Disclosure 6/26/2017. TEXPERS Derivatives Symposium. 6/20/2017 Chicago Board Options Exchange (CBOE)

Transcription

1 6/20/2017 Chicago Board Options Exchange (CBOE) TEXPERS Derivatives Symposium Kevin P. Davitt 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 Futures trading is not suitable for all investors, and involves risk of loss. 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 futures contract 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. CBOE, Chicago Board Options Exchange, CBOE Volatility Index and VIX are registered trademarks and The 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 and CBOE Futures Exchange, LLC. Financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor s, and Standard & Poor s makes no representation regarding the advisability of investing in such products. 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 2017 CBOE. All rights reserved. 2 1

2 TEXPERS Derivatives Symposium Overview A Little History Option Basics Why Should You Care? Option Strategies Questions 3 A Little History Chicago Trading History Chicago Board of Trade was established in 1848 In 1864 the first standard futures contracts established In 1898 Chicago Mercantile Exchange was established as the Chicago Butter and Egg Board The Black-Scholes pricing model developed in 1973 Standardized Options are traded in 1973 at CBOE Electronic futures trading system GLOBEX (CME) created in

3 The Recipe Option Valuation Model Physics jammed into Finance 5 A Little History CBOE History Founded by Chicago Board of Trade First day of trading was April 26, 1973 Calls only 16 stock series Total first day volume was 911 contracts 2004: CFE exchange VIX futures Historically: Member owned organization (931 seats) June 15, 2010: CBOE goes public w/~$3 billion valuation (current valuation ~$10 billion). 6 3

4 A Little History Option Markets Today There are 15 options exchanges linked together electronically Approximately 3000 different stocks, exchange traded funds, and indexes have listed option markets Daily volume between 15M and 25M contracts is typical The result of all these participants and volume is a very transparent and orderly market 7 Option Basics Call Option on a Stock Buyer of a call option on a stock (Long) pays a premium for the RIGHT to BUY 100 shares of stock (ETF/Index) at specified price (the strike price) by a certain date (expiration) Seller of a call option on a stock (Short) collects a premium and takes on the OBLIGATION to SELL 100 shares of stock (ETF/Index) at specified price (the strike price) by a certain date (expiration) Call buyers have defined risk (premium) and unlimited potential Time decay works against long option positions 8 4

5 Option Basics Put Option on a Stock Buyer of a put option on a stock (Long) pays a premium for the RIGHT to SELL 100 shares of stock at specified price (the strike price) by a certain date (expiration) Seller of a put option on a stock (Short) collects a premium and takes on the OBLIGATION to BUY 100 shares of stock at specified price (the strike price) by a certain date (expiration) Put option buyers have defined risk (premium) and significant potential Calls and puts are just contracts created between two parties where buyers pay a premium and have rights and sellers collect a premium and assume an obligation 9 Option Basics Insurance Tends to be Good Business The Insurance Analogy Option Contract Price of Index Option Strike Price Time Until Expiration Interest Rates Implied Volatility Insurance Policy Asset Deductible Time of Contract Interest Rates Risk of Loss Insurance Companies collect Premiums (option sellers) Home/Business/Automobile Owners pay Premiums (option buyers) 10 5

6 Questions? From Niche to Mainstream There s Something About Options 12 6

7 From Niche to Mainstream There s Something About Options 13 CBOE - Products Cash Settled Index Options SPX (S&P 500) VIX RUT (Russell 2000) NDX (Nasdaq 100) DJX (Dow Jones Industrial) OEX (S&P 100) MXEF (MSCI Emerging Markets Index) FTSE China 50 FTSE Developed Europe Index 14 7

8 VIX Introduction Evolution of VIX VIX was introduced by CBOE in 1993 based on work done by Dr. Robert Whaley The original VIX methodology used options on the S&P 100 In 2003 the VIX calculation changed to focusing on S&P 500 Index options The Index is considered the benchmark barometer of market volatility VIX has a negative correlation to S&P 500 prices 15 VIX Introduction Long Term Price Action Quarterly High / Low / Average Q Data Source: CBOE.COM 16 8

9 VIX Introduction Long Term Moving Averages 1, 5, 10 Year Moving Averages Year Average Year Average 5 Year Average Data Source: 17 Options: Strategy Basics 9

