A Week in Review - Safe Option Strategies...allow the options to expire worthless and the total credit could be booked as profit at Feb15 Monthly options expiration. As is our policy

The Signal

The Safe Option Strategy

Facebook, Inc.. (FB) Bear Call Spread

The Safe Option Strategy

STO Feb15 $77.50 Strike Calls - $0.84Credit (monthly options expiring on 02/20/15) BTO Feb15 $80.00 Strike Calls - $0.35 Debit (monthly options expiring on 02/20/15) Total Credit $0.50 Per Share Max Risk is $2.00 Per share (the difference between the strike prices minus the net credit). Target ROR is 20% Max ROR is 25% Target time in trade is < 18 days

Trade Explanation of the Bear Call Spread

Click on the link above to see the definition of the spread trade.

The Signal

The best weekly

newsletter for the

serious options trader.

February 2, 2015

By Safe Option Strategies www.safeoptionstrategies.com

http://www.safeoptionstrategies.com/

Safe Option Strategies LLC. does not advise any buying or selling of any securities nor any derivatives thereof. The information contained in this newsletter is for educational purposes only. Trading securities and options can generate substantial profits and losses. No advice is ever given to buy or sell and any trading with real money is done at the subscribers own potential risk.2

The Signal Company Profile

Brief: Facebook Inc. is a social networking website, which builds products that creates utility for users, developers and advertisers.

Revenue

SNDK's 1 year revenue growth is 10.64% lower than the industry average, which means the company is growing significantly slower than its peers. Compare SNDK's revenue growth to earnings growth to see if earnings are also lagging behind the industry average.

Net Income

SNDK's 1 year earnings growth is 24.49% lower than the industry average, which may indicate that the company has rising costs, decreased sales, or both. Compare the cost of goods, cost of sales, marketing, interest payments and other line item expenses on SNDK's past income statements to see if costs are rising as a percentage of sales.

Cash Flow

SNDK's 1 year cash flow growth is 17.88% lower than the industry average. Compare SNDK's cash flow growth to earnings and revenue growth to understand why SNDK's cash flow growth is lagging behind that of its competitors.

Total Debt/Equity

FB's total debt/equity ratio is 0.01 higher than the industry average, which means the company may be paying more in interest than its competitors. Take FB's total debt/equity figure and subtract its long-term debt/equity figure to see how much of FB's debt is due in the next 12 months. Also look at how FB's total debt/equity ratio has changed over time.

LT Debt/Equity

FB's long-term debt/equity ratio is 0.10 higher than the industry average, which means the company may be paying more in interest than its competitors. Look at FB's balance sheet and compare both its long- and short-term debt to its competitors'. Also look at how the long-term debt/equity ratio has changed over time.


The Signal Company Technical’s

Summary

Facebook reported good numbers last week, but there is continued concern over the CEO’s spending. The stock is all technically bearish, and continued to slide today. We are playing the most recent level of resistance, and will exit this trade quickly if we can get a 5-10% ROR in a week. The trade will expire in less than three weeks if left alone, and if the stock price finishes under $77.50.


The Signal

The Primary Exit Plan

A stagnant to bearish or even very slight bullish (provided the stock does not go above $77.50 per share) will

allow the options to expire worthless and the total credit could be booked as profit at Feb15 Monthly options

expiration. As is our policy and methodology with credit spreads we will close the trade if with more than a

couple weeks left to option expiration we can capture 50% or more of the sought after credit in the trade. We

are opening the trade for a credit of approximately $0.50 per share. If we can close it for $0.25 or less

(meaning we can buy it back to close for less than half of what we were paid to open it) in the next week or

two, we will do so.

Adjustment for Bullish Trend

It the price of the stock turns bullish and moves above $77.50 per share there are three different ways to

adjust: 1 – Look to close the trade at the theoretical breakeven of $78.00 per share. It is likely that doing this

would create a small loss, but probably not much more than our commissions. 2 – We could buy stock at

$77.50 per share, or as close as we could pick up shares to that price, to cover our short call and profit from

the credit in the trade as well as any premium that we can sell to close the long call for. If this happens, we

will only own shares for a short time. 3 – We can roll the entire trade out to a farther expiration and up in

strikes. This is a tricky adjustment so we will detail it if it becomes necessary to go this route.


