International Securities Exchange

1. International Securities Exchange

2. Stock Repair StrategyAlex JacobsonISE Education

3. For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy. Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS. Copies have been provided for you today and may be obtained from your broker, one of the exchanges or The Options Clearing Corporation. A prospectus, which discusses the role of The Options Clearing Corporation, is also available, without charge, upon request at 1-888-OPTIONS or www.888options.com. Any strategies discussed, including examples using actual securities price data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities.

4. www.iseoptions.com • Free volatility data on all ISE listed options • Updates on ISE broad market index products • Updates on ISE sector options • education@iseoptions.com • Webinars archived Education tab

5. Bullish Stock Investor Long Stock One Strategy: buy stock

6. Original stock position

7. Stock Repair • What do you do when you have a “broken” stock?

8. Risk/Return • Risk and return are inherently linked • Each investor must weigh their own investment goals and their own risk tolerances

9. Can I get even? • Depending on how far the stock has dropped, getting even might not be possible in the short term • Getting “even” may not be the only consideration, but how far the stock could move up or down in the future

10. An example of a 1 by 2 call spread • Stock trading at $27.11 (down from purchase price of $32.11) buy 54 day 27.5 call ($1.20) and sell two ($.50) 54 day 30 calls for a .20 debit (cost) • Finance the purchase of 27.5c with the sale of two 30c • Components can be viewed as bull call spread 27.5-30 and a 30 strike covered write with the previously purchased stock

11. What is my goal for this strategy? • The goal is to take advantage of theta, the amount an option depreciates per day • By selling two out of the money options in the same expiration month as the call purchased, an investor hopes to benefit from a slight increase in stock price

12. Longs and shorts equal • Due to the long stock and the long call option the two out of the money options are covered and no short option margin requirements are normally necessary • For every $1 move up between 27.5 and 30 you will make $2 • One drawback- your upside profits are capped to the strike price sold

13. What is my additional cost? • The cost of the debit, in this case $.20 • The cost of the trade is balanced against rights and obligations from the two strike prices • Can I ever do these 1 by 2 call spreads for credits? Depends on volatility…

14. New position • Long one hundred shares, long one 27.5 call and short two 30 calls

15. Economics of 1 by 2 Current Worse Case Unchanged Best case with spread -5.00 Long 100 -5.20 2.5-.20-2.11= .19

16. Rights and Obligations

17. Decisions, decisions • Average down- Can be very dangerous if stock continues to fall • Do nothing- Hope stock rebounds, somewhat dangerous if stock continues to fall • Accept loss and move on- May be advisable in certain situations; also named “stop loss” strategy. If you believe the stock will drop further this is the preferred strategy • Try to repair position with 1 by 2 ratio spread if you are moderately bullish

18. Risk/Reward

19. 1 by 2 call reward benefit? • Advantage- Lowers your breakeven point which may enable you to recover most of your original investment • Disadvantage- Cap your selling price at a lower price

20. 1 by 2 ratio spread • Goal is designed to help you repair your losing stock position • Forecast: Stock can possibly recover a bit but may not recover back to your stock purchase price

21. Depends on your stock forecast • If you are willing to hold your original stock you can try to “repair” the position by purchasing a ratio call spread • Normally the goal for the spread is little or no cost, the two options sold pay for the lower strike bought

22. Summary • The 1 by 2 call spread generally works best in a neutral to a moderately bullish market with stable to declining volatilities • To reiterate, this strategy allows an option investor be “double long” in between the strike price bought and sold • The upside profits are capped though to the strike price sold

23. How do I decide if this strategy is for me? • Volatility is key • If your forecast is for the stock to be much higher or much lower, then an alternative strategy should be examined • This strategy benefits from time decay from the options sold

24. Scenarios • Best case scenario is for the stock to finish expiration at the strike price sold • If your stock forecast is above the strike price, given the expiration limitations, another strategy may be superior • If the stock continues to drop you are no worse off except for the slight debit for the spread • If you believe the stock will continue to drop you may want to utilize a “stop loss” order for your stock

25. Caution • Just remember the market does not care what price you paid for the stock • All option strategies work, but they do not work all the time • Risk and reward are inherently linked • Trade within yourself based on your own investment goals and your own risk tolerances

26. www.iseoptions.com • Free volatility data on all ISE-listed options • Updates on ISE broad market index products • Updates on ISE sector index options • New webinar options topics each month

27. International Securities Exchange