DOCSLIB.ORG

THE VALUE LINE Guide to Option Strategies

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
THE VALUE LINE Guide to Option Strategies THE VALUE LINE Guide to Option Strategies How to Invest Using Options If you need assistance with our service, feel free to contact us at 1-800-825-8354 Value Line Publishing, Inc. 485 Lexington Avenue New York, NY 10017-2630 www.valueline.com TABLE OF CONTENTS List of Tables ...................................................................................................................................... 4 List of Graphs ..................................................................................................................................... 4 Preface - Options & the Value Line Daily Options Survey .............................................................. 5 Introduction - The Chapters Ahead .................................................................................................. 6 Chapter 1 – Option Basics ................................................................................................................. 7 Defining Some Terms ................................................................................................................................. 7 Some Sample Premiums ............................................................................................................................. 7 Buying a Call ............................................................................................................................................... 8 Buying a Put ................................................................................................................................................ 8 Selling before expiration ............................................................................................................................ 9 Writing Uncovered or “Naked” Options ................................................................................................ 10 Writing Covered Calls .............................................................................................................................. 10 Which strategy is best? ............................................................................................................................. 11 Additional Information ............................................................................................................................ 11 Chapter 2 – Finding the Most Attractive Options ........................................................................... 12 Value Line’s Common and Option Ranks .............................................................................................. 12 How We Rank Options ............................................................................................................................. 12 Using our Selected Options ...................................................................................................................... 13 Finding Options by Stock Ticker............................................................................................................. 14 Using our Quick Screener ........................................................................................................................ 15 Using our Option Screener ....................................................................................................................... 15 Getting Started .......................................................................................................................................... 16 Chapter 3 – Spotlight on Buying Calls ............................................................................................ 17 Paying Premium ........................................................................................................................................ 17 An In-the-Money “Deductible” ............................................................................................................... 17 At-the-Money: Insurance in Both Directions ......................................................................................... 18 Out-of-the-Money: Insurance Against Missing the Big Move .............................................................. 18 Your Best Call? ......................................................................................................................................... 19 Chapter 4 – Spotlight in Buying ‘Naked” Puts ............................................................................... 20 Varying Bearish Positions ........................................................................................................................ 20 Our Put Buying Picks ............................................................................................................................... 21 Adding Puts to Your Portfolio ................................................................................................................. 22 Chapter 5 - Spotlight on Uncovered or “Naked” Option Writing .................................................. 23 Why Write? ............................................................................................................................................... 23 Capital Requirements ............................................................................................................................... 24 Seeking Writing Opportunities ................................................................................................................ 24 Chapter 6 - Spotlight on Covered Call Writing ............................................................................... 25 In-, At- & Out-of-the-Money ................................................................................................................... 25 Calculating the Percentages ..................................................................................................................... 26 A Word on Dividends and Early Exercise .............................................................................................. 27 Chapter 7 – How Much Should I Invest in Options ....................................................................... 28 Define Objectives ...................................................................................................................................... 28 Using Relative Volatility ........................................................................................................................... 28 Using Diversification ................................................................................................................................ 29 How Much for Call and Put Buying ........................................................................................................ 29 How Much for “Naked” Call and Put Writes ........................................................................................ 29 How Much for Covered Calls .................................................................................................................. 30 How Much for Market-Neutral Hedges .................................................................................................. 30 Testing Different Strategy Mixes ............................................................................................................. 30 Chapter 8 – When to Close Out an Option Position ....................................................................... 31 Follow the Ranks ....................................................................................................................................... 31 Other Considerations ............................................................................................................................... 31 Chapter 9 - Managing a Covered Call Portfolio ............................................................................. 33 Why a Covered Call? ................................................................................................................................ 33 Looking at Your Portfolio ........................................................................................................................ 33 Chapter 10 – Option Trading Tips .................................................................................................. 36 Always Diversify ....................................................................................................................................... 36 Capital Considerations ............................................................................................................................. 36 Trading ...................................................................................................................................................... 38 Chapter 11 - Managing a Market-Neutral Hedge .......................................................................... 39 How the long/short hedge works ............................................................................................................. 39 Which Hedge is Best? ............................................................................................................................... 39 Setting Up Your Hedge ............................................................................................................................. 39 All Four Hedges Combined ...................................................................................................................... 40 Maintaining the Hedge ............................................................................................................................
