Web’s Weekly Roundup May 2, 2015 Presenter: Web Begole.

Web’s Weekly RoundupMay 2, 2015

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 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 DISCLAIMER

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 /GC (Gold Futures) and forecast

• Day Trading Using Weekly Options

/ES Futures (S&P 500) YTD 2015

4

Opening Price: 2047.25Current Price: 2102.25

High: 2119.75Low: 1962.50

O/C Change: +55.00ptsH/L Range: 157.25

Notable Pattern:Has started May inside of value after a fairly weak week.

Forecast:Upside resistance is at 2106.50 with downside support at 2070. The recent weakness may continue.

/DX Futures (USDollar Index) YTD 2015

5


High: 100.785Low: 91.55

O/C Change: +3.825ptsH/L Range: 9.235pts

Notable Pattern:The day before the FOMC announcement, broke below April’s value area and continues to look weak.

Forecast:Based on support on other time frames, I think it may continue an upward run butbe limited to around 97.

/CL Futures (Crude Oil) YTD 2015

6


High: 59.90Low: 45.47

O/C Change: +1.10ptsH/L Range: 14.43pts

Notable Pattern:Starting May inside of value and immediately pulling back from the value area high.New highs for the year happened Friday.

Forecast:Further upside towards 66. Support in May at 57.

/GC Futures (Gold Futures) YTD 2015

7


High: 1310.2Low: 1142.6

O/C Change: -9ptsH/L Range: 167.6pts

Notable Pattern:Started May below value and continues to look weak.

Forecast:Upside resistance at 1190 with possible further declines in May towards 1140

Looking Ahead

• Overall:

• Surprising weakness in the overall market this week as the FOMC announcement lead to

no new information. Has the old “Sell in May” routine come to haunt?

• The Dollar index is finding significant weakness as large money speculators have reduced

their long USD plays significantly in recent weeks.

• As I said last week, crude looks technically to me like a bottom is in – at least for now – I

like Crude to the long side until about 66 where I will become cautious of a downturn

again.

Day Trading Using Weekly Options

• How stock movement and time decay effects the value of options.

• How day-trading using weekly options works

• The rules of day-trading using options

• What I look for when choosing the option I’ll use for day-trading.

• Some of the technicals I look for to guide me through the trade.

• Defensive strategies if I feel like I need to break my own rules.

9


• Let’s start by talking about Texas Hold’em

• Before any cards are dealt, what are my odds of getting 4 aces?It’s possible, anything’s possible, but the odds are not great, we all know this is rare.This is like an option chain with lots of time remaining, anything is possible in the stock movement but some possibilities are less likely than others…

• The pocket cards are dealt, I receive 2 aces. Now what are my odds of getting 4 aces?My odds are much higher, I only need 2 more to hit on the table.This is like the stock moving very close to my target price but not there yet, the odds are looking up but there’s still the unknown.Time has passed – the unknown has moved from 7 cards down to only 5 now.Value of the hand has gone up, maybe I bet a lot to keep others in.(I’m likely to be raised if someone else also is holding 2 aces!)

• The flop is dealt, 1 ace appears.My odds are lower now, only two more cards for another ace to appear.This is like the stock moving closer and closer to my target.Time has passed again – the unknown has moved from 5 cards down to only 2 now.Value of the hand has gone up, maybe I continue to bet higher but others are less likely to follow, so this is like time decay eating away at the value.(Now I know I’m the only one holding 2 aces)

• The turn and the river both continue and I may or may not get my 4 th ace but with each deal the unknown diminishes and the value of my hand diminishes if no aces appear.

• The unknown is what drives the value of out-of-the-money options, as time passes more is known, therefore the possibilities of movement diminish and so does option premium value. Intrinsic value (the value of the option at expiration) does not change with the passage of time, only the movement of the stock.

10


• Let’s visualize Implied Volatility Premium In Out of the Money Options:• As the price of the underlying instrument moves, the effective delta (and intrinsic/extrinsic value) of any particular option changes

11

AtThe

MoneyCalls & Puts

Out ofThe

MoneyCalls

Out ofThe

MoneyPuts

Option Premium

Curve

40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

1 8 10 12 16 23 33 40 45 48 50 48 45 40 33 23 16 12 10 8 1Deltas

XYZ Price

Stock Price

Option Value


• As time passes, the expected ability (all else being equal) for a stock to move from its current price diminishes

12

AtThe

MoneyCalls & Puts

Out ofThe

MoneyCalls

Out ofThe

MoneyPuts

Option Premium

Curve

40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

1 8 10 12 16 23 33 40 45 48 50 48 45 40 33 23 16 12 10 8 1Deltas Main

XYZ Price

Time

0 1 5 8 22 30 35 45 50 45 35 30 22 8 5 1 0Deltas Second

0 5 20 38 50 38 20 5 0Deltas Third

Option Value


• Sometimes there are binary events (ex: Earnings) taking place that not only bring a lot of attention to a stock and its options but also keeps implied volatility high.When this happens, the volatility curve pictured here is artificially inflated as the expected movement of the stock is unknown.Once the event has taken place and the move has happened, this implied volatility pops like a bubble and immediately the volatility curve moves to the effective time remaining, where it should have been.This catches a lot of amateur option traders off guard, unable to understand why the options they purchased ahead of earnings event go down in value even when they were directionally right.

