Web’s Weekly Roundup February 14, 2015 Twitter: @MarketWebs Presenter: Web Begole

Web’s Weekly RoundupFebruary 14, 2015

Twitter: @MarketWebs

Presenter: Web Begole

Web’s Weekly Roundup -- Saturday January 31, 2015

• Past week’s events

• Analysis of /ES (S&P 500 Futures) and forecast

• Analysis of /CL (Crude Futures) and forecast

• Analysis of /GC (Gold Futures) and forecast

• Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination.

• Q&A Time

• Giving away 3 copies of the ToS Earnings Study!

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RISK DISCLAIMER

Overall Market this Past Week

• Most Significant: New all time highs.

• Greece – Lots of back and forth this week on good/bad news. Final news of cash Greek

govt. cash surplus lead to all time market highs.

• Consumer Sentiment – 93.6 vs exp. 98.5 largest miss on record. Low gas prices not

increasing sentiment as expected.

• Less Significant:

• Baltic Dry Index at record lows.

• Saudi Arabia comes out with statement saying “Oil has found a bottom.” changing their

tone.

/ES Futures (S&P 500) Week of Feb 9 – Feb 13

5

Opening Price: 2050.00Closing Price: 2094.75

High: 2095.00Low: 2036.50

O/C Change: +44.75ptsH/L Range: 58.50

Notable Pattern:Well above value for next week as price discovery has not found sellers yet.Closed on all-time highs.

Next Week Forecast:Support at 2077.75.Expected range:2036-2134.Further new all time highs expected next week.

/ES Futures (S&P 500) Month of February, 2015

6

Opening Price: 1990.50Current Price: 2093.50

High: 2095.00Low: 1973.75

O/C Change: +103ptsH/L Range: 121.25pts

Notable Pattern:Having broken above value last week, this week price continued to the upside reaching R2.Out of topping pattern formed in January.

February Forecast:Pullbacks expected to be limited to 2069.50 should bull-market continue. Further upside has 2116.50 in the cards.

/ES Futures (S&P 500) YTD 2015

7


High: 2095.00Low: 1970.25

O/C Change: +38.5ptsH/L Range: 124.75pts

Notable Pattern:Having closed (barely) above the 2091 arachnid level, /ES looks to continue higher with 2179.25 square in its sights.

Forecast:Technically bullish, fundamentally cautious. Blow-off top could be seen with a quick rise to the 2179 level before a sharp decline potentially to 1830’s by mid-year.

/CL Futures (Crude Oil) YTD 2015

8


High: 54.24Low: 43.58

O/C Change: -0.98ptsH/L Range: 10.66pts

Notable Pattern:Feb spent above value.POC has been lowered this week, /CL is poised for large breakout.

Forecast:Expecting upside resistance at 57.33 in

Feb and 65.33 during

the first quarter of 2015.

/GC Futures (Gold) YTD 2015

9


High: 1308.40Low: 1167.90

O/C Change: +38.50ptsH/L Range: 140.50pts

Notable Pattern:Broken below value for Feb.POC migrated lower, a break above 1275 could bring large push to upside.

Forecast:Expecting 1216 to act as support. If /GC can break above 1230 look for upside return to 1275 this month.

Looking Ahead

• Overall:

• /ES has fought against becoming a bear market. My outlook remains cautious as I worry

about a blow off top – 2170+ happening far too quickly. This could happen next week as it

will be a shortened holiday week and volume will be lighter than usual.

• /CL has consolidated bringing the POC lower for the month, a sharp upward trend is

expected. If inventory numbers show a draw down at any point, rally is expected.

• /GC needs more of a bid before a bull market takes off. Seems to struggle with Greek

news.

• Caution next week: Low volume expected on shortened holiday week.

Earnings Trades From Beginning to End: The Idea, the Execution, the Culmination.

• Earnings Plays• 50/50. Even if one knew the results ahead of time, who knows how the market will react? • But what’s the best way to go about playing earnings for the best risk vs. reward?• Directionally? Neutrally? • Let’s look at:

– CSCO – Naked earnings play. – KO – Protective earnings play. – Something for next week….

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• CSCO - Idea

12

Long Reasons:Cloud bullish.Recent long signal with entrance into value for Feb.Large rally after last earnings.

Short Reasons:Above average selloff after earnings beat.Down 17 quarters vs. up only 13 over the past 30.


• CSCO - Idea

13

Long Reasons:Broke above weekly value Tuesday, continued trend in afterhours.

Short Reasons:Sell off during the trading day just prior to earnings.

Decision (LONG):I am going on the assumption that Wednesday’s move was a showing of the hand.


• CSCO - Execution

14

Market Maker Move:+/- $1.23

I am leaning long, therefore I expect CSCO to move to ~29.30 tomorrow.(26.93 + 1.23)

What are my options?1) Long Call Options2) Call Vertical3) Butterfly at 294) 28-30 Iron Condor5) Iron Butterfly6) Limited Risk Reversal7) Etc…



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Given that CSCO has an above average tendency to sell off after earnings beats, I want protection.

So I want to play this to the long side using further dated options. If it moves up it will have a tendency to continue for about 3 days at least.

