Spread Adjustments & Time Premium. Disclaimers 10/29/2013

Transcription

1 Spread Adjustments & Time Premium Disclaimers Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at (877) 495-KING visiting System response and access times may vary due to market conditions, system performance, and other factors. Margin trading involves risks and is not suitable for all accounts. Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as a recommendation, or solicitation to buy or sell securities. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. 2 1

2 Disclaimers Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct. The Greeks (Delta, Gamma, Theta, Vega, Rho) represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Option prices are given as a per contract amount. Multiply loss and gain figures by 100 shares and by the number of contracts traded to determine the amount of the full potential loss or full potential gain. No additional calculations are needed to determine commission costs. TradeKing is a member of FINRA and SIPC. 3 Spread Adjustments & Time Premium Basics Speakers: M. Kahn and B. Overby Audio Help:

3 Four Basic Positions CALL PUT Buyer (long) Right to Buy Right to Sell Seller (short) Obligation to Sell Obligation to Buy 5 Long Call Spread (Bullish) Buy 1 XYZ 45-day Sell 1 XYZ 45-day Net Debit 4.50 Max Risk: 4.50 Max Profit: = 5.50 Break-Even: = Commission: $

4 Bull Call Spread P&L Diagram Buy 1 XYZ 45-day Sell 1 XYZ 45-day Net Debit 4.50 Commission: $6.25 Profit & Loss Long Stock Price at Expiration Long Spread Time Premium Analysis Calls Prem. Intrinsic = Time Time Premium Analysis Long 60 call Short 70 call Net Time

5 Distribution of Time Premium 30-Day Call Options with Stock at Assumes interest rates at 0%, no dividends and flat implied volatility 20% 9 Long Call Spread (Bullish) Buy 1 XYZ 45-day Sell 1 XYZ 45-day Net Debit 3.20 Commission: $6.25 Max Risk: 3.20 Time Premium Analysis Long 60 Call Short 65 Call Net Time

6 Long Call Spread P&L Diagram Profit & Loss Buy 1 XYZ 45-day Sell 1 XYZ 45-day Net Debit Long Spread Long Stock Price at Expiration Commission: $ Delta Example Delta: The amount a theoretical option's price will change for a corresponding one-unit (point) change in the price of the underlying security. 50 Strike is 50 3 Month Call $ Delta =

7 Delta Analysis Calls Price Delta Delta Analysis Long 60 Call +.65 Short 70 Call -.20 Net Delta Long Spreads compared to outright buying Long Spreads may help battle overall time decay. Can even be sent up as a positive time decay strategy Net Delta is usually lower overall. Max gain and risk usually occurs at expiration May be less susceptible to fluctuations in Implied Volatility. More commissions with long spreads and two bid/ask spreads to deal with on entry and on exit. 14 7

8 Spread Adjustments & Time Premium The Strategy Speakers: M. Kahn and B. Overby Audio Help: Long Spread Set-Up Fictitious Index with 7 days to expiration Long Spread Buy 1 Nov 1625 LMNW Sell 1 Nov 1630 LMNW Net Debit 2.70 Max Risk: Net debit paid = 2.70 Max Gain: Difference between strikes (5), minus the net debit = 2.30 Breakeven: 1625 strike plus net debit = Commission: $6.95 Includes LMN index exchange fee of 0.35 per contract 16 8

9 Long Call Spread Profit & Loss Graph 5 3 Buy 1 Nov 1625 Call Sell 1 Nov 1630 Call 2.3 Mid point 2.70 net debit Commission $6.95 Profit & Loss Stock Price at Expiration 17 Spread Adjustments & Time Premium Adjustment Speakers: M. Kahn and B. Overby Audio Help:

10 Strategy Concept LMN with 7 days to expiration (Friday) Long Spread Long 1 Nov 1625 LMNW Short 1 Nov 1630 LMNW Net Debit 2.70 Monday? Market Up: Yea! Market Unchanged: Stay the course Commission: $6.95 Market Down: Convert to Broken Wing Butterfly (BWB) Market Way Down: Convert BWB to Short Spread 19 Managing Long Call Spread Market Down Initially: Long one Call Spread Call Call Managing Action: Sell one Call Spread Call Call New Position: Long one Call BWB Call Call Call Wednesday: LMN at down since Friday STO 1 LMNW Nov BTO 1 LMNW Nov Max Risk now: = 6.25 Net Credit 1.45 Commission $

11 Long Call Spread Market Down New Position LMN with 2 days to expiration (Thursday) Long BWB Call Spread Long 1 Nov 1625 LMNW Call Short 2 Nov 1630 LMNW Call Long 1 Nov 1640 LMNW Call If no bounce we are down $1.25 Entire Net Debit 1.25 Expiration breakeven & Where would you like to close if market continues up? As always, pay attention to news! We have one more card to play but adds risk! 21 Managing Long Call Spread Market Way Down New Position: Long one Call BWB Call Call Call Managing Action: Sell one Call Spread Call Call Final Position: Short two Call Spreads Call Call Thursday: LMN at down since Friday STC 1 LMNW Nov Net Credit 1.35 BTO 1 LMNW Nov Max Risk now: = Commission $

12 Long Call Spread Market Way Down Final LMN with 1 day to expiration (Thurs) Short Two Call Spreads Short 2 Nov 1630 LMNW Call Long 2 Nov 1640 LMNW Call If expires we are up 10 cents less commissions But, have to mange risk Entire Net Credit 0.10 Short two 10 point wide call spreads Once again make sure you pay attention to news and have stop loss in place. 23 Discuss options trading with me via: Twitter.com/BrianOverby Twitter.com/TradeKing To learn more about option strategies: OptionsPlaybook.com 12