CONTRACT OPTIONS AT BINCKBANK N.V. CONTENTS

Product Features 3 1. Tradable instruments 3 2. Trading platforms 3 3. Orders supported 3 4. & Settlement 3 5. Expiry 3 6. Client profiles 4 7. Options Strategies 4 Contract Options Trading Conditions 5 Trading Options at BinckBank 8 1. Why trade Contract Options? 8 2. Unique Selling Points of Contract Options at BinckBank 8 Appendices 9 Appendix 1: Tradable instruments at launch 9 Appendix 2: Order ticket screenshots 11 Appendix 3: Margin Requirements 12 Appendix 4: Margin Reduction Schemes 15 Appendix 5: Introduction 16 Appendix 6: Option Basis 19 Appendix 7: Index Options Beginners Tutorial 28 Appendix 8: Options Glossary 30

2 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 PRODUCT FEATURES

1. Tradable instruments 2. Trading platforms All Contract Option instruments are listed on Contract Options will be tradable from an industry- an exchange and there is no market-making or standard options chain in the Binck Self Investing matching of client trades and orders. The full list of and the WebTrader. There will be no options chain instruments and exchanges on which they trade can in the MobileTrader but you will be able to close be seen in the table in appendix 1, but below there positions from MobileTrader. See the screenshots in is a summary of the key contracts available and their appendix 2 of the options chain and order ticket. product groups. 3. Orders supported Limit and Market orders will be supported. Good- Product Groups Key Contracts Till-Canceled (GTC) parameters are available. Agriculture Cocoa, Coffee, Corn, Soybean, Wheat, Sugar, Cattle, Hogs, … 4. Exercise & Settlement Energy Crude Oil, Natural Gas, Ethanol, BinckBank will be offering two types of option as ... defined by the exchange where a Contract Option Equity Index DAX, EUROSTOXX, FTSE, is listed. American style options can be exercised CAC, SMI, AEX, … S&P 500, at any time before the expiry, while European style NASDAQ-100, Dow Jones, … options can only be exercised at expiry. CBOE SPX, OEX, NDX, VIX, … ASX, HSI,NIKKEI, … Options can be exercised online from the trading FX EUR/USD, GBP/USD, Other platforms or are auto-exercised at expiry. In-the- Majors and Emerging Money (ITM), Contract Options on Futures (American Interest Rates STIRs (EuroDollar, EuriBor, style) are settled into a new Futures position, EuroYen, Sterling, …) European-style Contract Options on Indices Treasuries, Gilt, Bund, Bobl & (ITM) are cash settled into the trading balance at Schatz, … expiry. Metals Gold, Silver, Copper, … 5. Expiry These instruments are listed on the following All positions are subject to an Auto-Exercise exchanges: procedure at expiry: • ASX • All long positions on In-the-Money options are • CBOE assumed to be exercised. • CBOT • All short positions on In-the-Money options are • CME assumed to be assigned. • COMEX • All positions on Out-of-the-Money options are • EUREX abandoned. • EURONEXT – Ams • EURONEXT – Liffe A is In-the-Money when the • EURONEXT – Par is below the market price of the underlying asset. • HKEx A is In-the-Money when the strike price • SGX is above the market price of the underlying asset • TSE Abandonment of In-the-Money positions is not supported.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 3 Thus, clients should close their option positions prior to expiry.

6. Client margin profiles BinckBank will operate with two margin profiles: • A basic profile by default which enables clients to buy options only – puts and/or calls. • An advanced profile for individually assessed clients which enables the client to do the same as the basic profile and to write (sell/short) options and receive margin benefits on option strategies (combinations of options and/or underlying positions).

For more information about Margin requirement and Margin reduction schemes please refer to Appendix 3 & 4.

In case of a margin breach and stop-out is triggered, all option positions will be closed.

7. Options Strategies There will not, in this launch, be any automated execution of the separate legs of trading strategies. Clients wishing to trade strategies will need to execute the legs themselves or contact CTS to do so. For more details on options strategies, please refer to appendices 3, 4 & 5.

4 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 CONTRACT OPTIONS TRADING CONDITIONS

Contract Options Early Exercise of Options These Contract options are available for online Holders of a long position in American Style options trading through the BinckBank platform. can exercise the option any time prior to expiry, except on the last trading day. To exercise a long Short trades on Contract Options option position, an exercise request can be entered By default,you will not be enabled to trade Contract in the trading application; in the “Account Summary”. Options short. Short selling of Contract Options is allowed for individually assessed clients who have When the exercise request is entered, the option obtained an advanced margin profile. Please contact position is closed at price 0 and a position in the your account manager for more information. underlying instrument is created at the strike price. This happens instantly. Partial Fills Partial fills may occur on Limit orders and the Clients should always consider closing the option remaining amount stays in the market as a limit position in the market and acquiring the underlying order and may be filled within the order duration. instrument separately. Often the market value of the Market orders can be filled at numerous levels; the option exceeds the unrealized profit from opening price paid will be the volume weighted average price the underlying position at the strike price. of all the fills. options on CME are not allowed to be Exercise and Settlement exercised out of the money, hence these requests BinckBank offers two types of Contract Options as will be cancelled once encountered. defined by the exchange: • American style Options can be exercised online Exercise Cut-off at any time before the expiry apart from the last Exercise requests need to be entered before the trading day. exercise cut-off time as specified by BinckBank; see • European style Options can only be auto- these in Contract Options Settlement Conditions. exercised at expiry. The Exercise cut-off time facing BinckBank clients is prior to the cut-off times as defined by the exchange When in-the-money, an American style Contract in order to give BinckBank and its brokers the time Options position can be exercised into a specific to forward the request to the exchanges. If exercise position, which is visible on the requests are entered after the cut off time clients Account Summary until . Once the will be rejected and the client must wait until the Contract Option expires, the position stays visible next day to exercise before the cut off time. on the Account Summary until the settlement day (instrument-specific). A European style Option, when Last Trading day in-the-money, is only exercised at expiry and is cash On the last trading day, clients will not be able to settled. exercise any position, since the expiry auto-exercise process will manage exercising against the exercise settlement value.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 5 Expiry and Auto Exercise Deactivation of the underlying asset When trading Contract Options at BinckBank, all If the Exchange deactivates the underlying asset, Options positions are subject to an auto exercise BinckBank will notify its clients and remove the procedure at expiry: related positions from the clients trading accounts. • All long positions on in-the-money Options are assumed to be exercised Italian Financial Transaction Tax • All short positions on in-the-money Options are for derivatives assumed to be assigned The tax will be applied to all Italian Derivatives • All positions on out-of-the-money Options are whose underlying assets are equity instruments abandoned issued by Italian companies. The Italian FTT for Derivatives applies irrespective of the location of A Call Option is in-the-money when the strike price the client or the jurisdiction of the transaction, so is below the market price of the underlying asset. everyone trading Italian Derivatives will have to pay A Put Option is in-the-money when the strike price new Italian FTT for Buys and Sells. is above the market price of the underlying asset. Abandonment of in-the-money positions is not Contract Options on Italian Indices supported. Thus, clients should close their Option