The Signal

Trade Updates

CVX Call Ratio Back Spread (01/26) – We opened this trade on the morning of the 27th. On the morning of the 29th, we closed the trade for 15% ROR. What a great two-day trade. BA Call Ratio Back Spread (01/20) – We exited this trade with 18% ROR on 1/29. Barely over one week in the trade, and it produced nicely. SNDK Bear Put Calendar (01/12) – We are going to close SNDK at the open tomorrow. Our profit will not be great, but it will be profit. We should get out with about $0.20/share profit. The trade cost us $3.75/share to enter, so the profit will be about 5%. COST Bear Call (01/05) – The stock price is testing resistance again, but we are not in trouble, so we are going to sit tight. If we get closer to $145 (the strike of our short call) we will close or adjust the trade. Remember, our theoretical breakeven is $145.75, and we are still nearly $2.50/share below that price. APPL Bull Call (12/22) – Apple had a very strong move up following an earnings call that reported the biggest one-quarter profit of any company…ever! During the days following, we made two adjustments. We rolled the short calls out and up from JanWk5 $111 strike to Feb15 $114 strikes. We also added short puts at the Feb14 $115 strike. There are no additional adjustments to make today, but we will look to roll our bull put portion of this trade up, if the stock price breaks $120. CAT Bull Call Calendar (11/24) – The stock moved down sharply following a sub-par earnings report. At the open tomorrow we will chase the stock price down. We are going start by selling to close our Feb15 $95 strike long calls, and buying to open the Feb15 $85 long calls. This will add a $0.29/share debit to our trade.


The Signal After this, we will buy to close our Feb15 $90 strike short calls, and sell to open the Feb15 $81 strike short calls. This will bring in about $1.44/share credit to the trade.

The net result of this roll down is that we will bring in an additional $1.15/share to our trade. If these options expire worthless, we will be slightly profitable in the trade. If the stock price continues down, we will try once more to roll our options down in a similar fashion to this adjustment. RHT Bear Put Calendar (10/20) – RHT had a strong drop on Friday, but ended the day very close to the $64 support level we have been watching closely. We chose not to adjust at today’s open because we were still watching that support level to see if it could hold. The stock traded down for most of the day, and then rallied back above $64/share by the close. No change today. We will see if $64 can hold. FSLR Iron Condor (6/30) – Everything has crossed over on FSLR now. This means it is time to add shares. With earnings only three weeks away, it also means that in about a week and a half, we will be re-collaring our trade. At the open tomorrow, we will sell to close our open long puts. We should get about $2.60/share for these long puts. We will then take our total money in from our last set of long puts, and add it to this $2.60 (we took in $25.20 on those long puts, so we are looking at $27.80/share to reinvest). With all our long put money in, we will buy as many shares of FSLR as we can, in even increments of 100 shares. For example, if we had started with 300 shares, our combined long put money in would be $8340.00 ($27.80/share X 300 shares). At the current price of $45.48/share, we could buy 183 shares. Since we are trying to stay in increments of 100, we could then add $773 to our trade such that we could round up to 200 even shares, or we could buy 100 shares and have $3774 profit left unspent on the side. Since this is a first collar trade adjustment for some of our students, we have recorded a short video with a more detailed explanation at http://youtu.be/UiXYqbE6QS0 GRMN Put Calendar (5/12) – We are just waiting for GRMN to report in two weeks. Still no need to adjust this trade right now.

http://youtu.be/UiXYqbE6QS0

The Signal

Watch for the Signals

Signals to Watch for in the Upcoming Week

and Why. Economic Reports

Feb 02 Personal Income Dec

Feb 02 Personal Spending Dec

Feb 02 PCE Prices - Core Dec

Feb 02 ISM Index Jan

Feb 02 Construction Spending Dec

Feb 03 Factory Orders Dec

Feb 03 Auto Sales Jan

Feb 03 Truck Sales Jan

Feb 04 MBA Mortgage Index 01/31

Feb 04 ADP Employment Change Jan

Feb 04 ISM Services Jan

Feb 04 Crude Inventories 01/31

Feb 05 Challenger Job Cuts Jan

Feb 05 Initial Claims 01/31

Feb 05 Continuing Claims 01/24

Feb 05 Trade Balance Dec

Feb 05 Productivity-Prel Q4

Feb 05 Unit Labor Costs Q4

Feb 05 Natural Gas Inventories 01/31

Feb 06 Nonfarm Payrolls Jan

Feb 06 Nonfarm Private Payrolls Jan

Feb 06 Unemployment Rate Jan

Feb 06 Hourly Earnings Jan

Feb 06 Average Workweek Jan

Feb 06 Consumer Credit Dec

Watch the Reports

Personal Income and Spending

Highlights

Personal income increased 0.3% for a second consecutive month in December following a negative revision (from 0.4%) in November. The Briefing.com Consensus expected personal income to increase 0.3%. Personal spending declined 0.3% in December after increasing a downwardly revised 0.5% (from 0.6%) in November. The consensus expected personal spending to decrease 0.3%.