Therefore I choose a March Limited Risk Reversal (Super Bull)



16

Given the options skew and the time I put this on (around 2:30pm EST):

I sell 5 of the March 28/29 Put SpreadsAnd spend the credit to buy 35 of the March 30 Calls.

Buy Mar 28 Put: 1.33Sell Mar 29 Put: 2.03Net Credit: 0.70/1lot5x = 3.50Buy Mar 30 Call: 0.1035x = 3.50Net Cost: $0.00


• CSCO - Culmination

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Result position:+35 Mar 30 Calls-5 Mar 29 Puts+5 Mar 28 PutsResult Cost: $0.00Result Risk: $500.00Result Reward: Inf.

Stock moves Thursday to 29.50

P&L: +$1,300.00+

What do I do?


• CSCO - Culmination

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Given that I have +35 30 Strike Calls on,I look to take risk off and buy back the credit put spread using some of the calls.

Friday around 2pm,On one ticket, I buy back all 5 of the 28/29 Put Spreadsand sell 5 of the Calls to pay for it.

Sell 5x 28 Puts: 0.23 & Buy 5x 29 Puts: 0.54 == Cost: $155Sell 5x 30 Calls: 0.37 == Credit: $185

Net Credit: $30.00 + 30x CSCO March 30 Calls remain in my account for free.


• KO – Idea (Note: I am long Stock in KO)

19

Long Reasons:50/50 earnings reaction.

Short Reasons:Cloud bearish.50/50 earnings reaction.Below value for Feb.Short signal below value.


• KO – Idea (Note: I am long Stock in KO)

20

Long Reasons:None.

Short Reasons:Below value for the week.

Decision (SHORT):I am going on the assumption that below value for Feb and for the week leads to short position.I need to protect my stock.


• KO - Execution

21

Market Maker Move:+/- $1.13

I am leaning short, therefore I expect KOto move to ~40tomorrow.(41.23 - 1.12)

What are my options?1) Long Put Options2) Put Vertical3) Butterfly at 404) 40-42 Iron Condor5) Iron Butterfly6) Limited Risk Reversal7) Etc…


• KO - Execution

22

I decide to put on a limited risk reversal.

I sell the 42/43 Call Spread.I sell the 42 Call: 0.43I buy the 43 Call: 0.27Net Credit: $0.16I buy the 39 Put: 0.15Net Credit: $0.01/1lotI do this 40 times (I have 4000 shares)

I have downside protection.

Max Cost: -0.01/1lot (ie: I receive $40.00 to put this protection on 40 times.)Max Risk: $4,000 (or is it?)Ex. If KO tanks after earnings, my P&L is: – stock move + $4,000 per point below 39.Ex. If KO rallies after earnings (above 43), my P&L is: -$4,000 + stock move


• KO - Execution

23

Resulting position:+40x 43 Call-40x 42 Call+40x 39 PutNet Credit: $40.00Max Risk: $4,000Max Reward:A) $156,000.00(KO can only go to zero, therefore max reward is $3,900x40). But stock losses are capped below 39!B) Unlimited(If stock goes up indefinitely, $4k loss is a drop in the bucket)

What if KO stays between 39 and 42 by Feb 20th (expiration)? Well, it’s a scratch…Protection is put on for free, I keep my shares, and I move on!


• KO - Culmination

24

KO jumps to 43 after earnings and declines the rest of the week to 42.

I still have the position on as it expires next week (Feb 20).

If KO expires next Friday above 42, what are my options?

I don’t want to sell my stock position.

I will roll out the 42 call to March for a credit and buy back the calls when the roll credit pays for me to do so. (If KO jumps above 43, I will sell the 43 calls for profit.)


• Something for next week: • NOTE: I will never place an earnings trade until the last few hours before the event:

– I want to center the measured move around the closing price just prior to the event, – AND new information can change my opinion at any time!

• CAR (Avis)• SUNE (SunEdison)• SCTY (Solar City)• ACT (Activision)• ANGI (Angie’s List)• DTV (Direct TV)• IMAX (IMAX)• LINE (LINN Energy)• PCLN (Priceline)• WMT (Walmart)• SIX (Six Flags)• TRUE (True Car)• MRVL (Marvell)• FUEL (Rocket Fuel)

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Trend Lines: Fundamentally Substantial or Self-fulfilling Prophecies?

• Recap:• Earnings trades: 50/50?

– Collecting the most information available will give the trader an edge.– Analysis of historical movements combined with the technical analysis of choice will lead to

the most reasonable decisions.– As with any trade, if you cannot define your risk/reward before putting it on, think again.– If the trader is uncertain of a trade, why trade it? Do not force it!– There are no guarantees. – Risk management happens when the position is put on, not after!!

• Know how to manage a strategy before employing it. – Avoid not knowing what your P&L will be given a certain stock price. – Do not rely on others, everyone’s portfolio/trades are different!

• Every options strategy (earnings or not) has different optimal conditions/criteria. – Play around in paper trading until it becomes second nature.

• The trader must have tools he trusts more than his gut for successful, disciplined trading. – Avoid using tools beyond one’s comprehension.

Q & A With Web

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Web’s Weekly Roundup February 14, 2015 Twitter: @MarketWebs Presenter: Web Begole