Know Your Options
Learn the Option Greeks and Trade like Zeus
Robert Sarian
January 29, 2019 TradersMeetup of Glendale Disclaimer
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No Soliciting. No Recording. No Photography. About myself…
❖ Electronic Engineer in “past life” HRS, ISIL, CNXT, MSPD, INTC
❖ Currently fulltime trader Stocks and ETFs for the past 30 years Options for the past 9 years
❖ Member of TradersMeetup group for 5+ years
❖ Enjoy sailing, fishing and traveling Agenda
Introduction Extrinsic & Intrinsic Value Time Decay Volatility Option Greeks The Ultimate Options Trade for Everyone
Spreads – 14 kinds
Earnings Options Trades
Watch Out!
Real Trade Examples
An Option is a contract between a Buyer and a Seller to transact shares/contracts
The BUYER (debit) has the RIGHT to exercise the option - LONG
The SELLER (credit) has the OBLIGATION to honor the exercise - SHORT
The Buyer of a CALL option has the RIGHT to buy shares/contracts
The Buyer of a PUT option has the RIGHT to sell shares/contracts As an Options trader you can be either the Buyer or the Seller !!!
A PUT/CALL option contract has… - Underlying - Strike - Duration – Expiration - DTE - Size - Price The Option Chain The Option Price
ITM OTM
ATM
OTM ITM Stock P/L (Risk) Plot Put Option P/L Plots
Long Put Short Put Naked Short Cashed Secured Short Put Call Option P/L Plots
Long Call Short Call Naked Short Undefined Risk! The P/L Plot
Intrinsic Value
T+n line
Extrinsic Value (Time Value) Extrinsic Value
Uncertainty - Risk ATM vs I/O-TM
Time
Volitality - IV
Ext.V for Buyer Ext.V for Seller
Note: ACN ExtVal=$3 Time Decay
Not constant over time
ATM vs I/O-TM
Weeklys vs Monthly
Weekend / Holiday Falacy
Source: www.ichimokutrade.com Volitality: IV vs HS (SV) Implied Volitality: Assumed by the market to price options based on uncertainty (future looking - guessing)
Historic Volitality: The actual price movement of the undeerlying (past history) Volitality Index: VIX The index takes as inputs the market prices of the call and put options on the S&P 500 index (SPX)…
IV of SPX at Near Term DTE=23 VIX Calculation average DTE=30 Next Term DTE=37 Risk free i%
VIX Term Structure Contango Backwardation
Source: https://en.wikipedia.org/wiki/VIX http://www.cboe.com/trading-tools/strateg y-planning-tools/term-structure-data Index Options
S&P500 Index (SPX) Russell 2000 Index (RUT)
Style: American vs European
Expiration (W, Q, M), Settlement, (SET, RLS)
http://www.cboe.com/data/historical-options-data/in dex-settlement-values How does the Option Price change when…
the price of the underlying changes - DELTA
the time nears expiration - THETA
the volatility changes - VEGA
3 ways to Profit (Lose) with Options
Αυτό είναι το ελληνικό που χρειάζεστε That is all the Greek you need Higher Order Option Greeks…
Source: https://en.wikipedia.org/wiki/Greeks_(finance) The Option Price Long Call OTM vs ITM
CB=445 BE=160 PoP=28% CB=970 BE=155 PoP=38% D=41 T= -11 V=16 DTE=20 D=74 T= -11 V=14 DTE=20 ML=445 MP=inf RoR=inf ML=970 MP=inf RoR=inf An Option Trade for Stock Owners – Married Put
Stk=150 E: 11-Feb Prot=9.50 (15-Feb 155 Put, DTE=20, IV=42%) CB=159.50 ML=159.50-155=4.5 Risk=ML/CB=4.5/159.5=2.8% Cost of Prot=Prot/Stk=9.5/150=6.3% 6.3% added cost limits loss to 2.8%
Stk=150 E: 11-Feb Prot=14 (15-Mar 160 Put, DTE=48, IV=37%) CB=164 ML=164-160=4 Risk=ML/CB=4/164=2.4% Cost of Prot=Prot/Stk=14/150=9.3% 9.3% added cost limits loss to 2.4%
DN side Risk is limited & UP side Profit is unlimited The “Ultimate” Option Trade – Collar Trade Finance the protection by selling a Call - generate Income
Stk=150 E: 11-Feb Prot=14 (15-Mar 160 Put, DTE=48, IV=37%) Inc=2 (15-Mar 165 Call, DTE=48) CB=162 ML=162-160=2 Risk=ML/CB=2/162=1.2% Cost of Prot=Prot/Stk=12/150=8% 8% added cost limits loss to 1.2%
