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www.OptionsEducation.org

Understanding option strategies for a bull and bear market Edward J ModlaDirector of Retail EducationOptions Industry Council (OIC)

Andrew RakowskiRegional Brokerage ConsultantFidelity Investments

DisclaimerOptions 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 or by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200, Chicago, IL 60606.In order to simplify the calculations 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 © 2020. The Options Clearing Corporation. All rights reserved.

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3 DisclaimerDisclaimerThe information provided in this communication is solely for educational purposes and should not be construed as advice or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with The Options Industry Council. There is no form of partnership, agency affiliation, or similar relationship between The Options Industry Council 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 Options Industry Council and does not guarantee or assume any responsibility for its accuracy or completeness.

General Use

Presentation Outline

• Calls and Puts• Bullish Option Strategies with Stock

oCovered CalloProtective PutoCollar

• Bearish Option Strategieso Long PutoBear Put Spread

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General Use

Calls and Puts

Why Options?

• Options give you more ways to implement your market research • Options make it possible to target a variety of investment objectives:

• Risk Reduction• Income Generation • Stock Acquisition• Leverage

• Options offer FLEXIBILITY!

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Equity Call Options

• An equity call buyer:• Pays an upfront cash debit• Owns the right to buy underlying stock/ETF

• An equity call seller:• Receives an upfront cash credit• Has the obligation to sell underlying stock/ETF

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Equity Put Options

• An equity put buyer:• Pays an upfront cash debit• Owns the right to sell underlying stock/ETF

• An equity put seller:• Receives an upfront cash credit• Has the obligation to buy underlying stock/ ETF

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Bullish Option Strategies with Stock

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Covered Call

Own 100 shares XYZ at $104.00Sell 1 XYZ 110 call at $3.50

Maximum Profit:$110 (short call strike) - $104

(stock entry price) + $3.50 (call premium received) = $9.50

$950.00 Total

Break-even at Expiration:$104 (stock entry price) – $3.50

(call premium received) = $100.50

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10

10

100 110 1200

–

+

Long stock at $104.00

BEP $100.50

Protective Put (Hedge Stock Position)

Buy 100 shares XYZ at $84.00Buy 1 60-day XYZ 80 put at $3.10

Break-even at Expiration:$84.00 (stock entry price) + $3.10

(put premium paid) = $87.10

Maximum Loss:$84.00 (stock entry price) –

$80.00 (put strike) + $3.10 (put premium paid) = $7.10

$710.00 Total

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10

10

70 80 900

–

+Long stock at $84.00

BEP $87.10

Does not include commissions, fees, margin interest or taxes.

Protective Put (Hedge Portfolio)

Calculations/Inputs:Portfolio value: $100,000Desired Protection: 10% downside ($90,000)Underlying Index/ETF: $25010% Out-of-money put: 225 (250 – 10% = 225)Price of 90-day 225 put: $3.00 ($300 per contract)

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Protective Put (Hedge Portfolio)

Calculations/Inputs:

• Investor purchases 4 90-day 225 puts to hedge $90,000 worth of risk• $1,200 premium ($3.00/contract x 4 puts x $100) is cost of insurance• Can also buy fewer puts to hedge less of the positionAssumes 1-to-1 correlation between portfolio and hedge

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Portfolio $$$ to hedge

Notional Value of Strike Price

$90,000225 x 100

= 4 putsor

• Stock, ETF or Index buyer with unrealized gains wants• Downside protection – long put• Some upside participation – limited by short call

• Key benefits• Put cost fully or partially paid by call premium received• Objectives met whether share price up or down• Receives any dividend if not assigned on short call

• Risk remains in long stock up until long put kicks in

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Why Use a Collar?

Long 100 shares of stock at $75.00• Buy 67.50 put for $1.30• Sell 82.50 call at $0.90Net DEBIT: $.40

Max Profit: $82.5 (short call strike) – $75 (share price) - $0.40 (debit) = $7.10

Max Loss: $75 (share price) – $67.50 (long put strike) + $0.40 (debit) = $7.90 Breakeven: $75 (share price) + $0.40 (debit) = $75.40

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Traditional Collar Profit & Loss10

-10

B/E: $75.40

75 807065 85

67.50 82.50

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Bearish Option Strategies

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Put Buying (Speculate)

Break-even at Expiration:$70.00 (put strike price) – $4.50

(put premium paid) = $65.50

Maximum Loss:$4.50 (put premium paid) =

$450.00 Total

• Options positions are frequently closed before reaching expiration

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+

–

0

5

5

BEP $65.50

60 70 80

Stock trading at $72.00Buy 70.00 strike put at $4.50

Short Stock at $72.00

-$450

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Bear Put Spread

Break-even at Expiration:$90.00 (put strike price) – $1.70 (net

premium paid) = $88.30

Maximum Gain:$5.00 (difference between strikes) -$1.70 (net premium paid) = $3.30

$330.00 Total

Maximum Loss:$1.70 (net premium paid) =

$170.00 Total

• Stock trading at $92• Buy 90 strike put for $3.50• Sell 85 strike put for $1.80