1. Web’s Weekly Roundup Comparison of Option Strategies for Earnings June 13, 2015 Presenter: Web Begole

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3. Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast Analysis of /VX (S&P 500 Volatility Index Futures) and forecast Analysis of /DX (US Dollar Futures) and forecast Analysis of /ZB (30-Year Bond Futures) and forecast Comparison of Defined Risk Option Strategies for Earnings – as well as some tangential musings

4. /ES Futures (S&P 500) YTD 2015 4 Opening Price: 2038.25 Current Price: 2084.50 High: 2125 Low: 1953.5 O/C Change: +46.25pts (+2.22%) H/L Range: 171.50 Notable Pattern: Rotated into September contract, adjusting the webs. The compression of venom lines above means new highs above 2118 will be difficult. Forecast: As we have touched the bottom of value for the month here, I expect support and a test of the 2118 area. Failing that look for down-move to 2052.

5. /VX Futures (S&P Volatility Index Futures) YTD 2015 5 Opening Price: 23.35 Current Price: 14.21 High: 29.85 Low: 13.40 O/C Change: -9.14pts (-39.14%) H/L Range: 16.45 Notable Pattern: Trending down since February with all value areas gapping lower until May->June. Also notice the tight venom lines below June’s value. Forecast: I expect upward movement to be restricted to 16.5 but with the /ES expected to go higher I expect the /VX to stay in the 13.5-15 range.

6. /DX Futures (USDollar Index) YTD 2015 6 Opening Price: 92.005 Current Price: 95.195 High: 101.23 Low: 91.995 O/C Change: +3.19pts (+3.35%) H/L Range: 9.235pts Notable Pattern: As mentioned last week, the upward breakout from value was false. Forecast: I believe we continue to see weakness in the dollar coming with a downside target this month of 93.825 and upside resistance maintaining at 96.395.

7. /ZB Futures (30-Year Bonds) YTD 2015 7 Opening Price: 157’21 Current Price: 150’11 High: 165’11 Low: 147’16 O/C Change: -7’10 H/L Range: 17’27 Notable Pattern: Have fallen through value for the month of June and finding the bottom of value a significant resistance point. Forecast: I believe we continue to see weakness towards 144’08 in the extreme. If the bonds break into value look for 154’21.

8. Looking Ahead Overall: Notably, the S&P 500 hardly moved from open to close for the week (opened at 2083, closed at 2084.5, only a +1.50 point difference…..) Greek news continued to be the volatility catalyst throughout the week, up and down. Next week will be Quadruple Witching with the June S&P Futures, Equity Monthly Options, Futures Options all expiring in addition to FOMC announcement. (ie: Grab your popcorn cause it might be better to just watch from the sidelines!) Only thing I’m seeing as a definite probability is further declines in the USDollar which could be spurned by some kind of definite action in Europe… maybe.

9. A Comparison of Defined Risk Option Strategies For Earnings 9

10. Defined Risk Option Strategies for Earnings Criteria: All strategies have a defined risk if the trade is wrong AND all strategies have a higher reward potential than the risk involved. Naked Option Max Risk: Cost of Option Max Reward: “Unlimited“ ($1 per dollar in the money the option becomes MINUS the cost of the option) Debit Spread Max Risk: Cost of Spread Max Reward: Distance between strikes MINUS cost of spread Butterfly Max Risk: Cost of Spread Max Reward: Width of the Butterfly MINUS cost of the spread Iron Butterfly Max Risk: Width of the Iron Butterfly MINUS the credit received for selling it Max Reward: The credit received for selling it Limited Risk Reversal Max Risk: Width of the Credit Spread +credit/-debit for entering the trade Max Reward: Unlimited ($1 per dollar in the money the naked option becomes MINUS the value of the credit spread) 10

11. Defined Risk Option Strategies For Earnings For today’s discussion we’re going to use Restoration Hardware (RH) which had earnings after the bell this week on Thursday. With James Ramelli out of the office, I was moderating the room around earnings time (late afternoon) and the room wanted to look at RH for earnings. Because RH does not have weekly options, and the monthly options are 5-dollar wide strikes, this is not the kind of stock James would typically look to play for earnings. - Typically we only want weekly options, and preferably we want dollar wide or.50 wide strikes. This aspect makes RH harder to play for earnings than other stocks and harder to choose the optimal strategy. But I played it. Something to remember: – Statistically, a stock that closes higher the trading day after earnings relative to the close before earnings will continue to move higher for ~3 trading days. – Because it has monthly options instead of weekly, the “measured move” will not be as focused on earnings as weekly options expiring closer to earnings would be. (Because implied volatility is including extra days) 11