Load more

Recommended publications
  • FINANCIAL DERIVATIVES SAMPLE QUESTIONS Q1. a Strangle Is an Investment Strategy That Combines A. a Call and a Put for the Same
    FINANCIAL DERIVATIVES SAMPLE QUESTIONS Q1. A strangle is an investment strategy that combines a. A call and a put for the same expiry date but at different strike prices b. Two puts and one call with the same expiry date c. Two calls and one put with the same expiry dates d. A call and a put at the same strike price and expiry date Answer: a. Q2. A trader buys 2 June expiry call options each at a strike price of Rs. 200 and Rs. 220 and sells two call options with a strike price of Rs. 210, this strategy is a a. Bull Spread b. Bear call spread c. Butterfly spread d. Calendar spread Answer c. Q3. The option price will ceteris paribus be negatively related to the volatility of the cash price of the underlying. a. The statement is true b. The statement is false c. The statement is partially true d. The statement is partially false Answer: b. Q 4. A put option with a strike price of Rs. 1176 is selling at a premium of Rs. 36. What will be the price at which it will break even for the buyer of the option a. Rs. 1870 b. Rs. 1194 c. Rs. 1140 d. Rs. 1940 Answer b. Q5 A put option should always be exercised _______ if it is deep in the money a. early b. never c. at the beginning of the trading period d. at the end of the trading period Answer a. Q6. Bermudan options can only be exercised at maturity a.
    [Show full text]
  • Up to EUR 3,500,000.00 7% Fixed Rate Bonds Due 6 April 2026 ISIN
    Up to EUR 3,500,000.00 7% Fixed Rate Bonds due 6 April 2026 ISIN IT0005440976 Terms and Conditions Executed by EPizza S.p.A. 4126-6190-7500.7 This Terms and Conditions are dated 6 April 2021. EPizza S.p.A., a company limited by shares incorporated in Italy as a società per azioni, whose registered office is at Piazza Castello n. 19, 20123 Milan, Italy, enrolled with the companies’ register of Milan-Monza-Brianza- Lodi under No. and fiscal code No. 08950850969, VAT No. 08950850969 (the “Issuer”). *** The issue of up to EUR 3,500,000.00 (three million and five hundred thousand /00) 7% (seven per cent.) fixed rate bonds due 6 April 2026 (the “Bonds”) was authorised by the Board of Directors of the Issuer, by exercising the powers conferred to it by the Articles (as defined below), through a resolution passed on 26 March 2021. The Bonds shall be issued and held subject to and with the benefit of the provisions of this Terms and Conditions. All such provisions shall be binding on the Issuer, the Bondholders (and their successors in title) and all Persons claiming through or under them and shall endure for the benefit of the Bondholders (and their successors in title). The Bondholders (and their successors in title) are deemed to have notice of all the provisions of this Terms and Conditions and the Articles. Copies of each of the Articles and this Terms and Conditions are available for inspection during normal business hours at the registered office for the time being of the Issuer being, as at the date of this Terms and Conditions, at Piazza Castello n.
    [Show full text]
  • Launch Announcement and Supplemental Listing Document for Callable Bull/Bear Contracts Over Single Equities
    6 August 2021 Hong Kong Exchanges and Clearing Limited (“HKEX”), The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. This document, for which we and our Guarantor accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Rules”) for the purpose of giving information with regard to us and our Guarantor. We and our Guarantor, having made all reasonable enquiries, confirm that to the best of our knowledge and belief the information contained in this document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this document misleading. This document is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the CBBCs. The CBBCs are complex products. Investors should exercise caution in relation to them. Investors are warned that the price of the CBBCs may fall in value as rapidly as it may rise and holders may sustain a total loss of their investment. Prospective purchasers should therefore ensure that they understand the nature of the CBBCs and carefully study the risk factors set out in the Base Listing Document (as defined below) and this document and, where necessary, seek professional advice, before they invest in the CBBCs.
    [Show full text]
  • Margin Requirements Across Equity-Related Instruments: How Level Is the Playing Field?
