weakness continues.
Forecast:
Shortterm downside target at Below that we can expect to see 92 as a short term bottom and a period of chop between 92 and

6. /CL Futures (Crude Oil) YTD 2015
Opening Price:
Current Price: 60.77
High:
Low:
O/C Change: pts
H/L Range: pts
Notable Pattern:
Chop continues just barely above value for May with resistance living at the arachnid at
Forecast Continued chop for the next week or two between 60 and 63.

7. /6E Futures (Euro Futures) YTD 2015
Opening Price:
Current Price:
High:
Low:
O/C Change: pts
H/L Range: pts
Notable Pattern: Well above May’s value area maintaining a bullish disposition but nearing resistance.
Forecast:
Upside target maintains at 1.15 with an extreme of 1.16, if 1.16 is hit expect some chop between 1.15 and 1.16 for a period of time.

8. /GC Futures (Gold Futures) YTD 2015
Opening Price:
Current Price:
High:
Low:
O/C Change: pts
H/L Range: pts
Notable Pattern: Recently this week it has flipped from below May value to above. There are many arachnid resistance levels ahead of the first resistance zone.
Forecast:
Upside resistance at 1245 with support this month at 1215

9. Looking Ahead Overall:
The overall market was rather quiet this week even after the Non-Farm payroll numbers which caused an early boost in values but seemingly stifled by many stating the market is overvalued.
The Dollar index is finding significant weakness as large money speculators have reduced their long USD plays significantly in recent weeks.
I believe Crude remains in a bullish trend however I found it interesting that the response to the first notable draw-down in inventory numbers since early January had little immediate effect. It did however take us to new highs on the year.

10. Butterflies – How they Work, How To Manage
What a Butterfly Option Strategy is – A play that expects the underlying to move to a specific price at expiration. Low Risk; High Reward; Low Probability of Profit
Why do a butterfly???
How Butterflies work – As expiration approaches and the stock approaches the center strike, the butterfly increases in value.
How to Manage them – Legging out of them & when Legging into them & when
Some management trickery to increase the probability of profit. When the stock moves in the right direction When the stock moves in the wrong direction

11. Butterflies – How they Work, How To Manage
What a Butterfly Option Strategy is – A play that expects the underlying to move to a specific price and close at that price on expiration. Low Risk; High Reward; Low Probability of Profit It consists of selling two out-of-the-money options at an estimated closing strike price, and purchasing two other options, one on each equidistant side of the short strike.
Some general notes about the strategy: Butterflies will be cheaper to purchase when: - There is more time before expiration - The stock needs to move a lot to reach the center strike (ie: more out of the money is cheaper) - The width of the butterfly is smaller [All of the above make it a much “longer shot” for the butterfly to be profitable and therefore it will be cheaper, if the butterfly wins it will be a huge winner]
If the stock is outside of the long strikes in either direction (out of the money or in the money) the butterfly will be a full loser but I cannot lose any more than I paid for it to begin with.
Assignment risk is possible with a butterfly that goes incredibly in the money, but it is rare and should not be a concern because I maintain long, exercisable options to mitigate the risk.

12. Butterflies – How they Work, How To Manage
Why do a butterfly?
Let’s say XYZ is trading at and I expect XYZ to rally to 100 but no more…. The 95 Call is trading at $4.00 The 100 Call is trading at $2.50 The 105 Call is trading at $0.50
If I simply buy the 95 call, I am spending $4.00 to make an expected maximum of $1.00 IE: If XYZ gets to 100 and stops, the call will be worth (at expiration) $5.00 Max Risk: $4.00, Max Reward: $1.00…. But I am also subject to time (theta) decay while I wait and hope…
If I simply buy the 95/100 call vertical, buy the 95 call, sell the 100 call I am spending $1.50 ($ $2.50) to make an expected maximum of $3.50 IE: If XYZ gets to 100 (or higher), the vertical is worth $5.00 and I spent $1.50 on it. Max Risk: $1.50, Max Reward: $3.50… I am less subject to time decay because I am short an option as well.
If I sell the 95/100 back-ratio, buy the 95 call, sell 2x the 100 calls I receive $1.00 and expect a maximum profit of $6.00 IE: If XYZ gets to 100 only, the back-ratio is worth $5.00 and I received $1.00 to place it. Max Risk: Unlimited(!!!), Max Reward: $6.00… I am not subject to time decay, and if XYZ falls I keep my $1.00 But I am naked a short call leaving me exposed to unlimited upside risk…
The solution? Butterfly! I buy the 95/100/105 butterfly, I pay $0.50 and expect max profit of $4.50 Max Risk: $0.50, Max Reward: $4.50 How does this work?

