1. Adjusting Trades This class is a production of Safe Option Strategies © and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies © presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies © does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading. Module 5.1 Introduction to Adjusting Trades

2. Adjusting Trades  Concept of Adjusting Trades  Rolling Options  Cost Basis – The Most Important Thing About Adjustments Module 5.1 Introduction to Adjusting Trades

3. Stock What is an Adjustment?  Stocks move up down or sideways.  At best we have a 33% chance of being right.  What do you do if your guess is not right?  Adjustments are secondary exits, or backup plans for when we are wrong.  Stocks move up down or sideways.  At best we have a 33% chance of being right.  What do you do if your guess is not right?  Adjustments are secondary exits, or backup plans for when we are wrong. Module 5.1 Introduction to Adjusting Trades

4. Stocks Do Not Often Move in Straight Lines Module 5.1 Introduction to Adjusting Trades

5. Concept of Adjusting Trades  After Defining Our Primary Exit We Have to Ask “What else can the stock price do? (A,B,orC)”  Then we have to ask “what will I do IF (A,B,orC)?”  The Secondary Exit is our Backup Plan if the stock does not go the way we want it to.  There will be times we will have more than one secondary exit. Module 5.1 Introduction to Adjusting Trades

6. Rolling an Option is buying or selling to close, and selling or buying to open new at a different strike price, different expiration month, or both, in one transaction. When rolling the option you must factor the net debit or credit of the transaction against your original cost basis. Rolling an Option is buying or selling to close, and selling or buying to open new at a different strike price, different expiration month, or both, in one transaction. When rolling the option you must factor the net debit or credit of the transaction against your original cost basis. SC SC Rolling Options Module 5.1 Introduction to Adjusting Trades

7. Currently holding the Dec10 $310 strike short call valued at $10.75/share. Buy to close for $10.75/share debit and sell to open the Jan11 $320 strike for $11.25 / share credit. 10.75 – 11.25 = -$0.50/share. Whatever our trade, we have lowered our cost basis by $0.50/share. Currently holding the Dec10 $310 strike short call valued at $10.75/share. Buy to close for $10.75/share debit and sell to open the Jan11 $320 strike for $11.25 / share credit. 10.75 – 11.25 = -$0.50/share. Whatever our trade, we have lowered our cost basis by $0.50/share. Rolling Options Module 5.1 Introduction to Adjusting Trades

8. The Number One Rule of Rolling Short Options  No matter the credit you took in originally, always make sure you take in more credit on your new short option than what it will cost you right now to close your original short option. Module 5.1 Introduction to Adjusting Trades

9. Understanding Adjustments Begins with Mastering Cost Basis  Any time we change a trade, (i.e. adding long puts, adding short calls, rolling options, etc.) other than to close it out, we are going to change our cost basis.  We have to know how to recalculate our cost basis every time we adjust a trade.  Recalculating our cost basis is always a matter of simple addition or subtraction. Module 5.1 Introduction to Adjusting Trades

10. Cost Basis for a Bull Call Spread $72.50 Long Call for $2.03 / share debit $75.00 Short Call for $0.98/ share credit Cost Basis is $1.05 per share Cost Basis for a Bull Call Spread $72.50 Long Call for $2.03 / share debit $75.00 Short Call for $0.98/ share credit Cost Basis is $1.05 per share Calculating our Cost Basis Module 5.1 Introduction to Adjusting Trades

11. Cost Basis for a Bear Call Spread $72.50 Short Call for $1.98/ share credit $75.00 Long Call for $1.03/ share debit Net Credit is $0.95/share Cost Basis is $1.55/share Our broker will hold the difference in the strike prices ($2.50) minus the net credit ($0.95) as collateral for the worst case scenario Cost Basis for a Bear Call Spread $72.50 Short Call for $1.98/ share credit $75.00 Long Call for $1.03/ share debit Net Credit is $0.95/share Cost Basis is $1.55/share Our broker will hold the difference in the strike prices ($2.50) minus the net credit ($0.95) as collateral for the worst case scenario Calculating our Cost Basis Module 5.1 Introduction to Adjusting Trades

12. Cost Basis for a Bull Put Spread $70.00 Short Put for $1.57/ share credit $65.00 Long Put for $0.59/ share debit Net Credit is $0.98/share Cost Basis is $4.02/share Our broker will hold the difference in the strike prices ($5.00) minus the net credit ($0.98) as collateral for the worst case scenario Cost Basis for a Bull Put Spread $70.00 Short Put for $1.57/ share credit $65.00 Long Put for $0.59/ share debit Net Credit is $0.98/share Cost Basis is $4.02/share Our broker will hold the difference in the strike prices ($5.00) minus the net credit ($0.98) as collateral for the worst case scenario Calculating our Cost Basis Module 5.1 Introduction to Adjusting Trades

