Know Your Options

Learn the and Trade like Zeus

Robert Sarian

January 29, 2019 TradersMeetup of Glendale Disclaimer

Disclaimer: Neither TradersMeetup.net nor its organizers with the exception of today’s presenter, are licensed financial advisors, registered investment advisors, registered broker-dealer nor FINRA | SIPC | NFA-member firm. In accordance to the policies of TradersMeetup.net, this presentation does not provide investment or financial advice or make investment and trade recommendations. TradersMeetup.net is not in the business of transacting trades, nor does TradersMeetup.net agree to direct your brokerage accounts or give trading advice tailored to your particular situation. The content of today’s presentation does not constitutes a solicitation, recommendation, promotion or endorsement of any particular security, other investment product, transaction or investment. Moreover, the presented examples are computer generated hypothetical positions unless otherwise stated.

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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 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 the option - LONG

The SELLER (credit) has the OBLIGATION to honor the exercise - SHORT

The Buyer of a has the RIGHT to buy shares/contracts

The Buyer of a 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 – - 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 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 – 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 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

+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 Long 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/