13. Butterflies – How they Work, How To Manage
What is a Butterfly and How does it Work? A butterfly consists of a debit spread and a credit spread, with the short legs of both being at the same strike. EX: 95/100/105 Call Butterfly: Long the 95 Call, Short 2x 100 Calls, Long the 105 Call This is Long the 95/100 Call Vertical – Max Profit of $5.00 minus the price paid. Max Loss is the price paid. And Short the 100/105 Call Vertical – Max Profit is the credit received. Max loss of $5.00 minus the credit received. Assume this cost me $0.50 to place…. Max profit for the fly is $ $0.50 = $4.50/1lot For the trade to work to max profit, I need the stock to expire at 100.
$5.00 1 2 1
$0.00 95
100
105
-$0.50

14. Butterflies – How they Work, How To Manage
Another way to visualize this:
At 100, the Debit vertical is worth +$5.00 and the credit vertical is worth -$ Fly value: $ At 95, the Debit vertical is worth $0.00 and the credit vertical is worth -$ Fly value: $0.00 At 105, the Debit vertical is worth +$5.00 and the credit vertical is worth -$5.00 Fly value: $0.00
Time decay is key with verticals as well as stock movement. Premium needs to be removed from them to reach maximum or minimum value. For this reason, butterflies also gain in value as time passes.
Debit Call Vertical
100
105 95 1
Credit Call Vertical
$5.00 1 1
$0.00 95
100
105
-$0.50

15. Butterflies – How they Work, How To Manage
Management of the Butterfly
At Expiration – Near the end of the last trading day
If XYZ is trading at 100 at expiration, I will simply look to sell the Butterfly for near max value at $5.00
If XYZ is trading between 95 and 105 at expiration, I will look to sell the Butterfly for the best amount I can get for it.
If XYZ is trading below 95 at expiration, I will let the butterfly expire worthless.
If XYZ is trading above 105 at expiration, I will look to sell the butterfly for near $0.00 to avoid assignment costs IF this is advantageous for commissions. I check with my broker about assignment fees, calculate how much commissions it will cost to buy back the butterflies; if the commissions will cost less than assignment of all 3 legs, then I will buy it back, otherwise I will take assignment.
Some tips and tricks: - If I need to close out the butterfly to avoid assignment of any leg, sometimes the furthest out of the money option is worth so little it will not be trading. It is advantageous for me therefore to sell the back-ratio instead of the full fly. EX: Sell the 95 Call, Buy back 2x 100 Calls and let the 105s roll off worthless. This would net me a credit and it is like selling the whole butterfly. - If the whole fly is in the money and I can’t sell it for $0.00, I can call my broker and convince them to allow me to put in a debit order, looking to actually BUY the butterfly to close it for $0.01 or $0.02, they will be perplexed, but it does work and allows me to avoid assignment.

16. Butterflies – How they Work, How To Manage
Management of the Butterfly -- Increasing the probability of profit
A day or more before Expiration
I need to always remember what the ultimate goal is of all the components of the fly. A) I want the credit spread to be worth $0.00, I want the debit spread to be worth Max Value. B) Alternatively, I want the short options to be worth $0.00 and the long options to be worth as much as possible.
What does this mean? Well the above goals happen often, especially with a volatile stock. So I could, if I chose to, buy back the credit spread at any time that it’s overall value is near $0.00 And I could, if I chose to, sell the debit spread at any time it’s overall value is near Maximum value (ex: $5.00) There’s no reason to wait. The debit spread can’t be worth any more ever, the credit spread can’t be worth any less ever…. (Notably: Selling the debit spread first will require me to have margin in my account – a buying power reduction – however, the money received from selling the debit spread will offset this amount. I just won’t be able to spend that money on other things until the credit spread is closed)
In addition, many brokers allow me to buy back short options worth 0.05 or less for zero commissions… so there’s no reason not to take that opportunity if it presents itself.
So, EX: 95/100/105 Butterfly bought for $ (Debit call vertical bought for $1.50, Credit call vertical sold for $1.00) Say XYZ has a horrible day and tanks to 90…. The debit vertical is worth less, but the credit vertical may be worth near zero… so I buy back the credit vertical, or if possible I just buy back the short options for cheap and hope it turns around. Say XYZ rallies hard to 110…. The Debit vertical may be worth $5.00, but so is the credit vertical… So I sell the debit vertical for near $5.00 and hope that the stock turns around….

