HowtoPicktheRightExpirationDateTradingStrategyDesk

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Disclosures Optionstradingentailssignificantriskandisnotappropriateforallinvestors.Priortotradingoptions,youmustreceiveacopyofCharacteristicsandRisksofStandardizedOptions,whichisavailablefromFidelityInvestments,andbeapprovedforoptionstrading.Supportingdocumentationforanyclaims,ifapplicable,willbefurnisheduponrequest.

Examplesinthispresentationdonotincludetransactioncosts(commissions,margininterest,fees)ortaximplications,buttheyshouldbeconsideredpriortoenteringintoanytransactions.

CharacteristicsandRisksofStandardizedOption Theinformationinthispresentation,includingexamplesusingactualsecuritiesandpricedata,isstrictlyforillustrativeandeducationalpurposesonlyandisnottobeconstruedasanendorsement,recommendation.

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GoalsofToday’sWebinar

Intoday’swebinarwewillcoverthevariousmethodstradersusetoanalyzedifferentexpirationdates.

Whyproperexpirationselectionmatters?

Understandingtheeffectsoftimedecay

Analyzingimpliedvolatilityinyourdecisionmaking

Usingprobabilityanalysistochooseexpirations

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OptionExpiration:Whyisitimportant?

Expirationsetsatimeframeforyourtrade!• Whenyoubuyastocktheownershipdoesn’texpireuntilyousellit.• Whenyoubuyorsellanoptioncontractyoumustagreetoanexpirationdate,aspart

ofthatcontract. Useexpirationstofityourtradingstyle.

• Daytrader• PremiumSeller• TechnicalTrader• EarningsTrader

ExpirationCycles• Leaps>Quarterly>Monthly>Weekly

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OptionValue

IntrinsicValue+ExtrinsicValue=OptionValue

• Theintrinsicvalueofanoptionisthetangiblevalueoftheoption(theamountthatisinthemoney)

• Theextrinsicvalueistheportionoftheoptionpremiumthatisassignedtoexternalfactorssuchastimetoexpirationandvolatility.

(TheIntrinsicValue)+(Time&VolatilityValue)=OptionValue

• Themoretimeanoptionhasuntilexpiration,themoreopportunitythereis,thegreatertheopportunitythegreaterthepotentialvalue.

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TheImportanceofTimeDecay

ThetaistheGreekthatmeasureshowmuchtimevalueerodesfromtheoptioncontracteachday

Thetaisanegativevalueforpurchasedcallsorputsandapositivevalueforsoldcallsorputs.

If XYZ were trading at $50, and a 50 strike call with 150 days until expiration hadapremiumof$5.30andathetaof.018,youmightanticipatethattheoptionmightloseabout$0.018today,allelsebeingequal.

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TheImportanceofTimeDecay

Theta’sdecayisnon‐linear.Thecloseranoptionget’stoit’sexpirationdatethegreatertherateofdecay.

Thisaccelerationbecomesmostapparentwith30‐45daystoexpiration Thetimevalueoneveryoptioncontractis$0atexpiration

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TheImportanceofTimeDecay

Trader’spointofview:

• Optionbuyersneedtobalancethetradeoffoftimedecay.Shortertermoptionscanbeboughtatlowerpremiumsthatrequirelesscapital.HoweverthetradeoffisthatyouneedafasterdirectionalmoveorexpansionofIVtooffsettimedecay.

• Optionssellersalsoneedtobalancetheirriskandreward.Shortertermoptionscanbesoldatshorttermstomaximizetimedecay,howeveryouaretypicallybringinginlesspremium.

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ImpliedVolatility

Measureswhatthemarketexpectsvolatilityofthesecuritytobeinthefuture,basedonpremiumsonoptioncontractsforthatsecurityAnnualizedpercentageforfutureexpectedmoveDynamic‐ willchangewithoptionpricesbasedonsupplyanddemandforcontracts

62.35%annualizedexpectedmovebasedonhypothetical30dayoptioncontracts

ImageshowsvolatilitydatafromtheoptionstatisticstoolinActiveTraderPro

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ImpliedVolatility

IVisaproductofsupplyanddemandforoptioncontracts,andthereforehasanaffectonoptionprices.Itcanbeameasureofexpensiveness.

Higherexpectedmoveinthesecurity

Higherdemandforoptioncontracts

Higherimpliedvolatility(IV)

$$$Moreexpensivepremiums

IVpercentilecanbefoundintheoptionstatisticsfeatureonATP.

Howcanyoudeterminewhetheraspecificstock’sIVisrelativelyexpensive(orinexpensive?)

IVpercentileshowswhereaspecificstock’sIViscomparedtowhereitsbeenwithinthelast52weeks.

