Generating Income from Options - Fidelity Investments · 2020-02-19 · Income from Options . Jermal Chandler, Instructor . Cboe Global Markets . Options Institute . 2 . Disclaimer

May 23, 2019

Fidelity Webinar Series

Generating Income from Options Jermal Chandler, Instructor

Cboe Global Markets

Options Institute

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Disclaimer

Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker or from The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors and involves risk of loss. The information in this presentation is provided solely for general education and information purposes. No statement within this presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities or futures price data, are strictly for illustrative and educational purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Multiple leg strategies involve multiple commission charges. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation is available from Cboe upon request. Cboe Exchange, Cboe Volatility Index, CFE and VIX are registered trademarks and Cboe Futures Exchange, Cboe Short-Term Volatility Index, Cboe 3-Month Volatility Index, Cboe Mid-Term Volatility Index, Execute Success, SPX, The Options Institute VXST, VXV and VXMT are service marks of Cboe Global Markets, Incorporated (Cboe). S&P 500® is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by Cboe and Cboe Futures Exchange, LLC (CFE). Cboe's and CFE’s financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in such products. This presentation should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe product or service described in this presentation. Copyright © 2019 Cboe Global Markets. All rights reserved

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Disclaimer

The information provided in this communication is solely for educational purposes and should not be construed as advise or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with CBOE. There is no form of partnership, agency affiliation, or similar relationship between CBOE and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by the CBOE and does not guarantee or assume any responsibility for its accuracy or completeness.

Copyright © 2019 Cboe Global Markets. All rights reserved

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Option Selling Fundamentals Covered Call Cash Secured Puts Short Iron Condor Recap

Today’s Webinar Topics

Honoring All Those Who Served

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Option Seller Considerations*

If Assigned, Obligated to buy or sell the underlying instrument • Specified price (strike price) • Specified time (expiration date) Option seller receives premium for assuming this obligation Option selling is a positive theta trade • Time decay in seller’s favor Option selling is a negative vega trade • Volatility decrease is in sellers

favor *American Style Options

Option Selling Fundamentals

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Option Seller Considerations

One of THREE things can happen when a short option position is initiated: • Position may be exited through

buying it back • It may be assigned if a long

position is exercised (obligation) • It may expire if there is no value

(best case scenario)

Option Selling Fundamentals

Covered Call

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Long shares of stock combined with a short call option position • Trader sells (writes) one or more equity call contracts • Trader buys equivalent # of underlying shares • 1 short call for each 100 long shares

Neutral strategy; Expecting a minor increase/decrease in underlying stock Short call option (potentially) results in obligation to SELL underlying stock • At strike price; If assigned • For this obligation, the seller receives a premium

Covered Call

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Reasons to Use: • Collect cash income • Sell a stock holding above current price • Provide limited downside protection

–Lowers long stock break-even point When to Use: • When there is a neutral to moderately bullish outlook • Create a possible preset price to exit the underlying stock

Be Aware…… • Early assignement (related to dividend) could result in calls being

assigned prior to expiration

Covered Call

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Upside profit potential is limited • Strike price + call premium received – stock price paid • If assigned stock sold at strike price Break-even point • Stock price paid – call premium received

Downside loss potential is substantial • Downside risk is with stock • Short call option offers limited protection • Entire stock cost less call premium received is risk

Covered Call

Cash-Secured Puts

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Short put position and available cash to buy stock • Trader writes (sells) one or more ATM or OTM put option • Trader sets aside enough to purchase equivalent shares • 1 short put; cash on hand to purchase 100 shares MUST have capital in the account to cover assignment cost Short put option results in obligation to BUY underlying stock • At strike price; If assigned • For this obligation, the seller receives a premium

Cash-Secured Puts

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Reasons to Use • Profit from increase stock • Buying stock at discount When to Use • Slightly neutral-to-bullish forecast • Stagnant or rising stock; put declines

Be Aware…. • Early assignment – not a concern due to desire to purchase stock • Make sure cash is available

Cash-Secured Puts

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Upside profit potential is limited • Limited to premium received from selling put • If puts are assigned, potential profit is changed to a “long stock”

position Break-even point • Strike price – premium received

Downside loss potential is substantial • Substantial because stock can go to zero • Investor obligated to buy stock at strike price • Potential loss could/would be changed to “long stock” position

Cash-Secured Puts

Short Iron Condor

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Four-legged spread using two calls and two puts • Sell one call while buying another call with a higher strike • Sell one put while buying another put with a lower strike • Typically, call strikes are above and put strikes are below current

underlying level • Distance between call strikes (usually) equals distance between put

strikes Alternatively can be thought of as OTM Bull put spread and OTM Bear call spread. The further OTM call/put options (the wings) are both long positions • Serve as protection for significant upside/downside moves

Short Iron Condor

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Reasons to Use • Profit from low volatility in underlying • Take in a larger premium will limiting loss

When to Use • Anticipating minimal stock movement • Neutral; moderately bullish; moderately bearish • Index Options*

Be Aware….. • Trader might wish to setup trade such that strikes B & C are one

standard deviation or more away from underlying price at initiation *Index Options are European Style (Cash Settled) thus no delivery of shares

Short Iron Condor

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Max Profit: Ideally all options expire worthless, i.e. Underlying closes between Strikes B & C Max Loss: The wings (Strikes A & D) protect against significant moves in either direction • Stock is BELOW lowest put strike – both PUTS are ITM and calls

expire worthless • Stock is ABOVE highest call strike – both calls are ITM and puts

expire worthless Break-even point (two points) • Downside: Strike B (short put) minus the net credit received • Upside: Strike C (short call) plus the net credit received

Short Iron Condor

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Option Seller Considerations Covered Call Cash Secured Puts Short Iron Condor

Recap – Generating Income from Options

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Options Institute provides write-ups on Options Trades: News & Research < Options < Trading Ideas < Expert Option Analysis

Expert Options Analysis

Images are for illustrative purposes only.

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Next Webinar – June 11

Images are for illustrative purposes only.