13. Cost Basis for a Bull Call Spread $72.50 Long Call for $2.03/ share debit $75.00 Short Call for $0.98/ share credit Cost Basis is $1.05 per share Cost Basis for a Bull Call Spread $72.50 Long Call for $2.03/ share debit $75.00 Short Call for $0.98/ share credit Cost Basis is $1.05 per share Adjusting our Cost Basis We decide to roll our short calls down two strike prices $1.05 cost basis plus $1.03 to close our current short calls Minus $3.40 for the credit taken in on our new short calls 1.05 + 1.03 – 3.40 = -1.32 credit and $1.18 new cost basis We decide to roll our short calls down two strike prices $1.05 cost basis plus $1.03 to close our current short calls Minus $3.40 for the credit taken in on our new short calls 1.05 + 1.03 – 3.40 = -1.32 credit and $1.18 new cost basis Module 5.1 Introduction to Adjusting Trades

14. Our net credit is $0.95 – ($.20 X2) = $0.55 Or $0.95 - $0.20 - $0.20 = $0.55 Our cost basis is the difference in the strike prices minus our net credit. 10.00 - 0.55 = $9.45 Cost Basis Our net credit is $0.95 – ($.20 X2) = $0.55 Or $0.95 - $0.20 - $0.20 = $0.55 Our cost basis is the difference in the strike prices minus our net credit. 10.00 - 0.55 = $9.45 Cost Basis X2 Adjusting our Cost Basis We decide to get rid of one of our put contracts. Selling one put contract for $0.10 per share lowers our cost basis by $0.10. 9.45 – 0.10 = $9.35 new cost basis. This also means that our net credit and therefore maximum reward is now $0.65 per share. We decide to get rid of one of our put contracts. Selling one put contract for $0.10 per share lowers our cost basis by $0.10. 9.45 – 0.10 = $9.35 new cost basis. This also means that our net credit and therefore maximum reward is now $0.65 per share. X1 Module 5.1 Introduction to Adjusting Trades

15. If we can roll a short call up and out with no addition to our cost basis we can adjust out of a trade that is trending against us. LC Adjusting a Calendar Spread by Rolling Options SC Module 5.1 Introduction to Adjusting Trades

16. Rolling our short call down in a bull call spread adjusts the trade into a bear call. LC SC Module 5.1 Introduction to Adjusting Trades Adjusting a Vertical Trade by Rolling Options

17. Rolling both options is sometimes used to simply give us more time in a trade. LP SP Module 5.1 Introduction to Adjusting Trades Adjusting a Credit Spread by Rolling Options

18. Currently holding the Mar11 $72.50/70 bull put for a net credit of $0.45/share. Our cost basis is $2.05/share (difference in our strikes minus our net credit) Buy to close the entire trade for$0.92/share debit. (this increases our cost basis temporarily by $0.92/share) Sell to open the May11 $70/65 bull put for a net credit of $1.33 (this now lowers our cost basis by $1.33/share) Keep track of all the math Starting credit $0.45 Debit to close the trade -$0.92 Credit to open new trade $1.33 New Credit is $0.86 New Spread is $5.00 so the new cost basis (max risk) is $4.14/share. Currently holding the Mar11 $72.50/70 bull put for a net credit of $0.45/share. Our cost basis is $2.05/share (difference in our strikes minus our net credit) Buy to close the entire trade for$0.92/share debit. (this increases our cost basis temporarily by $0.92/share) Sell to open the May11 $70/65 bull put for a net credit of $1.33 (this now lowers our cost basis by $1.33/share) Keep track of all the math Starting credit $0.45 Debit to close the trade -$0.92 Credit to open new trade $1.33 New Credit is $0.86 New Spread is $5.00 so the new cost basis (max risk) is $4.14/share. Cost Basis in Rolling a Credit Spread Module 5.1 Introduction to Adjusting Trades May11

19. 1.Adjusting trades is crucial to success in today’s markets. 2.Adjustments must be pre-planned and flexible. 3.Understanding how an adjustment can effect your cost basis is crucial in keeping track of your profit and loss as well as in creating your adjustment strategies. 4.Rolling options will almost always effect your cost basis in your trade and has to be taken into account before you make an adjustment. Summary Module 5.1 Introduction to Adjusting Trades