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With Options Know Your Options Learn the Option Greeks 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. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. All rights reserved. This Material may not be reproduced or distributed, in whole or in part, any other reproduction in whatever form and by whatever media, is expressly prohibited without the prior written consent of TradersMeetup. 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/.
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