positions prior to expiry. Notional 0- 2.5- 5- 10k- 50- 100- 500- Over Value 2.5k 5k 10k 50k 100k 500k 1,000k 1,000k (EUR) Some exchanges can have different thresholds to determine if an option is OTM or ITM. Typical Tax (EUR) 0.25 0.5 1 5 10 50 100 200 convention is just one tick ITM, though e.g. for Hong Kong stock options, an option is only being exercised/assigned if it is at least 1.5% ITM. Closure of positions in case of excess of Otherwise the options are considered being OTM. Margin Utilization on your account BinckBank is a Dutch bank licensed by the Dutch Full premium vs. Futures Style premium National bank and subject to the rules of the When acquiring a long position in a full premium Dutch Financial Business Act which entails the Contract Option, the premium amount is deducted obligation for Dutch banks to control their credit from the client’s cash balance. Value from an open risk. When you chose to open the margin contracts, long Option position will not be available for margin you entered into contracts entailing leveraged trading other than indicated in the margin reduction positions. Your margin contracts also impose a schemes. credit risk for BinckBank. This credit risk is mitigated by the client´s obligation to maintain the margin BinckBank will treat future style premium Options as requirement at all times. Your obligation to uphold deferred premium. the Margin Requirement is clearly stated in the General Business Terms, which you accepted on As such, other than market conventions, unrealized becoming a client in point 23.3, 23.8 and 23.9. profit/loss is not processed in the clients cash balance on a daily basis. Instead, the original premium amount will remain on the transactions not booked until final settlement of the Option or when the position is closed.

In this way, all other values in the account summary can be treated equal to full premium Options.

6 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 BinckBank uses an automated exposure liquidation system which will continuously monitor the positions and margin utilization of the client. At 80 and 90% of the margin utilization the client will be notified with a pop-up that the client is approaching the 100% margin utilization. When the client’s margin utilization increases above 100%, BinckBank has the contractual right, but not obligation to forcefully close client positions when margin requirements are not met, however BinckBank allows a grace-period according to the below principles: • When the client’s margin utilization increases above 100%, a timer will be triggered and after 47 hours margin holding positions will be automatically closed. If the margin utilization decreases below 100% due to client actions and/ or due to a positive market movement the clock will automatically reset. The clock stops Friday 21:00 GMT and starts counting again Sunday 21:00 GMT. • A client that reaches the Margin Utilization trigger at the default level of 150%, at this moment all margin holding positions will be closed directly.

In addition to the automated exposure liquidation system, under-margined accounts with a margin requirement in excess of EUR 100k must be monitored and handled manually by BinckBank’s credit risk team in accordance with the following principles: • When the 90% Margin utilization is breached the client is contacted and requested to manage exposure. • When the 100% Margin utilization is breached the client contacted – providing client has not reached stop-out level of 150%. The client will have 1 hour to either; Reduce exposure below 90% Margin utilization (MU<90%) or; Refund the account bringing the account below 75% Margin utilization (MU <75%).

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 7 TRADING OPTIONS AT BINCKBANK

1. Why trade Contract Options? 5. Online exercise of options • leveraged directional plays with a known loss • Some Listed Options brokers require clients potential, wishing to exercise options before expiry • plays – either positioning for a to do so manually by telephone. Saxo will directional change in volatility or for no offer online exercise in addition to manual change in volatility, exercise. • portfolio hedging, • revenue enhancement on a portfolio – writing 6. Trading in options may incur to lose more options against a portfolio and keeping the money than your initial outlay (short selling), premium. when buying options you have the risk to lose the entire premium that you paid in case of an 2. Unique Selling Points of Contract opposite movement op the market. For more Options at BinckBank information on risk involved when trading 1. BinckBank’s Contract Options will be part of options please read the Risk Disclosure on page BinckBank’s multi-asset offering, which means: 38 of the General Business Terms. • You will be able to use and bonds as collateral. Remember it is free to hold a stock portfolio at Saxo. • Portfolio hedging and enhancement strategies will be possible on portfolios of Saxo’s existing asset classes. 2. BinckBank will not charge a minimum ticket fee or carrying cost • Some ETO brokers charge clients a minimum ticket fee and charge for holding positions overnight in addition to the trading cost. Saxo will not charge either. 3. BinckBank will not charge for the use of its software (trading platforms) • Some ETO brokers charge clients for using their trading platforms. You will not be charged additional fees to use SaxoTrader and WebTrader platforms. 4. BinckBank multi-language service and support • Saxo is renowned for its high service levels in many languages and, in many cases, with a true local presence. Some Listed Options brokers have a perceived weakness in their service levels.

