Risk Disclosure

The following Risk Disclosure is intended to give you an overview of the risks of investing and trading. This Risk Disclosure is not intended to be a complete or guide to all of the risks involved in investing and in trading. However, it is extremely important that you carefully read and fully understand the Risk Disclosure.

Credit Spread Cheat Sheet, LLC (“CSCS”) is not a registered investment advisor. By providing this Risk Disclosure, CSCS is not advising you to invest in any security, soliciting your investment in any security, or offering any security for your purchase.

At this time CSCS primarily trades options on Indexes and or ETF’s, which are considered stock options and or equity cash products. Throughout the Risk Disclosure you may see reference to non-equity cash products, such as Stocks and Futures, as two examples. Such references are being included for the possible future expansion of CSCS, and also because some subscribers may choose to use our timing signals and alerts to trade other markets.

THIS DOCUMENT IS NOT INTENDED AS AND DOES NOT CONSTITUTE AN OFFER TO SELL ANY SECURITIES OR A SOLICITATION OF ANY OFFER TO PURCHASE ANY SECURITIES. THE TRADING STRATEGIES DEPICTED HEREIN HAVE NOT BEEN APPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION”), THE COMMODITY FUTURES TRADING COMMISSION (“CFTC”), THE NATIONAL FUTURES ASSOCIATION (“NFA”), OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS THE COMMISSION, THE CFTC, THE NFA OR ANY SUCH AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

GENERAL RISKS OF SECURITIES TRADING

Trading securities is always speculative and involves substantial risk that you will lose money. CSCS strongly encourages you to utilize the information available at the websites of the Financial Industry Regulatory Authority (“FINRA”) at http://www.finra.org/index.htm and the Securities and Exchange Commission at http://www.sec.gov prior to making any investment. FINRA provides information about careful investing while the SEC provides information about publicly traded companies. CSCS also encourages you to seek advice from your professional investment advisor and to thoroughly investigate each trade before acting on any information published by CSCS. While CSCS believes the sources of the information published by it are reliable, CSCS does not and cannot guarantee the information it publishes is complete or accurate. Any action that you take in reliance on information published by CSCS is at your own risk; CSCS does not guarantee or warrant the success of any such action.

1. Trading and Investing May Result in You Losing Money.

Risk is always involved in trading and investing in securities. Because of this risk, you should only trade or invest money that you can afford to lose. The amount that you can afford to lose is a personal matter to which you should give substantial consideration. As a general rule, you should risk no more than 10% of your liquid net worth; however, in some cases, risking even that amount may be unadvisable. For example, if 10% of your liquid net worth represents the entirety of your retirement savings, you should not risk that amount to trade securities. Again, the question of how much you can afford to risk is personal. If you are unsure of how much you can afford to invest, you should seek the advice from your personal investment advisor. When trading stock and stock options, there is always a high risk of loss; you can lose any and all money that you invest in securities.

2. Past Performance Does Not Guarantee Future Success.

Past performance is not necessarily indicative of future results. All investments carry risk of loss. You retain the sole responsibility for any and all trading decisions you make. No investment systems, trading signals, or indicators can guarantee that they will result in profits or that they will avoid losses. You should ensure that you fully understand all risks associated with any kind of trading or investing you choose to do.

CSCS’s newsletter went live on the internet in the Spring of 2015. While we have traded credit spreads for many years prior to starting the newsletter, in an effort for greater transparency, we only show the track record from when there was a live public audience to witness our trading activity first hand.

All of the historical data information contains information from actual trades traded with real money.

Trading securities like stock options can be extremely complicated, so make sure you understand these trades before entering into them. For example, aggressive positions in options have a greater probability of losing, while less aggressive positions are less likely to yield substantial profits. Similarly, far out-of-the-money options are unlikely to finish in the money, and options purchased close to their expiration dates are very high-risk and, thus, likely to win big or lose big very quickly. Do not enter any trade without fully understanding the worst-case scenarios of that trade.

