InvestorsObserver Workshop

InvestorsObserver Workshop• Market update• What’s going on at InvestorsObserver: • Member-driven content: Questions, site demonstrations,

etc.• Can prepare slides for questions submitted ahead of

time: Mention “workshop”

S&P 500

One year

S&P 500

Three months

Dow vs. Russell 2000

YTD

What else is going on?• Earnings Starts in two weeks• Trade: Market still reacting to headlines, but effect is short lived… N. American

trade deal rally didn’t last long• Economic data points toward continued growth. • Jobs day Friday… Still expecting to see about 200k new jobs and

unemployment around 3.8%

Less soon

Diagonal SpreadInstead of buying stock for $159.44 a share, or $15,944, we purchase the $130 call for $31.05 per share, or for $3,105 or about 19.5% of the cost of buying the stock.

This transaction is called a “diagonal” because of the diagonal line we can draw between the call we buy and the call we sell.

SoonSell $165 Call

Buy $130 Call

Stri

ke p

rice

s

TIME

$31.05 = $3,105 net debit

Diagonal Spread Terms

Net debit: total cost to enter position (bought leg – sold leg)Breakeven: Bought leg strike + net debit

Strike width: Difference in strike prices

Target profit: Difference between net debit and strike width

Subscriber questionsFrom Bob: Defending Credit spreads. What are your ideas??Here are my methods1. If I think my directional bias is correct, and my short position is around +/- .50 delta, I’ll roll the whole thing out 1or 2weeks. This requires a broker that can handle a 4 legged order.I’ve used this method lots, works well as long as the stock moves in my direction, otherwise it gets really messy.2. If I think the direction has changed, I’ll buy back the short options and let the long ones run.. can be expensive. What about making it into an iron bug or bird? How to do this, and does it make sense?3. If I am unsure of stock direction, and my short side is being threatened, what if I roll out ( existing position) in time andconvert it into an Iron condor?? Your thoughts?4. When should I keep the original spread and buy some long options as protection. I could then take them off if the situation improved.

Answers:1. I agree that this can work if the stock goes back where you wanted it to, but also, yes it can also make a bad trade into a worse one.2. Buying back the sold to let the long run is one I’ve considered, but never pulled the trigger on. I turns a credit into a debit and you need the stock to go against your original direction pretty hard3. Rolling a vertical is buying to close on position and then opening a new position. If you’re already closing, why not pick something you feel more confident about?3. I’m not a huge fan of betting against yourself. If you have a bullish spread, you’ve got a levered-long, if you think that’s going bad, close it. Value of spreads is small position sizes, so use that for risk management.

Subscriber questionsFrom Bob: On defending Diagonals,What’s the plan with EA. It looks like its in a range of 100-120, and unlikely the short Nov 6, 100 call will break 30$ before expiry. If I am bullish on the stock, and willing to wait for price improvement, what can I do now to generate cash ( sell calls I guess) and what action can be taken as we approach the long position expiry to prevent a large loss? Roll the long position out and down at some cost?If this was a covered call, and I still liked the stock, I’d buy more stock, lowering my basis, then write short term ( 1-3 week) calls that are close to or just outside the Expected move and carry on, moving my call strikes up as the stock improved in price, rolling up in price and out in date ( sometimes 4 weeks or more is necessary to maintain a credit), Hopefully until I canclose the position at a Profit or Break even. How do I do this with a diagonal that is under water, i.e. EA??

Answers:EA reports earnings on 10/30, so we’re probably not going to hold it past then.Will be looking to sell more calls. Didn’t want to cap ourselves too soon when it was rising earlier in the weekYou can always exercise the long leg and turn this into a covered call if you want to hold it though earnings and past the 11/2 expiration. Rolling the long is a sell to close and a buy to open, which is basically closing one position and opening another. Makes sense if you just don’t want to take a loss on EA, but it is still effectively closing one position and opening another, so… unless you just love the stock, why not move on to another name?

Subscriber questionsFrom Dave: Out of money covered call window shows usually about 30% probability of assignment on income generation. Is there a way to determine probability of assignment for other strikes or call trades?

Answers:Delta can also tell you the probability that an option will expire in the money. A .30 delta has a 30% chance of being assignedA .50 delta will be right at the money and is a tossupDeltas approaching 1 will be very likely to be assigned

These tie together… A call with a strike price of 0 would have a delta of 1 and the price would move penny for penny with the stock, because they would effectively be identical instruments.