8 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 APPENDICES APPENDIX 1: TRADABLE INSTRUMENTS AT LAUNCH

Exchange Asset Class Description CBOT Commodities Corn Options CBOT Commodities Soybean Oil Options CBOT Commodities Soybean Options CBOT Commodities Wheat Options CME Commodities Lean Hogs Options CME Commodities Live Cattle Options CME Equity Index E-mini S&P 500 Options CME Equity Index S&P 500 EOM Options CME Equity Index E-mini S&P 500 EOM Options CME Equity Index S&P 500/Growth Options CME Equity Index S&P 500 Options CME Equity Index S&P 500/Value Options CME FX Australian Dollar Options CME FX British Pound Options CME FX Canadian Dollar Options CME FX Euro FX Options CME FX Japanese Yen Options CME FX Mexican Peso Options CME FX New Zealand Dollar Options CME FX Russian Ruble Options CME FX Swiss Franc Options CME Interest Rates Eurodollar Options CME Interest Rates Eurodollar Options 1yr Mid-Curve CME Interest Rates Eurodollar Options 2yr Mid-Curve CME Interest Rates Eurodollar Options 5yr Mid-Curve CBOT Interest Rates 3-Month Overnight Index Options CBOT Interest Rates 30-Year U.S. Treasury CBOT Interest Rates 5-Year U.S. Treasury Note Options CBOT Interest Rates 10-Year U.S. Treasury Note Options CME Interest Rates 30-Day Federal Funds Options CBOT Interest Rates 2-Year U.S. Treasury Note COMEX Metals Gold Options COMEX Metals Silver Options COMEX Metals Copper Options CBOE Dow Jones Indexes DJX - Dow Jones Industrial Average Index Options CBOE Nasdaq Indexes MML - CBOE Mini-NDX Long-Dated Options CBOE Nasdaq Indexes MNX® - CBOE Mini-NDX Index Options CBOE Nasdaq Indexes NDX - Nasdaq-100® Index Options CBOE Russell Indexes RMN - Mini-Russell 2000® Index Options CBOE Russell Indexes RUI - Russell 1000® Index Options CBOE Russell Indexes RUT - Russell 2000® Index Options CBOE Standard & Poor’s Indexes SPL - S&P Long-Dated Options CBOE Standard & Poor’s Indexes QUARTERLYS - S&P 500 Index Options

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 9 Exchange Asset Class Description CBOE Standard & Poor’s Indexes SPX - S&P 500® Index Options CBOE Standard & Poor’s Indexes WEEKLYSSM - Short-Term S&P 500 Index Options CBOE Standard & Poor’s Indexes VIX - CBOE Volatility Index® (VIX®) Options CBOE Standard & Poor’s Indexes QUARTERLYS - S&P 100 Index Options (European- style) CBOE Standard & Poor’s Indexes WEEKLYSSM - Short-Term S&P 100 Index Options CBOE Standard & Poor’s Indexes XEO® - S&P 100® Index LEAPS (European-style) CBOE Standard & Poor’s Indexes XEO® - S&P 100® Index Options (European-style) CBOE Standard & Poor’s Indexes QUARTERLYS - Mini-SPX Index Options CBOE Standard & Poor’s Indexes XSP - Mini-SPX Index Options EUREX Equity Index DAX Option EUREX Equity Index DJ Euro Stoxx 50 EUREX Equity Index DJ EURO STOXX 50, 1st Friday EUREX Equity Index DJ EURO STOXX 50, 2nd Friday EUREX Equity Index DJ EURO STOXX 50, 5th Friday EUREX Interest Rate Options on the BOBL Future EUREX Interest Rate Options on the BUND Future EUREX Interest Rate Options on the SCHATZ Future EUREX Equity Index Swiss Market Index EUREX Equity Index DJ Euro Stoxx Banks EUREX Equity Index DJ STOXX 600 Banks Options EUREX Equity Index DJ STOXX 600 Basic Resources Options EUREX Equity Index DJ STOXX 600 Insurance EURONEXT - Ams Equity Index AEX EURONEXT - LIFFE Equity Index FTSE 100 (Eu) EURONEXT - LIFFE Interest Rate 3m Euribor EURONEXT - Ams Equity Index AEX Weekly EURONEXT - Ams Equity Index AEX Daily EURONEXT - Par Equity Index CAC 40 Index Options EURONEXT - LIFFE Commodity London Cocoa EURONEXT - LIFFE Commodity Robusta Coffee 10T EURONEXT - LIFFE Interest Rate 1yr Euribor Mid-Curve EURONEXT - LIFFE Interest Rate 3m Sterling HKEx Equity Index Hang Seng Index Options HKEx Equity Index Mini-Hang Seng Index Options HKEx Equity Index H-Shares Index Options KRX Equity Index KOSPI 200 Options ASX Equity Index ASX 200 Index Options ASX Real Estate Index ASX 200 A-REIT Options ASX Equity Index ASX 50 Index Options ASX Interest Rate Australian 3 yr Treasury Bond Options ASX Dow Jones Indexes Australian 10yr Treasury Bond Options ASX Interest Rate Australian 90 Day Bank Bill Options ASX Interest Rate Australian 30 Day Interbank Rate Options ASX Commodity Australian Milling Wheat ASX Commodity Australian Feed Barley ASX Commodity Australian Sorghum

10 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 APPENDIX 2: ORDER TICKET SCREENSHOTS

Order ticket, Exercise module

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 11 APPENDIX 3: MARGIN REQUIREMENTS

For certain instruments, we require a margin Cash and Position Summary charge to cover potential losses involved on holding Position Value 1 * 34.25 * $50.00 = $1,712.50 a position in the instrument. Options are such Unrealized Profit/ -- Loss instruments. Cost to Close - ($11.95 + $0.29) = - $12.24 Unrealized Value of $1,700.26 Full Premium vs. Future Style Premium Positions There are two different ways to calculate margins

on our options. The first is full premium, which Cash Balance $10,000.00 means you’re paying the premium up front and it Transactions not - ($1,712.50 + $ 11.95 + - $1,724.74 will be charged to your cash balance. The second Booked $0.29) = way to do this is futures style premium, which you Account Value $9,975.52 can translate to variation margin, like on futures Not Available as - 1 * 34.25 * $50.00 = - $1,712.50 contracts. Clients must post a margin, which is Margin Collateral marked to the market daily. Used for Margin -- Requirement Full Premium Example: Available for $8,263.02 When acquiring a long position in a full premium Margin Trading option, the premium amount is deducted from the client’s cash balance. The value from an open In case of a full premium option, the transactions long option position will not be available for margin not booked will be added to the clients cash balance trading other than indicated in the margin reduction in overnight processing. The next day when the schemes. option market has moved to 35.75 (Future @ 1324.75), the account summary will show: A client buys an E-mini S&P500 SEP 2011 1325.00 Call @ 34.25 (E-mini SEP 2011 Future @ 1321.65). Cash and Position Summary The Figure Value is $50.00, buy/sell commissions Position Value 1 * 35.75 * $50.00 = $1,787.50 $6.00 per lot with a minimum of $11.95, and Unrealized Profit/ -- Loss clearing/trading fees $0.13/$0.16. Cost to Close - ($11.95 + $0.29) = - $12.24 Unrealized Value of $1,775.26 With a cash balance of $10,000.00, his account Positions summary will show: Cash Balance $8,275.26 Transactions not -- Booked Account Value $10,050.52

