Options 101Options Tutorial Series – Part 1-A of 3

Basic to Intermediate Concepts

November 26, 2019Robert Sarian

TradersMeetup of Glendale

DisclaimerDisclaimer: Neither TradersMeetup.net nor its organizers with the exception of today’s presenter, are licensedfinancial advisors, registered investment advisors, registered broker-dealer nor FINRA | SIPC | NFA-member firm. Inaccordance to the policies of TradersMeetup.net, this presentation does not provide investment or financial advice ormake investment and trade recommendations. TradersMeetup.net is not in the business of transacting trades, nordoes TradersMeetup.net agree to direct your brokerage accounts or give trading advice tailored to your particularsituation. The content of today’s presentation does not constitutes a solicitation, recommendation, promotion orendorsement of any particular security, other investment product, transaction or investment. Moreover, thepresented examples are computer generated hypothetical positions unless otherwise stated.

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial riskof loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in lightof your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment.Opinions, market data, and recommendations are subject to change at any time.

All rights reserved. This Material may not be reproduced or distributed, in whole or in part, any other reproduction inwhatever form and by whatever media, is expressly prohibited without the prior written consent of TradersMeetup.

No Soliciting. No Recording. No Photography.

Fulltime trader

Stocks and ETFs for the past 30 years

Options for the past 12 years

Regsitered (FINRA & NASAA)

Series 7 & IAR licenses

Member of TradersMeetup group for 6+ years

About myself…

Agenda

Option Contracts

Option Pricing

How to Profit from Options

Types of Options based on Underlying

Option Greeks

Option Risk Profiles

Option Strategies

Future Meetups

What Are Options?

Not to be confused with “compensation” Options

An Option is a contract between a

Buyer and a Seller to transact shares

(or cash) of an underlying instrument

CALL Option

The BUYER (pays money - debit) of a CALL option is betting that the price of

an underlying will appreciate and has the right to purchase shares of the

underlying at a set price (strike) by a specific date (expiration).

The BUYER of a CALL option is LONG the CALL.

The SELLER (receives money - credit) of a CALL has the obligation to sell

shares of the underlying at a set strike by the expiration.

The SELLER of a CALL option is SHORT the CALL.

PUT Option

The BUYER (pays money - debit) of a PUT option is betting that the price of an

underlying will depreciate and has the right to sell shares of the underlying at a

set price (strike) by a specific date (expiration).

The BUYER of a PUT option is LONG the PUT.

The SELLER (receives money - credit) of a PUT has the obligation to buy

shares of the underlying at a set strike by the expiration.

The SELLER of a PUT option is SHORT the PUT.

So How Much Do These Options (Contracts) Cost?

Black–Scholes–Merton Options Price Model

https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

FB Currently at About 200…

I believe by 20-Dec-19 it will be above 205

Anyone willing to bet?

I would like the option of buying it at 205

Yes! I’ll bet.

“Considering the past volatility and Implying the

future Volatility to be +/- 11…”

I’ll sell you shares at 205 up until 20-Dec-19 in

return you pay me 2.60

How many shares? 100

FB

Current Price

Strike

Expiration

IV

Size (x100)

(Interest %)

Price

2.60

CALL Option

Option Price… Further OUT in Time

I believe by 17-Jan-20 it will be above 205

Anyone willing to bet?

Hmm…

“20-Dec-19 205 CALL is 2.60… Considering the IV

and the longer time…”

I’ll sell you a 17-Jan-20 205 CALL for…

4.90

FB

Current Price

Strike

Expiration

IV

Size (x100)

(Interest %)

Price

4.90

CALL Option

Option Price… Further AWAY from Current Price

I believe by 20-Dec-19 it will be above 210

Anyone willing to bet?

Hmm…

“20-Dec-19 205 CALL is 2.60… Considering the IV

and the fact that the strike is farther away …”

I’ll sell you a 20-Dec-19 210 CALL for…

Only $1.40

FB

Current Price

Strike

Expiration

IV

Size (x100)

(Interest %)

Price

1.40

CALL Option

Option Price… Effect of Sentiment

I believe by 20-Dec-19 it will be above 205

Anyone willing to bet?

