Scott Chaney Chaney Investment Strategies LLC

Transcription

1 Scott Chaney Chaney Investment Strategies LLC

2 . Introduction to Stock Options

3 What is a Stock Option? CALL option: An agreement (contract) that gives the owner (buyer) the right, but not the obligation, to buy an underlying stock at a specified price within a specific time period, i.e. until the option expires.

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7 CALL Options Positive Pete Thinks the stock price will go UP! Wants to buy CALL options Expects to profit from the rising stock price

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9 What is a Stock Option? Negative Nellie Thinks the stock price will go DOWN! Wants to buy PUT options Expects to profit from the declining stock price

10 What is a Stock Option? PUT option: An agreement (contract) that gives the owner (buyer) the right, but not the obligation, to sell an underlying stock at a specified price within a specified time period, i.e. until the option expires.

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12 What is a Stock Option? Where does the money go?

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15 Option Trading Strategy: Spread A spread trade refers to the simultaneous buying of one option contract and selling another related one in an attempt to profit from the change in the price difference between the two. The next few slides illustrate spread trades using Potash Corp. stock options

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30 . Index Option Trading Strategies

31 What is an Index? A statistical measure of the changes in a portfolio of stocks representing a portion of the overall market; not a single stock or collection of stocks that you can actually purchase When most people talk about the market they are actually referring to an index such as the Dow Jones Industrial Average, the S&P 500, or the NASDAQ Composite

32 Stock options vs. Index options Index options generally behave the same as stock options, but they have some advantages for traders: Reduced volatility (an index can t go bankrupt) No time wasted searching for a good stock to trade!

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52 Trading as a Business Must qualify as a Trader in Securities according to IRS standards: You must seek profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation Your activity must be substantial You must carry on the activity with continuity and regularity (from IRS publication 550)

53 Trading as a Business Traders are not Investors, according to IRS A Trader is operating a business; file tax returns accordingly (compare t0 used car dealer) Can be self-employed, LLC, or Corporation Unique tax advantages (no self-employment tax)

54 April 2009 SUNDAY MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY OPTIONS EXPIRE 18 GOLF GOLF GOLF GOLF GOLF GOLF

55 Stock Option Trading Strategies Questions?

56 Stock Option Trading Strategies Question: Can I do this with my IRA account?

57 ROTH IRA Conversion In 2009: $200,000 April 15: conversion Taxes due; to ROTH ~$60, In 2010: Jan. 2010: income: income: $200,000 $100,000 $100,000 conversion tax due on taxes due on 2011 income 2012 income ~$30,000 ~$30,000

58 Stock Option Trading Strategies What if the stock market crashes?

59 Stock Option Trading Strategies Question: Who buys PUT options on an Index? Answer: Institutional investors (Mutual Funds, Pension Funds, Non-profit Trust Funds) with a large portfolio of stocks worth many millions of dollars. If the value of the fund portfolio has risen significantly, the fund manger may want to protect the fund from a market downturn. Buying PUTS on each individual stock is inefficient. The manager will instead buy PUTS on a major market index.

60 Stock Option Trading Strategies Thank you!

61 Option Trading Strategy: Spread The Spread Trade strategy is designed to earn profits from Time Decay, not from active trading or day trading.

62 Time Decay As time passes, the market value of a stock option decreases as the expiration date approaches. Approximately 30 days prior to expiration, a stock option will begin to lose its Time Value quite rapidly.

63 Time Decay

64 . Question: Who buys PUT options? Answer: Active Traders, and Long-term Investors If the price of a stock spikes up, a Long-term Investor may want to buy a PUT option to lock in his profit, rather than sell his stock and incur a tax on the profit. The PUT option will rise in value if the stock price falls, and the investor will profit from the increased value of the PUT option.