DN side Risk is limited & UP side Profit is also limited
Enter a Long Stock position with Collar Trade
Dynamic Collar https://www.nasdaq.com/article/a-dynamic-twist-on- the-collar-trade-cm119124 Long Call
Advantages: Delta Theta
Disadvatages: Cost Theta Low PoP
Use Spread instead
CB=970 BE=155 PoP=38% D=74 T= -11 V=14 DTE=20 ML=970 MP=inf RoR=inf Bull Spread Debit vs Credit
CB=535 BE=150 PoP=48% CB=-465 BE=150 PoP=48% D=24 T=0 V=0 DTE=20 D=24 T=0 V=0 DTE=20 ML=535 MP=465 RoR=465/535=87% ML=535 MP=465/535 RoR=87% Debit & Credit Spreads Green: Debit Spreads Red: Credit Spreads
-C +C
Bear Call +C -C
Iron Condor
+P -P
Bull Put -P +P Putting it All Togather…
Iron Condor Iron Butterfly
+P -P -C +C +P -P -C +C Long Broken Wing or Unbalanced BF Long Condor Long Butterfly
+P -2P +P +P -P -P +P Short Broken Wing Short Condor Short Butterfly or Unbalanced BF
-P +P +P -P -P +2P -P -aP +bP -cP Putting it All Togather…
Long Strangle Long Straddle Calendar
+P +C +P+C -p+P
Short Strangle Short Straddle
-P -C -P-C Ext Value of Put vs Call - Skew
Volatility Skew about Jun 2018
On 1/28/19 SPX 50p OTM DTE=45 46.00 vs 37.50 Vertical, Horizontal & Diagonal… +V
V -C +C +V +C +V +C -V V +C -2C V -C T T+n -V -C +C -V
T T+n T T+n +V -C
V +C
Roll Up/Dn & Roll Out… -V
T T+n Earnings Options Trade – 1. Delta Trade
Earnings Delta Trade Expected Price Move – Long Straddle Cost
1. Non-Directional Large directional price move Smaller directional price move
2. Directional Long Call / Put Spread Bull / Bear BWBF BackRatio Spread Backratio Spread
OTM Call CB=210 BE=162 PoP=23% CB=445 BE=160 PoP=28% D=29 T= -11 V=16 D=41 T= -11 V=16 ML=690 MP=inf RoR=inf ML=445 MP=inf RoR=inf Earnings Options Trade – 2. Vega Trade
Earnings IV Trade
IV increases when approaching Earnings Debit Spreads (+IV) BackRatio Spreds (+IV)
IV collapses at Earnings announcement Iron Condor (-IV) Butterfly (-IV)
Source: www.ivolatility.com Earnings Options Trade - Due Diligence
You have to KNOW how the stock behaves
Use short term Options expiring within a few days of the Earnings date
IV increases when approaching Earnings Debit Spreads (+IV) BackRatio Spreds (+IV)
IV collapses at Earnings announcement Iron Condor (-IV) Butterfly (-IV) Double Diagonal
Source: www.powercycletrading.com Types of Securities to Trade Options
Bid-Ask Spread SPY: sprd/price=0.04/6.30=0.6% AAPL: 0.10/5.00=2.0% MTCH: 0.20/3.20=6.3% * When Market is open!
Weekly Options
Open Interest
Price
Cost-Profit Ratio
Stock / ETF / Index Synthetic Equivalants
+C
-P +C -C (+P -P)
+S = +C -P Don’t Let the Market…
Fully understand the Option Trade
Have a Plan What ifs… Primary Exit Secondary Exit
Learn how to defend the position Short option
Position Size / Risk
Start small (conservative) then build up (aggressive) Real Trade Example 1: Broken Wing Butterfly Trade BWBF Trade 1/23/2019
CB=-60 BE=2575 PoP=82% D=3 T=35 V=-33 DTE=7 ML=2440 MP=2500 RoR=2500/2440=102% BWBF Trade 1/23/2019
Trade on 1/28/2019 DTE=2 30Jan 2600 PUT $7.70 D=1 T=100 V=-27 (IV increased) Profit=200 RoR=200/2440=8% in 5 days
30Jan 2625 PUT $11.90
CB=-60 BE=2575 PoP=82% D=3 T=35 V=-33 DTE=7 ML=2440 MP=2500 RoR=2500/2440=102% BWBF Trade 1/23/2019
Closed on 1/28/2019 for 1.75 Profit = 235 RoR=235/2440=9.6% in 6 days
At close D=-6 T=14 Thank You
Sources: https://www.sheridanmentoring.com/ https://www.tastytrade.com https://en.wikipedia.org/wiki/VIX http://www.cboe.com/trading-tools/strategy-planning-tools/term-structure-data http://www.cboe.com/data/historical-options-data/index-settlement-values https://en.wikipedia.org/wiki/Greeks_(finance) https://www.nasdaq.com/article/a-dynamic-twist-on-the-collar-trade-cm119124 https://www.powercycletrading.com https://www.optionstrategist.com/ https://www.optionsanimal.com/