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Teachers Workshop 2014

Teachers Workshop 2014. US Options Industry Presentation Erich Umar Sr. Vice President NYSE Amex & Arca Options Andrew Raquet Director NYSE Amex & Arca Options. What is an option? It is a Derivative!. Common underlying assets. Stocks Bonds Interest Rates Commodities Currency.

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Teachers Workshop 2014

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  1. Teachers Workshop 2014 US Options Industry PresentationErich UmarSr. Vice President NYSE Amex & Arca OptionsAndrew RaquetDirectorNYSE Amex & Arca Options

  2. What is an option?It is a Derivative! Common underlying assets Stocks Bonds Interest Rates Commodities Currency A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. • Its value is determined by fluctuations in the underlying asset. Source(s): NYSE Euronext

  3. What is an option? Our focus today: Equity Options Index Options

  4. What is an option? An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, exchange traded fund (ETF), or similar product. Contract size: For equity options, the amount of underlying interest is generally set at 100 shares of stock The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. This is the price per share at which 100 shares of the underlying security can be bought or sold at the time of exercise. It has an expiration date. When an option expires, it no longer has value and no longer exists. There are multiple pre-determined expiration periods. Options come in two varieties, calls and puts, and you can buy or sell either type. You make those choices—whether to buy or sell and whether to choose a call or a put—based on what you want to achieve as an options investor. An options class refers to all the calls or all the puts on a given underlying security. Within a class of options, contracts share some of the same terms, such as contract size and exercise style. An options series is all contracts with identical terms, including expiration month & strike price. Example, all XYZ calls are part of the same class, while all XYZ February 90 calls are part of the same series. Source(s): NYSE Euronext, OIC

  5. What is an option? Example of Professional User Options Chain Montage

  6. What is an Option? Options Symbology Initiative (OSI) Here is how a computer reads it! XYZ140815C00550000 “XYZ Feb 550 Call” • The right, but not the obligation • to BUY (“call”) 100 shares • of XYZ. stock • at a price of $550.00 per share • on or before the third Friday in August

  7. What is an Option? Options Symbology Initiative (OSI) Here is how a computer reads it! XYZ140815P00600000 XYZ Mar 600 Put • The right, but not the obligation • to SELL (“put”) 100 shares • of XYZ Inc. stock • at a price of $600.00 per share • on or before the third Friday in August

  8. EXAMPLE What is an option? IntercontinentalExchange NYSE Ticker Symbol: ICE Stock is trading at $198.00 Jun 24 09:30am ET • Equity Call Option • In-the-money = strike price less than stock price • At-the-money = strike price same as stock price • Out-of-the-money = strike price greater than stock price • Equity Put Option • In-the-money = strike price greater than stock price • At-the-money = strike price same as stock price • Out-of-the-money = strike price less than stock price • Intrinsic Value & Time Value Last Sale on our Option August ICE 195 Call Option Option is trading at $7.90 Intrinsic value = current underlying price – option strike price An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero. Intrinsic value = $198.00 - $195.00 = $3.00 Time value = $7.90 - $3.00 = $4.90 Time Value = Current Premium - Intrinsic Value

  9. What is an option? Puts Participants Calls BUY The Right to Sell BUY The Right to Buy Holder SELL The Obligation to Sell SELL The Obligation to Buy Writer

  10. What is an option? Premium Puts Calls The purchase price you must pay when buying an option BUY The Right to Buy BUY The Right to Sell Holder As a buyer, you start out with a Net Debit since you have spent money to buy the option SELL The Obligation to Sell SELL The Obligation to Buy The proceeds you receive from a buyer when selling an option Writer As a seller, you start out with a Net Credit since you have received money from selling the option

  11. Common reasons to use options One can protect stock holdings from a decline in market price One can increase income against current stock holdings One can prepare to buy stock at a lower price One can position oneself for a big market move – even without a clear understanding which way prices will move One can benefit from a stock’s price rise and fall without incurring the cost of buying or selling the stock outright

  12. The US Options Market Major Components Options Clearing Corporation Founded in 1973, is the world's largest equity derivatives clearing organization. Dedicated to promoting stability and financial integrity in the marketplaces Acting as guarantor, ensures that the obligations of the contracts fulfilled. – ensuring counter party risk controls. Options Industry Council – training & education Market Participants Retail Customers Institutional Customers (Hedge Funds, Retirement Funds, Endowments, etc) Professional Customers Broker Dealers Market Makers Firms (Banks, Proprietary, etc) Options Price Reporting Authority OPRA is the Securities Information Processor (SIP) for market information generated by trading of Options Securities in the United States. Last sale reports & quotations are the core of the information that OPRA disseminates. Provides Best Bids and Offers from each of the exchanges Provides Best Bids and Offers of all the exchanges – National Best Bid and Offer or NBBO. US Options Exchanges Market Operators managing orderly, efficient, liquid & transparent markets for trading fungible US Equity & Index Options Ensures fair and orderly trading as well as dissemination of the securities trading therein. Self Regulated Organizations (SRO’s) US Government oversight by the Securities & Exchange Commission (SEC)