3. CSCS is Solely a Publisher and Does Not Provide Personalized Trading or Investment Advice.

CSCS is a publisher of information. The information published by CSCS should not be construed as a recommendation that you should buy, sell, or hold, any security. CSCS cannot legally provide personalized investment and/or trading advice to you or any other subscriber. Do not contact CSCS seeking personalized investment and/or trading advice as CSCS cannot and will not provide such advice. CSCS also cannot discuss winning positions or personal trading or investing ideas with you. CSCS also cannot advise you on what to do if you make a bad investment or trade. If you choose to make investments and/or trades that you do not fully understand, CSCS cannot help you. In making any investment and/or trading decisions or in dealing with problems that might arise as a result of your decisions, you must rely solely upon your own knowledge and that of any professional investment advisor retained by you. No information published by CSCS should be viewed by you as advice that you engage in any particular course of action or that any particular course of action is advisable for you.

4. You Can Lose Your Profits.

In the event that you receive profits on your investments, you can lose those profits if you do not take them at the right time. The question of when you should take any profit is personal to your situation. While the information published by CSCS may contain suggested profit targets, you should take profits at whatever point you personally deem optimal. As with all other information provided by CSCS, you are free to either follow or ignore any profit targets published by CSCS. If you do not take the profit, there is always a risk that you will lose the profit. Regardless of any information provided by CSCS, you retain the sole discretion to determine when to take any profits. If you have questions regarding when it is most beneficial for you to take a profit, you should speak with your personal professional investment advisor.

RISKS OF STOCK OPTIONS TRADING

When you open a stock option account, you should receive a booklet entitled “Characteristics and Risks of Standardized Options,” which is also available on the Chicago Board Options Exchange website at http://www.cboe.com/Resources/Intro.aspx. This booklet contains an in-depth discussion of the characteristics and risks associated with stock options trading. CSCS strongly encourages you to carefully read and fully understand the information in the booklet before engaging in any stock options trading.

1. Assignment of Exercise to Writers.

As a writer of a stock option, you may be assigned an exercise at any time from the date of sale through approximately two days after the date of expiration. The consequences of being assigned an exercise depend upon whether the writer of a call is covered or uncovered, as discussed below. Since an option writer may not be informed of the assignment of exercise until up to two days after expiration, special risks can come into play. For example, an option writer who sells out their underlying position upon expiration may find out the next day that they have to surrender stock they do not now own.

2. Writers of Call Options Face Risk of Unlimited Losses.

If the value of the underlying stock moves unfavorably, a “naked” or uncovered writer of a call option is at a risk of loss that is theoretically unlimited. In options terminology, “naked” refers to strategies in which the underlying stock is not owned and options are written against this phantom stock position. The writer of a naked option also faces the risk of having to meet applicable margin requirements. Margin calls in these situations can be quite steep and result in substantial loss to the options writer. Additionally, because pricing of options tends to be magnified relative to the underlying stock, the naked writer may be at significantly greater risk of loss than a seller of the underlying stock.

3. Deep Out-of-the-Money Options Carry High Risk of Loss.

A “deep out of the money option” is an option with a strike price that is significantly above (for a call option) or below (for a put option) the market price of the underlying asset. Purchasing stock options at strike prices significantly above or below the market value of the underlying asset carries a high risk of losing your money. While these options may be attractive to you because they are relatively inexpensive, the chances of making a profit on such options are very low. You should not buy deep out of the money options unless you are fully aware of and understand all of the risks associated with such purchases.

4. Out-of-the-money Options Near Expiration Carry a High Risk of Loss.

Typically, the closer an out-of-the-money option is to its expiration date, the less likely it is be profitable. Again, while these options are relatively inexpensive, there is only an extremely small chance that they will be profitable. Therefore, if you purchase an out of the money option near its expiration date, you run a very high risk of losing your entire investment.

