Interactive Brokers Webcast September 2016 Equity Option ......Cash Secured Put Overview Combination...

Equity Option Selling Strategies Russell Rhoads, CFA Director of Education – CBOE Options Institute

Interactive Brokers Webcast September 2016

2 CBOE OPTIONS INSTITUTE

Disclosure

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. 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 to provide investment advice. Any strategies discussed, including examples using actual 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 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®, Chicago Board Options Exchange® and VIX® are registered trademarks and CBOE Options Institute and Weeklys are service marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P 500® is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by CBOE. 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. All other trademarks and service marks are the property of their respective owners. CBOE is not affiliated with Interactive Brokers. 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 © 2016 CBOE. All rights reserved

http://www.theocc.com/


Options

Outline

Time Decay Review Implied Volatility Review Covered Call Cash Secured Put Summary / Q&A / Contact


Time Decay Review

Time Decay

Time to expiration, underlying price relative to strike price, and implied volatility all contribute to time value All else being the same, an option with time value is expected to lose value as expiration approaches

Theta is the option Greek used to display expected rate of time decay

The rate of time decay will vary

based on a variety of factors


Time Decay Review

Time Decay

Stock at 40.00 – 60 Calendar Days to Expiration

Price 7 Day Theta

36 Call 4.35 0.05 38 Call 2.80 0.07 40 Call 1.65 0.10 42 Call 0.85 0.07 44 Call 0.40 0.06

ITM ITM ATM OTM OTM


Time Decay Review

Time Decay

Stock at 40.00 – 7 Calendar Days to Expiration

Price 7 Day Theta

ITM 36 Call 4.01 0.01 ITM 38 Call 2.05 0.05 ATM 40 Call 0.55 0.55 OTM 42 Call 0.05 0.05 OTM 44 Call 0.01 0.01


Time Decay Review

Time Decay

40 Call vs 42 Call – Stock at 40.00

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

60 50 40 30 20 10 0

40 Call

42 Call


Time Decay Review

WeeklysSM Options

Short-dated options on stocks were introduced in 2010 Currently there a over 400 markets with Weeklys available for trading

As of September 1st 8 Indexes

76 Exchange Traded Funds / Notes 374 Stocks


Implied Volatility Review

Implied Volatility

The Insurance Analogy –

Option Contract Insurance Policy Price of Stock Option Strike Price Time Until Expiration Interest Rates Implied Volatility

Asset Deductible Time of Contract Interest Rates Risk of Loss



Implied Volatility

Two Types of Volatility –

Historical Volatility – based on past stock price changes

Implied Volatility – expected volatility based

on option market pricing

Vega is the option Greek that indicates how much an option price will change based on a 1% change in Implied Volatility



Implied Volatility

Vega – 40 Call Price 1.25

Implied Volatility 20% 1.35 21%

1.15 19%

Implied Volatility up 1% Call price up 0.10

Vega = 0.10

Implied Volatility down 1% Call price down 0.10

Vega = 0.10



Implied Volatility

Vega – 40 Put Price 1.25

Implied Volatility 20% 1.35 21%

1.15 19%

Implied Volatility up 1% Put price up 0.10

Vega = 0.10

Implied Volatility down 1% Put price down 0.10

Vega = 0.10

Implied Volatility changes have the same impact on call and put options



Implied Volatility

Option Pricing Calculator –

Inputs Stock Price 40.00 Strike Price 40 Days to Expiration 60 Interest Rate 1.00% Dividends 0.00% Implied Volatility 20.00%

Output 40 Call Price 1.25 ? This is a ‘theoretical value’

The theoretical value is based on these inputs



Implied Volatility

Option Pricing Calculator –

Inputs Stock Price 40.00 Strike Price 40 Days to Expiration 60 Interest Rate 1.00% Dividends 0.00% 40 Call Price 1.45

Output Implied Volatility 22% ? This is the implied volatility

based on market prices

The actual implied volatility is based on these inputs


Volatility Risk Premium

Examples

VIX® vs. S&P 500® Realized Volatility

0

5

10

15

20

25

30

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VIX

Realized Vol

Data Sources: cboe.com & finance.yahoo.com



Examples

VXAPL vs. AAPL Realized Volatility

5

10

15

20

25

30

35

40

45

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VXAPL

Realized Vol




Examples

VXAZN vs. AMZN Realized Volatility

5

15

25

35

45

55

65

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VXAZN

Realized Vol




Examples

VXGOG vs. GOOG Realized Volatility

5

10

15

20

25

30

35

40

45

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VXGOG

Realized Vol




Examples

VXGS vs. GS Realized Volatility

10

15

20

25

30

35

40

45

50

55

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VXGS

Realized Vol




Examples

VXIBM vs. IBM Realized Volatility

5

10

15

20

25

30

35

40

45

1/4/16 2/8/16 3/14/16 4/18/16 5/20/16 6/24/16 7/29/16

VXIBM

Realized Vol



Covered Call

Overview

Combination of long stock and short a call option – the obligation associated with the short call is ‘covered’ by the long stock holding When executed as a single trade it is often referred to as a buy write There can be two motivations for initiating a covered call – either to exit a stock at a higher price or to generate income


