January 23, 2018 Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest. Previous Impact of Government Shutdowns? Looks like this was a non-event at least judging by historical standards. Shutdowns have lasted on average 8 days and have moved the market, on average, 0%. Start of Shutdown Days of Shutdown S&P 500 Return President Sep-77 13-3% Carter Oct-77 9 1% Carter Nov-77 9-1% Carter Sep-78 18-2% Carter Sep-79 12-4% Carter Nov-81 3 0% Reagan Sep-82 2 1% Reagan Dec-82 4 1% Reagan Nov-83 4 1% Reagan Sep-84 3-2% Reagan Oct-84 2 0% Reagan Oct-86 2 0% Reagan Dec-87 2 0% Reagan Oct-90 4-2% Bush Sr. Nov-95 6 1% Clinton Dec-95 22 0% Clinton Sep-13 17 3% Obama Jan-18 2 1% Trump Utilities? Since November, Utilities (XLU) are down 10% while the S&P is up 8%. While utilities do tend to underperform in interest rising environments (same as bonds), the spread between utilities and the overall market may present opportunity. Especially since falling prices make the 4% yields in utilities more attractive for longer term investors/traders. We discussed this in more detail in the January 9th Cherry Picks (goo.gl/f9bb1s). If you re bullish and want that 4% yield, what call should you sell, i.e. covered call? It depends on how much on upside potential you think the stock has and/or how much downside protection you want. The higher the call strike, the lower the probability of success but the larger the upside potential you have. On the other hand, the closer to at-the-money the call is the greater premium (extrinsic value) of the option and the greater the downside protection is since you are lowering your breakeven. This will have a higher theoretical probability of profit, but you ll miss out if the stock makes a sudden move to the upside. That said, we generally would go a strike or two out of the money for example, buying 100 shares and selling the 52 call. That way, we still have some upside potential, but we also lower our costs-basis. Think longer-term. Michael Rechenthin, PhD Kai Zeng, MBA Brick Welch, MS research@tastytrade.com
Trade What I m Thinking Statistics I am continuing to roll positions and make modest adjustments to existing trades. SBUX Strangle 0.55 Cr. Sell 1x 65 Call FEB Sell 1x 55 Put FEB IBM Iron Condor 1.14 Cr. Buy 1x 185 Call MAR Sell 1x 175 Call MAR Sell 1x 150 Put MAR Buy 1x 140 Put MAR XLE Skewed Strangle 1.35 Cr. Sell 1x 80 Call MAR Sell 1x 72.5 Put MAR I think we are in an extraordinary period of asset speculation and I m positioning myself for a significant opportunity to fade the masses. I feel like it s a pot-odds situational rarity and I am looking forward to a reversal in the current crowd enthusiasm. I m short equities and I m pretty sure I m alone. Taking advantage of high implied volatility due to earnings which will be announced January 25 after the market close. I am keeping in my preferred 80% range of 79% POP with 24 days to expiration. Strangle tends to be my go-to strategy as I am willing to manage either side if it gets tested post earnings announcement. However, I am staying outside of the expected move on trade entry which is around a $3 move on either side. I m playing a post earnings contraction in volatility. Crude has been rallying recently, XLE has increased 13% since December 2017. We are looking to get some short deltas in the form of a skewed strangle. We are short the 30Δ Call and 16Δ Put. - Downside breakeven at 54.5, upside breakeven at 65.5, probability of profit 79%. Probability of profit 72% and a max profit of 114. Probability of profit 64%, short 14Δ s, Downside breakeven 71.15, upside breakeven 81.35, Looking to manage at $70 (50% of credit). tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 2 of 10
Popular ETFs DIA Dow EEM Emerging Mkt. Fund EFA MSCI EAFE EWZ Brazil FEZ Euro Stoxx 50 FXI China Large Cap GDX Gold Miners GDXJ Jr. Gold Miners GLD Gold IWM Russell 2000 ETF KRE Regional Banking OIH Oil Services QQQ Nasdaq 100 SLV Silver SPY S&P 500 TLT 20+ Year T-Bond ETF XBI Biotech XLB Materials XLE XLF XLI XLK XLP XLU XME XOP XRT Energy Select Sector Financial Industrial Tech Consumer Staples Utilities Metals and Mining Oil & Gas Exploration & Product Retail 3-Month Correlation Matrix of Price Returns tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 3 of 10
