dealing with a down market

Dealing with a Down Market by Dan Sheridan

Presented byThe Options Industry Council

Dealing with a Down Market by Dan SheridanOptions involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker or The Options Industry Council at One North Wacker Drive, Chicago, IL 60606.

In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.

Presentation Outline

Surviving a down market- The importance of having a plan- A real-life, historical example using Russell 2000

Index options (symbol RUT)- Ideas on adjusting position after big underlying

move

Dans tips for survival in a volatile market

Surviving a Down Market

Example- At-the-money Time Spread- RUT Russell 2000 Index Options- Down Market July 2007

RUT Price Chart 1 Year

Source: IVolatility.com Accessible via www.888options.com

This presentation should not be construed as an endorsement or indication by OIC of the value of any non-OIC product or service described in this presentation.

RUT Price Chart Detail

Close Change % Change

July 19 851.85 + 5.94July 20 836.44 - 17.41 - 2.04%July 23 835.62 - 0.82 - 0.10 %July 24 811.62 - 23.76 - 2.84%July 25 812.50 + 0.64 + 0.08%July 26 791.48 - 21.02 - 2.59%July 27 777.83 - 13.65 - 1.72%

July 20th to 27th = - 8.69%

Before We Move On Standard Deviation Review Standard deviation formula

- RUT level x ATM call implied x

Example strategy coming up = RUT time spread- To be established July 17, 2007- RUT at 849.90- Before major down move July 20th thru 27th

- 1-day standard deviation (19% volatility) 8.50 points

What should standard deviations mean to you?

Days to Expiration

365

RUT Implied Volatility Chart 1 Year

Source: IVolatility.com Accessible via at www.888options.com

This presentation should not be construed as an endorsement or indication by OIC of the value of any non-OIC product or service described in this presentation.

RUT Price Change vs. Implied Volatility

Implied Volatility

Price

Example

RUT Aug/Sep 850 Call Time Spread

- Purchased July 17, 2007- RUT Closing Price = 849.90

RUT Aug/Sep 850 Call Time Spread

July 17, 2007RUT = 849.90

Sell August 850 Call- price = $19.40- implied volatility 18.3%- time value = $19.40

Buy September 850 Call- price = $32.30- implied volatility 20.2%- Time value = $32.30

Net debit = $12.90 = $1,290 total*Position net theta 8.14Position net vega 44.00

* Not including commissions

P&L Graph - August 2007 Expiration

VolatilityAssumption

19%Maximum Profit

= $1,003RUT at 849.90

Downside Break-even Point

= 832.62Upside Break-even Point

= 877.45

Graph not drawn to exact scale

RUT 850 Call Time Spread

July 17, 2007 RUT at 849.90

What factors might make this a good or bad trade?- RUT price when spread established look at chart- implied volatility levels compare to past levels

Sell August 850 Call price = $19.40 implied volatility 18.3%

Buy September 850 Call price = $32.30 implied volatility 20.2%

Net debit = $12.90 = $1,290 total** Not including commissions

A Plan Is Everything!

Dans sample plan: Have a maximum loss in mind

- How much of our $12.90 cost do we lose?- Maybe 20%

Have adjustment points in mind- Maybe the up and downside break-even points

When to take profits?- As important as cutting a loss- Maybe 15%

P&L Graph - July 24, 2007

If RUT down to either expiration

break-even point:

Downside = - $32*

Upside = - $59*




If RUT down and we did nothing:RUT = 811.62(down 38.28 pts)

Long Call: 32.30 15.50

Short Call: 19.40 5.00

Spread at $10.50

Loss = $240*




RUT Down:

- What if youd acted in time?

- Is timing important with adjustments?

- Break-even points are good guidelines when a time spread is beginning to go bad!

Tips For Surviving A Down Market


Dans Tips:- Have a plan.

- Have contingent orders in at all times.

markets move too fast on the downside

- Be alert when market is up 4-6 months in a row.

usually not the time to get bullish

- Any time put credit spreads go under $0.20 take them off.


How to be aware snow storm has started?- Keep track of your stocks or indexes daily standard

deviations

When an underlying hits 2 to 3 standard deviation, move in a day.

- Have a glass of lemonade seek sidelines and safety


What happens in the options marketplace historically in October & November?

- Last big earnings period of the year- Will keep up October implied levels through

November

November & December?- Can experience market swings- Usually implied levels decrease until the end of year


What is the effect of Oct/Nov earnings and end-of-year implied volatility decrease on individual investors?

- Late December: good deals on January options?- Isnt January first big earnings period of the year?

1-888-OPTIONS www.888options.com

Dealing with a Down Market by Dan SheridanPresentation OutlineSurviving a Down MarketRUT Price Chart 1 YearRUT Price Chart DetailBefore We Move On Standard Deviation ReviewRUT Implied Volatility Chart 1 YearRUT Price Change vs. Implied VolatilityExampleRUT Aug/Sep 850 Call Time SpreadP&L Graph - August 2007 ExpirationRUT 850 Call Time SpreadA Plan Is Everything!P&L Graph - July 24, 2007P&L Graph - July 24, 2007P&L Graph - July 24, 2007Tips For Surviving A Down MarketTips For Surviving A Down MarketTips For Surviving A Down MarketTips For Surviving A Down Market

dealing with a down market

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