Key Factors

The personal income and spending data were already incorporated in the advance Q4 GDP report that was released last week. The only new information was how revisions to October or November data would impact the December monthly numbers. Wages and salaries increased 0.1% in December after increasing 0.6% in November. The December income gain was in-line with the December employment report, which showed virtually flat wage growth. On the spending side, goods spending decreased 1.3% as both durable (-1.2%) and nondurable (-1.3%) demand fell by nearly equal rates. Services spending increased 0.1%. The personal savings rate increased to 4.9% in December from 4.3% in November. That was the largest personal savings rate since reaching 5.0% in July 2014.

Big Picture

Core PCE prices increased by only 1.3% y/y in December. That is 0.7% below the FOMC target rate and falling.


The Signal ISM Index

Highlights

The ISM Index for December checked in at 55.5, down 3.2 percentage points from the high 58.7 reading in November. The December reading marked the 19th consecutive month of expansion; however, it was weaker than the Briefing.com consensus estimate, which was pegged at 57.5.

Key Factors

The pullback in December was driven by the new orders and production indexes. The former fell to 57.3 from 66.0 while the latter dropped to 58.8 from 64.4. The employment index increased to 56.8 from 54.9 while the prices index fell to 38.5 from 44.5, reflecting the impact of lower raw materials prices. The inventories index slipped into contraction with a 45.5 reading that was down six percentage points from November. The backlog of orders and export indexes both fell to 52.5 from 55.0. The import index was down one percentage point to 55.0.

Big Picture

A number above 50 denotes expansion, so the pullback in December doesn't connote weakness so much as it connotes the manufacturing sector cooling down from a very hot November.

Construction Spending

Highlights

Construction spending in November declined 0.3% from October, which was revised up to show an increase of 1.2% versus 1.1% previously. The November reading was below the Briefing.com consensus estimate, which called for a 0.1% increase.

Key Factors

The drop in construction in November was rooted in public construction spending, which declined 1.7% to a

seasonally adjusted annual rate of $277.3 billion. A 2.5% pullback in educational construction spending was a key drag on public construction spending. Total private construction spending increased 0.3%, bolstered by a 0.9% increase in residential construction to a seasonally adjusted annual rate of $352.7 billion. Nonresidential construction spending, however, declined 0.3% on the back of declines in office (-1.7%), commercial (-1.9%), health care (-4.4%), and educational (-2.0%) spending.

Big Picture

The value of construction put in place factors into GDP computations.

Factory Orders

Highlights

Factory orders declined 0.7% in November. That was worse than the Briefing.com consensus estimate, which called for a 0.4% decline. There was no revision to factory orders for October, which also declined 0.7%.

Key Factors

Orders for durable goods declined 0.9%, which was more than a previously reported 0.7% decline. Nondurable goods orders, meanwhile, declined 0.5%. Excluding transportation, orders declined 0.6% versus a previously reported 0.4% decline. Shipments, which factor into GDP growth, declined 0.6% in November on top of a 0.9% decline in October.

Big Picture

November marked the fourth straight month of declines in factory orders.


The Signal Light Vehicle Sales

Highlights Motor vehicle sales remained elevated, but dipped slightly in December. Total sales fell to 16.9 mln SAAR from 17.2 mln SAAR in November. Domestic sales fell to 13.6 mln SAAR in December from 14.0 mln in November. Car sales dropped to 5.9 mln SAAR from 6.1 mln SAAR and truck sales fell to 7.7 mln SAAR from 7.9 mln SAAR. Total import sales were virtually unchanged at 3.4 mln SAAR.

Key Factors

Year-over-year, motor vehicle sales increased 11% in December.General Motors (GM) and Fiat Chrysler (FCAU) led the way with sales growth near 20% y/y. Toyota (TM, +14%) and Hyundai-Kia (+14%) also gained market share. Sales at Nissan rose 7%, and demand for vehicles from Honda (HMC) increased 1%. Ford (F) continued to disappoint. Sales rose a very modest 1% in December and are down 1% for all of 2014. Volkswagen (-2%) was the only other major motor vehicle manufacturer to see sales fall in 2014. Overall, sales increased 6% in 2014, from 15.6 mln vehicles in 2013 to 16.5 mln vehicles.