Upcoming Earnings Symbol Description Expected Report Date Time of Day Weekly Options In Dow? In S&P 500? In Russell 2000? In tastytrade Watchlist? VZ Verizon Communications Tue Jan-23 Before Open Yes Yes Yes - - TRV The Travelers Companies Tue Jan-23 Before Open - Yes Yes - - KMB Kimberly-Clark Tue Jan-23 Before Open Yes - Yes - - PG Procter & Gamble Tue Jan-23 Before Open Yes Yes Yes - - JNJ Johnson & Johnson Tue Jan-23 Before Open Yes Yes Yes - - UAL United Continental Holdings Tue Jan-23 After Close Yes - Yes - Yes TXN Texas Instruments Tue Jan-23 After Close Yes - Yes - - CREE Cree Tue Jan-23 After Close Yes - - Yes - GE General Electric Wed Jan-24 Before Open Yes Yes Yes - - UTX United Technologies Wed Jan-24 Before Open Yes Yes Yes - - ABT Abbott Laboratories Wed Jan-24 Before Open Yes - Yes - - F Ford Motor Wed Jan-24 After Close Yes - Yes - - FFIV F5 Networks Wed Jan-24 After Close Yes - Yes - - RJF Raymond James Financial Wed Jan-24 After Close - - Yes - - FCX Freeport-McMoRan Thu Jan-25 Before Open Yes - Yes - Yes MMM 3M Thu Jan-25 Before Open Yes Yes Yes - - AAL American Airlines Group Thu Jan-25 Before Open Yes - Yes - - CLF Cleveland-Cliffs Thu Jan-25 Before Open Yes - - Yes - CAT Caterpillar Thu Jan-25 Before Open Yes Yes Yes - Yes ISRG Intuitive Surgical Thu Jan-25 After Close Yes - Yes - - INTC Intel Thu Jan-25 After Close Yes Yes Yes - - SBUX Starbucks Thu Jan-25 After Close Yes - Yes - Yes WYNN Wynn Resorts, Limited Thu Jan-25 n/a Yes - Yes - - HON Honeywell International Fri Jan-26 Before Open Yes - Yes - - LMT Lockheed Martin Mon Jan-29 Before Open Yes - Yes - - STX Seagate Technology PLCs Mon Jan-29 Before Open Yes - Yes - - MCD McDonald's Tue Jan-30 Before Open Yes Yes Yes - - PFE Pfizer Tue Jan-30 Before Open Yes Yes Yes - - AMD Advanced Micro Devices Tue Jan-30 After Close Yes - Yes - - * Hightlighted the stocks from our tastytrade watchlist tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 4 of 10
Stocks and ETFs with an upcoming dividend. In the money short call options are the only options at risk of additional early assignment due to the dividend. If the extrinsic value of the in the money short call is less than the dividend, the option is at (a greater than average) risk of being assigned. Symbol Description Ex-Dividend Date Dividend Per Share In Dow? In S&P 500? In Russell 2000? In tastytrade Watchlist? CL Colgate-Palmolive Mon, Jan 22 0.4 - Yes - - CVS CVS Health Tue, Jan 23 0.5 - Yes - - CLX Clorox Tue, Jan 23 0.84 - Yes - - LOW Lowe's Companies Tue, Jan 23 0.41 - Yes - - LEN Lennar (Class A) Thu, Jan 25 0.04 - Yes - - TXN Texas Instruments Tue, Jan 30 0.62 - Yes - - MS Morgan Stanley Tue, Jan 30 0.25 - Yes - - KMI Kinder Morgan Tue, Jan 30 0.125 - Yes - - tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 5 of 10
Shows From the Research Team The Past Few Days: Date Segment Title Link Mon, Jan 22 Market Measures Pairs Trading Currencies with Options LINK Mon, Jan 22 The Skinny on Options: Abstract Applications Heteroskedasticity LINK Mon, Jan 22 Best Practices Best Practices LINK Fri, Jan 19 Market Measures 2017's Most Boring Sector LINK Fri, Jan 19 Resize & Analyze Week of January 15th LINK Fri, Jan 19 Closing the Gap - Futures Edition Closing the Gap - Futures Edition LINK Thu, Jan 18 Market Measures Trading Crude Oil Products LINK Thu, Jan 18 The Skinny On Options Data Science Data Science Links and Spreadsheets LINK Thu, Jan 18 Trades From the Research Team LIVE Trades From the Research Team LIVE LINK Wed, Jan 17 Market Measures Should We Consider Collars? LINK Wed, Jan 17 Options Jive Why Not Hold To Expiration? LINK Wed, Jan 17 tasty BITES Trade Method LINK Tue, Jan 16 Market Measures Options Opportunities with Market Sectors LINK Tue, Jan 16 The Skinny on Options: Abstract Applications Charm: Part Two (Implementation) LINK Tue, Jan 16 Best Practices How a Strangle Makes Money LINK Fri, Jan 12 tasty Extras Analyzing the Markets: Part Three - Quantitative Analysis LINK Fri, Jan 12 Market Measures Shorter Duration or Managing Earlier LINK Fri, Jan 12 Resize & Analyze Week of January 8th LINK Fri, Jan 12 Closing the Gap - Futures Edition Nat. Gas: Combining Futures & ETFs LINK Thu, Jan 11 tasty Extras Analyzing the Markets: Part Two - Fundamental Analysis LINK Thu, Jan 11 Market Measures IV Rank Ranges LINK Thu, Jan 11 Options Jive Options Prices and Trade Mechanics LINK Thu, Jan 11 Trades From the Research Team LIVE Trades From the Research Team LIVE LINK Wed, Jan 10 tasty Extras Analyzing the Markets: Part One - Technical Analysis LINK Wed, Jan 10 Market Measures GDX: Opportunities in Gold Miners LINK Wed, Jan 10 Options Jive What Drives Options Prices? LINK Wed, Jan 10 Strategies for IRA Verticals in an IRA LINK Tue, Jan 09 Market Measures Getting the Timing Right with Options LINK Tue, Jan 09 Options Jive Getting Long Volatility with Covered Calls LINK Tue, Jan 09 tasty Extras Sosnoff Says Where's the Risk? LINK Tue, Jan 09 tasty BITES Go Naked or Define Our Nakedness? LINK tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 6 of 10