10 Overview Options are often considered risky trading instruments In reality call and put options are typically used to create strategies that REDUCE equity or portfolio risk Income generation and hedging against adverse outcomes are also goals that may be achieved using options Options, in many ways, make protecting and potentially growing capital easier 19 Financial Market Participants Investors: Seek to profit through long-term ownership of assets Speculators: Attempt to profit from fluctuations in the market value of a tradable good or instrument Hedgers: Enter into transactions that offset pre-existing risk Spreaders/Relative Value: Attempt to buy and sell fungible instruments that trade at different prices in various markets Investors make up the vast majority of market participants. Smart money typically hedges their investment portfolio 20 10

11 Buy Write and Put Write Great Combinations Combining options with a long position in an underlying equity, ETF, Index, or Cash can be a great combination 21 The Covered Call This strategy involves selling a call option against a long stock position A short call results in the obligation to sell shares at a certain price over a certain period of time This obligation to sell shares is covered through having a long stock position Often a first option strategy - it combines a passive long position with a short (sold) call The Covered Call (or Buy Write) has defined risk/reward parameters over the life of the short option The Buy Write reduces risk and often, but not always, enhances performance 22 11

12 Covered Call On March 18 th IBM is trading at A holder of 100 shares of IBM decides they would be a willing seller of shares over in four weeks Standard April options expire on April 15 th Trade Sell 1 IBM Apr 175 Call at Covered Call Position Long 100 IBM at Short 1 IBM Apr 175 Call at 23 Covered Call Payoff at Expiration Long 100 IBM at Short 1 IBM Apr 175 Call at Stock Price Stock Profit / Loss (7.50) (5.00) (2.50) Call Value at Expiration (2.50) (5.00) (7.50) Option Income Profit / Loss (4.50) (2.00)

13 Covered Call Payoff at Expiration Long 100 IBM at Short 1 IBM Apr 175 Call at Covered Call Long IBM at Covered Call Payoff at Expiration Long 100 IBM at Short 1 IBM Apr 175 Call at Call Option Expires Shares Called Away

14 CBOE S&P 500 BuyWrite Index (BXM SM ) Same Strategy Applied to an Index Smart Money (2001): we need a benchmark. Prof. Robert Whaley of Duke U. commissioned by the CBOE Passive Buy Write benchmark index calculated for period from June 1, 1988 (when S&P began reporting daily dividends) Methodology Buy and hold S&P 500 stock portfolio. Write (sell) S&P 500 (SPX) call option 12 times a year. Call option has exercise price just above prevailing index level (i.e., slightly outof-the money). Call option is held until expiration and cash-settled, at which time a new onemonth call is written. 27 Index BuyWrite Realistic outcomes Most broad based Indexes remain relatively range bound in the short term Quick Math: SPX (M/M)>1.7% (1986-May 2017)= ~15.2% SPX (M/M)>2.0% (1986-May 2017)= ~13.5% Covered Call strategy outperforms in any down market Covered Call strategy outperforms in many up markets Covered Call strategy underperforms in some up markets 28 14

15 Option Strategies Cash Secured Put On March 18 th IBM is trading at An investor would be willing to buy 100 shares of IBM if it sold off by 3% Standard April options expire on April 15 th Trade Sell 1 IBM Apr Put at Cash Secured Put Position Long $16,750 in an account Short 1 IBM Apr Put at 29 Option Strategies Cash Secured Put Payoff at Expiration Long Cash + Short 1 IBM Apr Put at Stock Price Long IBM stock (12.50) (10.00) (7.50) (5.00) (2.50) Put Value at Expiration Option Income $ Secured Put P&L (4.50) (2.00)

16 Cash Secured Put v. Long Stock Long 100 IBM at Short 1 IBM Apr Put at Long IBM Shares Expiry below $ = Long IBM with effective purchase price of $ Buy Write & Cash Secured Put Write 32 16

17 Option Basics Summary Options give investors tremendous flexibility as well as the potential to enhance yield/generate income and protect downside Option buyers pay a premium and have rights Option sellers collect a premium and assume an obligation The options business continues to grow as more people understand and embrace their utility Risk mitigation is often the primary goal of option users If you have questions we likely have answers! 33 Questions / Contact Kevin Davitt davitt@cboe.com Twitter