Not Available as - 1 * 35.75 * $50.00 = - $1,787.50 Margin Collateral Used for Margin -- Requirement Available for $8,263.02 Margin Trading

12 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 Position Value: Increased due to the price of the Short Option Margin option is higher. Short option position exposes the holder of that Unrealized Value of Positions: Increased due to the position of being assigned to deliver the underlying price of the option is higher. proceeds when another market participant who Cash Balance: Reduced by the price of the option. holds a long position exercises his option right. Transactions not Booked is now zero. Losses on a short option position can be substantial Account Value: Increased due to the price of the when the market moves against the position. We option is higher. will therefore charge premium margin to ensure Not Available as Margin Collateral: Increased to the sufficient account value to be available to close new value of the position. the short position and additional margin to cover overnight shifts in the underlying value. The margin Futures Style Premium Example: charges are monitored in real-time for changes in BinckBank will treat future style premium options market values and a stop out can be triggered when as deferred premium. As such, other than market the total margin charge for all margined positions conventions, unrealized profit/loss is not processed exceeds the client’s margin call profile. in the clients cash balance on a daily basis. Instead, the original premium amount will remain on the The generic formula for the short option margin transactions not booked until final settlement of the charge is: option or when the position is closed. In this way, all Short Option Margin = other values in the account summary can be treated Premium Margin + Additional Margin equal to full premium options. If the contracts in the example above, considering The Premium Margin ensures that short option the option price change, would have had future position can be closed at current market prices and style premium, the opening premium would have equals the current Ask Price at which the option can remained in the transactions not booked (the be acquired during trading hours. The Additional commissions and fees are still booked): Margin serves to cover overnight price changes in the underlying value when the option position Cash and Position Summary cannot be closed because limited trading hours. Position Value 1 * 35.75 * $50.00 = $1,787.50 Unrealized Profit/Loss -- Options on Cash Indices Cost to Close - ($11.95 + $0.29) = - $12.24 For options on Indices, the additional margin equals Unrealized Value of $1,775.26 a percentage of the underlying reference value Positions minus a discount for the amount that the option is out-of-the-money. Cash Balance $9,987.76 Transactions not Booked -$1,712.50 Account Value $10,050.52 Additional Margin Call = Max (X% * Underlying Spot) – Out-of-the-Money Amount, Y% * Underlying Spot) Not Available as Margin - 1 * 35.75 * $50.00 = - $1,787.50 Collateral Additional Margin Put = Max (X% * Underlying Spot) – Used for Margin -- Out-of-the-Money Amount, Y% * Strike Price) Requirement Available for Margin $8,263.02 Trading The margin percentages are set by BinckBank and are subject to change. Typically the margin Cash Balance: Commission will still only be charged. percentage for a broad market index is set at 15%. Transactions not Booked: Will remain the same. The actual values can vary per option contract and are configurable in the margin profiles. Clients can see the applicable values in the trading conditions of the contract.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 13 The out-of-the-money amount for a call option Out-of-the-Money Amount in case of a Call option equal: equals: Max (0, Option Strike – Underlying Spot) Max (0, Option Strike Price - Underlying Future Price)

The out-of-the-money amount for a put option Out-of-the-Money Amount in case of a Put option equal: equals: Max (0, Underlying Spot Price – Option Strike) Max (0, Underlying Future Price – Option Strike Price)

To get the currency amount involved, the acquired Example: values need to be multiplied with the trading units. A clients shorts an E-mini S&P500 SEP 2011 1325 Put @ 38.00 (Future @ 1321.65, maintenance Example: margin = $4500, 60 Days to Expiry). The option A clients shorts an ODAX SEP 2011 7250 Call @ figure value is $ 50.00. In the account summary, it 213.50 (DAX index @ 7221.25, 60 days to expiry). will show: The option figure value is € 5.00. The OTM amount is 28.75 index points, resulting of an additional Cash and Position Summary margin of 1078.87 index points (€ 5272.20). In the Position Value - 1 * 38.00 * $50.00 = - $1,900.00 account summary, the premium margin is taken out Unrealized Profit/ -- Loss of the position value: Cost to Close - ($11.95 + $0.29) = - $12.24 Unrealized Value of - $1,912.24 Cash and Position Summary Positions Position Value - 1 * 213.50 * €5.00 = - €1,067.50

Unrealized Profit/ -- Cash Balance $10,000.00 Loss Transactions not $1,900.00 - $1,887.76 € € € Cost to Close - ( 11.95 + 0.50) = - 12.45 Booked ($11.95 + $0.29) = € Unrealized Value of - 1,079.95 Account Value $9,975.52 Positions

Not Available as -- Cash Balance €10,000.00 Margin Collateral € € Transactions not 1,067.50 - 1,055.05 Used for Margin - $4,500.00 = - $4,500.00 € € Booked ( 11.95 + 0.50) = Requirement € Account Value 9,975.90 Available for $5,475.52 Margin Trading Not Available as -- Margin Collateral Used for Margin - €5.00 * - €5,272.18 With the additional margin equal to the Requirement ( (0.15 * 7221.25) – 28.75) maintenance margin of the future, it is ensured that Available for €4,703.72 the client can carry the margin charge of the future Margin Trading positions in case he is assigned. The premium margin is sufficient to cover the loss in acquiring the Options on Futures future positions at the strike price. For options on futures, the additional margin equals the maintenance margin of the underlying future minus a discount for the amount that the options is out-of-the-money, but never less than 50% of the Maintenance Margin (configurable in the margin profile). The margin per contract equals: Additional Margin = Max (Underlying Margin – Out-of-the-Money Amount, 50% * Underlying Margin)

14 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 APPENDIX 4: MARGIN REDUCTION SCHEMES

