What is Volatility? - Fidelity Investments Volatility Index, CFE and VIX are registered trademarks and CBOE Futures Exchange, CBOE Short -Term Volatility Index, CBOE 3-Month Volatility

What is Volatility?

September 12, 2017 @PeterLusk – CBOE Options Institute

Webinar Series for Fidelity Investments

815657.1.0

2 CBOE OPTIONS INSTITUTE

Disclosure Statement 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, Chicago Board Options 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, RVX, SPX, The Options Institute VXST, VXN, VXV and VXMT are service marks of Chicago Board Options Exchange, 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. Russell 2000® is a registered trademark of Russell Investments, used under license. The NASDAQ-100 Index®, NASDAQ-100®, and NASDAQ® are trademark or service marks of The NASDAQ Stock Market, Inc. (with which its affiliates are the "Corporations"). These marks are licensed for use by CBOE in connection with the trading of products based on the NASDAQ-100 Index. The products have not been passed on by the Corporations as to their legality or suitability. The products are not issued, endorsed, sold or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). CBOE is not affiliated with Interactive Brokers. 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 © 2017 CBOE. All rights reserved.


Average Monthly Value of VIX


Pricing Concepts

Intrinsic Value and Time Value

Intrinsic Value The amount that an option is in the money

Time Value

The portion of an option price that is above the intrinsic value


Pricing Concepts

Intrinsic Value and Time Value XYZ at 55.00 XYZ 50 Call at 8.00

Price of 50 Call 8.00

Stock Price 55.00

Strike Price 50.00

Intrinsic Value 5.00

Time Value 3.00

Intrinsic Value 5.00 Time Value 3.00

+ Market Value 8.00


• Only options have implied volatility • IV predicts a stocks future volatility

Volatility

Today

Historical Volatility

Implied Volatility

↑

Stock Price ↓


Effects of Changing Volatility

Change in Volatility Call

Prices Put

Prices Volatility ↑ ↑ ↑ Volatility ↓ ↓ ↓


Pricing Concepts

Vega

40 Call Price 1.25 Implied Volatility 20%

1.35 21%

1.15 19%

Implied Volatility up 1% Call price up 0.10

Vega = 0.10

Implied Volatility down 1% Call price down 0.10

Vega = 0.10


XYZ currently at $60.00 Volatility 25%

In one year’s time

• XYZ expected to trade between $45.00 & $75.00 (± 25%) • ≈ 68% of time (1 standard deviation) • therefore, only ≈ 32% outside this range

Volatility: Expected Variance in Stock Price


Converting the 1-year standard deviation:

Underlying Price × I.V. × √ Days to Exp √ Days per year

SPX Index Level 2,390.00 Days to Expiration 28 Implied Volatility 9%

2,390.00 × .09 × √ 28 √ 365

Calculating 1 Standard Deviation

≈ 60.00


The Option Greeks Delta - Impact of underlying price Gamma - Change in delta Vega - Impact of volatility Theta - Impact of time


Implied Volatility


Volatility Skew


Pricing Concepts

Option Price Components Six Option Pricing Factors

Price of Stock

Option Strike Price

Time Until Expiration

Interest Rates

Dividends

Implied Volatility


Options Calculator


Planning a Trade

Three-Part Forecast 1) What will the stock do? 2) How long will it take? 3) What about volatility?

Forecasts are the foundation of all option trades


Bull Call Spread Example

50 55

Max Loss

$170.00

Max Profit

$330.00

BEP $51.70

Break-even point lower strike + debit paid $50.00 + $1.70 = $51.70

Not including commissions

Long 50 Call 2.90 Short 55 Call 1.20 Net Debit 1.70

Stock Trading $50 30 days to expiration


Two Greeks Vega Theta Long 50 Call 2.90 +.10 −0.03 Short 55 Call 1.20 −.08 +0.02 Net Debit 1.70 +.02 -.01

Bull Call Spread


Long Straddle Example

Max Loss: $6.20 Debit Paid

$620.00 Total Break-even at Expiration: Upside = Strike + Debit Paid

$50.00 + $6.20 = $56.20 Downside = Strike – Debit Paid

$50.00 – $6.20 = $43.80 Max Profit: Unlimited

0

5

5

BEP $43.80

50 45 55

BEP $56.20

Not including commissions Long 50 ATM call $3.20 Long 50 ATM put $3.00 Net debit $6.20

Stock Trading $50 30 days to expiration


Two Greeks Vega Theta Long 50 Call 3.20 +.10 − 0.03 Long 50 Put 3.00 +.10 − 0.03 Net Debit 6.20 +.20 − .06

Long Straddle


Summary • Understand changes in implied volatility

• vega

• Know the factors that can impact volatility

• When establishing a position • know current implied level compared to past levels

• Expect the unexpected • implied levels can change abruptly and significantly

Thank you for attending! @PeterLusk

What is Volatility? - Fidelity Investments Volatility Index, CFE and VIX are registered trademarks and CBOE Futures Exchange, CBOE Short -Term Volatility Index, CBOE 3-Month Volatility

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