    Fortune pgs 31-50 1/6/04 8:21 PM Page 31 Margin Requirements Across Equity-Related Instruments: How Level Is the Playing Field? hen interest rates rose sharply in 1994, a number of derivatives- related failures occurred, prominent among them the bankrupt- cy of Orange County, California, which had invested heavily in W 1 structured notes called “inverse floaters.” These events led to vigorous public discussion about the links between derivative securities and finan- cial stability, as well as about the potential role of new regulation. In an effort to clarify the issues, the Federal Reserve Bank of Boston sponsored an educational forum in which the risks and risk management of deriva- tive securities were discussed by a range of interested parties: academics; lawmakers and regulators; experts from nonfinancial corporations, investment and commercial banks, and pension funds; and issuers of securities. The Bank published a summary of the presentations in Minehan and Simons (1995). In the keynote address, Harvard Business School Professor Jay Light noted that there are at least 11 ways that investors can participate in the returns on the Standard and Poor’s 500 composite index (see Box 1). Professor Light pointed out that these alternatives exist because they dif- Peter Fortune fer in a variety of important respects: Some carry higher transaction costs; others might have higher margin requirements; still others might differ in tax treatment or in regulatory restraints. The author is Senior Economist and The purpose of the present study is to assess one dimension of those Advisor to the Director of Research at differences—margin requirements.
    [Show full text]
  • RT Options Scanner Guide
    RT Options Scanner Introduction Our RT Options Scanner allows you to search in real-time through all publicly traded US equities and indexes options (more than 170,000 options contracts total) for trading opportunities involving strategies like: - Naked or Covered Write Protective Purchase, etc. - Any complex multi-leg option strategy – to find the “missing leg” - Calendar Spreads Search is performed against our Options Database that is updated in real-time and driven by HyperFeed’s Ticker-Plant and our Implied Volatility Calculation Engine. We offer both 20-minute delayed and real-time modes. Unlike other search engines using real-time quotes data only our system takes advantage of individual contracts Implied Volatilities calculated in real-time using our high-performance Volatility Engine. The Scanner is universal, that is, it is not confined to any special type of option strategy. Rather, it allows determining the option you need in the following terms: – Cost – Moneyness – Expiry – Liquidity – Risk The Scanner offers Basic and Advanced Search Interfaces. Basic interface can be used to find options contracts satisfying, for example, such requirements: “I need expensive Calls for Covered Call Write Strategy. They should expire soon and be slightly out of the money. Do not care much as far as liquidity, but do not like to bear high risk.” This can be done in five seconds - set the search filters to: Cost -> Dear Moneyness -> OTM Expiry -> Short term Liquidity -> Any Risk -> Moderate and press the “Search” button. It is that easy. In fact, if your request is exactly as above, you can just press the “Search” button - these values are the default filtering criteria.
    [Show full text]
  • Income Solutions: the Case for Covered Calls an Advantageous Strategy for a Low-Yield World
    Income Solutions: The Case for Covered Calls An advantageous strategy for a low-yield world Covered call writing is a time-tested approach that can add income, dampen volatility and diversify both equity and fixed income core strategies. Adding a covered call strategy in a core-satellite, multi-asset-class approach can be accomplished as: • A hedged equity strategy with an “income kicker” to enhance overall income production • A supplement to a core large-cap strategy (especially late in the market cycle when valuations are long-in-the-tooth and price action is volatile) as a means of boosting income and mitigating downside risk • A better-yielding alternative to a high yield bond allocation We believe that investors are well-served by strongly considering the addition of an income-producing covered call strategy in virtually all market environments and multi-asset class strategies. Madison’s active call writing/active stock selection approach provides more opportunity for premium income and alpha from underlying security selection than common passive call writing. Total Return of the BXM and S&P 500 1987-2013 Rolling Returns Source: Morningstar Time Period: 1/1/1987 to 12/31/2013 Rolling Window: 1 Year 1 Year shift 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Return 0.0 S&P 500 -5.0 -10.0 CBOE S&P 500 Buywrite BXM -15.0 -20.0 -25.0 -30.0 -35.0 -40.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 S&P 500 TR USD Covered calls show equity-likeCBOE returns S&P 500 with Buyw ritelower BXM volatility Source: Morningstar Direct 888.971.7135 madisonfunds.com | madisonadv.com Covered Call Strategy(A) Benefits of Individual Stock Options vs.
