Cabot Investors Conference 2013 www.cabot.net Options Primer Jacob Mintz Analyst, Cabot Options Trader [email protected]
Jan 13, 2016
Cabot Investors Conference 2013 www.cabot.net
Options Primer
Jacob MintzAnalyst, Cabot Options
Trader
Cabot Investors Conference 2013 www.cabot.net
Options Primer
• Calls
• Puts
• Market Leverage
• Using Options to Create Yield
• Using Options to Protect Your Portfolio
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About Me• How did I become a trader?• My unlce “knew a guy”• Learned under two CBOE
legends• Became a Market Maker• Designated Primary Market
Maker on CBOE and Pcoast• Took my team off the trading
floor in 2010 • What I’m doing now
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Call Option
• A call option gives its holder the right to BUY 100 shares of the stock at the strike price, anytime prior to the options expiration date
• The seller of the option has the obligation to sell the shares
• Equity option contracts represent 100 shares of the underlying stock
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TSLA Call
• Buy 1 TSLA September 155 Call for $10
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TSLA Call• Symbol: TSLA
• Month of the Call’s Expiration: September
• Date of expiration: September 21, 2013
• Strike: 155
• Price: $10
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Premium• An option’s price
• The potential loss for the holder of an option is LIMITED to the initial premium paid for the contract
• On the other hand, the seller of the call has UNLIMITED potential loss, which is somewhat offset by the initial premium received
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How is the Price of the Call Determined?
VolatilitySupply and demand: If I want to buy this call, you will sell some at $10, then when you see I want more, you will raise the price to $10.05 You want more? Now the price is $10.10
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How is the Price of the Call Determined?
Likelihood the call will finish in-the-money due to time Generally, the longer the time remaining until an option’s expiration, the higher the premium—because the longer an option’s lifetime, the greater the possibility the underlying share price will move to make the option in-the-money
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Profit and Loss Graph
• Insert Graph hereTSLA Call at Expiration
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
140 145 150 155 160 165 170 175 180 185 190
Stock Price
Pro
fit a
nd L
oss
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Power of Options
• Instead of paying $ 15,500 to buy 100 shares of TSLA, you can pay $1000 for the opportunity to buy 100 shares at $150
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Order Flow Reading
Following a large order from a hedge fund or trading desk who may have more information
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Using Long-Term Options
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Put Option•A put option gives its holder
the right to SELL 100 shares of the stock at the strike price, at any time prior to the option’s expiration date
•The seller of the option has the obligation to buy the shares
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AAPL Put• Buy 1 AAPL September 450 Put
for $8
• Symbol: AAPL
• Month of the put’s expiration: September
• Date of expiration: September 21
• Strike: 450
• Price: $8
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How is Price of Put Determined?
• Volatility in puts is like a hurricane coming at your house: When the hurricane is coming, you want as much insurance as possible—so you buy protection (puts) in case the storm hits your home
• Likelihood of finishing in-the-money due to time
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Profit and Loss GraphAAPL Put at September Expiration
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
1400
430 435 440 445 450 455 460 465
Stock Price
Pro
fit
and
Lo
ss
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The Power of Options
• Unless you have special arrangements, brokers won’t let you short stocks without paying significant margin due to the risk
With options, you only have to pay $800 to have the ability to short 100 shares of AAPL
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The Flash Crash
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Creating Yield
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Covered Call Writing
• A Covered Call Write consists of buying or owning a stock and selling (i.e., shorting) a call option on that stock
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Facebook Covered Call
• Buy 100 Facebook at $38
• Sell 1 FB September 40 Call at $1.75
• Expires 9/21/2013
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FB Covered Call• You can write one Call on
each 100 shares of stock you own. Your short option position is “covered” by the stock. A short Call on stock in your account (a Covered Call) is a very conservative strategy and requires no margin.
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Profit and Loss GraphFacebook Covered Call at September Expiration
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45
Stock Price
Pro
ft an
d Lo
ss
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Net Yield CreatedStock at 38 we have created a
4.6% yield
Stock at 40 we have created a 9.8% yield
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Portfolio Protection
• Covered Call
• Put Purchase
• Risk Reversal
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SPY Covered Call • Buy 100 SPY at $170
• Sell 1 SPY September 172 at $2
• Expires 9/21/2013
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PNL GraphSPY Covered Call at September Expiration
-1000
-800
-600
-400
-200
0
200
400
600
160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180
Stock Price
Pro
fit a
nd L
oss
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SPY Put Purchase• Buy 100 SPY at 170
• Buy 1 SPY September 168 Put at 2.50
• Expires 9/21/2013
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PNL GraphSPY Put Position at September Expiration
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
700
800
160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180
Stock Price
Pro
fit
and
Lo
ss
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“It’s better to be lucky …
than good.”
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