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ImpliedVolatilityHowcanyoudeterminewhetheraspecificstock’sIVisrelativelyexpensive(orinexpensive?)continued…

IVindexchartcompareshistoricalvolatility(HV)withimpliedvolatility(IV)overthelastyear

Helpstocomparecurrentvolatilitydatawithhistoricaldatatoidentifypotentiallyhighorlowlevels

AllowstraderstoidentifydivergenceandconvergencebetweenHVandIV Quickwaytofindwhenvolatilitymeasuresareatextremesandmayreverttotheirmeanvalues

IVIndexchartcanbefoundintheoptionresearchsectiononFidelity.com

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ImpliedVolatility Trader’spointofview:It’simportanttoremembereachoption

contracthasitsownIV.TraderswilloftenlookattheIV’sofdifferentexpirationdatestoseetheimpactofaneventlikeearnings.Theearningsdateonthisexampleis2/25/16.

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DeltaandProbability

Deltaisameasurementofanoption’spricesensitivitytoagivenchangeinthepriceofanunderlyingasset.Asaresultofeach$1moveforastock,optionpricestendtoadjustbytheamountofthedelta.So,ifthedeltais.30foraspecificoptioncontract,fora$1movetheoptionpricewilltheoreticallymoveby$0.30.

DeltalikeallGreeks,isdynamic,thatisconstantlychangingbecauseitisimpactedbyotherfactors.

Deltaisalsousedasaprobabilityestimateofthelikelihoodthattheoptionwillbeinthemoneyatexpiration.Ifyourlongcallisshowingadeltaof.30,theoptionmarketisimplyingthatthereisapproximatelya30%probabilityofbeinginthemoneyatexpiration.

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DeltaandProbability

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DeltaandProbability

Gammaistherateofchange,orsensitivity,toapricechangeintheunderlyingfordelta

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OptionLiquidity

Liquidityishoweasilyaninvestorcanbuyorsellanasset. Weneedtobeginbyanalyzingvolumeontheunderlyingstockandthenlookatvolumeandopeninterestoftheexpirationcycle.

Ifthestockisliquiditdoesnotmeantheoptionsare! Bid/Askspread

• Atightbid/askspreadisageneralindicationthattheoptionistradedfrequently.• Widebid/askspreadscanbespecific toastrikeprice forthatunderlyingandmay

indicatethatthatspecificoptionhastradedlessfrequentlyandthusmayhavelessliquidity.

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OptionLiquidity

Weekly'soptionscanhelpinvestorsefficientlytakeadvantageofmarketevents,suchasearnings,governmentreportsandFedannouncements.However,weeklycontractscanbelessliquidthanmonthlycontracts.

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KeyTakeaways

Forminganoutlookontimeiscriticalwhentradingoptions Understandhowtimedecayandchangesinvolatilitywillimpactyourtradebeforeyouplaceit.Shorttermoptionsdecayatafasterratethanlongtermoptions.

Don’tforgetthetradeoff,shorttermoptionsaremoresensitivetopricemovements.

Createaclearlydefinedprocessforyourtrades.Usingaspecificprobabilityisanexampleofadefinedparameter.

Takeamomenttoseewhatupcomingeventsarescheduledbeforeyourexpirationandpositionyourselfaccordingly(i.e.,Earnings,ex‐dividenddate,orotherannouncements)

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ImpactofExpirationSelection Withcashonhand,atraderfeelsSPYisgoingtomakeanupwardmovement.WithSPY

at$192thetraderhasabullishpriceoutlook,andthefollowingcontractstochoosefrom:

Option1:BuyaMarch11th 192Callfor$3.37

Option2:BuyaMay20th 192callfor$7.06

Whichisbetter....?

ImageaboveisfromtheProfit/LosstoolinActive TraderPro

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Buyingtheshortertermoptionswouldresultintheoptionlosingmorevalueonadaytodaybasisfromtimedecay.Howevertheoptionspriceismuchmoresensitivetoadirectionalmoveandthelowerpremiumwouldrequirelessupfrontcapital

Buyingthelongertermoptionscostmoreupfront,thusrequiringmorecapital.Thetradeoffisthattimedecaywillhavelessofanimpactonadaytodaybasisand,allelsebeingequal,thereislesssensitivitytoaquickdirectionalmove.

ImpactofExpirationSelectionQ:Whichisbetter?

A:Oneisnotbetterthantheother.Theyeachofferdifferentbenefits/tradeoffs

Thetradeoffforalowerrisktradeisalowerreward

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Thankyouforattending.

PleasejointheTradingStrategyDeskforourupcomingwebinars:

March17th – ManagingPortfolioVolatilityThroughSectorInvesting

April4th – IntroductiontoOptionsPart1:WhoWantstoLearnAboutOptionsTrading

ToRegister,pleasevisittheFidelity.comLearningCenterhttps://www.fidelity.com/learning‐center

Foradditionalsupport,pleasecontactaFidelityrepresentativeat(877)907‐4429.

Thisconcludestoday’spresentation.

Howtopicktherightexpirationdate