interactive brokers webcast short term trading …...short term trading with short dated options...

Short Term Trading With Short Dated Options August 21, 2013 Presented by Russell Rhoads, CFA – Senior Instructor

Interactive Brokers Webcast

CBOE OPTIONS INSTITUTE 2

Disclosure

CBOE 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, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at www.theocc.com. Any strategies discussed, including examples using actual securities, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. 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 stock and options 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. The information in this presentation is not intended and should not be construed to constitute investment advice or recommendations to purchase or sell securities. CBOE and Chicago Board Options Exchange are registered trademarks and The Options Institute and Execute Success are service marks of Chicago Board Options Exchange, Incorporated (CBOE). 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 © 2013 CBOE. All rights reserved


Short Term Trading

Outline

A Quick Look (review of) at Short Dated Options Directional Trade High Volatility Trade Low Volatility Trade Summary / Q&A


Short Dated Options

Overview

Introduced in 2005 on indexes then in 2010 on stocks and exchange traded products All markets with short dated options have a series available that will expire at the end of the week Some markets have serial options with expirations for five weeks in a row The popularity of these options (in terms of trading volume) has been tremendous Time decay characteristics has contributed to this growth in trading volume


Short Dated Options

Time Decay

IBM @ 200.00

30 Days 25 Days 20 Days 15 Days 10 Days 5 Days Expiration 195 Call 2.15 1.80 1.45 1.10 0.70 0.25 0.00 200 Call 4.25 3.85 3.40 3.00 2.40 1.70 0.00 205 Call 7.30 6.95 6.60 6.20 5.75 5.30 5.00

0.35 0.25


Short Dated Options

Time Decay

IBM @ 200.00


0.40 1.70


Short Dated Options

Time Decay

IBM @ 200.00


0.35 0.30


Short Dated Options

Time Decay

IBM @ 200.00

ATM – 200 Call

ITM – 195 Call OTM – 205 Call


Directional Trade

Introduction

An option spread may be traded to try to take advantage of a prevailing trend in a market or stock The strike prices used for a spread would be based on some sort of near term target The target may be fundamental or technical A credit spread is often a logical choice in this situation


Directional Trade

Bull Put Spread

DDD is trading at 32.50 on a Monday afternoon This places the stock price on a prevailing uptrend Extending this trend line out a few days results in a target price of 34.00


Directional Trade

Bull Put Spread

DDD @ 32.50

Source: Yahoo Finance


Directional Trade

Bull Put Spread

DDD @ 32.50

Option Bid Ask 4 Day 30 Put 0.10 0.15 4 Day 31 Put 0.30 0.35 4 Day 32 Put 0.65 0.70 4 Day 33 Put 1.30 1.35 4 Day 34 Put 1.85 1.90


Directional Trade

Bull Put Spread

DDD @ 32.50

Buy 1 DDD 4 Day 32 Put at 0.70 Sell 1 DDD 4 Day 34 Put at 1.85

Net Credit = 1.15

Spread Credit Max Loss Break Even 30 / 34 1.75 -2.25 32.25 31 / 34 1.50 -1.50 32.50 32 / 34 1.15 -0.85 32.85 33 / 34 0.50 -0.50 33.50


Directional Trade

Bull Put Spread

DDD @ 32.50


Directional Trade

Summary

An established trend may be traded on a short term basis with short dated options A credit spread with the short option strike price equal to a target price is a logical trading choice The defined risk and reward makes this an attractive trading choice


High Volatility Trade

Overview

Typically a trade that is attempting to take advantage of high volatility in a stock would be based on a pending event The most common and predictable event would be an earnings announcement The timing of these announcements is known well in advance The unknown is what sort of reaction will result in the stock after the earnings announcement



Straddle

A straddle is comprised of one long call and one long put Both options are on the same underlying stock, share a strike price, and have the same expiration date A drawback to buying a straddle in front of an earnings announcement is that there is usually elevated implied volatility After an earnings announcement the implied volatility of options will often contract



Straddle

FB @ 26.51




Straddle

FB @ 26.51 FB reports earnings on a Wednesday after the close The average FB move on earnings has been 9.3% The nearest dated option expiration is in two trading days With the stock at 26.51 the at the money straddle would utilize the 26.50 Call and Put

Buy 1 FB 2 Day 26.50 Call at 0.95 Buy 1 FB 2 Day 26.50 Put at 0.95

Net Cost = 1.90



Straddle

FB @ 26.51

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

23.50 26.50 29.50

-9.3% +9.3%

FB @ 26.51



Summary

Buying a straddle in front of an earnings report is an ‘expensive’ trade It can make sense if an outlook is for a stock to move more than what the market is expecting based on option prices In the FB example, the market was pricing in a lower than average reaction to earnings Be aware that, in addition to overcoming a price move in the underlying market, a drop in implied volatility will also dampen option premiums


Low Volatility Trade

Overview

In front of earnings announcements, option prices are often elevated due to high implied volatility Implied volatility may often reflect the most recent earnings announcement If the previous earnings period resulted in larger than average move, options may reflect this move



Iron Condor

There are several spread trades that may be used if a stock is expected to stay within a range of prices The iron condor is one of the better choices due to a range of maximum payout along with defined risk When trading around an earnings event having the potential risk defined by the spread is advisable



Iron Condor

IBM @ 194.55 IBM is set to report earnings on a Wednesday afternoon after the close There are options with two trading days left to expiration available for trading The average move for IBM is about 4% on earnings, the last quarter IBM moved over 8% after earnings



Iron Condor

IBM @ 194.55




Iron Condor

IBM @ 194.55

Buy 1 IBM 2 Day 185 Put at 1.05 Sell 1 IBM 2 Day 190 Put at 2.25 Sell 1 IBM 2 Day 200 Call at 1.75 Buy 1 IBM 2 Day 205 Call at 0.65

Net Credit = 2.30



Iron Condor

IBM @ 194.55

IBM @ 194.55



Iron Condor

Summary Forecast for less than average move out of IBM after earnings report Iron condor resulted in a payoff that matched this forecast Spread has defined risk and reward regardless of what occurs in IBM stock price post earnings


Short Term Trading

Summary

Short dated options have unique time decay characteristics Rapid time decay occurs for at the money options as they approach expiration Time decay of out of the money or in the money contracts may be minimal depending on other pricing factors A short dated option or spread with these options can work well with a short term forecast for a stock or index


Weeklys Options

Contact / Links

Me – Russell Rhoads [email protected]

Links

www.cboe.com/blogs www.cboe.com/weeklys

mailto:[email protected]

http://www.cboe.com/blogs

http://www.cboe.com/weeklys

interactive brokers webcast short term trading …...short term trading with short dated options...

Documents