    [Show full text]
  • Options Slide Deck Updated Version
    www.levelupbootcamps.com 4/4/21 Derivatives Option Strategies 4/4/21 LevelUp, LLC©2021 All rights reserved 1 1 Derivatives & Currency Management Option Strategies 4/4/21 LevelUp, LLC©2021 All rights reserved 2 2 Level Up, LLC©2021 All rights reserved 1 www.levelupbootcamps.com 4/4/21 Risk Management with Options Synthetic Positions • Synthetic Long & Short Forward Option Strategies • Synthetic Puts & Calls Multiple Option Strategies Single Option + Underlying Single Option Directionless Volatility Long U/L Risk Reduction Writing Puts • Long Straddle = LC + LP Covered Call = U/L + SC • Lower purchase cost • Short Straddle = SC + SP • Income enhancement • Fiduciary put = SP + Money Spreads • Reduce at favorable price cash to cover (ftn 13) “Small Moves Up or Down” • Target price realization The Greeks • Bull & Bear Call Spreads • Manza Case 1. Delta + & - • Bear & Bull Put Spreads Protective Put = U/L + LP 2. Gamma + • Insurance Calendar Spreads 3. Theta (time) - Collar = U/L + LP + SC Short “Its all about Theta” 4. Vega (Implied Vol) + • Risk Reversal • Long Calendar Spread Portfolio Mgt • Short Calendar Spread Short U/L Risk Reduction 1. Strategies using • Short U/L + Long Call volatility & market view • Short U/L + Short Put 2. Adjusting risk exposure 4/4/21 LevelUp, LLC©2021 All rights reserved 3 3 Single Option Strategies Refresher . just in case + + X S Long Call – LC S Short Call – SC - - X “writing” Want U/L up – bullish Want U/L down – bearish Right to buy at strike price X Obligated to sell at strike price X Max gain = ∞ when S
    [Show full text]
  • 11 Option Payoffs and Option Strategies
    11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expira- tion for various stock prices. 73 74 CHAPTER 11 OPTION PAYOFFS AND OPTION STRATEGIES 2. Consider a put option with an exercise price of $80 and a cost of $4. Graph the profits and losses at expiration for various stock prices. ANSWERS TO QUESTIONS AND PROBLEMS 75 3. For the call and put in questions 1 and 2, graph the profits and losses at expiration for a straddle comprising these two options. If the stock price is $80 at expiration, what will be the profit or loss? At what stock price (or prices) will the straddle have a zero profit? With a stock price at $80 at expiration, neither the call nor the put can be exercised. Both expire worthless, giving a total loss of $9. The straddle breaks even (has a zero profit) if the stock price is either $71 or $89. 4. A call option has an exercise price of $70 and is at expiration. The option costs $4, and the underlying stock trades for $75. Assuming a perfect market, how would you respond if the call is an American option? State exactly how you might transact. How does your answer differ if the option is European? With these prices, an arbitrage opportunity exists because the call price does not equal the maximum of zero or the stock price minus the exercise price. To exploit this mispricing, a trader should buy the call and exercise it for a total out-of-pocket cost of $74.
    [Show full text]
  • Black-Scholes Equations
    Chapter 8 Black-Scholes Equations 1 The Black-Scholes Model Up to now, we only consider hedgings that are done upfront. For example, if we write a naked call (see Example 5.2), we are exposed to unlimited risk if the stock price rises steeply. We can hedge it by buying a share of the underlying asset. This is done at the initial time when the call is sold. We are then protected against any steep rise in the asset price. However, if we hold the asset until expiry, we are not protected against any steep dive in the asset price. So is there a hedging that is really riskless? The answer was given by Black and Scholes, and also by Merton in their seminal papers on the theory of option pricing published in 1973. The idea is that a writer of a naked call can protect his short position of the option by buying a certain amount of the stock so that the loss in the short call can be exactly offset by the long position in the stock. This is standard in hedging. The question is how many stocks should he buy to minimize the risk? By adjusting the proportion of the stock and option continuously in the portfolio during the life of the option, Black and Scholes demonstrated that investors can create a riskless hedging portfolio where all market risks are eliminated. In an efficient market with no riskless arbitrage opportunity, any portfolio with a zero market risk must have an expected rate of return equal to the riskless interest rate.
