March 7 2015 Twitter MarketWebs Presenter Web Begole 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 toleran ID: 421914
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Web’s Weekly RoundupMarch 7, 2015Twitter: @MarketWebs
Presenter: Web
Begole
Slide2
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 RAI for execution, margin, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on www.optionhacker.com and www.keeneonthemarket.com
RISK DISCLAIMERSlide3
Web’s Weekly Roundup -- March 7, 2015
Analysis of /ES (S&P 500 Futures) and forecastAnalysis of /ZB (S&P 500 Futures) and forecastAnalysis of /CL (Crude Futures) and
forecastAnalysis of /GC (Gold Futures) and forecast
Analysis of /6E (Euro Futures) and forecastAnalysis of
/DX (Euro Futures) and forecastEstablishment of Limited Risk Reversals – The method
Q&A TimeSlide4
/ES Futures (S&P 500) YTD 2015
4
Opening Price: 2055.00
Current Price: 2072.25
High: 2117.75Low: 1970.25
O/C Change:
+20.25pts
H/L Range:
147.50
Notable Pattern:
Resistance at top of March value, heading towards value area
low (2046.50)Forecast:Support at 2046.50.A break below 2034 could lead to further selling with support coming in at 1982.50.Slide5
/ZB Futures (30 Year Bonds) YTD 2015
5
Opening Price: 159’05
Current Price: 155’20
High: 166’22Low: 154’27
O/C Change: -
4’15
H/L Range:
11’27
Notable Pattern
:Below value through Feb, breaking hard below value end of this week.
Forecast:Next downside target 151’08 with a longer term downside target of 141.Slide6
/CL Futures (Crude Oil) YTD 2015
6
Opening Price: 54.65
Current Price: 49.78
High: 56.00Low: 44.39
O/C Change:
-4.87pts
H/L Range:
11.61pts
Notable Pattern
:Chop. Still has not exited the gravity of the long term
trendline. Notably has also not broken it.February Forecast:
A brief pop to 53 could
happen at any time as
/CL will want to explore
March value area.
A break below 48.39
could see a return to the
trendline
at 46.50.Slide7
/GC Futures (Gold) YTD 2015
7
Opening Price: 1185.40
Current Price: 1168.20
High: 1309.20Low: 1162.90
O/C Change:
-17.20pts
H/L Range:
146.30
Notable Pattern
:End of week breaking below March value area. Notably also below all
trendlines.Forecast:Nearterm downside
target is 1135 with a
longer term downside
target in the 1080s.
All contingent on
continued strength in
the dollar index.Slide8
/6E Futures (Euro/USD) YTD 2015
8
Opening Price: 1.211
Current Price: 1.0847
High: 1.2113Low: 1.084
O/C Change:
-0.1263
H/L Range:
0.1273
Notable Pattern
:Has essentially stayed below every monthly value area for the year.
Forecast:Next support in March comes in at 1.07. For the year, the next support is at 1.065. Dollar Parity expected before December.Slide9
/DX Futures (US Dollar Index) YTD 2015
9
Opening Price: 90.81
Current Price: 97.755
High: 97.755Low: 90.80
O/C Change:
+6.945
H/L Range:
16.955pts
Notable Pattern
:Above monthly value areas the entire year.Opening the year on the lows, closing this week on the highs.
Forecast:Next upside target 98.1. We may see weakness at this level. If not, 99.73 will be the longer target.Slide10
Looking AheadOverall:
The strength of the /DX is king throughout the market. As the /DX strengthens, more speculation enters the market about interest rate increases as well as weakening of all commodity futures.Not much on the horizon next week for news except jobs numbers. Speculation will be king.Slide11
Establishing Limited Risk Reversals – The MethodExploration of “Risk”
The options market is an efficient market. The ability to arbitrage options has diminished to near an impossibility.As such, the options market lives by one rule: Risk & Reward are directly proportional.I mean this in terms of a single “strategy”, I’m not particularly talking about the number of lots placed or the amount of money invested.Buying a $5 scratcher ticket has a higher reward potential than a $1. The more scratchers the more chances to win. (Each ticket is its own random system)Risking more on an options play has a higher reward potential than risking less. However, multiplying the number of lots does not increase the chances to win. (Each lot plays by the same random system, the same underlying)
Therefore to maximize risk should equate to maximizing reward. The underlying price movement over time is still the chance taken.When establishing a limited risk reversal (with limited risk and unlimited reward) we are as close as possible to breaking this efficient market rule, or are we?
Risk comes in many forms:Price movement of the underlyingMonetary
ManagementLoss mitigationInvoluntary Assignment With limited risk reversals, we are limiting monetary risk, but we can still maximize the risk (and subsequently the reward) in the play by manipulating the other forms of risk.
11Slide12
Establishing Limited Risk Reversals – The MethodWhen establishing limited risk reversals – what are the things I am looking at
?~$0.00 = (CreditSpread)-N*(LongOption)My criteria for the Credit Spread:No more than $500 risk or thereabouts
Typically this means I’m looking to sell spreads that are no more than 5pts wide, or 2x of 2.5pt wide, or 5x of 1pt wide.Maximum reward desired.I want to own as many long options as possible.