12. Defined Risk Option Strategies For Earnings Using Restoration Hardware from this week, let’s look at how the strategies could be established Thursday June 11, RH closes the day trading at 94.83 with an expected move by June 19 th of +/-6.643 Upside target ~101.50 Downside target ~88 No weeklies, just Monthlies expiring next week. Strikes WIDE. I am expecting RH to rally, so I want to target the long-side. Naked Option – Buy the 95 Call for $3.60 Max Risk: $360 Max Reward: Unlimited above 98.60 Breakeven: 98.60 Debit Spread – Buy the 95 Call, Sell the 100 Call for $1.95 Max Risk: $195 Max Reward: $305 Breakeven: 96.95 Butterfly – Sell 2x 100 Calls, Buy the 95 Call, Buy the 105 Call for $0.85 Max Risk: $85 Max Reward: $415 Breakevens: 95.85 & 104.15 Iron Butterfly – Sell 95 Call & 95 Put, Buy the 100 Call and 90 Put for $4.00 credit Max Risk: $100 Max Reward: $400 Breakevens: 91 & 99 Limited Risk Reversal – Sell the 100 Put, Buy the 95 Put, Buy the 95 Call for $0.55 Max Risk: $555 Max Reward: Unlimited above 97.55 Breakeven: 97.55 12 Call MarkStrikePut Mark 14.55800.12 10.30850.50 6.55901.60 3.60953.65 1.651006.70 0.5510510.65 0.1511015.55 June 2015 Option Chain (Thurs)

13. Defined Risk Option Strategies For Earnings 13 RH Price AT EXPIRATION 95 Call Naked95/100 Call Spread 95/100/105 Call Butterfly 90/95/100 Iron Butterfly 95/100|95C Limited Risk Reversal RISK:$360$195$85$100$555 89-$360-$195-$85-$100-$555 90-$360-$195-$85-$100-$555 91-$360-$195-$85$0-$555 92-$360-$195-$85$100-$555 93-$360-$195-$85$200-$555 94-$360-$195-$85$300-$555 95-$360-$195-$85$400-$555 96-$260-$100$15$300-$355 97-$160$5$115$200-$155 98-$60$105$215$100$45 99$40$205$315$0$245 100$140$305$415-$100$445 101$240$305$315-$100$545 102$340$305$215-$100$645 103$440$305$115-$100$745 104$540$305$15-$100$845 105$640$305-$85-$100$945 106$740$305-$85-$100$1045

14. Defined Risk Option Strategies For Earnings 14 RH Price Friday 6/12 RH closes at 96.22 95 Call Naked95/100 Call Spread 95/100/105 Call Butterfly 90/95/100 Iron Butterfly 95/100|95C Limited Risk Reversal RISK:$360$195$85$100$555 96-$145-$15$67.50$112.50-$165 Call MarkStrikePut Mark 15.90800.02 11.05850.02 6.35900.15 2.15950.95 0.351004.20 0.071058.40 0.0211013.40 June 2015 Option Chain (Fri) There is still a week before the expiration, so lets see how these strategies faired at the end of the next day. RH Closes at 96.22 (up 1.40ish) There are five more trading days to go…

15. Defined Risk Option Strategies For Earnings 15 RH Price AT EXP 95 Call Naked 95/100 Call Spread 2x95/100 Call Spread 95/100|95C Limited Risk Reversal RISK:$360$195$555 89-$360-$195-$555 90-$360-$195-$555 91-$360-$195-$555 92-$360-$195-$555 93-$360-$195-$555 94-$360-$195-$555 95-$360-$195-$555 96-$260-$100-$355 97-$160$5-$155 98-$60$105$45 99$40$205$245 100$140$305$445 101$240$305$545 102$340$305$645 103$440$305$745 104$540$305$845 105$640$305$945 106$740$305$1045 Some musings: In putting this chart together, I noticed the Naked Call combined with the debit vertical gave me the same risk/reward as the Limited Risk Reversal. So why not do that? This would be buying 2x the 95 Calls and selling 1 of the 100 Calls for a net debit of $555 The profit loss graph is exactly the same as the limited risk reversal… Honestly, no reason to do one over the other unless you have an aversion to puts. RH Price Friday 6/12 RH closes at 96.22 95 Call Naked + 95/100 Call Spread 95/100|95C Limited Risk Reversal RISK:$555 96-$160-$165