Big Picture

Not only did sales in 2014 easily top the consensus forecast of 16.2 mln vehicles from January, but it was stronger than our most optimistic forecaster within the consensus.

ISM Services

Highlights

The ISM Services Index for November registered a reading of 56.2 for December. That was 3.1 percentage points lower than the November reading and short of the

Briefing.com consensus estimate, which was pegged at 58.5.

Key Factors

The dip in December was driven by a pullback in all index categories. Notably, the New Orders Index dipped to 58.9 from 61.4; the Employment Index slipped to 56.0 from 56.7; and the New Export Orders Index dropped to 53.5 from 57.0. Two indexes fell into contraction, namely the Backlog of Orders Index (to 49.5 from 55.5) and the Prices Index (to 49.5 from 54.4).

Big Picture

A number above 50 denotes expansion, so it can be said that the services sector is still doing well; it's just expanding at a slower pace than seen in November.

Initial and Continuing Claims

Highlights The initial claims level dropped to 265,000 for the week ending January 24 from an upwardly revised 308,000 (from 307,000) for the week ending January 17. The Briefing.com Consensus expected the initial claims level to fall to 301,000. The continuing claims level declined to 2.385 mln for the week ending January 17 from an upwardly revised 2.456 mln (from 2.443 mln) for the week ending January 10. The consensus expected the continuing claims level to drop to 2.429 mln.

Key Factors

Not only did the drop break three consecutive weeks above 300,000, but the initial claims level fell to its lowest level since April 2000. As it has for the past several months, the DOL reported that there were no special factors impacting the initial claims level.


The Signal It is still unknown why the initial claims level suddenly and unexpectedly jumped above 300,000. There were reports that low oil prices were causing increased layoffs in the energy sector, but the state-specific data do not support this. For example, even though the national aggregate initial claims level was still above 300,000 for the week ending January 17, big energy producing states such as Texas and North Dakota reported that their specific initial claims levels declined by more than 1,000.

Big Picture

The initial claims level supports monthly payroll growth above 200,000.

Trade Balance

Highlights The U.S. trade deficit declined to $39.0 bln in November from a downwardly revised $42.2 bln (from $43.4 bln) in October. The Briefing.com consensus expected the trade deficit to fall to $41.8 bln.

Key Factors

That was the smallest trade deficit since December 2013 (-$37.4 bln). As expected, the weakness in oil prices had a contractionary effect on the trade deficit. Even though U.S. petroleum producers have increased their exports of petroleum-based products over the last few years, the U.S. is still a net importer of crude products. The fall in oil prices had a larger impact in lowering total imports than reducing exports, which led to the smaller trade deficit in November. The goods deficit fell by $3.3 bln to $58.3 in November from $61.6 bln in October. The services surplus declined to $19.3 bln from $19.4 bln. Export levels slid by $2.0 bln in November to $196.4 bln. Half of the decline in exports was a result of a reversal in civilian aircraft sales (-$1.1 bln). Declines in autos (-$0.5 bln) and consumer goods (-$0.5 bln) rounded out the rest of the pullback.

Imports declined by $5.2 bln in November to $235.4 bln. Imports of industrial supplies fell by $4.6 bln, which included a $2.9 drop in crude and fuel oil. Capital goods imports declined by $0.8 bln. Consumer goods imports increased by $1.6 bln in November. Most of the gain came from a $1.8 bln increase in cell phone sale, likely the result of the latest Apple (AAPL) iPad release. The petroleum-based net export deficit fell to $11.4 bln in November from $15.2 bln in October.

Big Picture

Lower oil prices played a large role in reducing import demand in November.

Productivity and Unit Labor Costs

Highlights Nonfarm business productivity was revised up to 2.3% in Q3 2014 from an originally reported 2.0% gain. The Briefing.com consensus expected productivity to be revised to 2.4%.