    [Show full text]
  • Structured Products in Asia
    2015 ISSUE: NOVEMBER Structured Products in Asia hubbis.com 1st Leonteq has received more than 20 awards since its foundation in 2007 THE QUINTESSENCE OF OUR MISSION STATEMENT LET´S REDEFINE YOUR INVESTMENT EXPERIENCE Leonteq’s explicit goal is to make a difference through particular transparency in structured investment products and to be the preferred technology and service partner for investment solutions. We count on experienced industry experts with a focus on achieving client’s goals and a fi rst class IT infrastructure, setting new stand- ards in stability and fl exibility. OUR DIFFERENTIATION Modern platform • Integrated IT platform built from ground up with a focus on automation of key processes in the value chain • Platform functionality to address increased customer demand for transparency, service, liquidity, security and sustainability Vertical integration • Control of the entire value chain as a basis for proactive service tailored to specifi c needs of clients • Automation of key processes mitigating operational risks Competitive cost per issued product • Modern platform resulting in a competitive cost per issued product allowing for small ticket sizes LEGAL DISCLAIMER Leonteq Securities (Hong Kong) Limited (CE no.AVV960) (“Leonteq Hong Kong”) is responsible for the distribution of this publication in Hong Kong. It is licensed and regulated by the Hong Kong Securities and Futures Commission for Types 1 and 4 regulated activities. The services and products it provides are available only to “profes- sional investors” as defi ned in the Securities and Futures Ordinance (Cap. 571) of Hong Kong. This document is being communicated to you solely for the purposes of providing information regarding the products and services that the Leonteq group currently offers, subject to applicable laws and regulations.
    [Show full text]
  • Rallis India Stock Recommendation
    Rallis India Stock Recommendation Glumaceous and unstinting Vernor store her tilths unmuffle or unknot depravedly. Urinary Troy ensnares assertively while Englebart always exorcized his brouhaha overstretch eastward, he stints so mickle. Rudimentary and asbestous Harv sneers while fell Ignacio codifies her mangers ignobly and e-mail meagrely. Thomson first of rallis india stock recommendation to time to regain its management and hedged through the inventory situation or tsr darashaw consultants private ltd 30 Year Financial Data of Rallis India Ltd NSERALLIS. Rallis India Ltd BrokerageResearch Reports analyst. The recommendations of cash management reviews emerging needs and recommends rallis expects them from simple account and cockroaches. Customize your preference and dip a personalized recommendation of stories. Multiple factors for library stock are Bullish like MACD Bollinger Band KST and OBV 3 With ROE of 131 it finally a. Jaiswal recommends Rallis India as his intended pick above a long term view The pattern for new stock has been very interesting with a caution of Rs 125 in. Doing crams for gm crops seed development and recommendations to yahoo finance. RALLIS INDIA Number of Employees is currently at 977. Top Stocks for January 2021 Investopedia. Yes Warren Buffett Really Owns 7 Of Your Favorite Companies. Have not given that stocks now appears that are handled by the recommendations. Rallis india stock recommendation to recommend appropriate authorities during workshop. Jsw energy storage facilities in which have no. Recommendations Buy or sell Rallis India stock Mumbai Stock Market Finance report prediction for current future You'll jolt the Rallis India share forecasts. India and recommends measures are recognised by nsdl from experience and enhancing livelihood opportunities in respect of development skill development.
    [Show full text]
  • OPTION-BASED EQUITY STRATEGIES Roberto Obregon
    MEKETA INVESTMENT GROUP BOSTON MA CHICAGO IL MIAMI FL PORTLAND OR SAN DIEGO CA LONDON UK OPTION-BASED EQUITY STRATEGIES Roberto Obregon MEKETA INVESTMENT GROUP 100 Lowder Brook Drive, Suite 1100 Westwood, MA 02090 meketagroup.com February 2018 MEKETA INVESTMENT GROUP 100 LOWDER BROOK DRIVE SUITE 1100 WESTWOOD MA 02090 781 471 3500 fax 781 471 3411 www.meketagroup.com MEKETA INVESTMENT GROUP OPTION-BASED EQUITY STRATEGIES ABSTRACT Options are derivatives contracts that provide investors the flexibility of constructing expected payoffs for their investment strategies. Option-based equity strategies incorporate the use of options with long positions in equities to achieve objectives such as drawdown protection and higher income. While the range of strategies available is wide, most strategies can be classified as insurance buying (net long options/volatility) or insurance selling (net short options/volatility). The existence of the Volatility Risk Premium, a market anomaly that causes put options to be overpriced relative to what an efficient pricing model expects, has led to an empirical outperformance of insurance selling strategies relative to insurance buying strategies. This paper explores whether, and to what extent, option-based equity strategies should be considered within the long-only equity investing toolkit, given that equity risk is still the main driver of returns for most of these strategies. It is important to note that while option-based strategies seek to design favorable payoffs, all such strategies involve trade-offs between expected payoffs and cost. BACKGROUND Options are derivatives1 contracts that give the holder the right, but not the obligation, to buy or sell an asset at a given point in time and at a pre-determined price.
    [Show full text]