GENERAL RISKS OF FUTURES TRADING

A futures contract is a legally binding agreement between two parties to buy or sell in the future, on a designated exchange, a specific quantity of a commodity at a specific price. Futures contracts are standardized to facilitate trading on a futures exchange. The terms “futures contract” and “futures” may be used interchangeably. As discussed in more detail below, futures trading involves a high degree of risk and is unsuitable for many people. You should not enter into any futures transactions unless you fully understand all of the risks involved in the futures transaction, as well as the full the nature and extent of your rights and obligations under the futures contract. It is advisable that prior to entering into any futures contract, you have the contract reviewed by your attorney and/or professional investment advisor.

1. You May Lose More Than The Amount You Invested.

Futures carry the risk that you may lose more than the amount of capital you risked because of leverage. The term “leverage” has different meanings in different contexts but generally refers to techniques to multiply gains and losses. Futures trading is a highly leveraged form of speculation. This means that only a relatively small amount of money is required to control assets that have a much greater value. Your futures broker will require you to maintain a certain amount of money in your futures account. Because of the leverage of futures contracts, a small positive movement in the price of the commodity traded can have a large positive impact for the investor; however, a small negative movement in price the price of the commodity can have a large negative impact on the investor. Thus, the leverage of futures trading can work for you when prices move in the direction you anticipate or against you when prices move in the opposite direction.

Leverage may result in you losing all of the money in your futures account very quickly. Moreover, if your account balance falls below the minimum account balance amount required by your futures broker, you will receive a margin call. A margin call generally requires that you deposit further cash into your account to cover your potential losses. You may only have a short amount of time to deposit the cash and the amount of cash required can be substantial. If you cannot timely satisfy the margin call, the broker may liquidate your positions at a loss. If that happens, you will be personally liable for any remaining difference. You should also be aware that your futures broker may be allowed to liquidate your positions without waiting to see if you meet the margin call and may not be required to consult you before selling. The funds in your futures account may fall for reasons over which you have no control. There may be additional risks associated with the leverage of futures.

2. Stop Orders May Not Eliminate Your Trading Risk.

A stop order, also referred to as a stop-loss order, is an order, to buy or sell a particular stock or commodity when the stock or commodity reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A market order is an order to execute the specified trade at the best immediately obtainable price. Futures traders often use stop orders in an attempt to limit the amount of money they might lose.

However, there is no guarantee that the futures trader will be able to execute the order at the specified price. Market conditions may make it impossible to execute the order at the price specified. For example, prices may rise or decline so quickly that you effectively have no opportunity to sell your interest in the stock or commodity at your designated stop price. Generally, your future’s broker’s only obligation is to execute your market order at the best available price, which may be a worse price for you than the one specified in your order. Thus, while stop orders may be able to reduce your trading risk, they cannot eliminate your risk.

RISKS OF FUTURES OPTIONS TRADING

Buying or selling options, whether futures options or stock options, is unsuitable for many people. You should not engage in options trading unless you fully understand all of the risks, rights, and obligations associated with options trading. As with all trading, you should only use money that you can afford to lose.

An option on a commodity futures contract is a legally binding agreement which gives the buyer the right to exercise an option to purchase within a specific time period. In exchange for this option right, the buyer pays a market determined price called a premium. The buyer is not obligated to purchase but retains the right to purchase while the option is open. The grantor of the option cannot terminate the option until the option expires under the agreement of the parties.

1. Options on Futures Should Only be Sold if You Are Able to Meet Margin Calls and Survive Substantial Financial Losses.

You cannot purchase options on margin. As such, when you buy an option, you may lose the entire purchase price plus any commissions you paid, but not more than that. However, it may be required to deposit additional funds with your broker when you sell an option, if the price of the commodity moves adversely. Before selling options, you should ensure that you can meet margin calls if they arise and that you can survive the substantial financial losses that are a risk of selling options. As the option seller, you may also have difficulty finding buyers for the option you are selling; in that case, you remain subject to the full risk of the position until the options expire.

