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Choosing The Best Option Strategy: March 10, 2016 Peter Lusk - The Options Institute at CBOE

ChoosingBestOptionsStrategy

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179 views

Choosing The Best Option Strategy: March 10, 2016 Peter Lusk - The Options Institute at CBOE

ChoosingBestOptionsStrategy

Uploaded by

debaditya_hit326634
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Choosing the Best Option Strategy

March 10, 2016


Peter Lusk - The Options Institute at CBOE

Copyright(c)2016CBOE. AllRightsreserved

Disclosure
In order to simplify the computations, commissions have not been included in the examples used in these
materials. Commission costs will impact the outcome of all stock and options transactions and must be
considered prior to entering into any transactions. Multiple-leg strategies involve multiple commission
charges.
Any strategies discussed, including examples using actual securities and 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.
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, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite
500, Chicago, Illinois 60606. Investors considering options should consult their tax advisor as to how taxes
may affect the outcome of contemplated options transactions.
CBOE and Chicago Board Options Exchange are registered trademarks and The Options Institute is a
servicemark of CBOE. All other trademarks and servicemarks are the property of their respective owners.
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 2016 Chicago Board Options Exchange, Incorporated. All rights reserved.

CBOE OPTIONS INSTITUTE

PresentationOutline

Quiz - Pick the best option


Buy Call vs Bull Call Spread
Straddle vs Strangle
Protective Put vs Collar

CBOE OPTIONS INSTITUTE

Pick the Best Option

Quiz PicktheBestOption
50 days to expiration
Stock 92.80 96.50
Days to Exp.
50 40
(50-day options)
91 Call
4.10
93 Call
2.90
95 Call
1.95
97 Call
1.20

CBOE OPTIONS INSTITUTE

Which option would


you buy?

Quiz PicktheBestOption
50 days to expiration
Stock
Days to Exp.
(50-day options)

92.80 96.50
50
40

Estimated results in $

91 Call

4.10 6.40

+2.30

93 Call

2.90 4.95

+2.05

95 Call

1.95 3.70

+1.75

97 Call

1.20 2.70

+1.50

CBOE OPTIONS INSTITUTE

Quiz PicktheBestOption
50 days to expiration
Stock
Days to Exp.
(50-day options)

92.80 96.50
50
40

Estimated results in %

91 Call

4.10 6.40

+2.30

+ 56%

93 Call

2.90 4.95

+2.05

+ 70%

95 Call

1.95 3.70

+1.75

+ 90%

97 Call

1.20 2.70

+1.50

+125%

CBOE OPTIONS INSTITUTE

Time Decay and Volatility

ATMCallOption
Option premium erodes with the passage of time
only time value affected not intrinsic value
erosion accelerates as expiration approaches

Option Option
Premium
Premium

Time to Expiration (Months)

CBOE OPTIONS INSTITUTE

EffectsofChangingVolatility
Change in Volatility
(Implied or Assumed)

Call
Prices

Put
Prices

Volatility

Volatility

CBOE OPTIONS INSTITUTE

10

Volatility
Today

Stock
Price

Historical
Volatility

Implied
Volatility

Only options have implied volatility


IV predicts a stocks future volatility
16

CBOE OPTIONS INSTITUTE

11

Buy Call vs Bull Call Spread

PlanningaTrade
Three-Part Forecast

1) What will the stock do?


2) How long will it take?
3) What about volatility?

