Options overview

1. Options overview Presented by Minh LE and roy Choi

2. Options and you • What you should try to do • Understand the risk of options • Keep an open mind about options • What you shouldn’t try to do • Consider yourself an expert on options • Start trading options tomorrow • A note about hedging

3. Options and you • Today • Vanilla options: American/European

4. Overview • Long and Short Stocks • Call and Put Options • Options Duration and Expiration

5. Long and Short Stocks • Buying/selling stocks • Any number of shares Long Stock Short Stock Profit Profit Purchase Price Stock Price Stock Price Sell Price Loss Loss

6. Call Option • Buying/selling a call option • 100 shares per contract

7. Put Option • Buying/selling a put option • 100 shares per contract

8. Options Duration • Time is money • Time to expiration (T-t) • Time value • Logarithmic time decay

9. Options Expiration • Varying expirations • > 1 year: LEAPs (Long-Term Equity Anticipation Securities ) • Quarterly • Monthly • Weekly

10. One Last Thing… RISK!!!!

11. Options – Introduction (Part II) Using Options to Tweak Your Equities Portfolio By Wonwoo Choi and Minh Le

12. Table • 1. Intro / Warning • 2. Reducing Risk • 3. Ramping Up Risk (will be skimmed only) • 4. Reducing Risk Somewhere and Ramping Up Risk Elsewhere

13. 1. Combining Options and Equities • Pure options strategy is extremely risky. You must be very intimate with Implied Volatility and its behavior, which can be very challenging. • For most investors, even the seasoned ones, combining options on their equities portfolio is the practical extent of options usage. • Caveat Emptor: Beware of what options you are buying and selling to combine with your equities leg. You may take on unlimited risk/reward potential very easily if you’re not monitoring your trades carefully. • Don’t try this at home unless you’ve gained some experience.

14. 2. Reducing Risk • Fundamental Principle: Surrender some profit potential to decrease your risk. • Collar • Covered Call (OTM) • Covered Call (ITM) • Protective Put (OTM)

15. Collar • A very common concept used in other markets (e.g. interest rate collar) • Give up topside potential to gain downside protection. Interest rate collar Options Collar P/L +100 Stock -1 OTM Call +1 OTM Put

16. Covered Call (OTM) • Give up SOME topside potential to improve break-even point and/or collect a fixed amount. +100 Stock -1 OTM Call

17. Covered Call (ITM) • Give up ALL topside potential to afford greater downside protection. +100 Stock -1 ITM Call

18. Protective Put (OTM) • Pay a “fee” to gain protection +100 Stock +1 OTM Put

19. 3. Ramping Up Risk • People find it very easy to ramp up risk. • A few simple tricks. • Add a long call or bullish call spread to your stock position. • Add a short put or bullish put spread to your stock position. • Add a synthetic long / short position for a home made leverage (still restricted to your options margin, of course)

20. Synthetic Long Position • C(t) – P(t) = S(t) – Ke^(-r(T-t)) • +1 call & -1 put with same strike will behave as stock purchased with borrowed money. • Why do this instead of just buying at margin? • Well, it depends on your broker’s margin requirement. If it turns out that just plain old margin is better than uncovered options margin, don’t do this.

21. 4. Reducing Risk Somewhere and Ramping Up Risk Elsewhere • Stock Repair Strategy +100 stock +1 ATM Call -2 OTM Call