Options Core Concepts.

Transcription

1 0 Options Core Concepts

2 1 Disclaimer Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, available by visiting OptionsEducation.org. To obtain a copy, contact your broker or The Options Industry Council at 125 S. Franklin, Suite 1200, Chicago, IL In order to simplify the computations used in the examples in these materials, commissions, fees, margin interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Weeklys SM is a service mark of CBOE Exchange, Inc. Copyright The Options Industry Council. All rights reserved.

3 2 U.S. Listed Options Exchanges and OCC/OIC

4 3 Annual Options Volume OCC Annual Contract Volume by Contract Type Cleared Contracts (Billions) Equity Non-Equity

5 4 Presentation Outline Options Defined Types Of Options Contract Terms Option Chains Exercise & Assignment Pricing: ITM / ATM / OTM & Premium

6 5 Defining an Option Options are contracts that give: the buyer the right to buy or sell an underlying asset the seller an obligation to buy or sell an underlying asset at a specified price, on or before a given date in the future. Buyers have rights Sellers have obligations

7 6 Why Options? Options give you more ways to implement your market research Options make it possible to target a variety of investment objectives: Risk Reduction Income Generation Stock Acquisition Options offer FLEXIBILITY!

8 7 Flexibility With options, these are some of the available choices. Long Call Short Call Long Put Short Put Long Straddle Short Straddle Long Strangle Short Strangle Long Call Spread Short Call Spread Long Put Spread Short Put Spread Ratio Call Spread Ratio Put Spread Call Volatility Spread Put Volatility Spread Long Split- Strike Synthetic Collar

9 8 Long Stock vs. Short Stock In a world without options, stock investors have limited choices. Profit Profit Stock Stock Buy Price Sell Price Loss Loss Long Stock Short Stock

10 Calls & Puts

11 10 Calls and Puts There are two types of options: Calls Puts For equity or ETF options, the underlying asset to be purchased or sold: 100 shares of underlying stock or 100 shares of an ETF (Exchange Traded Fund)

12 11 Equity Call Options An equity call buyer: Has the right to buy underlying stock/etf Long Holder An equity call seller: Has the obligation to sell underlying stock/etf Short Writer

13 12 Equity Put Options An equity put buyer: has the right to sell underlying stock/etf Long Holder An equity put seller: has the obligation to buy underlying stock/etf Short Writer

14 13 Calls and Puts Options contracts give Call Put Long (buyer or holder) Right to buy Right to sell 100 shares of the underlying at the strike price Short (seller or writer) Obligation to sell Obligation to buy any time before expiration

15 Contract Terms

16 15 Option Contract Terms Equity option contracts have standardized terms: Underlying stock/etf Unit of trade Strike or exercise price Expiration date

17 16 Option Components XYZ Jan 17, call at $2.50 Underlying Typically 100 shares of the stock/etf on which the right or obligation exists Example: XYZ Jan 17, call at $ shares of XYZ is the underlying for this option Expiration Date The day on which the option ceases to exist Example: XYZ Jan 17, call at $2.50

18 17 Option Components XYZ Jan 17, call at $2.50 Strike or Exercise Price Price at which the underlying may be bought or sold Example: XYZ Jan 17, call at $2.50 Premium The price of an option that is paid by the buyer and received by the seller Example: XYZ Jan 17, call at $2.50 ($2.50 per share or $250 per option plus/minus commissions)

19 18 Option Chains What are they? Array of information detailing all options available to trade in a security What do they tell us? In addition to available strikes, chains can detail current bid/ask market and size, volume, open interest, IV, Greeks, etc. Where to find them? Online trading sites, brokerage platforms, and OIC Quotes page (OptionsEducation.org)

20 Exercise & Assignment

21 20 Buy or Sell Underlying Stock The option buyer has the right: to buy (for a call) or sell (for a put) 100 shares of underlying stock/etf at the strike price per share if he/she exercises a long contract To exercise, the buyer issues an exercise notice to his/her brokerage firm (or Auto-ex) Only option buyers may exercise an option contract