Forecasts are the foundation of all option trades

CBOE OPTIONS INSTITUTE

13

BuyCallExample
Max Profit
Unlimited

50

Max Loss
$290.00

55

BEP
$52.90

Break-even point
lower strike + debit paid
$50.00 + $2.90 = $52.90

Long 50 strike call $2.90


Not including commissions
CBOE OPTIONS INSTITUTE

14

TwoGreeks
Buy Call

Long 50 Call 2.90

CBOE OPTIONS INSTITUTE

Vega Theta
+.10 0.03

15

BullCallSpreadExample

Max Profit
$330.00
50
55

Max Loss
$170.00

BEP
$51.70

Long 50 Call
Short 55 Call
Net Debit
CBOE OPTIONS INSTITUTE

2.90
1.20
1.70

Break-even point
lower strike + debit paid
$50.00 + $1.70 = $51.70

Not including commissions


16

TwoGreeks
Bull Call Spread

Long 50 Call 2.90


Short 55 Call 1.20
Net Debit
1.70

CBOE OPTIONS INSTITUTE

Vega Theta
+.10 0.03
.08 +0.02
+.02
-.01

17

Straddle vs Strangle

LongStraddleExample
+
5
BEP
$43.80

BEP
$56.20

0
45

50

55

Maximum Loss:
$6.20 Debit Paid
$620.00 Total
Break-even at Expiration:
Upside = Strike + Debit Paid
$50.00 + $6.20 = $56.20
Downside = Strike Debit Paid
$50.00 $6.20 = $43.80

Long 50 ATM call $3.20


Long 50 ATM put $3.00
Net debit
$6.20
CBOE OPTIONS INSTITUTE

Not including commissions

19

TwoGreeks
Long Straddle

Long 50 Call 3.20


Long 50 Put 3.00
Net Debit
6.20

CBOE OPTIONS INSTITUTE

Vega Theta
+.10 0.03
+.10 0.03
+.20 .06

20

LongStrangleExample
+
5
BEP
$57.45

BEP
$42.55

0
45

50

55

Maximum Loss:
$2.45 Debit Paid
$245.00 Total
Break-even at Expiration:
Upside = Call Strike + Debit Paid
$55.00 + $2.45 = $57.45
Downside = Put Strike Debit Paid
$45.00 $2.45 = $42.55

Long 55.00 call $1.40


Long 45.00 put $1.05
net cost: $2.45
CBOE OPTIONS INSTITUTE

Not including commissions

21

TwoGreeks
Long Strangle

Long 55 Call 1.40


Long 45 Put 1.05
Net Debit
2.45

CBOE OPTIONS INSTITUTE

Vega Theta
+.06 0.02
+.06 0.02
+.12 .04

22

Protective Put vs Collar

ProtectivePut
Own 100 shares XYZ at $42.00
Buy 1 60-day XYZ 40 put at $1.55
Break-even at Expiration:
Stock Price Paid + Put Premium Paid
$42.00 + $1.55 = $43.55

+
Long stock
at $42.00

0
35

40

45

BEP $43.55

CBOE OPTIONS INSTITUTE

Maximum Loss:
Stock Price Break-even for Put
$42.00 ($40.00 $1.55) = $3.55
$355.00 Total

24

TheCollar
Own 100 XYZ shares at $42
60-day
39
40
41
42
43
44
45

Calls
Puts
$4.20 $1.15
$3.55 $1.55
$3.00 $1.95
$2.50 $2.45
$2.05 $3.00
$1.65 $3.65
$1.35 $4.30

Buy 1 60-day XYZ 40 put at $1.55


Sell 1 60-day XYZ 44 Call at $1.65
Net Credit $.10
CBOE OPTIONS INSTITUTE

25

TheCollar
Own 100 shares XYZ at $42.00
Buy 1 60-day XYZ 40 put at $1.55
Sell 1 60-day XYZ 44 Call at $1.65
Net Credit $.10
Break-even at Expiration:
Stock Price Net Credit
$42.00 - $.10 = $41.90

+
5
BEP $41.90
0
35

40

45

Long stock
at $42.00

CBOE OPTIONS INSTITUTE

Maximum Loss:
Stock Price Put Strike Net Credit
($42.00 40.00) $.10) = $1.90
$190.00 Total

26

Summary
What is the plan to make money?
Market direction?
Time erosion?
Change in volatility?
Set realistic expectations
Get familiar with all possible strategies
Dont overtrade

CBOE OPTIONS INSTITUTE

27

Thank you for attending!

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