17. Butterflies – How they Work, How To Manage
Management of the Butterfly -- Increasing the probability of profit
A day or more before Expiration
A real life example: BABA Earnings, Nov 2014: Stock moves against me
I was bullish into BABA earnings in November (it’s first ever)
On Monday ahead of Earnings, with BABA trading around 102, I bought 4 of the 107/110/113 Call Butterflies for $ Risking $ Max reward: $1200-$136=$1064
On Tuesday, BABA opens down at 100 after earnings, I maintain my bullish position and buy back the 110 calls for $ Risk is now $288.
BABA rallies for the rest of the week. I sell the 107 calls for around $3.65avg and the 113 calls for $1.00 Profits: $1860-$280 = $ (more than the max potential originally)

18. Butterflies – How they Work, How To Manage
Management of the Butterfly -- Increasing the probability of profit
A day or more before Expiration
If the stock moves my direction but too far there’s an interesting play at foot. Remember the debit spread can only be ever worth max value and the credit spread can only be worth max value. If the stock has blown through my butterfly, the debit spread is worth max value and so is the credit spread.
To increase my chance of not losing out in the trade, I can do some cleaver management. I can sell the debit spread for max value (hopefully) And I can roll the credit spread for a better chance of recovering…
If the stock has moved far enough, my credit spread is likely marking full value, but it means that there may also be credit spreads closer to the money that are also marking at or near full value. I may have to pay to make this adjustment, but if it increases my probability of profit on what would otherwise be a full loosing position, it may be an option I’d like to consider. The closer the new credit spread is to full value the less I will have to pay to do the roll but also the less likely the stock is to recover beyond it.

19. Butterflies – How they Work, How To Manage
Management of the Butterfly -- Increasing the probability of profit
A day or more before Expiration
A real life example: LNKD Earnings, May 2015: Stock moves my direction
I was bearish into LNKD earnings in May
On Thursday ahead of Earnings, with LNKD trading around 252, I bought 4 of the 225/230/235 Put Butterflies for $ Risking $ Max reward: $2000-$144=$1566
On Friday, LNKD opens down at 200 after earnings, It’s way below my butterfly and I have no expectations of recovery above So I sell the 230/235 debit spreads for $4.98 And roll the 225/230 credit spreads to 210/215 for a debit of $0.20 I collect $1992 for selling the debit spreads, and spend $80 to roll the credit spreads. Risk is now: $232
All I need is for LNKD to expire above 215 and I will have profited $1760 ($1992-$232) Sadly LNKD did not do this so I lost my $232 on the play. But through this cleaver management I was able to increase my chances of profit from needing the stock to expire at 230 to needing it to expire simply anywhere above 215.

20. Butterflies – How they Work, How To Manage
Legging Into the Butterfly We’ve talked about why we want to put on a butterfly some times, and we’ve talked about legging out as part of management…. But why would we ever leg into a butterfly?
Sometimes there’s good reason to simply buy a vertical spread instead of a butterfly, if I believe there will be a rally but I don’t know when or how far, I don’t want to limit myself by putting a specific price on expiration, I just want to make money to the upside but don’t want to be subject to time decay either… so I buy a vertical.
Well if the stock slowly grinds in my direction and doesn’t seem to have any vigor, I may be able to sell a vertical against the one I bought for (hopefully) the same price as I paid originally. What this does is still give me an opportunity for profit but if the stock fails to do as expected, I won’t be risking as much either.
In TSLA this week, On Monday I bought the 247.5/250 Vertical for $0.60 expecting the stock to rally. It slowly moved in my direction but not very quickly. On Tuesday, I saw that I could sell the 250/ Vertical for $0.60 as well. This created a butterfly that I could have on for free! If TSLA were to get to 250 any time before expiration I would sell it for what ever I could get. On Friday TSLA tried but failed to get there, but I was able to take $1.13 in profits anyway with zero risk! (In effect making a triple of $1.93 in profits off $0.60 risk)

21. Butterflies – How they Work, How To Manage
Recap:
Butterflies are simply another strategy in the options tool book to be aware of. They are most useful if there is a likelihood of an underlying closing at a specific price on expiration. EX: Using the measured move target into an earnings event or at the beginning of the week etc.
They are a wonderfully high risk/reward strategy but this is because it is extremely difficult to “call” the close price of a stock days ahead of time; so there is a low probability of profit inherent in the strategy. Think of a casino giving higher payouts for the harder bets – works the same way.
Butterflies are cheapest with either lots of time remaining or lots of price movement necessary (the further out of the money the butterfly, the cheaper it will be.)
Increasing the width of the butterfly (the width of the spreads) increases my probability of profit at the onset as the stock can be in a wider range for profits of some kind, but these will cost more to place as well.
Management into and out of butterflies is the only way to increase the probability of profit but may require additional investment into the strategy so should really be carefully considered.

22. Q & A With Web