ETF Options Strategies: Controlling Risk, Maximizing Returns

Transcription

1 ETF Options Strategies: Controlling Risk, Maximizing Returns Don Chance, Moderator James C. Flores Endowed Chair of MBA Studies Louisiana State University Rudy Aguilera, Panelist Principal Helios LLC Guido Giese, Panelist Director, Research and Development STOXX Limited Steve Meizinger, Panelist Director of Education International Securities Exchange

2 ETF Options Strategies: Controlling Risk, Maximizing Returns Rudy Aguilera, Panelist Principal Helios LLC

3 ETF Options Strategies Steve Meizinger Director of Education International Securities Exchange

4 For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy.. Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS. Copies have been provided for you today and may be obtained from your broker, one of the exchanges or The Options Clearing Corporation. A prospectus, which discusses the role of The Options Clearing Corporation, is also available, without charge, upon request at OPTIONS or Any strategies discussed, including examples using actual securities price data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities.

5 SPY as an example 111 as of Nov 24 09

6 SPY 53 day option prices. 53 day calls Strike 53 day puts

7 Long Calls and Puts Have Limited Risk $111 reference 53 days until expiry 108c $ p $5.25

8 Covered Calls for Income Generation 53 days left until expiry, $ net debit, selling the (2.75) 111 call against long SPY. SPY trading $111

9 Collars for Protection 53 days left until expiry, $1.24 credit for 111c/105p collar, $ net debit. 111 SPY, 111c $2.75, 105p $1.51

10 Credit Call and Put Spreads for Income Generation with Limited Risk 53 days left until expiry, 113/118c spread 1.34 credit, 109/104p spread 1.34 credit. SPY 111, 113c $1.82, 118c $0.48, 109p $2.65, 104p $1.31

11 Long OTM Calls and OTM Puts Expecting Movement with Limited Risk 53 days left until expiry, buy a strangle. Buy the 114c (1.45) and the 108p (2.35) for a total debit of SPY 111

12 ETF Options Strategies: Controlling Risk, Maximizing Returns Guido Giese, Panelist Director Research & Development STOXX Ltd.

13 Options on ETFs Exchange-traded funds offer an efficient vehicle that allows access to a wide range of index-based investments across multiple asset classes. Options on ETFs increase the overall attractiveness of the market by allowing investors to reduce risk or generate returns on this new, wide range of investable assets in ways historically only available to institutional investors using bespoke, over-the-counter markets. How do some of these strategies really perform when systematically executed?

14 BuyWrite Strategy Case Study: Dow Jones EURO STOXX 50 BuyWrite Index Replicates the performance of a monthly rolling covered call strategy. Long underlying, short calls. Profits by being paid a premium in return for forgoing the upside. Sell calls on the underlying index (strike 5% out of the money). Pay-off 5% 0 Option premium Long Index Payout Invest notional in the index but potentially give the upside away. Works well in markets that are neutral to moderately bullish. 5% Strike Par Short Call Underlying Index

15 PutWrite Strategy Case Study: Dow Jones EURO STOXX 50 PutWrite Index Replicates the performance of a rolling collateralized put option strategy. Profits from higher risk premiums on put options compared with calls. Sell puts on the underlying index (strike 5% out of the money). Invest notional plus option premium into the money market. Performance boost by writing three monthly put tranches collateralized by quarterly Euribor. Works well in markets that are not very bullish.

16 Index Performance: Rebased to Index values / / / / / / / / / / / / / / / / / / / / /2009 Underlying Index PutWrite Index BuyWrite Index

17 Index Performance: Risk/Return 10% 8% 6% Aver. Annual Return Perf. 4% 2% 0% 0% 5% 10% 15% 20% 25% 30% -2% -4% -6% Aver. Annual Risk Volatility Underlying Index PutWrite Index BuyWrite Index

18 ETF Options Strategies: Controlling Risk, Maximizing Returns Don Chance, Moderator James C. Flores Endowed Chair of MBA Studies Louisiana State University Rudy Aguilera, Panelist Principal Helios LLC Guido Giese, Panelist Director, Research and Development STOXX Limited Steve Meizinger, Panelist Director of Education International Securities Exchange