• This kind of falsely inflated volatility can happen even outside of earnings. For example: CNBC Mentions Salesforce (CRM) may get bought out by Oracle (ORCL), both CRM and ORCL see implied volatility inflate as speculative traders step in, not knowing where the stock can run. When the dust settles the options return to their true volatility curves and the option value has gone down without either stock moving.

13

Option Premium

Curve

40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

1 8 10 12 16 23 33 40 45 48 50 48 45 40 33 23 16 12 10 8 1Deltas Main

XYZ Price

TimeOption Value

Earnings Event ComingTrue Vol Curve


• Day Trading is a very aggressive trading style subject to very gratifying profits and very significant risks.

• Instead of day trading stock – as one may attribute to the name “Day Trader” – day trading with weekly options is much cheaper and a less risky way to day-trade and capture intraday moves. It’s also much easier to trade long and short (calls or puts).

• Rules of the game:– Day-Trades Only.

- I will buy these options with the strict intention of selling them WLD (Win, Lose, Draw) by the end of the day.- I will limit my risk to an acceptable level – I will not spend more than I am willing to lose, this strategy is too aggressive to bet the farm on!- I will only add to the position if I continue to think movement in my direction is possible and the risk stays within my acceptable guidelines

– I will aim to avoid getting into a trade after a news event in the same day- This only applies to events happening during trading hours. Post earnings or after pre-market news is okay.- I do not want to buy into falsely inflated implied volatility. If I’ve missed my shot, so be it.

– I will only hold overnight if the option is in the money and the option’s parity value is 2x my initial cost.- I will look to take some profits (ie: take off some risk) regardless- This means I can either sell part of the position or sell a further out of the money option against mine.

– If I have reason to close the position WLD I will do so.- If I no longer think the stock can run further than it has, I will take off most or all of the position.

– I may or may not set stop losses and targets, depending on my ability to pay attention to any one position throughout the day.

14


• AAPL Day Trade from Friday May 1, 2015

15

Added ~126.5

Added ~126

Bought 127 Calls exp today~126.75

Closed~127.90

10:18 am: Bought 4x 127 Calls Exp Today for $0.31$124 risk

10:52 am:Bought 4x 127 Calls Exp Today for $0.22$124 + $88 = $212 risk

11:27 am:Bought 5x 127 Calls Exp Today for $0.17$212 + 85 = $297 risk

2:51 pm:Sold 13x 127 Calls Exp Today for $0.80Credit of $1,040 $1040-$297 = $743 profits

Notably, by the end of the day the calls were worth $1.50… :’-(


• XSP (Same as SPY really…) Day Trade from Thursday April 30, 2015

16

Added ~209.10

Added ~209.5

Bought 208.5 Putsexp next day~209.20

Closed~207.90

9:51 am: Bought 3x 208.5 Puts Exp Tomorrow for $0.45$135 risk

9:54 am:Bought 3x 208.5 Puts Exp Tomorrow for $0.45$135 + $135 = $270 risk

11:01 am:Bought 3x 208.5 Puts Exp Tomorrow for $0.45$270 + $180 = $450 risk

3:11 pm:Sold 10x 208.5 Puts Exp Tomorrow for $1.20Credit of $1,200$1200-$450 = $750 profits


• How do weekly options work?

• Pros:With very little premium remaining in the options, they are typically cheaper near the money. Therefore they have the possibility of gaining in value very quickly (gamma exposure) and be more likely to become ITM.

• It’s all about delta and parityIn the morning on Expiration Friday with XYZ trading at 100 and moving to the upside, the 101 Call may only be marking $0.05 because the stock has very low volatility.If the stock then moves to $102 for any reason, those options are now worth $1.00 at parity (not taking into account remaining premium at all).That constitutes a 20x increase in value with a $2.00 move in the stock….

• Cons:As expiration approaches, the premium will decay very quickly with weekly options. If they remain out of the money, the premium (which is the only value they have) will decay.Two periods of extreme decay happen: The weekend before expiration Friday, and Thursday night before expiration Friday.I don’t want to be exposed to those two events!

• Decay also happens quickly on Expiration Friday. If XYZ is trading at $102 and I buy the 101 calls for $1.20 and suddenly XYZ moves down to $101 in the last 30minutes of trading, the calls will be worth rounghly $0.05-$0.10… that’s a 20x LOSS on the trade, and I was trading ITM calls!!!

• So one must take care, and be convinced of direction!

17


• Where I get my day-trading ideas:– UOA (Unusual Options Activity) buying weekly options expiring either this week or next week with ambitious price targets

[not in the money!]– ORB (Opening Range Breakout) Scan– Market chatter about particular stocks (trending on StockTwits, SeekingAlpha, FinViz, etc.) [CNBC, Bloomberg, etc but likely

too late to trade by this time]– Stocks I like trading, I’ll look at the charts periodically throughout the day, how is it looking on the technicals? How about

the value areas?