16. Defined Risk Option Strategies For Earnings 16 Some musings: Another question I often get is about the reverse… selling a call credit spread to buy a call So in this case it would be selling 1x the 95 call and buying 2x of the 100 calls. Net credit of this trade would be $0.30 Max Reward: Unlimited Max Risk: $470 Breakevens: 95.30 & 104.70 There’s a reason I don’t particularly like this idea…. (Remember the expected upside move is ~101) RH Price AT EXPIRATION Back Ratio 95/100 Spread 95/100|95C Limited Risk Reversal RISK:$470$555 89$30-$555 90$30-$555 91$30-$555 92$30-$555 93$30-$555 94$30-$555 95$30-$555 96-$70-$355 97-$170-$155 98-$270$45 99-$370$245 100-$470$445 101-$370$545 102-$270$645 103-$170$745 104-$70$845 105$30$945 106$130$1045

17. Defined Risk Option Strategies For Earnings 17 Some musings: Then of course maybe you’re asking yourself…. What about the other back ratio? Selling 2x the 100 calls to buy 1x of the 95 calls?? Net debit of this trade would be $0.30 Max Risk: $30…. You’d think… but nope, UNLIMITED! Max Reward: $470 Breakevens: 95.30 & 104.70 RH Price AT EXPIRATION Back Ratio 1x95/2x100 Spread Back Ratio 2x95/1x100 Spread 95/100|95C Limited Risk Reversal RISK:UNLIMITED$470$555 89-$30$30-$555 90-$30$30-$555 91-$30$30-$555 92-$30$30-$555 93-$30$30-$555 94-$30$30-$555 95-$30$30-$555 96$70-$70-$355 97$170-$170-$155 98$270-$270$45 99$370-$370$245 100$470-$470$445 101$370-$370$545 102$270-$270$645 103$170-$170$745 104$70-$70$845 105-$30$30$945 106-$130$130$1045

18. Defined Risk Option Strategies For Earnings 18 Some musings: Let’s go back for a second and revisit the selling a call spread to buy a call… but let’s be daring and go in the money with the call spread. So say we sell the 90 Call and buy 2x the 95 calls. The net debit of this would be $0.65 And it looks like this at expiration…. This is interesting…. What about protecting that max risk zone with an iron butterfly? (Yes…. Web may have too much time on his hands) RH Price AT EXPIRATION Back Ratio 90/95 Spread 95/100|95C Limited Risk Reversal RISK:$565$555 89-$65-$555 90-$65-$555 91-$165-$555 92-$265-$555 93-$365-$555 94-$465-$555 95-$565-$555 96-$465-$355 97-$365-$155 98-$265$45 99-$165$245 100-$65$445 101$35$545 102$135$645 103$235$745 104$335$845 105$435$945 106$535$1045

19. Defined Risk Option Strategies For Earnings 19 Some musings: So if I put the back ratio on (sell the 90 call, buy 2x 95 calls) for $0.65 and then I sell the 90/95/100 Iron Butterfly for $4.00 credit. What do I have? Well the overall credit to my account is $3.35 I am short the 90 call I am long the 90 put I am long the 95 call I am short the 95 put I am long the 100 call Say what? Well originally I had: Short the 90 call Long 2x 95 calls Then I sold 1x 95 call, 1x 95 put and bought 1x90 put and 1x100 call… So net, the above is my position…. Let’s look at the P&L sheet… RH Price AT EXP Back Ratio 90/95 Spread Back Ratio combined with Iron Butterfly 90/95/100 Iron Butterfly RISK:$565$165$100 89-$65-$165-$100 90-$65-$165-$100 91-$165 $0 92-$265-$165$100 93-$365-$165$200 94-$465-$165$300 95-$565-$165$400 96-$465-$165$300 97-$365-$165$200 98-$265-$165$100 99-$165 $0 100-$65-$165-$100 101$35-$65-$100 102$135$35-$100 103$235$135-$100 104$335$235-$100 105$435$335-$100 106$535$435-$100