Short option positions in American Style Options Note: To trade out of a spread position, it is can be combined with long option positions or recommended to first close the short leg before covering positions in the underlying deliverable to closing the long leg to avoid the high margin charge offset the high risk exposure. As such, the margin of the naked short option position. However, as the charges can be reduced or even waived. We will spread margin reservation might not be sufficient provide margin reduction on the following position to cover the cash amount required to buy back the combinations: short option position, a client might find himself • /put locked into a position that he cannot trade out off • Call/Put Spread without additional funds have been made available. • Short Note: For options on futures, assignment of Covered Call / Put the short leg option in the spread position can A short call position can be offset with a long result into a future position with a higher margin position in the underlying. Vice versa a short put can requirement as charged in the spread margin. It is be offset with a short position in the underlying. In the responsibility of the client to make sure that he case of cash settled index option, it is not possible can carry the future position when assigned. to take a position in the underlying and as such the rule is not applicable. Short Straddle / When the underlying is a future, the position is The short straddle / strangle rule is different covered for price movements in the underlying compared to the Covered and Spread rules as the future, but as the future is not a full premium legs of the short straddle do not provide coverage instrument, the potential loss for acquiring the for each other. A short straddle / strangle combines future position at the strike price is still open. As a short call with a short put. Since the exposure of such, only the additional margin on the short option the short call and short put are opposite in regard position can be waived. The out-the-of-money to market direction, only the additional margin of discount is a discount the additional margin only the leg with the highest margin charge is required. and as such not applicable. When the call leg of the strangle position is assigned, the client needs to deliver a future. The Call / Put Spread short future can be combined with the remaining A spread position allows a long option position to put leg of the original strangle, resulting into the cover for a short option position of an option of the covered put. Vice versa, when the put is assigned, same type, and same underlying deliverable. When the client needs to take delivery of a future. The long the long option is deeper in the money compared future can be combined with the remaining call leg to the short option (), the value of of the original strangle, resulting into a cover call. the long option is used up to the value the short option for coverage with no additional margin to be required. When the short leg is deeper in the money compared to the long leg (), the full value of the long option is used for coverage plus an additional margin equal to the strike difference. When the long and short options are expiring on different dates, an additional inter-month spread margin should be charged. The long option should expiry after the short option and both options should into the same underling deliverable.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 15 APPENDIX 5: OPTION INTRODUCTION

Definition An option is a contract between two parties in which the option buyer (holder) purchases the right (but not the obligation) to buy/sell an underlying (Index, Stock, Commodity, Currency) at a predetermined price from/to the option seller (writer) within a fixed period of time.

Option Contract Specifications The following terms are specified in an option contract: The two classes of options are puts and calls. Call options confer the buyer the right to buy the underlying asset while put options give him the rights to sell them.

Strike Price, Option Premium & When selecting options to buy or sell, for options expiring on the same month, the option’s price (premium) and moneyness depends on the option’s strike price.

Strike Price The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised. It’s relation to the market value of the underlying asset affects the moneyness of the option and is a major determinant of the option’s premium.

Definition: The strike price is defined as the price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying when the option is exercised. Hence, strike price is also known as exercise price.

16 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 Relationship between Strike Price & Call Option Price For call options, the higher the strike price, the cheaper the option. The following table lists option premium typical for near term call options at various strike prices when the underlying is trading at 50.

Strike Price Moneyness Call Option Premium Intrinsic Value Time Value 35 ITM 15.50 15 0.50 40 ITM 11.25 10 1.25 45 ITM 7 5 2 50 ATM 4.50 0 4.50 55 OTM 2.50 0 2.50 60 OTM 1.50 0 1.50 65 OTM 0.75 0 0.75

Relationship between Strike Price & Put Option Price Conversely, for put options, the higher the strike price, the more expensive the option. The following table lists option premium typical for near term put options at various strike prices when the underlying is trading 50

Strike Price Moneyness Put Option Premium Intrinsic Value Time Value 35 OTM 0.75 0 0.75 40 OTM 1.50 0 1.50 45 OTM 2.50 0 2.50 50 ATM 4.50 0 4.50 55 ITM 7 5 2 60 ITM 11.25 10 1.25 65 ITM 15.50 15 0.50

OptionsPremium Time Value In exchange for the rights conferred by the option, An option’s time value is dependent upon the the option buyer has to pay the option seller a length of time remaining to exercise the option, the premium for carrying on the risk that comes with moneyness of the option, as well as the volatility of the obligation. The option premium depends on the underlying security’s market price. the strike price, volatility of underlying, as well as the time remaining to expiration. There are two The time value of an option decreases as its components to the options premium, the intrinsic expiration date approaches and becomes worthless value and the time value. after the date. This phenomenon is known as time decay. As such, options are also wasting assets. Intrinsic Value The intrinsic value is determined by the difference For in-the-money options, time value can be between the current trading price and the strike calculated by subtracting the intrinsic value from price. Only in the money options have intrinsic the option price. Time value decreases as the option value. Intrinsic value can be computed for in-the- goes deeper into the money. For out-of-the-money money options by taking the difference between the options, since there is zero intrinsic value, time value strike price and the current trading price. Out-of- = option price. the-money options have no intrinsic value.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 17 Typically, higher volatility gives rise to higher time Out-the-money options have zero intrinsic value value. In general, time value increases as the and possess greater likelihood of expiring worthless, uncertainty of the option’s value at expiry increases. aspects which make them relatively cheaper.

Effect of on Time Value Expiration Date Time value of call options on high cash Option contract are wasting assets and all options stocks can get discounted while similarly, time value expire after a period of time. Once the option of put option can get inflated. expires, the right to exercise no longer exists and the option becomes worthless. The expiration Moneyness month is specified for each option contract. The Moneyness is a term describing the relationship specific date on which expiration occurs depends on between the strike price of an option and the the type of option. For instance, index options listed current trading price of its underlying. In options on Eurex expire on the third Friday of the expiration trading, terms such as in-the-money, at-the-money month. and out-of-the money describe the moneyness of options. An option contract can be either American style or At-the-Money (ATM) European style. The manner in which options can be An at-the-money option is a call or put option that exercised also depends on the style of the option. has a strike price that is equal to the market price American style options can be exercised anytime of the underlying asset. While the premiums for at- before expiration while European style options can the-money options are relatively lower than in-the- only be exercise on expiration date itself. money options, it possesses no intrinsic value and contains only time value which is greatly influenced Underlying Asset by the volatility of the underlying and the passage of The underlying asset is the security which the time. option seller has the obligation to deliver to or purchase from the option holder in the event the Often, it is not easy to find an option with a strike option is exercised. In case of stock options, the price that is exactly equal to the market price of the underlying asset refers to the shares of a specific underlying. Hence, close to the money or near to company. Options are also available for other the money options are bought or sold instead. types of securities such as , indices and commodities. In-the-Money (ITM) A call option is in-the-money when its exercise price Contract Multiplier is below the current trading price of the underlying The contract multiplier states the quantity of the asset. A put option is in-the-money when its underlying asset that needs to be delivered in the exercise price is above the current trading price of event the option is exercised. For stocks options, in the underlying asset. general each contract covers 100 shares.