  13. The US Options Industry Participating Members of OIC ICE NYSE AMEX Options ICE NYSE ARCA Options BATS Options Exchange Nasdaq OMX PHLX Nasdaq Options Market Nasdaq BX Market MIAX Options Exchange International Securities Exchange (ISE) International Securities Exchange (Gemini) Chicago Board Options Exchange (CBOE) Chicago Board Options Exchange (C2) BOX Options Exchange

  14. U.S. Options Industry Growth • The U.S. options industry saw substantial growth from 2000 to 2013, with a CAGR of 13.2%, and ongoing (but slower) growth in recent years, ex-2011 • 2013 saw approximately 4.1 billion contracts, 2.7% above 2012 but 9.9% below 2011 *Total 2014 annual volume projected based on Q1 2014 volume

  15. US Options exchanges Basic Retail Order Lifecycle

  16. What is an option? xxxxxxxxx $100,000.00 xxxx xxxx xxxx xxxx xxxx Retail Order Entry Sample Screen Shot

  17. US Options exchanges Basic Trade lifecycle Orders Routed, Ack’d & Filled Broker/Dealer Firms Market Making Firms Institutional Firms Exchange Systems Order Gateways OMM Orders Retail Orders Inst. Orders Hedge Funds Institutional Order Mgmt Systems Matching Engines Quote Gateways Broker Order Mgmt Systems Market Maker Quoting Systems Risk Mgmt Position Mgmt Market Data Risk Mgmt Position Mgmt Market Data Market Data Risk Mgmt Position Mgmt Matched Trades Market Data Back Office Systems Back Office Systems Back Office Systems OCC Options Clearing Corp Executed Trades Options Series Master File Clearing Firms In Out OPRA Options Price Reporting Authority Trades, Quotes, Symbols, etc Market Data Vendors & Distributors

  18. NYSE US Options Exchanges

  19. 1842: Curbstone Brokers • 1908: New York Curb Market founded • 1921: Moved indoors to 86 Trinity • 1953: American Stock Exchange (“The Amex”) • 1975: Amex begins trading options • 2008 : Purchased by NYSE Euronext • 1882: Founding of San Francisco Stock & Bond Exchange • 1889: founding of Los Angeles Oil Exchange • 1957: merge of San Fran and LA exchanges to form Pacific Coast Stock Exchange • 1976: Pacific Stock Exchange began trading options • 2005: Pacific Exchange was bought by ArcaEx, which merged with NYSE in 2006

  20. Common Technology Infrastructure supports complementary market structures • NYSE Amex • Customer Priority • Customer Trades Free • Market Makers - ProRata • Deep liquidity • NYSE Arca • Price Time • Maker Taker Pricing • Tight Markets

  21. u.s. options capacity & performance metric EXECUTIVE OVERVIEW FEB2014 - OPRA hit a record 10ms peak rate of over 12M messages1 APR2014 - OPRA hit a record 193.7B Total Monthly Messages UGW new order latency: ARCAavg 882 uS, 99%ile 15.1 mS. (Ord,Cxl, Cxl Rep) – Peak  1 sec: 18.15K (35% of 52K msg/sec) - Total: 29.45M (21% of all time record of 140M) AMEX avg1.02 mS, 99%ile 8.7 mS - AMEX Options MPS (Ord + Cxl + Cxl Rep) – Peak  1 sec: 4.14K (4% of all time record of 106K msg/sec) - Total: 2.35M (2% of all time record of 124M). MMD Quote latency: ARCA avg 625 uS, 99%ile 3.4 mS. ARCA Options Quotes (MM + OPRA)– Peak  1 sec: 6.91M (90% of all time record of 7.67M msg/sec) - Total: 7.10B (42% of all time record of 16.8B). AMEX avg 631 uS, 99%ile 6.49 mS. AMEX Options Quotes (MM + OPRA)– Peak  1 sec: 7.40M (90% of all-time record of 8.19M msg/sec) - Total: 8.23B (44% of all time record of 18.7B). Source: ICE NYSE Euronext; Financial Information Forum 1 10 Millisecond statistics in messages per second are calculated by multiplying the highest number of messages flowing in the busiest 10 millisecond by 100

  22. A Historical Overview • NYSE U.S. Options is the #1 exchange group in ETF/ETN market share in 2014 • NYSE U.S. Options was the #1 exchange group in normalized equity market share in 20131 NYSE ARCA NYSE Arca NYSE Arca NYSE Arca NYSE Arca NYSE AMEX NYSE Amex NYSE Amex NYSE Amex NYSE Amex 1 Normalized equity volume excludes ex-dividend data Source: NYSE Data, OCC

  23. Volume by Account Type Source: NYSE Data, OCC

  24. Teacher resources www.OptionsEducation.org Source: OCC Data

  25. Teacher Resources Source: OCC Data

  26. Teacher Resources Source: OCC Data

  27. Teacher Resources Source: OCC Data

  28. Federal Hall New York Stock Exchange Trinity Church

  29. The statutory figures atop the New York Stock Exchange symbolize “Integrity” in the center flanked by Agriculture & Mining on the left with Science, Industry & Invention on the right Symbols of a growing nation…

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