joe burgoyne director, options industry council options ... · stock and options transactions and...
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Joe Burgoyne Director, Options Industry Council
www.OptionsEducation.org
Options Strategies for Big Stock Moves
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Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, available by visiting OptionsEducation.org. To obtain a copy, contact your broker or The Options Industry Council at 125 S. Franklin St., Suite 1200, Chicago, IL 60606. In order to simplify the computations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Copyright © 2018. The Options Industry Council. All rights reserved.
Disclaimer
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5 Annual Options Volume 1973-2017
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73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
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OCC Annual Contract Volume by Contract Type
Equity Non-Equity
6 Presentation Outline
Delta Risks:
Vertical Spreads
Volatility Risks:
Strangle
Q&A
Considering Different Strategies
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Joe Burgoyne Director, Options Industry Council
www.OptionsEducation.org
The Right Strategy is Key
8 Two Key Questions
Motivation? • Income • Risk Protection • Stock Acquisition
Outlook? • Bullish/Bearish/Neutral • Increase/Decrease in
Implied Volatility • Short/Long-term • Event Horizon
10 A Spread Transaction
A spread involves two or more positions:
Buy or sell one option and buy or sell an option, stock or other product
• Usually the same underlying • Usually the same expiration dates
• Usually different strike prices
Different types of spreads: • Vertical Spreads • Horizontal (Time) Spreads • Diagonal Spreads
11 Vertical Spreads
Buy one option and sell another option
• Same underlying • Same expiration dates • Different strike prices
12 Two Types of Vertical Spreads
• Debit Spread (calls & puts) • You pay to initiate the position
• Credit Spread (calls & puts)
• You receive cash (or a credit) to initiate the position
• Defined risk in both spreads
13
Nov Calls
85 90
Jan Calls
80 90
Long Vertical Spreads • All calls or all puts • Same expiration • Different strikes
Nov 85/90 call spread
Jan 80/90 call spread
• Also known as bull call spread • Long leg has lower strike (more expensive) than short leg • Seeking price appreciation • Maximum value = difference in strikes • Maximum risk = debit paid for spread
Spread Basics Vertical
14 Bull Call Spread Example
XYZ @ $90 28 Days to Expiration
• Buy 1 28-day 90 Call $ 2.05 • Sell 1 28-day 95 Call $ 0.70 Net Debit $ 1.35
This is a Bull Call spread
Excludes transaction costs
15 Bull Call Spread Example
XYZ @ $90 28 Days to Expiration Buy the 90 – 95 bull call spread for $1.35
Excludes transaction costs
Breakeven:
Margin:
Maximum Risk:
Maximum Gain: $3.65
$1.35
$1.35*
$91.35
*MINIMUM margin requirement
16 Bull Call Spread Example
Buy a lower strike call and sell a higher strike call • Buy 1 90 Call $2.05 • Sell 1 95 Call $0.70 Net Debit $1.35
95 90 85 100
Max. Profit $3.65
Max. Loss $1.35
B/E: $91.35
Excludes transaction costs
17 Bear Put Spread Example
XYZ @ $88.50 28 Days to Expiration
• Buy 1 28-day 90 put $ 3.50 • Sell 1 28-day 85 put $ 1.80 Net Debit $ 1.70
This is a Bear Put spread
Excludes transaction costs
18 Bear Put Spread Example
XYZ @ $88.50 28 Days to Expiration Buy the 90 – 85 bear put spread for $1.70
Excludes transaction costs
Breakeven:
Margin:
Maximum Risk:
Maximum Gain: $3.30
$1.70
$1.70*
$88.30
*MINIMUM margin requirement.
19 Bear Put Spread Example
Buy a higher strike put and sell a lower strike put • Buy 1 90 put $3.50 • Sell 1 85 put $1.80 Net Debit $1.70
90 85 80 95
Max. Profit $3.30
Max. Loss $1.70
B/E: $88.30
Excludes transaction costs
20 Call Credit Spread Example
XYZ @ $88.50 28 Days to Expiration
• Sell 1 28-day 90 Call $ 3.50 • Buy 1 28-day 95 Call $ 1.80 Net Credit $ 1.70
This is a bearish call spread
21 Call Credit Spread Example
XYZ @ $88.50 28 Days to Expiration Sell the 90 – 95 call credit spread at $1.70
What is this spread worth with XYZ at $88.50 in 21 days? In 7 days?
Excludes transaction costs
Breakeven:
Margin:
Maximum Risk:
Maximum Gain: $1.70
$3.30
$3.30
$91.70
22 Call Credit Spread Example
Sell a lower strike call and buy a higher strike call • Sell 1 90 Call $3.50 • Buy 1 95 Call $1.80 Net Credit $1.70
95 90 85 100
Max. Profit $1.70
Max. Loss $3.30
B/E: $91.70
23 What Happens at Expiration?
95 90 85 100
Stock is < or = $90?