In-the-money options possess significant intrinsic The Option Market value and are generally more expensive. Participants in the options market buy and sell call and put options. Those who buy options are called Out-the-Money (OTM) holders. Sellers of options are called writers. Option Calls are out-of-the money when their strike price is holders are said to have long positions, and writers above the market price of the underlying asset. Put are said to have short positions. options are out-the-money when their strike price is below the market price of the underlying asset.

18 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 APPENDIX 6: OPTION BASIS

An Investor can use options to achieve a number The formula for calculating profit is given below: of different things depending on the strategy the • Maximum profit = Unlimited investor employs. • Profit Achieved When Price of Underlying >=Strike Price of Long Call + Premium Paid Novice option traders will be allowed to buy calls • Profit = Price of underlying – Strike Price of Long and puts, to anticipate rising as well as falling Call – Premium Paid markets. Limited risk Example: Risk for the long call is limited to the price paid for the call option no matter how low Buying Call or Long Call the stock price is trading on expiration date. The long call option strategy is the most basic option trading strategy whereby the options trader The formula for calculating maximum loss is given buys call options with the belief that the price of the below: underlying will rise significantly beyond the strike • Max Loss = Premium Paid + Commissions Paid price before the expiration date. • Max Loss Occurs when Price of Underlying <= Strike Price of Long Call Breakeven Point Leverage: Compared to buying the underlying outright, the The underlie price at which breakeven is achieved call option buyer is able to gain leverage since for the long call position can be calculated the lower priced calls appreciate in value faster using the following formula. percentagewise for every point rise in the price of • Breakeven Point = Strike Price of Long Call + the underlying. Premium Paid However, call options have a limited lifespan. If the underlying stock price does not move above the Long Put strike price before the option expiration date, the The long put option strategy is a basic strategy in call option will expire worthless. options trading where the investor buy put options with the belief that the price of the underlying will go significantly below the striking price before the expiration date.

Compared to short selling the underlying, it is more convenient to bet against an underlying by purchasing put options. The risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying outright.

Unlimited Profit Potential Since they can be no limit as to how the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 19 Covered Call (OTM) construction Long Underlying Sell 1 Call Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obliged to sell his shares.

However, the profit potential of covered call writing is limited as the investor had, in return for the Unlimited Potential premium, given up the chance to fully profit from a Since stock price in theory can reach zero at substantial rise in the price of the underlying asset. expiration date, the maximum profit possible when using the long put strategy is only limited to the Out-of-the-money Covered Call striking price of the purchased put less the price This is a covered call strategy where the moderately paid for the option. bullish investor sells out-of-the-money calls against a holding of the underlying shares. The OTM The formula for calculating profit is given below: covered call is a popular strategy as the investor • Maximum Profit = Unlimited gets to collect premium while being able to enjoy • Profit Achieved when Price of Underlying = 0 capital gains if the underlying stock rallies. • Profit = Strike Price of Long Put – Premium Paid

Limited risk Risk for implementing the long put strategy is limited to the price paid for the put option no matter how high the underlying price is trading on expiration date.

The formula for calculating maximum loss is given below: • Max Loss = Premium Paid + Commissions Paid

• Max Loss Occurs When Price of Underlying >= Strike Price of Long Put Limited Profit Potential In addition to the premium received for writing Breakeven Point the call, the OTM covered call strategy’s profit also The underlier price at which breakeven is achieved includes gain if the underlying stock price rises, up for the long put position can be calculated using the to the strike price of the call option sold. following formula. The formula for calculating maximum profit is given • Breakeven Point = Strike Price of Long Put – below: Premium Paid • Max Profit = Premium received – Purchase Price Covered calls of the Underlying + Strike Price of Short Call – The covered call is a strategy in options trading Commissions Paid whereby call options are written against a holding of • Max Profit Achieved when Price of Underlying>= the underlying security. strike Price of Short Call

20 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 Unlimited Loss Potential Potential losses for this strategy can be very large and occurs when the price of the underlying falls. However, this risk is no different from that which the typical stockowner is exposed to. In fact, the covered call writer’s loss is cushioned slightly by the premiums received for writing the calls.

The formula for calculating loss is given below: • Maximum loss = Unlimited • Loss Occurs When Price of Underlying < Purchase Price of Underlying – Premium received Limited Upside Profits • Loss = Purchase Price of Underlying – Price of Maximum gain is reached for the bull call spread Underlying – Max Profit + Commissions Paid options strategy when the underlying price move above the higher strike price of the two calls and its Breakeven Points equal to the difference between the price strike of The underlier price at which breakeven is achieved the two call options minus the initial debit taken to for the covered call (OTM) position can be calculated enter the position. using the following formula. • Breakeven Point = Purchase Price of Underlying – The formula for calculating maximum profit is given Premium Received below: • Max Profit = Strike Price of Short Call – Strike Bull Call Spread Price of Long Call – Net Premium Paid – The Bull Call Spread option trading is employed Commissions Paid when the options trader thinks that the price of the • Max Profit Achieved When Price of Underlying >= underlying asset will go up moderately in the near Strike Price of Short Call term. Limited Downside Risk Bull call spreads can be implemented by buying The bull call spread strategy will result in a loss if the an at-the-money call option while simultaneously underlying price declines at expiration. Maximum writing a higher striking out-of-the-money call option loss cannot be more than the initial debit taken to of the same underlying and the same expiration enter the spread position. month. The formula for calculating maximum loss is given Bull Call Spread Construction below: Buy 1 ATM Call • Max Loss = Net Premium Paid + Commissions Sell 1 OTM Call Paid • Max Loss Occurs When Price of Underlying <= By shorting the-out-of-the-money call, the options Strike Price of Long Call trader reduces the cost of establishing the bullish position but forgoes the chance of making a large Breakeven Point profit in the event that the underlying asset price The underlier price at which breakeven is achieved skyrockets. for the bull call spread position can be calculated using the following formula. • Breakeven Point = Strike Price of Long Call + Net Premium Paid

