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Options Primer. Jacob Mintz Analyst, Cabot Options Trader jacob@cabot.net. Options Primer. Calls Puts Market Leverage Using Options to Create Yield Using Options to Protect Your Portfolio. About Me. How did I become a trader? My unlce “knew a guy†Learned under two CBOE legends
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Options Primer Jacob Mintz Analyst, Cabot Options Trader jacob@cabot.net
Options Primer • Calls • Puts • Market Leverage • Using Options to Create Yield • Using Options to Protect Your Portfolio
About Me • How did I become a trader? • My unlce “knew a guy” • Learned under two CBOE legends • Became a Market Maker • Designated Primary Market Maker on CBOE and Pcoast • Took my team off the trading floor in 2010 • What I’m doing now
Call Option • A call option gives its holder the right to BUY 100 shares of the stock at the strike price, anytime prior to the options expiration date • The seller of the option has the obligation to sell the shares • Equity option contracts represent 100 shares of the underlying stock
TSLA Call • Buy 1 TSLA September 155 Call for $10
TSLA Call • Symbol: TSLA • Month of the Call’s Expiration: September • Date of expiration: September 21, 2013 • Strike: 155 • Price: $10
Premium • An option’s price • The potential loss for the holder of an option is LIMITED to the initial premium paid for the contract • On the other hand, the seller of the call has UNLIMITED potential loss, which is somewhat offset by the initial premium received
How is the Price of the Call Determined? • Volatility Supply and demand: If I want to buy this call, you will sell some at $10, then when you see I want more, you will raise the price to $10.05 You want more? Now the price is $10.10
How is the Price of the Call Determined? • Likelihood the call will finish in-the-money due to time Generally, the longer the time remaining until an option’s expiration, the higher the premium—because the longer an option’s lifetime, the greater the possibility the underlying share price will move to make the option in-the-money
Profit and Loss Graph • Insert Graph here
Power of Options • Instead of paying $ 15,500 to buy 100 shares of TSLA, you can pay $1000 for the opportunity to buy 100 shares at $150
Order Flow Reading Following a large order from a hedge fund or trading desk who may have more information
Put Option • A put option gives its holder the right to SELL 100 shares of the stock at the strike price, at any time prior to the option’s expiration date • The seller of the option has the obligation to buy the shares
AAPL Put • Buy 1 AAPL September 450 Put for $8 • Symbol: AAPL • Month of the put’s expiration: September • Date of expiration: September 21 • Strike: 450 • Price: $8
How is Price of Put Determined? • Volatility in puts is like a hurricane coming at your house: When the hurricane is coming, you want as much insurance as possible—so you buy protection (puts) in case the storm hits your home • Likelihood of finishing in-the-money due to time
The Power of Options • Unless you have special arrangements, brokers won’t let you short stocks without paying significant margin due to the risk With options, you only have to pay $800 to have the ability to short 100 shares of AAPL
Covered Call Writing • A Covered Call Write consists of buying or owning a stock and selling (i.e., shorting) a call option on that stock
Facebook Covered Call • Buy 100 Facebook at $38 • Sell 1 FB September 40 Call at $1.75 • Expires 9/21/2013
FB Covered Call • You can write one Call on each 100 shares of stock you own. Your short option position is “covered” by the stock. A short Call on stock in your account (a Covered Call) is a very conservative strategy and requires no margin.
Net Yield Created Stock at 38 we have created a 4.6% yield Stock at 40 we have created a 9.8% yield
Portfolio Protection • Covered Call • Put Purchase • Risk Reversal
SPY Covered Call • Buy 100 SPY at $170 • Sell 1 SPY September 172 at $2 • Expires 9/21/2013
SPY Put Purchase • Buy 100 SPY at 170 • Buy 1 SPY September 168 Put at 2.50 • Expires 9/21/2013