22 21 Buy or Sell Underlying Stock The option seller has the obligation: to sell (for a call) or buy (for a put) 100 shares of underlying stock/etf at the strike price per share if he/she is assigned an exercise notice Assignment notice is received from seller s brokerage firm Only option sellers may be assigned on an option contract

23 22 Exercise Style American Long side can exercise at any time during the life of the option. Short side can be assigned at any time during the life of the option. European Exercise and assignment can take place only at expiration typically 3 rd Friday of the month for monthly contracts. *Weeklys SM expire more often

24 23 Settlement Style Physical Securities credited to and cash debited from your account (purchase transaction). Securities debited from and cash credited to your account (sale transaction). Cash You receive or pay out the cash difference between the in-themoney strike price and the settlement value of the index (intrinsic value).

25 Pricing: ITM / ATM / OTM & Premium

26 25 Calls: In-the-Money, At-the-Money, Out-of-the-Money Call is in-the-money (ITM) Strike price below stock price Call is at-the-money (ATM) Strike price same as stock price Call is out-of-the-money (OTM) Strike price above stock price Stock Price $50.00 Jan call Feb call Apr call Jan call Feb call Apr call Jan call Feb call Apr call Jan call Feb call Apr call Jan call Feb call Apr call ITM ATM OTM

27 26 Puts: In-the-Money, At-the-Money, Out-of-the-Money Put is in-the-money (ITM) Strike price above stock price Put is at-the-money (ATM) Strike price same as stock price Put is out-of-the-money (OTM) Strike price below stock price Stock Price $50.00 Jan put Feb put Apr put Jan put Feb put Apr put Jan put Feb put Apr put Jan put Feb put Apr put Jan put Feb put Apr put OTM ATM ITM

28 27 The Ins and Outs Quiz Stock Price Option In, At, Out $75.00 $35.00 $25.00 $ $ Call Call Put Put Call Out In In In At

29 28 Option Premium An option buyer pays premium An option seller receives premium Option buyers/sellers can often trade back the contract to close Premium quoted on a per share basis total paid/received = quoted price x 100 shares example: $3.00 quoted x 100 = $ total excluding commissions

30 29 Intrinsic Value vs. Time Value Option Premium: Intrinsic Value (if any) + Time Value Intrinsic value in-the-money amount Time value any premium in excess of intrinsic value decays with time as expiration approaches ( time decay ) At expiration option worth only intrinsic value no time remaining when exercised, only the intrinsic value of an option is received/delivered time value (if any) is lost

31 30 Intrinsic Value vs. Time Value Option Premium Intrinsic Value Time Value Stock Price Strike Price Time Volatility Interest Rate/Dividends

32 31 Intrinsic Value vs. Time Value In-the-money calls and puts have intrinsic value may have time value At-the-money calls and puts no intrinsic value all time value Out-of-the-money calls and puts no intrinsic value all time value Total Premium Total Premium Time Value? Intrinsic Value Time Value

33 32 Intrinsic Value vs. Time Value XYZ at $ per share XYZ January call at $5.20 Call is in-the-money by $3.00 (stock price $ strike price $97.00) Intrinsic Value = $3.00 Total Premium = $5.20 Time Value = $2.20 For a call at $2.10: What is the intrinsic value? $0 What is the time value? $2.10 Time Value = Total Premium Intrinsic Value

34 33 Premium Value Quiz Stock Price Option Option Price In, At, Out Intrinsic Value Time Value $ Call $3.50 In-the-money $2.00 $1.50 $ Put $2.00 In-the-money $1.00 $1.00 $ Put $1.25 Out-of-the-money 0 $1.25 $ Call $1.50 At-the-money 0 $1.50

35 34 Things to Know What is a call? What is a put? What are the rights & obligations for call & put buyer & sellers? Option contract terms Exercise/assignment Where to find option prices What are ITM/ATM/OTM options? How to make a trade

36 35 The Options Education Program Whether you re an options novice or just deployed an iron condor, the Options Education Program has you covered. MyPath assessment--learn at your own pace online and customize your curriculum for your skill level. Download our podcasts and videos. Attend webinars and learn from the pros. Live options help from industry professionals at Investor Services. OptionsEducation.org

37 36 For More Information Investor Services: OIC YouTube Channel Follow us on