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 21 Bear Put Spread The formula for calculating maximum profit is given The bear put spread option strategy is employed below: when the options trader thinks that the price of the • Max profit = Strike Price of Long Put – Strike Price underlying asset will go down moderately in the of Short Put – Net Premium Paid – Commissions near term. • Max Profit Achieved When Price of Underlying <= Strike Price of Short Put Bear put spread can be implemented by buying a higher striking in-the-money put option and selling Limited Upside Risk a lower striking out-of-the-money put option of the If the stock price rise above the in-the-money put same underlying security with the same expiration option strike price at the expiration date, then the date. bear put spread strategy suffers a maximum loss equal to the debit taken when putting on the trade. Bear Put Spread Construction • Max Loss = Net Premium Paid + Commissions Buy 1 ITM Put Paid Sell 1 OTM Put • Max Loss Occurs when Price of Underlying >= Strike Price of Long Put By shorting the out-of-the-money put, the options trader reduces the cost of establishing the bearish Breakeven Point position but forgoes the chance of making a large The underlier price at which breakeven is achieved profit in the event that the underlying asset price for the bear put spread position can be calculated plummets. using the following formula. • Breakeven Point = Strike Price of Long Put – Net Premium Paid

Risk Reversal A is an option strategy that is constructed by holding the underlying asset while simultaneously buying protective puts and selling call options against the holding. The puts and the calls are both out-of-the-money options having the same expiration month and must be equal in number of contracts. Limited Downside Profit To reach maximum profit, the underling needs to Risk Reversal Strategy Construction close below the strike price of the out-of- the-money Long underlying put on the expiration date. Both options expire Sell 1 OTM Call in the money but the higher strike put that was Buy 1 OTM Put purchased will have higher intrinsic value than the lower strike put that was sold. Thus, maximum profit Technically, the Risk reversal Strategy is the for the bear put spread option strategy is equal to equivalent of an out-of-the-money covered the difference in strike price minus the debit taken call strategy with the purchase of an additional when the position was entered. .

The Risk Reversal Strategy is a good strategy to use if the options trader is writing covered call to earn premium but wish to protect himself from an unexpected sharp drop in the price of the underlying asset.

22 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 The long options strangle is an unlimited profit, limited risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. Long strangles are debit spreads as a net debit is taken to enter the trade.

Limited Profit Potential The formula for calculating maximum profit is given below: • Max Profit = Strike Price of Short Call – Purchase Price of Underlying + Net Premium Received – Unlimited Profit Potential Commissions Paid A large gain for the long strangle option strategy is • Max Profit Achieved When Price of Underlying >= attainable when the underlying stock price makes a Strike Price of Short Call Limited Risk very strong move either upwards or downwards at expiration. The formula for calculating maximum loss is given below: The formula for calculating profit is given below: • Max Loss = Purchase Price of Underlying – Strike • Maximum Profit Unlimited Price of Long Put – Net Premium Received + • Profit Achieved When Price of Underlying > Strike Commissions Paid. Price of Long Call + Net Premium Paid or Price • Max Loss Occurs When Price of Underlying <= of Underlying < strike Price of Long Put – Net Strike Price of Long Put Breakeven Point Premium Paid • Profit = Price of Underlying – Strike Price of Long The underlier price at which breakeven is achieved Call – Net Premium Paid or Strike Price of Long for the risk reversal strategy position can Put – Price of Underlying – Net Premium Paid be calculated using the following formula. • Breakeven Point = Purchase Price of Underlying Limited Risk + Net Premium Paid Maximum loss for the long strangle options strategy is hit when the underlying stock price on expiration Long strangle date is trading between the strike prices of the The Long strangle, is a neutral strategy in options options bought. At this price, both options expire trading that involve the simultaneous buying of a worthless and the options trader loses the entire slightly out-of-the-money put and a slightly out-of- initial debit taken to enter the trade. the-money call of the same underlying asset and expiration date. The formula for calculating maximum loss is given below: Long Strangle Construction • Max Loss = Net Premium Paid + Commissions Buy 1 OTM Call Paid Buy 1 OTM Put • Max Loss Occurs When Price of Underlying is in between Strike Price of Long Call and Strike Price of Long Put

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 23 Breakeven Points Limited Risk There are 2 breakeven points for the long strangle Maximum loss for long occurs when the position: The breakeven points can be calculated underlying stock price on expiration date is trading using the following formulae: at the strike price of the options bought. At this • Upper Breakeven Point = Strike Price of Long Call price, both options expire worthless and the options + Net Premium Paid trader loses the entire initial debit taken to enter the • Lower Breakeven Point = Strike Price of Long Put trade. – Net Premium Paid The formula for calculating maximum loss is given Long straddle below: The Long straddle is a neutral strategy in options • Max loss = Premium Paid + Commissions Paid trading that involve the simultaneously buying of a • Max Loss Occurs when Price of Underlying = put and a call of the same underlying asset, striking Strike Price of Long Call/Put price and expiration date. Breakeven Points Long straddle construction There are 2 breakeven points for the long straddle Buy 1 ATM Call position. The breakeven points can be calculated Buy 1 ATM Put using the following formulae: • Upper Breakeven Point = Strike Price of Long Call Long straddle options are unlimited profit, limited + Net Premium risk options trading strategies that are used when • Lower Breakeven Point = Strike Price of Long Put the options trader thinks that the underlying asset – Net Premium Paid will experience significant volatility in the near term. Writing The naked call write is a risky options trading strategy where the options trader sells calls against stock which he does not own. Also known as uncovered call writing.

The out-of-the-money naked call strategy involves writing out-of-the money call options without owning the underlying stock. It is a premium collection options strategy employed when one is Unlimited Profit Potential neutral to mildly bearish on the underlying. By having long positions in both call and put options, straddle can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.