• Things I take into consideration when I’m day trading:– What is the overall market doing – Up, Down, Sideways?– If I see a particular stock possibly good for a day trade, how are other stocks in its sector doing today?– How far has this stock run already today? What’s its ATR (Average True Range)?– Is the movement news driven? If so, is it a fleeting rumor or television mention or is there news that could fundamentally

change the value of the stock?– How does the stock look on different time frames?

Primarily I will day trade from a 5minute chart, but I prefer the direction I’m trading to be in agreement with the stocks sentiment on larger time-frames (1hr, daily, weekly)This includes looking at candle stick patterns and overall technicals

– What’s the activity like today in the stock? High volume on candles moving in my direction? Any interesting UOA activity?– What is the Beta of the Stock? Is it likely to really move or kinda stagnate?

18


• So I’ve picked my stock, I’ve picked my direction, I want to get into it, how do I decide which option to use?

• Many factors I look at, but the most important is this:How much does the option cost?

– I have in my mind a maximum I’m willing to risk on the trade. Earlier in the week I’ll have to spend more, but I have more time for them to play out.

– So with my maximum in mind, say $200, how many options can I get for $200? If the option is $0.50, I can get 4…. Not terrible.If the option is $0.10, I can get 20… Much better!If the option is $0.05, I can get 50…. Say what?!

• The other aspect is this:How likely is this option to be profitable?

– Using the ATR of the stock, I can gauge how likely the option I’m looking at is to become ITM (In The Money). I don’t want to be day trading options that are extremely likely to end the day out of the money -- volatility decay works against me here.EX: If the ATR of a stock is 2.3, and the stock has already moved 1 pt to the upside before I look to get in, I don’t want to buy a call any further than 1 point higher to the upside.

– The deltas of the option also give me a hint here – I don’t want to be buying an option with a delta of less than .10 and preferably much higher!

19


• Great, so I’ve picked my option, and purchased. Now what?

• I will keep an eye on my technicals and look for clues as to “Am I right?” and look for clues as to “If X happens, I’m totally not right…” and also look for hints when to close the position (Reversals)

• If I have lots of options on, I will look to take targets at specified levels. Selling ½ of the position at double the value of what I paid for them means I have the remainder on for free ie: no risk.Ex: I bought 20 calls for $0.10. I spend $200. I sell 10 calls for $0.20. I receive $200.I have 10 calls remaining at $0.00 cost.

• End goal target:Having looked at the ATR of the stock, I have the expected price at which it can trade today in mind.Looking at the current ATM (At the money) option in my direction (call/put) I can see how much my option is likely to be worth if the stock moves to the price target I have in mind.EX:I have the XYZ 102 Calls because the ATR says it can get there today. They are currently worth $0.25XYZ is trading at 101 and the 101 calls are worth $0.85. Therefore I can expect when XYZ gets to 102, my calls should be worth $0.85, so I will set my sell order to close them all at $0.85.

• If I expect my calls to go in the money (perhaps well in the money) based on the ATR, then I will have to look at the current value of the option equivalently in the money.EX 2:I have the XYZ 102 Calls on because the ATR says XYZ can go to 104 today. They are currently worth $0.25XYZ is trading at 101 and the 99 calls are worth $2.95.Therefore I can expect when XYZ gets to 104, my calls should be worth $2.95, so I will set my sell order to close them all at $2.95

20


• Playing Defense• It’s easy to be tempted to leave on a position past the end of the day.

(Yes, I have my rules for trading like this, and yes I break them.)• So what do I do if I want to leave some (all?) on?

Biggest worry: Volatility decay because time is passing.

• How much did I buy the option for? If I bought the option for $0.05 or less, time decay is not going to hurt me very much unless this is a position established Thursday going into Friday.

• Is the option currently in the money?If in the money, the now intrinsic value of the option will protect me somewhat from premium decay.If it is not in the money it is going to be very sensitive to the time decay and definitely needs some protection.

• The key: Put the time decay in your favor.At the end of the day, if I can sell an option further out of the money that is worth the same or more than I bought my options for, I can hold the options for free. I have created a vertical spread with maximum reward being the distance between the strikes but I have it for free, bonus!Both options will go down from the time decay the next day – I’m losing value on my long options and gaining profits on my short options. If I want, I can buy back the short options immediately and regain that decay value. Or if the stock goes down I may be able to buy back the short options even cheaper.

Note: I don’t want to sell an option that is worth any less than $0.10, it wont decay fast enough.So I may have to go into the following week’s option chain and sell one there creating a calendar spread.Also note, I never want to sell an option in another chain that is at or nearer the money than my long option strike, this will hurt profits if the stock moves in my direction.

21

Q & A With Web

Web’s Weekly Roundup May 2, 2015 Presenter: Web Begole.

Documents

futures trading

forecast day trading

options trading

weekly options slide

opening price

trading experience

trading operations

current price