30-Day Expected Range Plots The colored cone represents a 30-day expected theoretical price range that is calculated from the options implied volatilities. In theory, we expect that prices will stay, with a 68% probability, within the boundary of the cone. tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 7 of 10
30-Day Expected Range Plots The colored cone represents a 30-day expected theoretical price range that is calculated from the options implied volatilities. In theory, we expect that prices will stay, with a 68% probability, within the boundary of the cone. tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 8 of 10
30-Day Expected Range Plots The colored cone represents a 30-day expected theoretical price range that is calculated from the options implied volatilities. In theory, we expect that prices will stay, with a 68% probability, within the boundary of the cone. tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 9 of 10
Reading this Report Expected Range Cone. The colored cone represents a 30-day expected theoretical price range that is calculated from the options implied volatilities. If the implied volatility is relatively high, then the market is expecting a larger price change in the underlying stock or ETF. From this we can derive the market s 1 standard deviation theoretical expectation of where prices might be in the future. In other words, the market is expecting, with a 68% theoretical probability, that prices will fall within the boundary of the cone at the end of 30 days. Cone Color. The color of the cone is significant. The darker the color, the more extreme the implied volatility (IV) which is represented by implied volatility rank (IV Rank). This information can help you decide on a trading strategy. Glossary IV. Implied Volatility is the estimated volatility of a security s price derived from its option price; the higher the IV, the more expensive the option and therefore the larger the expected price move. IV is an annualized number of volatility, e.g. a IV of 27 means the option s market is pricing in an annualized price range, either plus or minus, of 27%. IV Rank near 100% IV Rank near 0% IV Rank. IV by itself doesn t tell us if if the volatility is high or low - but IV Rank does. An IV Rank of 70 means that the IV is 70% between its low and high IV over the past year. The higher the IV Rank, the higher the security s IV is compared to its past year. We provide six levels to make evaluating easier: Extremely High: IV Rank between 90 and 100 High: IV Rank between 75 and 90 Moderately High: IV Rank between 50 and 75 Moderately Low: IV Rank between 25 and 50 Low: IV Rank between 10 and 25 Extremely Low: IV Rank between 0 and 10 Option Liquidity. At tastytrade we have our own theoretical measure of option liquidity, Poor, Moderate, Good, or Great. It examines the options bid/ ask spread, open interest, and the number of strikes with non-zero bids. Correlation with S&P 500. Correlation is a statistical measure of how strong a relationship two securities have with one another. A correlation of -1 means the stocks are perfectly negatively correlated (they move in opposite directions), while a correlation of +1 means the stocks are perfectly positively correlated (they move in the same direction). A correlation of 0 means there exist little relationship. Earnings. The earnings date of the security. In practice we tend to see stocks have a larger amount of implied volatility (IV) nearer to earnings as the market is pricing in the fear of the upcoming earnings announcement. In parenthesis, is BTO or AMC; "Before the Open" or "After Market Closes", respectively. Upcoming earnings dates do sometimes change. Disclosures Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf tastytrade content is provided solely by tastytrade, Inc. and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Multi-leg option strategies incur higher transaction costs as they involve multiple commission charges. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). All customer futures accounts' positions and cash balances are segregated by Apex Clearing Corporation. Futures and futures options trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products found in Disclosures under the Documents tab. tastytrade.com, 2018 Michael Rechenthin, PhD Kai Zeng Brick Welch Page 10 of 10