Key Factors

Productivity growth is still down from a 2.9% increase in Q2 2014.As expected from the upward revision to Q3 2014 GDP, output was revised up to 4.9% in the third quarter from 4.4% in the advance release. Hours worked were also revised higher, but at a smaller rate (2.5% from 2.3%). The bigger gain in output compared to hours worked resulted in the increase in productivity. Unit labor costs were revised down and now show a 1.0% decline in the third quarter after initially showing a small 0.3% increase in costs. That marks the second consecutive quarterly decline in unit labor costs. The consensus expected flat unit labor costs for the quarter. Hourly compensation was revised down and increased 1.3% instead of the 2.3% increase reported in the advance release. The downward revision was in-line with the weak income reports in the third quarter GDP data.


The Signal Big Picture

Productivity gains help keep cost-push inflation pressures from rising wages in check. Over the long term, it is productivity gains that provide the increase in output that have led to the consistent gains in living standards in free market economies.

Nonfarm and Unemployment Payroll

Highlights Nonfarm payrolls increased by 252,000 in December after adding an upwardly revised 353,000 (from 321,000) in November. The Briefing.com Consensus expected nonfarm payrolls to increase by 245,000. The unemployment rate fell to 5.6% in December from 5.8% in November. The consensus expected the unemployment rate to fall to 5.7%.

Key Factors

At first blush, the employment report seemingly looks positive. Payrolls exceeded expectations and upward revisions to previous months showcase a strengthening labor market. Yet, those numbers are actually masking what we would determine as a decidedly weak report. The key is wage growth. With strong payroll growth and a downward-moving unemployment rate, the labor market would seem to be gather strength. But the average hourly wages in December actually contracted, falling 0.2% after increasing a downwardly revised 0.2% (from 0.4%) in November. For all of those increases in payrolls, the decrease in wages resulted in no change in aggregate income in December. Unfortunately, without aggregate income gains, consumption growth cannot accelerate, inflation trends will remain subpar, and the overall economy cannot improve.

Furthermore, the unemployment rate - which the headline decline suggests was another improvement in labor market conditions – was mostly caused by a large decline in the labor force. If the participation rate remained at November levels, the unemployment rate would have been virtually unchanged at 5.8%.

Big Picture

Lackluster income trends will cap potential consumption growth and keep the overall economy from significantly improving.

Consumer Credit

Highlights Consumer credit increased by $14.1 bln in November, down from an upwardly revised $16.0 bln (from $13.2 bln) increase in October. The Briefing.com Consensus expected consumer credit to increase by $15.0 bln.

Key Factors

For the last 12 months, consumer credit has increased by at least $10.0 bln per month. Typically, consumer credit goes through substantial revisions before the final numbers are released. Any future revision is unlikely to alter the current growth trend. Revolving credit declined by $0.9 bln in November, from $883.1 bln in October to $882.1 bln. Nonrevolving credit increased to $2415.8 bln in November from $2400.8 bln in October, a gain of $15.0 bln.

Big Picture

Consumer credit has increased by an average of $18.2 bln per month in 2014.


The Signal

The Watch List

Symbol Earnings AAPL 4/21 ADBE 3/17 BA 4/21 BBY 3/3 BIDU 2/11 CAT 4/22 COST 3/5 CVX 4/30 DE 2/20 DIS 2/3 EBAY 4/27 F 4/23 FB 4/21 FSLR 2/23 GRMN 2/18 HD 2/24 MON 4/1 NFLX 4/20 NKE 3/18 P 2/5 RHT 3/25 SBUX 4/23 SNDK 4/14 SWHC 3/3 TSLA 2/11 TM 5/6 UA 2/4 V 4/22 XOM 2/2


The Signal The Bear Call Spread

A credit spread, the bear call uses a short call (usually in the current month or week of expiration, or very close) which is out

of the money (OTM) and above recent or long-term resistance, as the primary money making option. A long call is then

added to the trade one or two strike prices higher and in the same month or week of expiration, as the protective option. The

object of the trade is to see both options lose value as a result of a bearish trend, time decay, or both. The result should be an

overall decrease in the credit of the trade, allowing us to buy it back for less than what we were paid, or to simply let it

expire worthless. Bear call spreads take advantage of any stagnant to bearish trend, as long as the stock price stays below

the strike price of the short call long enough for the trade to become profitable. While a bear call can be a great cash flow

strategy, it can also be a difficult trade to adjust. Pay special attention to the adjustment strategy, and to your cash balance of

your portfolio relative to the price of the underlying stock and the number of share in your trade.

Documents

A Week in Review - Safe Option Strategies...allow the options to expire worthless and the total credit could be booked as profit at Feb15 Monthly options expiration. As is our policy