Total debit on the trade should not exceed $0.05I will pay higher if I am putting fewer spreads on – if I am only selling 1x 5pt wide spread, I may pay more. The more I pay the more I add to my risk.Things I look at:Time frame of the trade – Short? (earnings) Long? (swing)
Implied Volatility of the stock – Some are more expensive than othersTheta decay as well as premium.How far out of the money can I sell a spread to get me a reasonable multiple of opposite long options?
Concessions I make:
I will sell a spread to gain 1x long option if I have to, but prefer multiples.
If I have to, I will sell a put spread to buy a call spread, but this is last resort.
Bonuses I look for:
If I have reason to believe actual volatility will exceed implied volatility, I can benefit.
12Slide13
Establishing Limited Risk Reversals – The MethodManipulating Credit Spread Risks
Risk evaluation by spread size (same monetary risk):The 5pt Spread (Least Risk / Least Reward):Pros: Small number of contracts, large amount of creditUnderlying has a 5pt range to come in at less than full lossCons:The least amount of potential credit.
The 2.5pt Spread (Mid Risk / Mid Reward):Pros:Underlying has a 2.5pt range to come in at less than full loss
Can put this on twice leading to more total creditCons:Not able to provide the most potential credit.The 1pt Spread (Highest Risk / Highest Reward):
Pros: By putting this on five times, I receive the most amount of total creditCons:Underlying only has a 1pt range of less than full loss potential
The largest number of contracts to put on
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Establishing Limited Risk Reversals – The MethodManipulating Credit Spread Risks
Risk evaluation by spread placement (same monetary risk):Fully Out of the Money (Least Risk / Least Reward):Pros: Least chance of loss on the credit spread.All extrinsic premium, so theta decay works highly in my favorCons:The least amount of potential credit.
Straddling At the Money (Mid Risk / Mid Reward) [Short option in the money, long option out of the money]:Pros:High potential credit.
Theta decay occurs fastest in this location.Underlying only needs to move in my direction a small amount to make spread fully out of the money and subject to theta decay.Cons:
Higher potential loss on the credit spread as the underlying only needs to move against me a little to make the play a loser.Fully In the Money (Highest Risk / Highest Reward):Pros:
Highest potential credit.
Cons:
Underlying needs to move in my direction for theta decay to work in my favor.
A
ssignment risk possibility from on-set
Highest potential loss on the credit spread, if the underlying does not move, I lose on the trade.
14Slide15
Establishing Limited Risk Reversals – The MethodManipulating Credit Spread Risks
Risk evaluation by option-chain (time) placement (same monetary risk):Furthest term (ex: two months out) (Least Risk / Least Reward):Pros: More time to mitigate losses as credit spread maintains premium.More credit to be received as premium is higher.Cons:Theta decay will take time to work in my favor
Long options are more expensive so I have to go further out of the moneyMid term (ex: 1 month out) (Mid Risk / Mid Reward):Pros:
High potential credit.Theta decay occurs fast at this time.I maintain time to mitigate loss as premium remains in spread.
Cons:Long options remain expensive and I need to look further out of the money (but not as far)Nearest term (ex: expiring same week) (Highest Risk / Highest Reward):
Pros:
Long options at their cheapest.
Theta decay occurs fastest, in a matter of days.
I have a best sense of the underlying potential movement.
Cons:
Premium leaves the spread quickly, so my management potential is at its minimum
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Establishing Limited Risk Reversals – The MethodManipulating Long Option Rewards
The reward multipleBuying multiple long options increases my reward and allows me to manage risk by selling partial long options to buy back the credit spreads before expiration.In the money long options: Expensive and typically require an in the money credit spread to buyBecause of expense, typically can only buy oneLess susceptible to theta decay as intrinsic value remains
At the money long options:Expensive and thus typically can only buy one, limiting reward multiple and management possibility.Underlying doesn’t have to move as much to turn them in the money, reducing theta decay and increasing delta exposure
Out of the money long options:Ability to buy multiples
Susceptible to theta decayUnderlying must move further for these to become in the moneyLow IV Bonus: With low implied volatility, I can buy nearer the money options at multiples, the best reward potential available.
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Establishing Limited Risk Reversals – The MethodWhen establishing limited risk reversals – what are the things I am looking at
?~$0.00 = (CreditSpread)-N*(LongOption)My criteria for the Credit Spread:No more than $500 risk or thereabouts
Typically this means I’m looking to sell spreads that are no more than 5pts wide, or 2x of 2.5pt wide, or 5x of 1pt wide.Maximum risk / reward desired.
I want to own as many long options as possible, this means maximizing my risks on the credit spread.Total debit on the trade should not exceed $0.05I will pay higher if I am putting fewer spreads on – if I am only selling 1x 5pt wide spread, I may pay more. The more I pay the more I add to my risk.
Things I look at:Time frame of the trade – Short? (earnings) Long? (swing)Implied Volatility of the stock – Some are more expensive than others
Theta decay as well as premium.
How far out of the money can I sell a spread to get me a reasonable multiple of opposite long options?
Concessions I make:
I will sell a spread to gain 1x long option if I have to, but prefer multiples.
If I have to, I will sell a put spread to buy a call spread, but this is last resort.
Bonuses I look for:If I have reason to believe actual volatility will exceed implied volatility, I can benefit.
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Establishing Limited Risk Reversals – The MethodSome examples:L
ow implied volatility, good rewards available.CSCOKOFNSRJDSUHigh implied volatility, less rewards available.PCLNTSLANFLXAMZN
SPYMiddle of the road:AAPLBABA
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