Download - The Options Playbook Rookie Strats I
-
http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Brian Overby,Presenter
The Options Playbook:
Option Strategies for RookiesPart I
Delivering Options Education TO EXPAND THE KNOWLEDGE OF INVESTORS
-
http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Brian Overby,Presenter
The Options Playbook:
Option Strategies for RookiesPart I
Delivering Options Education TO EXPAND THE KNOWLEDGE OF INVESTORS
-
3http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
3
Disclaimers Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at (877)495-KING visiting www.tradeking.com/ODD or by downloading the file in the pop-up window on your screen.
Any strategies discussed and 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. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. 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 stock and options transactions and must be considered prior to entering into any transactions.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.
http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
-
4http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
4
Disclaimers The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct.
Webinars are provided for educational and informational purposes only. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment,financial, legal or tax advice.
The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.
Chicago Board Options Exchange, Incorporated (CBOE) is not affiliated with TradeKing.
http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
-
TradeKings Trader Networkhttp://community.tradeking.com
Member FINRA & SIPC
twitter.com/TradeKing
-
6http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Options Playbook Series: Options Strategies for Rookies
Basic Terms
-
7http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Terms & Conditions of an Option Contract
Options are contracts: Giving the owner the right to buy or sell an asset at a fixed
price for a specific period of time and obligating the seller to take the opposite side if and when
the right embedded in the option contract is exercised by the owner.
Buyers pay cash and receive a benefit.Sellers receive cash and have an obligation.
-
8http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Exercise & Assignment Defined
Exercise: to invoke the right contained in an option contract you make happen
Assignment: to be required to fulfill the obligation assignment happens to you
Someone must exercise before someone can be assigned
-
9http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Right to buy
Right to sell
CALL PUT
Obligationto buy
Obligationto sell
Buyer(long)
Seller(short)
Four Basic Positions
-
10http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Stock Price 35Strike Price - 30Intrinsic Value 5
Intrinsic & Time Value
Options Price 6Intrinsic Value - 5Time Value 1
30 Strike Call @ 6Stock Price @ 35
35 Strike call @ 2.50
-
11http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Options Playbook Series: Options Strategies for Rookies
Covered Call Example
-
12http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Covered Call / Buy - Write
Buy 100 XYZ Shares @ (93.84) Sell 1 XYZ July 95 Call @ 3.50 = 3.86%
Net Debit (90.34) Commission $10.55 At expiration (35 days)
If XYZ is above 95.00Cost Basis - 90.34Gain 4.66 = 5.14 %
If XYZ is below 95 Long 100 XYZ at a Cost Basis of 90.34
If XYZ is below 90.34 losses will occur
-
13http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
-8
-6
-4
-2
0
2
4
6
8
90 95 100
Stock Price at Expiration
Profit&
Loss
Covered Call - P & L Graph
Buy 100 XYZ Shares @ (93.84)Sell 1 XYZ July 95 Call @ 3.50
Long Stock@ 93.84
B.E. = 90.34
-
14http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
At-The-Money-Call
1 month =
2 month =
3 month = $1 x 3
$1 x 2
$1
Time Decay
-
15http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
C S E t r e tS N d E e r t N d
d S E r t t
d d t
( , , , , ) ( ) ( )
[ ln ( / ) ( / ) ] /
=
= + +=
1 2
12 2
2 1 S = current price E = strike price r = continuously compounded risk-free interest rate = continuously compounded dividend yield t = time to expiration of the option = rate of return volatility on the stock N() = cumulative normal density function
The Black-Scholes Formula
-
16http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
At-The-Money-Call
1 month =
2 month =
3 month = $1 x 3 = 1.73$1 x 2 = 1.41$1
Time Decay
-
17http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Time Decay of ATM Call Option
1.41
1.73
1.00
0
1
2
90 60 30 0
Option Premium
Days to Expiration
-
18http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
0
1
2
3
4
Exp. of Aug.Exp. of July
O
p
t
i
o
n
P
r
e
m
i
u
m
60-Day (Aug) 100 Call @ 3.5030-Day (July) 100 Call @ 2.50 Stock = 100
ATM Option Time Decay
-
19http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Options Playbook Series: Options Strategies for Rookies
Covered CallsReturn Calculations
-
20http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Information From Case Study
The stock price is $43.50 The XYZ October 45 Call is $2.30 It is 80 days to option expiration The stock pays a dividend of $0.18 in 27 days
-
21http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the Static Return
Also known as the standstill return, thestatic return assumes that the stock priceis unchanged at expiration and the callexpires worthless.