Hmm…

“20-Dec-19 205 CALL was 2.60… news FB will be

announcing a new service …”

I’ll sell you a 20-Dec-19 205 CALL for…

3.60 !

FB

Current Price

Strike

Expiration

IV

Size (x100)

(Interest %)

Price

3.60

CALL Option

CALL Option Price… Below the Current Market Price

I believe by 20-Dec-19 it will be above the current

price of 200

But I would like to buy the 20-Dec-19 195 CALL?!

Wow ! Hmm…

“Gain of $5 built in plus the risk …”

I’ll sell you a 20-Dec-19 195 CALL for…

7.60 !

Intrinsic Price = 5.00

Extrinsic Price = 2.60

FB

Current Price

Strike

Expiration

IV

Size (x100)

(Interest %)

Price

7.60

CALL Option

Extrinsic (Time*) Value vs Strike

Buyers to Avoid

Sellers to Relish

Extrinsic Value on Price Chart

Taking Profit… To Exercise or Not To Exercise?!Let’s assume…

On 11/25/19 FB = 200 & Bot 1x FB 20-Dec-19 205 CALL for 2.60

4 days later FB = 210

On 11/25/19 11/29/19

Ext Value = 2.60 1.60

Int value = 0.00 5.00

Exercise (Assignment):

Buy 100sh FB 20,500

CB = 20,500 + 260 = 20,760

Sell 100sh FB 21,000

Profit = 240

Sell to Close*:

CB = 260

Sell 1x CALL = 660

Profit = 400

Types of Options Based on the UnderlyingOptions on Equities (Stocks, ETFs, etc.)

One contract is x100 shares underlying

American Style Options

Options on Indices (S&P500, Russell 2000, etc.)One contract is Underlying x100 cash (i.e. SPX 3100 x100 = $310,000)

European Style Options

Expiration

Options on Futures (ES, RTY, CL, etc.)Each contract Futures x1000 cash (i.e. ES 3100 x1000 = $3,100,000)

European Style Options

Options are Derivatives – trading hours

Options are Leveraged – margin/cash accounts & Reg-T

Why Trade Options?

Let’s assume…

On 11/25/19 11/29/19

FB 200 210

FB 20-Dec-19 205 CALL 2.60 6.60

Stock Trade: Options Trade:

Buy 100sh FB 20,000 Buy CALL 260

Sell 100sh FB 21,000 Sell CALL 660

Profit = 1,000 Profit = 440

RoC = 1,000/20,000 = 5% RoC = 400/260 = 154%

Options (Big Fat) Greeks

Source: https://en.wikipedia.org/wiki/Greeks_(finance)

Long 1x FB 20-Dec-19 205 CALL for 2.60

Debit Amount (CB) = 260.00

Bought on 11/25/2019

FB price goes up from 200 to 201, no other change

The position = 293.00 Delta = +33 (1 point increase in stock price)

One day passes, no other change

The position = 251.00 Theta = -9 (passing of one day)

FB announces new product, no other change

The position = 279.60 Vega = 19.60 (1% increase in IV)

An Option Position Makes & Looses Money

In 3 ways…

1. Change in price of the underlying Delta

2. Passing of time Theta

3. Change in Volatility Vega

The Option Chain

ATMOTM

OTM

ITM

ITM

20-Dec-19 CALL Delta on Price Chart

OTM

ITM

50

90

10

Time Decay of Extrinsic Value

Not constant over time

ATM vs I/O-TM

Weeklys vs Monthly

Weekend / Holiday Falacy

Source: www.ichimokutrade.com

Volitality Index: VIX Expected move of SPX (in %) within the next 30 days with 68% confidence level.

The Fear Index

Measure of how inflated the Extrinsic Value is.

Source: https://en.wikipedia.org/wiki/VIX

Thank You

Sources:https://www.sheridanmentoring.com/https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_modelhttps://www.tastytrade.comhttps://en.wikipedia.org/wiki/VIXhttps://en.wikipedia.org/wiki/Greeks_(finance)