Covered Call

Trading Example

September 1st – FDX at 164.85 Considering selling a FDX 165 Call

Choices Expiration 165 Call Bid

Sep 9th 1.35 Sep 16th 1.95 Sep 23rd 4.05 Sep 30th 4.35

Earnings 9/20

Sell FDX Sep 16th 165 Call at 1.95


Covered Call

Trading Example

Payoff at Expiration

-7.50

-5.00

-2.50

0.00

2.50

5.00

7.50

160.00 162.50 165.00 167.50 170.00

Long FDX @ 164.85

Covered Call

Shares Called Away at 165 net profit 2.10

Option expires Out of the Money


Covered Call

Trading Example

FDX Daily Prices

140

145

150

155

160

165

170

175

6/23/16 7/6/16 7/18/16 7/28/16 8/9/16 8/19/16 8/31/16

Shares Called Away at 165 net profit 2.10

Data Source: finance.yahoo.com


Covered Call

Trading Example

Monday August 29th Trader came in and purchased VZ at 52.60 and sold the VZ Nov 18th 52.50 Call for 1.35 – net trade cost = 51.25 Stock was also scheduled to pay a dividend in early October


Covered Call

Trading Example


-10.00

-7.50

-5.00

-2.50

0.00

2.50

5.00

7.50

47.50 50.00 52.50 55.00 57.50

Long VZ @ 52.60

Covered Call

Shares Called Away at 52.50 net profit 1.25

Option expires Out of the Money


Covered Call

Trading Example

VZ Daily Prices

50

52

54

56

58

6/20/16 6/30/16 7/13/16 7/25/16 8/4/16 8/16/16 8/26/16

Shares Called Away at 52.50 net profit 1.25



Cash Secured Put

Overview

Combination of holding cash and selling a put – the obligation associated with a short put is ‘secured’ by the cash in an account There may be two motivations for executing a cash secured put – either as a bullish trade to generate income or to take in a credit and have the obligation to purchase shares at the strike price


Cash Secured Put

Trading Example

August 30th – AAPL trading at 106.00 Willing to buy shares below 105.00 Decide to sell 1 AAPL Sep 9th 105 Put for 1.00


Cash Secured Put

Trading Example


-7.50

-5.00

-2.50

0.00

2.50

5.00

100.00 102.50 105.00 107.50 110.00

Put in the money Long AAPL net cost of 104

Option Expires Net Profit = 1.00


Cash Secured Put

Trading Example

AAPL Daily Prices

90

95

100

105

110

115

6/22/16 7/5/16 7/15/16 7/27/16 8/8/16 8/18/16 8/30/16

Purchase shares net effective cost of 104



Cash Secured Put

Trading Example

September 1st – EWZ trading at 33.50 Put seller comes in with an order to sell the EWZ Sep 16th 32.50 puts for 0.50 Timing coincided with the impeachment of Dilma Rousseff


Cash Secured Put

Trading Example


-5.00

-2.50

0.00

2.50

30.00 32.50 35.00

Put in the money Long EWZ net cost of 32.00

Option Expires Net Profit = 0.50


Cash Secured Put

Trading Example

EWZ Daily Prices

25

30

35

40

6/24/16 7/7/16 7/19/16 7/29/16 8/10/16 8/22/16 9/1/16

Purchase shares net effective cost of 32.00



Equity Option Selling Strategies

Summary

Selling call or put options may be motivated by different factors If a trader believes a stock will not be at a certain price level they may consider selling options to benefit from that outlook Traders may also sell calls to potentially exit a stock or sell puts to enter a stock Option selling opportunities may be found, even in a low volatility environment


Equity Option Selling Strategies

Q&A / Contact / Links

Questions?

Russell Rhoads, CFA [email protected] @RussellRhoads

www.cboe.com/weeklys

www.cboeoptionshub.com

mailto:[email protected]

http://www.cboe.com/weeklys

http://www.cboeoptionshub.com/

Interactive Brokers Webcast September 2016 Equity Option ......Cash Secured Put Overview Combination...

Documents

Transcript of Interactive Brokers Webcast September 2016 Equity Option ......Cash Secured Put Overview Combination...