Interactive Brokers Webcast Bearish Spreads April 19, 2017
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 www.theocc.com. 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 to provide investment advice. Any strategies discussed, including examples using actual price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. 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. Investors should consult with their tax advisors to determine how the profit and loss on any particular strategy will be taxed. Past performance is not indicative of future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation is available from CBOE upon request. CBOE and Chicago Board Options Exchange are registered trademarks and CBOE Options Institute is a service mark of Chicago Board Options Exchange, Incorporated (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. 2017 CBOE. All rights reserved 2
Bearish Spreads Outline Bearish Vertical Spreads Trading Examples Summary / Q&A 3
Bearish Vertical Spreads Construction A Bearish Vertical Spread may be structured in two ways All Put Options Long higher strike / short lower strike Pay a Debit for initiating the trade All Call Options Long higher strike / short lower strike Receive a Credit for initiating trade 4
Bearish Vertical Spreads Examples Bear Put Spread Short 1 XYZ 25 Put at 5.20 Long 1 XYZ 30 Put at 7.50 Pay Debit of 2.50 Bear Call Spread Short 1 XYZ 55 Call at 7.00 Long 1 XYZ 60 Call at 5.00 Receive Credit of 2.00 5
Bearish Vertical Spreads Call Spread Example XYZ Trading at 44.00 Bearish outlook for XYZ Target price of 4 in 45 Days 45 Day Option Pricing Bid Ask 40 Call 4.70 4.75 45 Call 1.75 1.80 50 Call 0.45 0.50 Sell 1 40 Call at 4.70 Buy 1 45 Call at 1.80 Net Credit = 2.90 6
Bearish Vertical Spreads Call Spread Example Payoff at Expiration Stock 40 Call 45 Call Credit P/L 35 40 45 50 55 (5.00) (1) (15.00) 5.00 1 2.90 2.90 2.90 2.90 2.90 2.90 2.90 (2.10) (2.10) (2.10) Recall Target Price = 4 7
Bearish Vertical Spreads Call Spread Example Payoff Diagram 4 3 Max Gain +2.90 XYZ 44.00 2 1 0 Target price 4 4 45.00-1 -2-3 Break even 4 + 2.90 = 42.90 Max Loss -2.10 8
Bearish Vertical Spreads Call Spread Example XYZ Trading at 44.00 Neutral to bearish outlook for XYZ Expect stock at 44.00 in 45 Days 45 Day Option Pricing Bid Ask 40 Call 4.70 4.75 45 Call 1.75 1.80 50 Call 0.45 0.50 Sell 1 45 Call at 1.75 Buy 1 50 Call at 0.50 Net Credit = 1.25 9
Bearish Vertical Spreads Call Spread Example Payoff at Expiration Stock 45 Call 50 Call Credit P/L 35 40 45 50 55 (5.00) (1) 5.00 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 (3.75) (3.75) Recall Expect stock < 45.00 10
Bearish Vertical Spreads Call Spread Example Payoff Diagram 2 1 Max Gain +1.25 Target Price less than 45.00 0 45.00 5-1 -2-3 XYZ 44.00 Break even 45.00 + 1.25 = 46.25 Max Loss -3.75-4 11
Bearish Vertical Spreads Call Spread Comparison 40 / 45 Bear Call Spread Risk = 2.10 Reward = 2.90 45 / 50 Bear Call Spread Risk = 3.75 Reward = 1.25 This is explained better with a payoff diagram 12
Bearish Vertical Spreads Call Spread Comparison Payoff Diagrams 4 3 2 1 0-1 -2 Max Gain +2.90 Max Gain +1.25 XYZ 44.00 4 45.00 5 Break even 42.90 Break even 46.25 Max Loss +2.10-3 -4-5 Max Loss -3.75 13
TWTR Earnings Bear Call Spreads On February 5 th TWTR Closed at 41.26 scheduled to report earnings after the close Two different bearish trades came in late in the day Three year summary of TWTR earnings reactions Max Min Abs Avg. Last Q 19.98% -24.16% 15.64% -9.84% 15.64% = +/- 6.45 Data Source: Bloomberg 14
TWTR Earnings Bull Put Spreads Sell 1 TWTR Feb 6 th 48 Call at 0.45 Credit = 0.23 Buy 1 TWTR Feb 6 th 50 Call at 0.22 Risk = 1.77 Sell 1 TWTR Feb 6 th 45 Call at 0.97 Credit = 0.75 Buy 1 TWTR Feb 6 th 50 Call at 0.22 Risk = 4.25 15
TWTR Earnings Bear Call Spreads TWTR Feb 6 th 48 / 50 Bear Call Spread 2.00 1.00 Average move 47.70 41 42 43 44 45 46 47 48 49 50 51 52-1.00-2.00-3.00-4.00-5.00-6.00 16
TWTR Earnings Bear Call Spreads TWTR Feb 6 th 45 / 50 Bear Call Spread 2.00 1.00 Average move 47.70 41 42 43 44 45 46 47 48 49 50 51 52-1.00-2.00-3.00-4.00-5.00-6.00 17
TWTR Earnings Bear Call Spreads Spread Comparison 2.00 1.00 Average move 47.70 41 42 43 44 45 46 47 48 49 50 51 52-1.00-2.00-3.00-4.00-5.00-6.00 18
TWTR Earnings Price Action Daily Prices 50 45 Friday Close 48.01 40 35 30 11/26/14 12/15/14 1/2/15 1/21/15 2/6/15 Data Source: Bloomberg 19
TWTR Earnings Summary Two bearish spreads based on the same event One is actually more neutral and one is actually more of a bearish trade The neutral trade was wrong and still turned out well 20
Russell 2000 Index Option Trade Bear Call Spread Friday February 12, 2016 RUT @ 960 Sell RUT Mar 18 th 1060 Call at 2.90 Buy RUT Mar 18 th 1080 Call at 1.55 Net Credit = 1.35 21
Russell 2000 Index Option Trade Bear Call Spread RUT Mar 18 th 1060 / 1080 Bear Call Spread 1 5.00 RUT @ 960 RUT @ 1060 Up 10.4% 920 940 960 980 1000 1020 1040 1060 1080 1100 1120-5.00-1 -15.00-2 22
Bearish Spreads Questions / Links / Contact Questions? www.cboe.com/education www.cboe.com/blogs CBOE App @RussellRhoads rhoads@cboe.com 23