March 27, 2019

Fidelity Webinar Series

Intricacies of Trading Options

Jermal Chandler, Instructor 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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Institutional Option Trading Flow • What Is It? • How Can You Tell? • Utilizing Trading Volatility • Basics • Underlying Stock Vol • HV Versus IV • Changes in IV Trading Event and Earnings Assignment and Exercise • American-style Options • European-style Options

Today’s Webinar Topics

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Pension funds, Mutual funds, Insurance companies, ETFs Pool together funds for Large block trades – typically set Limit price Referred to as “Smart Money” • May potentially have informed idea • Indicator of money flow • Possible precursor for direction, etc. Often trade options to hedge other positions May trade for pure speculation Pre-positioning in advance of news Has the ability to affect share price due to large volume

Institutional Flow – What Is It?

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Institutional Flow – How Can You Tell? So

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General Mills (GIS) – Mar. 19, 2019

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Compare trade size to average call/put volume Is there any related news? Examine trading in adjacent months Use open interest (OI) data in conjunction • Does volume exceed OI? Does large order affect implied volatility? Aggressiveness of the trade: Bid or offer Goal: Spot big players and use as a tool

Institutional Flow – Utilizing

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Volatility = Measure of the relative degrees of change Volatility should be viewed as a tool Periods of relatively high volatility and low volatility S&P 500® Index volatility - 30 year period • 17.4% annually • 5.0% monthly Volatility Drivers • Market: Geopolitical, Earnings, Central Banks • Equity names: Industry, Earnings, Balance sheet, CEO/Board Change is possible independent of stock/index move

Trading Volatility - Basics

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Historical Volatility (HV) • Actual volatility based over a defined past period • Measure of past changes in underlying Implied Volatility (IV) • Estimate of volatility based on market’s perception • Represents the current market price for volatility Snapshot of HV and IV provide a picture Multiple time periods of HV and IV – Be aware Volatility traders attempt to trade diff of HV and IV Buying options = Buying volatility; Selling options = Selling volatility

Trading Volatility – Underlying Stock Vol

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AAPL 30 day HV and 30 day IV comparison

Trading Volatility – HV Versus IV

Source: LiveVol Pro

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Long AAPL May 180 Straddle for $14.60; Implied vol is 24 Scenario 1: Stock trading 225 at expiration – Calls $45 ITM, Puts expire $0 Scenario 2: Stock trading 135 at expiration - Calls expire $0, Puts $45 ITM Scenario 3: Today’s date. No price change. IV now 28.8 - Volatility up 20%???

Trading Volatility – Change in IV

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Quarterly earnings provide peek into company progress Earnings events are somewhat binary Options month that captures earnings typically higher in IV IV generally increases as earnings grow near Trading options for earnings considerations: • Implied volatility collapse post-reporting • Potential Stock price move post-report Earnings often filled with uncertainty Other events much the same way • FDA events, conferences, analyst meetings, investor day • Build up in volatility with possibility of stock move

Trading Earnings and Events

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All optionable equity stocks and ETFs Holder has right to exercise at any time prior to expiration • Any option ITM by $0.01 is subject to auto-exercise* Long option owner has right if ITM • Can exercise and buy/sell underlying Short option holder has obligation if ITM • Most commonly leads to assignment Pay close attention to multi-leg strategies and spreads Dividends – stock will be lower by div amt. on ex-div date • Long calls – sell to close or exercise • Long puts – probably best to hold • Short calls and puts – Long holder will make decision

*Owner would have to specifically request not to exercise

Exercise and Assignment – American-style

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Can only be exercised at expiration CASH SETTLE - No shares exchange hand Last day to trade Thursday before 3rd Friday • Non-standard trades until 3pm (e.g. SPXW) Settlement value determined Friday morning Most index options are European • SPXSM – S&P 500 Index – broad based equities • RUTSM – Russell 2000 Index – small cap equities • Cboe VIX® – Volatility Index – equity market volatility • DJX – Dow Jones Industrial Average

• MSCI – Emerging Markets – global equities

Exercise and Assignment – European-style

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Recap – Intricacies of Trading Options

Institutional

Volatility

Earnings and Events

HV versus IV American

European

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

Fidelity Expert Options Analysis

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Next Webinar – April 23, 2019

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