Note: Return calculations assume that the same per-period profit can be earned repeatedly throughout the year, and this may not be possible.
-
22http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the Static Return
Income over Investment multiplied by Time Factor
Time FactorXIncome
Investment
Call plus Dividend over Stock Price multiplied byDays/Year over Days to Expiration
XCall + Dividend
Stock Price
Days/Year
Days to Expiration
-
23http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the Static Return
RequiredInformation:
X$2.30 + $0.18
$43.50
Stock Price: $43.50Call Price: $2.30Days to Expiration: 80Dividend: $0.18
36580
= 26%
-
24http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Static Return Worksheet
Call Price
plus Dividends +
equals Income =
divided by Stock Price _
equals % Income =
times 365/80 (days to expiration) x
equals Annualized Static Return =
$2.30
:
$0.18
$2.48
$43.50
5.7%
26%
4.5
-
25http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the If-Called Return
The if-called return assumes that the stockprice rises above the strike price and that the call is assigned at expiration. This means that the stock is sold at the strike price.
Note: Return calculations assume that the same per-period profit can be earned repeatedly throughout the year, and this may not be possible.
-
26http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the If-Called Return
Income plus Gain over Investment multiplied byTime Factor
Time FactorXIncome + Gain
Investment
Call plus Dividend plus Strike Price minus StockPrice over Stock Price multiplied by Days/Year over Days to Expiration
(Call + Dividend) + (Strike Stock)
Stock PriceX
Days/Year
Days to Expiration
-
27http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Calculating the If-Called Return
RequiredInformation:
X$2.48 + $1.50
$43.50
Stock Price: $43.50Call Price: $2.30Strike Price: $45.00Days to Expiration: 80Dividend: $0.18
36580
= 42%
-
28http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
If-Called Return Worksheet
Call Price plus Dividend =
Strike Price minus Stock Price =
equals Income plus Gain =
divided by Stock Price
equals % Income =
times 365/80 (days to expiration) x
equals Annualized If-Called Return =
$2.48
:
$1.50
$3.98
$43.50
9.1%
42%
4.5
-
29http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Things to Think About
How do I enter this trade can it be done as one trade? Which position causes the risk stock or option? Am I stuck in the position until expiration? Can I buy the stock first and then sell the call later? When can I expect assignment? (what role do dividends play?) Do you really want to sell the shares? Too much premium is that possible? Not enough premium is that possible?
-
30http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Options Playbook Series: Options Strategies for Rookies
Cash-Secured Put Example
-
31http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Right to buy
Right to sell
CALL PUT
Obligationto buy
Obligationto sell
Buyer(long)
Seller(short)
Four Basic Positions
-
32http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Selling Cash Secured Put
Fictitious stock LMN @ 43.11 Sell 1 LMN July 40 Put @ 1.40 commission $5.60
and place $4,000 in a Money Market
At expiration (35 days from now) If LMN is above 40
Keep the premium If LMN is below 40
Long 100 LMN at a Cost Basis 40 1.40 = 38.60 If LMN is below 38.60 losses will occur
-
33http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
-8
-6
-4
-2
0
2
4
6
8
40 45 50
Stock Price at Expiration
Profit&
Loss
Selling Cash-Secured Put - P & L Graph
Sell 1 LMN July 40 Put @ 1.40
Long Stock@ 43.11
B.E. = 38.40
-
34http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Cash-Secured vs Naked Put Selling
Cash-Secured Put Selling: The concept is to only sell the number of contracts that will
purchase the number of shares of stock that you normally trade.
Usually buy 300 shares - only sell 3 puts. Conservative or Risky?
Naked Put Selling LEVERAGE is the theme here. Sell many contracts and hope they are not assigned.
-
35http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Things to Think About
Cash-Secured means you have the cash or the ability to buy the stock if assigned
Can be done in an IRA account at TradeKing if approved for that level of trading.
Am I stuck in the position until expiration? When can I expect assignment? (what role do dividends
play?) Do you really want to buy the shares? Too much premium is that possible? Not enough premium is that possible? Think about selling puts to buy stock and selling calls to sell
stock
-
36http://webinars.tradeking.com www.twitter.com/TradeKing [email protected]
Phone Numbers:(877) 495-KING
New expanded 2nd edition
E-mail:[email protected]@tradeking.com
Brian Blog: The Options Guyhttp://optionsguy.tradeking.comhttp://webinars.tradeking.com
Web Site: TradeKing.com
Phone Number:(877) The-CBOE, press 2
Web Site: www.CBOE.com
E-mail:[email protected]
Next TK Sponsored Webcast:Thursday, August 12, 20103:30 pm Central