Web’s Weekly Roundup
March 7, 2015
Twitter: @MarketWebs
Presenter: Web Begole
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Web’s Weekly Roundup -- March 7, 2015
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Analysis of /ES (S&P 500 Futures) and forecast
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Analysis of /ZB (S&P 500 Futures) and forecast
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Analysis of /CL (Crude Futures) and forecast
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Analysis of /GC (Gold Futures) and forecast
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Analysis of /6E (Euro Futures) and forecast
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Analysis of /DX (Euro Futures) and forecast
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Establishment of Limited Risk Reversals – The method
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Q&A Time
/ES Futures (S&P 500) YTD 2015
Opening Price: 2055.00
Current Price: 2072.25
High: 2117.75
Low: 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.
4
/ZB Futures (30 Year Bonds) YTD 2015
Opening Price: 159’05
Current Price: 155’20
High: 166’22
Low: 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.
5
/CL Futures (Crude Oil) YTD 2015
Opening Price: 54.65
Current Price: 49.78
High: 56.00
Low: 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.
6
/GC Futures (Gold) YTD 2015
Opening Price: 1185.40
Current Price: 1168.20
High: 1309.20
Low: 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.
7
/6E Futures (Euro/USD) YTD 2015
Opening Price: 1.211
Current Price: 1.0847
High: 1.2113
Low: 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.
8
/DX Futures (US Dollar Index) YTD 2015
Opening Price: 90.81
Current Price: 97.755
High: 97.755
Low: 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.
9
Looking Ahead
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Overall:
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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.
Establishing Limited Risk Reversals – The Method
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Exploration 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 underlying
– Monetary
– Management
– Loss mitigation
– Involuntary 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.
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Establishing Limited Risk Reversals – The Method
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When 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 $0.05
• I 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.
12
Establishing Limited Risk Reversals – The Method
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Manipulating Credit Spread Risks
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Risk evaluation by spread size (same monetary risk):
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The 5pt Spread (Least Risk / Least Reward):
– Pros:
• Small number of contracts, large amount of credit
• Underlying has a 5pt range to come in at less than full loss
– Cons:
• The least amount of potential credit.
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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 credit
– Cons:
• Not able to provide the most potential credit.
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The 1pt Spread (Highest Risk / Highest Reward):
– Pros:
• By putting this on five times, I receive the most amount of total credit
– Cons:
• Underlying only has a 1pt range of less than full loss potential
• The largest number of contracts to put on
13
Establishing Limited Risk Reversals – The Method
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Manipulating Credit Spread Risks
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Risk evaluation by spread placement (same monetary risk):
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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 favor
– Cons:
• The least amount of potential credit.
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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.
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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.
• Assignment risk possibility from on-set
• Highest potential loss on the credit spread, if the underlying does not move, I lose on the trade.
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Establishing Limited Risk Reversals – The Method
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Manipulating Credit Spread Risks
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Risk evaluation by option-chain (time) placement (same monetary risk):
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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 money
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Mid 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)
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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 Method
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Manipulating Long Option Rewards
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The reward multiple
– Buying 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.
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In the money long options:
– Expensive and typically require an in the money credit spread to buy
– Because of expense, typically can only buy one
– Less susceptible to theta decay as intrinsic value remains
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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
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Out of the money long options:
– Ability to buy multiples
– Susceptible to theta decay
– Underlying must move further for these to become in the money
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Low 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 Method
•
•
•
•
•
•
When 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 $0.05
• I 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 Method
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Some examples:
Low implied volatility, good rewards available.
CSCO
KO
FNSR
JDSU
High implied volatility, less rewards available.
PCLN
TSLA
NFLX
AMZN
SPY
Middle of the road:
AAPL
BABA
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Q & A With Web
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@MarketWebs
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