January 10, 2018

Option Strategies for the Stock

Investor

Webinar Series for Fidelity Investments

@PeterLusk

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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. Futures trading is not suitable for all investors and

involves risk of loss. 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 future or to provide investment advice. Any strategies discussed, including examples using

actual securities or futures price data, 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 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 does not guarantee future results. Supporting documentation for any

claims, comparisons, statistics or other technical data in this presentation is available from Cboe upon request.

Cboe, Cboe Exchange, Inc., Cboe Volatility Index, CFE and VIX are registered trademarks and Cboe Futures

Exchange, Cboe Short-Term Volatility Index, Cboe 3-Month Volatility Index, Cboe Mid-Term Volatility Index,

Execute Success, RVX, SPX, The Options Institute VXST, VXN, VXV and VXMT are service marks of Cboe

Exchange, Inc (Cboe). S&P 500® is a registered trademark of Standard & Poor's Financial Services, LLC and

has been licensed for use by Cboe and Cboe Futures Exchange, LLC (CFE). Cboe's and CFE’s financial

products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no

representation regarding the advisability of investing in such products. Russell 2000® is a registered trademark

of Russell Investments, used under license. The NASDAQ-100 Index®, NASDAQ-100®, and NASDAQ® are

trademark or service marks of The NASDAQ Stock Market, Inc. (with which its affiliates are the "Corporations").

These marks are licensed for use by Cboe in connection with the trading of products based on the NASDAQ-

100 Index. The products have not been passed on by the Corporations as to their legality or suitability. The

products are not issued, endorsed, sold or promoted by the Corporations. THE CORPORATIONS MAKE NO

WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). Cboe is not affiliated with

Fidelity Investments. 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 © 2018 Cboe Exchange, Inc. All rights reserved.

Disclosure

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Option Basics Review

Rights / Obligations

Long Short

Call

Put

Right to Buy

Right to Sell

Obligation to Sell

Obligation to Buy

Owners have rights.

Sellers have obligations.

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Option Price Components

Six Option Pricing Factors

Pricing Concepts

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ATM Time Decay

Time Decay

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An option is trading today at $3.50

−theta of -$.03

−option is worth $3.50 x 100 shares = $350.00

Option’s expected value tomorrow = $3.50 - $.03 = $3.47

−option is worth $3.47 x 100 shares = $347.00

−theta -$.03 → $3.00 loss per contract

Assuming other pricing factors constant

Theta

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• Only options have implied volatility

• IV predicts a stocks future volatility

Today

Historical

Volatility

Implied

Volatility

↑

Stock

Price

↓

Volatility

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Converting the 1-year standard deviation:

Underlying Price I.V. Days to Exp

Days per year

SPX Index Level 2,600

Days to Expiration 28

Implied Volatility 12%

2,600 .12 28

365

SPX – Expected Range Example

= 82

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XYZ 60.00 strike call

• price = $5.00

• current volatility = 50%

• vega = .15

Volatility up from 50% to 51%

• call price increase $5.00 + .15 → $5.15

Volatility down from 50% to 49%

call price decrease $5.00 – .15 → $4.85

Assuming other pricing factors constant

Volatility and Vega

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Higher Volatility = higher premiums

option buyers pay more for more stock fluctuation

option sellers want more for increased risk

Lower volatility = lower premiums

option buyers pay less for smaller stock fluctuation

option sellers take less for decreased risk

Volatility

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Buy Call Example

Today is January 10th

XYZ trading $64.70

Buy 1 XYZ March 65 Call $2.40

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Buy Call Example

Profit and Loss at Expiration

Buy 1 XYZ March 65 Call $2.40

Max Profit = Unlimited

Max Loss = $2.40

Break-even = $67.40

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Covered Call

Today is January 10th

Own 100 shares XYZ at $31.50

Sell 1 XYZ February 33 Call $1.20 (theta .02)

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Covered Call

Maximum Profit = $2.70

Long Stock $31.50

Break-even = $30.30

Profit and Loss at Expiration

Sell 1 XYZ February 33 Call $1.20

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Short Put

Today is January 10th

XYZ trading $49.30

Sell 1 XYZ February 45 Put $1.00 (theta .02)

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Short Put

Profit and Loss at Expiration

Sell 1 XYZ February 45 Put $1.00

Maximum Profit = $1 Break-even = $44

Maximum Loss = Significant

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Covered Call and Short Put Comparison

• Profit potential if assigned:

effective stock sale price –

stock price paid

• Risk: substantial

• BEP: stock price paid – call

premium received

• Profit potential: limited to premium

received

• Risk: substantial

• BEP: strike – premium received

Covered Call Short Put

+

–

+

–

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• Own a $500,000 portfolio that closely

follows the S&P 500 (SPX) now at 2,600

• You are worried about a 15-20% market

decline in the next 3 months.

• You want to limit downside risk and keep

upside profit potential intact.

Protecting a Diversified Portfolio

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Determine # of SPX contracts:

Portfolio $Value to be Hedged

Notional Value of Index Contract (Strike x $100)

$500,000

2600 x $100

Buy 2 SPX April 2600 Puts @ $75 ($7,500/Contract)

Protecting a Diversified Portfolio

2 SPX

Puts

=

20

$500,000

SPX @ 2,600

Buy 2 SPX April 2600 Puts $75

Cost = 2 x 75 x $100 = $15,000

1 SPX Put protects $260,000

Strike price is at-the-money

Protecting a Diversified Portfolio

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Assume SPX at 2,080

Market is down 20% so portfolio is down 20%

$485,000 stock portfolio now $388,000

SPX 2,080 2,600 puts $520

Value of Puts: $520 x 2 x $100 = $104,000

Total Portfolio: $388,000 + $104,000 = $492,000

Market down 20% Portfolio down 1%

Protecting a Diversified Portfolio

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Collar Strategy

• Investor thinks put premium too costly

• Premium received will partially finance cost of put

Jun Calls Puts

50 $10.60 $0.30 55 $6.55 $1.40 60 $2.30 $2.10 65 $1.25 $6.20 70 $0.40 $10.20 75 $0.10 $14.90

Sell one 65 call @ 1.25

Buy one 55 put @ 1.40

Net Debit .15

Long 100 shares at $60

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• Understand ramifications of time decay and implied

volatility

• Theta

• vega

• Be familiar with implied volatility behavior

• factors that can affect it

• When establishing any position have a 3-part forecast

• Price of stock

• Time until expiration

• Implied volatility

Summary

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Cboe Global Markets

400 South LaSalle Street

Chicago, IL 60605

www.cboe.com

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