Weeklys Options What s New?

Transcription

1 Interactive Brokers Webcast SM Weeklys Options What s New? July 17, 2013 Presented by Russell Rhoads, CFA Senior Instructor

2 Disclosure CBOE Disclosure Statement 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, by calling OPTIONS, or from The Options Clearing Corporation atwww.theocc.com. Any strategies discussed 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 stock and options 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 option strategy will be taxed. Past performance is not indicative of, and does not guarantee, future results. No statement in this presentation is intended and should not be construed to constitute investment advice or recommendations to purchase or sell securities. CBOE, Chicago Board Options Exchange, OEX and XEO are registered trademarks and BuyWrite, BXM, Execute Success, SPX, The Options Institute and Weeklys are service marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P and S&P 500 are registered trademarks of Standard & Poor's Financial Services, LLC and have been licensed for use by CBOE. CBOE is not affiliated with Interactive Brokers. 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 2013 CBOE. All rights reserved. CBOE OPTIONS INSTITUTE 2

3 SM Weeklys Options What s New Outline Quick Introduction What s New Time Decay With Weeklys Short Term Trading Summary / Q&A / Contact CBOE OPTIONS INSTITUTE 3

4 Quick Introduction Weeklys on Indexes were introduced in 2005 (SPX OEX ) In 2010 following new symbology, Weeklys were introduced on stocks and exchange traded funds These short dated options have taken off in popularity 20% of daily volume often being attributed to Weeklys Approximately 200 underlying securities now have Weeklys listed on them CBOE OPTIONS INSTITUTE 4

5 What s New Serial options were introduced on several markets just over six months ago Many of the most actively traded options markets now have expiration every Friday for five weeks in a row This allows for added flexibility around timing of positions CBOE OPTIONS INSTITUTE 5

6 What s New Serial Options 7/19 7/26 8/2 8/9 8/16 Expirations Available Indexes OEX, RUT, SPX, XEO ETFs EEM, GDX, GLD, IWM, QQQ, SLV, SPY, VXX, XLF Stocks AAPL, AMZN, BC, BBRY, BIDU, BP, C, CLF, DDD, F, FS, FSLR, GMCR, GOOG, GS, HFL, IBM, IOC, ISRG, JCP, JPM, LNKD, MU, NFLX, PCLN, S, WFC, WYNN CBOE OPTIONS INSTITUTE 6

7 What s New Mini options were rolled out in the first quarter of this year on AMZN, AAPL, GOOG, GLD, and SPY Each option represents 10 shares of the underlying as opposed to 100 shares Mini Weeklys are also available on these stocks and exchange traded products CBOE OPTIONS INSTITUTE 7

8 Time Decay One of the reasons that Weeklys have become so popular relates to the impact of time decay on short dated option prices This pertains to rapid time decay for at the money options as well as very little time value with respect to in the money options Short term trades can benefit from low time value or rapid time decay CBOE OPTIONS INSTITUTE 8

9 Time Decay Call Premium over 20 Days CBOE OPTIONS INSTITUTE 9

10 Time Decay Call Premium over 20 Days CBOE OPTIONS INSTITUTE 10

11 Covered Call A covered call is one of the most common uses of the option market by all levels of option traders The motivation may either be for income or to exit a long stock position Regardless of the motivation the seller of a call option will benefit from time decay CBOE OPTIONS INSTITUTE 11

12 Covered Call The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index that tracks the performance of a hypothetical buy-write strategy on the S&P 500 Index The index tracks a passive strategy based on owning a portfolio that replicates the S&P 500 Index and writing SPX call options on a monthly basis The strategy takes a new short position in the nearest SPX strike price above the S&P 500 Index on the third Friday of each month The position is taken in the next standard expiration which is four to five weeks in the future This strategy can be replicated with shorter dated options as well SM CBOE OPTIONS INSTITUTE 12

13 Covered Call S&P 500 Total Return and BXM 12/31/1999 6/28/2013 BXM S&P 500 TR CBOE OPTIONS INSTITUTE 13

14 Covered Call 6/21/2013 BXM Roll Date Standard Expiration 7/19/2013 Weekly Expiration 6/28/2013 S&P 500 closed at Methodology will sell the 1595 Call Options SPX Weekly 6/28/ Call SPXPM 7/19/ Call for 5 Trading Days for 18 ½ Trading Days* *July 4 th Independence Day Holiday + July 3 rd Half Trading Day CBOE OPTIONS INSTITUTE 14

15 Covered Call Benefits of covered call strategy is shown through performance of the BXM BXM sells a near at the money call option that consistently expires approximately a month in the future The BXM methodology using a shorter dated option can result in more time decay benefits than selling an option that expires four to five weeks in the future CBOE OPTIONS INSTITUTE 15

16 Spread Trading Many spread trades will not realize their full profitability until very close to expiration A vertical spread is a prime example of this sort of price behavior Short term trading was somewhat limited related to the option market with respect to the spread trades The introduction of Weeklys has resulted in spread trading becoming a viable alternative for trading short term outlooks CBOE OPTIONS INSTITUTE 16

17 Spread Trading XYZ trading at Believe XYZ will be trading close to in 20 trading days Decide to put on a XYZ / Bull Call Spread that expires in 20 Trading Days Buy 1 XYZ Sell 1 XYZ Net Cost = 2.45 CBOE OPTIONS INSTITUTE 17

18 Spread Trading Payoff at 15 Days to Expiration versus Expiration CBOE OPTIONS INSTITUTE 18

19 Spread Trading Payoff at 10 Days to Expiration versus Expiration CBOE OPTIONS INSTITUTE 19

20 Spread Trading Payoff at 5 Days to Expiration versus Expiration CBOE OPTIONS INSTITUTE 20

21 Spread Trading With shorter dated contracts available options may now be a consideration for short term trades Previously the time constraints around expirations may have caused option trades to be immediately stricken from consideration for a short term trade Now spread trades that used to take weeks to reach their maximum profit levels can reach this point in just days CBOE OPTIONS INSTITUTE 21

22 Summary Weeklys have taken off in popularity since they were introduced on equity instruments in 2010 The flexibility of short dated options has increased with serial options and mini options being introduced Strategies that take advantage of time decay such as a covered call can benefit from shorter time to expiration Also strategies that involve having time decay work against the position may also make more sense with a short dated option CBOE OPTIONS INSTITUTE 22

23 Contact / Links Me Russell Rhoads rhoads@cboe.com Links CBOE OPTIONS INSTITUTE 23