2. The Exercise of a Futures Option Will Result in a Futures Position.

If an option on a futures contract is exercised, it will result in the establishment of a futures position. The futures position carries with it all the risks of futures contracts. There are two types of options that a buyer might purchase – a call option and a put option. If you buy and exercise a call option, you will be assigned a long position in the underlying futures. If you buy and exercise a put option, you will be assigned a short position in the underlying futures. Additionally, some option contracts provide that the option may only be exercised for a limited period of time. Again, because options on commodity futures contracts are legally binding agreements, you should not enter them unless you are fully aware of and understand all of the terms and conditions of the contract.

3. Lack of Liquidity in the Futures or Options Market May Make it Impossible for You to Liquidate Your Position.

No exchange’s trading system can guarantee that a liquid offset market will exist on the exchange for any particular option, or at any particular time. For some options, there may not be any existing offset market on that exchange at all. Thus, for some options, it may be impossible to effect offsetting transactions. To realize any profit in such an event, the holder of the option will have to assume substantial risks and exercise the option. The risks of such action would include complying with margin calls and, in the case of a physical commodity, the costs of holding the physical goods. In sum, if you exercise your option you may then be unable to liquidate your resulting futures position as a result of lack of liquidity in the futures market.

4. Futures Options May Experience Unlimited Daily Price Fluctuation.

Another risk associated with futures options is that the options may not be subject to daily price fluctuation limits. This can be true even if the underlying futures position has daily price fluctuation limits. As a result, normal pricing relationships may not exist between options and the underlying futures. Additionally, if a futures position is assigned as a result of an option expiring, you may not be capable of offsetting the position if the underlying futures contract is at a price limit.

5. Additional Risks of Granting Futures Options.

There are other substantial risks associated with granting futures options. The grantor of an option may face a risk of loss that exceeds the premium the grantor received for the initial sale of the call option. The grantor of an option may also be subject to the risk of decline in price of the underlying futures, resulting in loss to the grantor. Granting options involves serious risk of loss. Before granting any options in futures contracts, you should discuss the grant with your attorney and/or professional investment advisor to ensure that you understand the risks and obligations associated with the grant.

RISKS OF INVESTING IN STOCK

As discussed above, all investments entail some degree of risk; investing in stock is no exception. Some of the general risks of investing in stock include:

1. The investment in stock may not be easily or quickly sold or converted to cash. There may also be penalties or fees charged to you for selling a stock.

2. If you invest in a publicly traded company, there is a risk that the company will not be successful. The risk is typically greater with companies that have little or no operating history but the risk is still present even with companies that have an operating history and extensive public information. There are additional risks associated with low-priced stock with a limited trading market, such as “penny stocks.”

3. Stock investments, including mutual funds, are not federally insured against a loss in market value.

4. Stock investments may be subject to actions by the company and/or third-parties that can affect the value of your ownership interest, such as tender offers, mergers, and reorganizations. When these actions occur, your action or failure to act can have detrimental effects on your investment. You should pay careful attention to public announcements and information sent to you about such transactions and be sure you fully understand the transactions before you act.

5. The value of stock investments can drop to zero. If this happens, you will lose your entire investment. You could also lose more than your entire investment if you engage in certain trading strategies such as what is known as “short selling” stock.

Conclusion

Once again, CSCS stresses the importance of understanding all of the risks of any form of trading or investing that you choose to do. This Risk Disclosure should not be construed as a complete statement of all the risks that you may face when trading or investing. You should speak with your professional investment advisor and conduct independent research regarding the risks of any particular transaction prior to trading or investing. You should fully understand the worst-case scenario prior to conducting and trading or investing activities. Past performance is not necessarily indicative of future results. You take full responsibility for all trading actions, and should make every effort to understand the risks involved.