options primer

Cabot Investors Conference 2013 www.cabot.net

Options Primer

Jacob MintzAnalyst, Cabot Options

Trader

[email protected]


Options Primer

• Calls

• Puts

• Market Leverage

• Using Options to Create Yield

• Using Options to Protect Your Portfolio


About Me• How did I become a trader?• My unlce “knew a guy”• Learned under two CBOE

legends• Became a Market Maker• Designated Primary Market

Maker on CBOE and Pcoast• Took my team off the trading

floor in 2010 • What I’m doing now


Call Option

• A call option gives its holder the right to BUY 100 shares of the stock at the strike price, anytime prior to the options expiration date

• The seller of the option has the obligation to sell the shares

• Equity option contracts represent 100 shares of the underlying stock


TSLA Call

• Buy 1 TSLA September 155 Call for $10


TSLA Call• Symbol: TSLA

• Month of the Call’s Expiration: September

• Date of expiration: September 21, 2013

• Strike: 155

• Price: $10


Premium• An option’s price

• The potential loss for the holder of an option is LIMITED to the initial premium paid for the contract

• On the other hand, the seller of the call has UNLIMITED potential loss, which is somewhat offset by the initial premium received


How is the Price of the Call Determined?

VolatilitySupply and demand: If I want to buy this call, you will sell some at $10, then when you see I want more, you will raise the price to $10.05 You want more? Now the price is $10.10


How is the Price of the Call Determined?

Likelihood the call will finish in-the-money due to time Generally, the longer the time remaining until an option’s expiration, the higher the premium—because the longer an option’s lifetime, the greater the possibility the underlying share price will move to make the option in-the-money


Profit and Loss Graph

• Insert Graph hereTSLA Call at Expiration

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Power of Options

• Instead of paying $ 15,500 to buy 100 shares of TSLA, you can pay $1000 for the opportunity to buy 100 shares at $150


Order Flow Reading

Following a large order from a hedge fund or trading desk who may have more information


Using Long-Term Options


Put Option•A put option gives its holder

the right to SELL 100 shares of the stock at the strike price, at any time prior to the option’s expiration date

•The seller of the option has the obligation to buy the shares


AAPL Put• Buy 1 AAPL September 450 Put

for $8

• Symbol: AAPL

• Month of the put’s expiration: September

• Date of expiration: September 21

• Strike: 450

• Price: $8


How is Price of Put Determined?

• Volatility in puts is like a hurricane coming at your house: When the hurricane is coming, you want as much insurance as possible—so you buy protection (puts) in case the storm hits your home

• Likelihood of finishing in-the-money due to time


Profit and Loss GraphAAPL Put at September Expiration

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The Power of Options

• Unless you have special arrangements, brokers won’t let you short stocks without paying significant margin due to the risk

With options, you only have to pay $800 to have the ability to short 100 shares of AAPL


The Flash Crash


Creating Yield


Covered Call Writing

• A Covered Call Write consists of buying or owning a stock and selling (i.e., shorting) a call option on that stock


Facebook Covered Call

• Buy 100 Facebook at $38

• Sell 1 FB September 40 Call at $1.75

• Expires 9/21/2013


FB Covered Call• You can write one Call on

each 100 shares of stock you own. Your short option position is “covered” by the stock. A short Call on stock in your account (a Covered Call) is a very conservative strategy and requires no margin.


Profit and Loss GraphFacebook Covered Call at September Expiration

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30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

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Net Yield CreatedStock at 38 we have created a

4.6% yield

Stock at 40 we have created a 9.8% yield


Portfolio Protection

• Covered Call

• Put Purchase

• Risk Reversal


SPY Covered Call • Buy 100 SPY at $170

• Sell 1 SPY September 172 at $2

• Expires 9/21/2013


PNL GraphSPY Covered Call at September Expiration

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SPY Put Purchase• Buy 100 SPY at 170

• Buy 1 SPY September 168 Put at 2.50

• Expires 9/21/2013


PNL GraphSPY Put Position at September Expiration

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“It’s better to be lucky …

than good.”

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