Both options expire worthless Maximum profit of $1.70 achieved No stock position
Sell 1 90 Call $3.50 Buy 1 95 Call $1.80 Net Credit $1.70
24 What Happens at Expiration?
95 90 85 100
Stock is > or = $95?
Maximum loss = difference in strikes ($5) less premium received ($1.70) = $3.30 Short call is assigned, long call is exercised No stock position
Sell 1 90 Call $3.50 Buy 1 95 Call $1.80 Net Credit $1.70
25 What Happens at Expiration?
95 90 85 100
Stock is > $90 and < 95?
Short call is assigned = short stock Margin required Long call expires out of the money/worthless
Sell 1 90 Call $3.50 Buy 1 95 Call $1.80 Net Credit $1.70
26 Put Credit Spread Example
XYZ @ $88.50 28 Days to Expiration
• Sell 1 28-day 85 Put $ 2.05 • Buy 1 28-day 80 Put $ 0.70 Net Credit $ 1.35
This is a bullish put spread
27 Put Credit Spread Example
XYZ @ $88.50 28 Days to Expiration Sell the 85 – 80 put credit spread at $1.35
What is this spread worth with XYZ at $88.50 in 21 days? In 7 days?
Excludes transaction costs
Breakeven:
Margin:
Maximum Risk:
Maximum Gain: $1.35
$3.65
$3.65
$83.65
28 Put Credit Spread Example
Sell a higher strike put and buy a lower strike put • Sell 1 85 Put $2.05 • Buy 1 80 Put $0.70 Net Credit $1.35
85 80 75 90
Max. Profit $1.35
Max. Loss $3.65
B/E: $83.65
29 What Happens at Expiration?
85 80 75 90
Stock > or = $85?
Both options expire worthless Maximum profit of $1.35 achieved No stock position
Sell 1 85 Put $2.05 Buy 1 80 Put $0.70 Net Credit $1.35
30 What Happens at Expiration?
85 80 75 90
Stock < or = $80?
Maximum loss = difference in strikes ($5) less premium received ($1.35) = $3.65. Short put is assigned, long put exercised No stock position
Sell 1 85 Put $2.05 Buy 1 80 Put $0.70 Net Credit $1.35
31 What Happens at Expiration?
85 80 75 90
Stock > $80 and < $85?
Stock price between strikes at expiration: Short put is assigned = long stock Long put expires out of the money/worthless
Sell 1 85 Put $2.05 Buy 1 80 Put $0.70 Net Credit $1.35
32 Long Straddle Example
• Buy 1 87.50 Call $2.15 • Buy 1 87.50 Put $1.85 Net Debit $4.00
90 85 80 95 Max. Loss
$4.00 B/E: $83.50 B/E: $91.50
Unlimited upside potential
Current share price of $87.50
Excludes transaction costs
33 Strategies: Strangles
Investor motivation:
• Same as the straddle, but with typically out-of-the money calls & puts, the investor has a wider opportunity to be “right” (long strangle) or “wrong” (short strangle)
• Typically lower risk (and lower reward) than the straddle
34 Strategies: Strangles
Long Strangle: • Buy call + buy put of different strike & same expiry
Short Strangle: • Sell call + sell put of different strike & same expiry
Buy 1 Dec 90 Call $ 2.15 + Buy 1 Dec 85 Put $ 1.85 Net Debit $ 4.00
Sell 1 Dec 90 Call $ 2.15 + Sell 1 Dec 85 Put $ 1.85 Net Credit $ 4.00
35 Long Strangle Example
XYZ @ $87.50 45 Days to Expiration
Excludes transaction costs
Breakeven: Margin: Maximum Risk:
Maximum Gain: Unlimited $2.50 (100% of investment) $2.50 $82.50 and $92.50
Buy 1 45-day 90.00 Call $ 1.20 Buy 1 45-day 85.00 Put $ 1.30 Net Debit $ 2.50
36 Long Strangle Example
90 85 80 95 Max. Loss
$2.50 B/E: $82.50 B/E: $92.50
Unlimited upside potential
Buy 1 45-day 90.00 Call $ 1.20 Buy 1 45-day 85.00 Put $ 1.30 Net Debit $2.50
Current share price of $87.50
Excludes transaction costs
37 Straddles versus Strangles
• Straddles: • Higher cost and lower leverage • Break-even points closer together
• Strangles: • Lower cost and higher leverage • Break-even points farther apart
• Both: time decay is painful and need big stock move
38 Things to Know:
• Historic Vol: Where the stock has been
• Implied Vol: Where the market thinks the stock is going based on the options price
• Long straddle/strangle: takes advantage of low IV and sharp stock price moves
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