20. Defined Risk Option Strategies For Earnings 20 Some musings: Alright…. So say I want to sell a spread to buy a strangle?? That way I have a pseudo bias for earnings, but I still don’t know which way it’ll go…. So let’s look at the Limited Risk Reversal, and we’ll sell the 95/100 put spread, and then we’ll buy the 100 call and the 90 put strangle. This can be done for $0.20 debit. Let’s look at the P&L Graph…. And for giggles lets look at the original limited risk reversal along with the Iron Butterfly…. RH Price AT EXP 95/100|95C Limited Risk Reversal 95/100 Sold Put Spread 90/100 Strangle Bought RISK:$555$520 89-$555-$420 90-$555-$520 91-$555-$520 92-$555-$520 93-$555-$520 94-$555-$520 95-$555-$520 96-$355-$420 97-$155-$320 98$45-$220 99$245-$120 100$445-$20 101$545$80 102$645$180 103$745$280 104$845$380 105$945$480 106$1045$580

21. Defined Risk Option Strategies For Earnings 21 Some musings: So I put on the 95/100|95 Limited Risk Reversal And I sell the 90/95/100 Iron Butterfly To start with I am long the 95 call I am long the 95 put I am short the 100 put Then I put on the IB which is: Short the 95 call and the 95 put Long the 100 call and Long the 90 put My net position therefore is: I am long the 90 put I am short the 100 put I am long the 100 call (one might note, this is nothing but a wider limited risk reversal… where the credit received to place was $3.45) RH Price AT EXP 95/100|95C Limited Risk Reversal LRR & Iron Butterfly 90/95/100 Iron Butterfly RISK:$555$655$100 89-$555-$655-$100 90-$555-$655-$100 91-$555 $0 92-$555-$455$100 93-$555-$355$200 94-$555-$255$300 95-$555-$155$400 96-$355-$55$300 97-$155$55$200 98$45$145$100 99$245 $0 100$445$345-$100 101$545$445-$100 102$645$545-$100 103$745$645-$100 104$845$745-$100 105$945$845-$100 106$1045$945-$100

22. Defined Risk Option Strategies For Earnings 22 Some musings: At the end of the day on Friday, here’s how the two compared: Ultimately, taking on more risk (and therefore moderately less reward) increases the probability of profit…. Call MarkStrikePut Mark 15.90800.02 11.05850.02 6.35900.15 2.15950.95 0.351004.20 0.071058.40 0.0211013.40 June 2015 Option Chain (Fri) RH Price Friday 6/12 RH closes at 96.22 95/100|95C Limited Risk Reversal 90/100|100C Limited Risk Reversal RISK:$555$655 96-$165$155

23. Defined Risk Option Strategies For Earnings 23 RH Price AT EXP 95/100|95C Limited Risk Reversal 90/100|100C Limited Risk Reversal 90/95|100C Limited Risk Reversal 85/95|2x100C Limited Risk Reversal 95/100|2x100C Limited Risk Reversal RISK:$555$655$470$1115$525 89-$555-$655-$470-$615-$525 90-$555-$655-$470-$515-$525 91-$555 -$370-$415-$525 92-$555-$455-$270-$315-$525 93-$555-$355-$170-$215-$525 94-$555-$255-$70-$115-$525 95-$555-$155$30-$15-$525 96-$355-$55$30-$15-$425 97-$155$55$30-$15-$325 98$45$145$30-$15-$225 99$245 $30-$15-$125 100$445$345$30-$15-$25 101$545$445$130$185$175 102$645$545$230$385$375 103$745$645$330$585$575 104$845$745$430$785$775 105$945$845$530$985$975 106$1045$945$630$1185$1175

24. Defined Risk Option Strategies For Earnings I encourage everyone to play around with option strategies as a kind of homework. Use your platform to get end of the day option prices, and put together a list of different ways to play the underlying using options. Build a spreadsheet like I’ve done here with different prices on expiration. Then just do the math: An option that is In the Money at expiration is worth AbsoluteValue(Underlying Price – Strike Price) If I’m short that option, that’s not a good thing. If I’m long that option that’s a great thing! All options that expire At the Money or Out of the Money are worth $0.00 on expiration. If I’m long that option, that’s not a good thing. If I’m short that option that’s a great thing! Example: I’m long the 95 Call, I’m long the 95 Put, I’m short the 100 Put If the stock expires at 99, the spread worth? Long 95 Call is worth $4.00 (ITM by 4pts) -- Gain Long 95 Put is worth $0.00 (OTM) – Loss Short 100 Put is worth $1.00 (ITM by 1pt) – Loss I get to sell the 95 call and collect $400! But to avoid assignment I have to buy back the 100 put for $100. So my next income is $300. Then I just need to subtract what the trade cost originally to establish. 24

25. Q & A With Web