The formula for calculating profit is given below: • Maximum Profit = Unlimited • Profit Achieved When Price of underlying > strike Price of Long Call + Net Premium Paid or Price of Underlying< Strike price of Long Put – Net Premium Paid • Profit = Price of Underlying – Strike Price of Long Call – Net Premium Paid or strike Price of Long Put – Price of Underlying – Net Premium Paid

24 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 Limited Profit Potential Maximum gain is limited and is equal to the premium collected for selling the call options. The formula for calculating maximum profit is given below: • Max Profit = Premium received – Commissions Paid • Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Unlimited Loss Potential If the underlying price goes up dramatically at Limited profits with no upside risk expiration, the out-of-the-money naked call writer Profit for the uncovered put write is limited to the will be required to satisfy the options requirements premiums received for the options sold. to sell the obligated underlying to the options The writer sells slightly out-of-the-money holder at the lower price buying the underlying from puts month after month, collecting premiums as the open market price. long as the stock price of the underlying remains above the put strike price at expiration. Since there is no limit to how high the underlying • Max Profit = Premium received – Commissions price can be at expiration, maximum potential Paid losses for writing out-of-the-money naked calls is • Max Profit Achieved when Price of Underlying >= therefore theoretically unlimited. Strike Price of short Put

The formula for calculating loss is given below: Unlimited downside risk with little downside • Maximum Loss = Unlimited protection • Loss Occurs When Price of Underlying > Strike While the premium collected can cushion a slight Price of Short Call + Premium Received drop in the underlying price, loss resulting from a • Loss = Price of Underlying – Strike price of Short catastrophic drop in the price of the underlying can Call – Premium Received + Commissions Paid be huge.

Breakeven Point The formula for calculating loss is given below: The underlier price at which break-even is achieved • Maximum Loss = Unlimited for the naked call (OTM) position can be calculated • Loss Occurs When Price of Underlying < Strike using the following formula. Price of Short Put – Premium Received • Breakeven Point = Strike Price of Short Call • Loss = Strike Price of Short Put – Price of +Premium Received Underlying – Premium received + Commissions Paid Uncovered Put write Writing uncovered puts is an options trading Breakeven Point strategy involving the selling of put options without The underlier price at which breakeven is achieved shorting the obligated underlying. Also known for the uncovered put write position can be as naked put write or cash secured put, this is a calculated using the following formula. bullish options strategy that is executed to earn a • Breakeven Point = Strike Price of Short Put – consistent profits by ongoing collection of premium. Premium Received

Uncovered Put Write Construction Sell 1 ATM Put

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 25 Short straddle The formula for calculating loss is given below: The short straddle or naked straddle sale is • Maximum Loss = Unlimited a neutral options strategy that involve the • Loss Occurs when Price of Underlying > Strike simultaneous selling of a put and a call of the same Price of Short call + Net premium received or underlying stock, striking price and expiration date. Price of underlying < Strike Price of Short put – Short straddles are limited profit, unlimited risk Premium received. options trading strategies that are used when the options trader thinks that the underlying securities Breakeven Points will experience little volatility in the near term. There are 2 breakeven points for the short straddle position. The breakeven points can be calculated Short Straddle Construction using the following formulae. Sell 1 ATM Call • Upper Breakeven Point = Strike Price of Short Sell 1 ATM Put Call + Net Premium Received • Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

Short Strangle The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the- money call of the same underlying and expiration date. The short strangle option strategy is a limited profit, Limited Profit unlimited risk options trading strategy that is taken Maximum profit for the short straddle is achieved when the options trader thinks that the underlying when the underlying stock price on expiration date stock will experience little volatility in the near term. is trading at the strike price of the options sold. At this price, both options expire worthless and the Short Strangle Construction options trader gets to keep the entire initial credit Sell 1 OTM Call taken as profit. Sell 1 OTM Put

The formula for calculating maximum profit is given below: • Max Profit = Net Premium Received • Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put • Unlimited Risk

Large losses for the short straddle can be incurred when the underlying price makes a strong move either upwards or downwards at expiration, causing Limited Profit the short call or the short put to expire deep in the Maximum Profit for the short strangle occurs when money. the underlying stock price on expiration date is trading between the strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.

26 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 The formula for calculating maximum profit is given below: • Max Profit = Net Premium Received • Max Profit Achieved When Price of underlying is in between the Strike Price of the Short Call and the Strike Price of the Short Put

Unlimited Risk Large losses for the short strangle can be experienced when the underlying stock price makes a strong move either upwards or downwards at expiration.

The formula for calculating loss is given below: • Maximum Loss = Unlimited • Loss Occurs When Price of underlying > Strike Price of short Call + Net Premium Received or Price of Underlying < Strike Price of Short Put – Net Premium Received • Loss = Price of Underlying – strike Price of Short Call – Net Premium received or Strike Price of short Put – Price of Underlying – Net Premium Received

Breakeven Points There are 2 breakeven points for the short strangle position. The breakeven points can be calculated using the following formulae. • Upper Breakeven Point = Strike Price of Short Call + Net Premium Received • Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 27 APPENDIX 7: INDEX OPTIONS BEGINNERS TUTORIAL

Buy a put to take advantage of a rise Selling covered calls A diversified portfolio of EUR 100.000 can be An investor running a portfolio of European equities hedged by buying put options on the Eurostoxx50 wants to achieve a higher return. His holdings have Index. To avoid paying too high a premium, one will already posted gains, he is confident the current choose a strike price that is at the money or slightly sluggish trend will continue, and he believes the out of the money. uncertainty of future returns is sufficiently low that he can afford to take a short position in call options. On august the 1st, with the underlying index at 2595, the premium for a put option with a strike price of He therefore decides to write call options on the 2575 and a September expiry is 16.90 per contract Eurostoxx50 index. The option premiums provide or 169 Euros given the 10 Euros lot size. immediate cash income today. The constraint is that The number of put options to be bought is if the stocks in his portfolio rise sharply, his gains calculated as follows: will be limited. The options he writes are European options, which mean that he cannot be assigned Portfolio = 100 000 = 3.88 before expiry. ––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––– Strike price X multiplier 2575 X 10 Strategy: For simplicity, the example below uses a portfolio Hedging a perfectly diversified euro-zone portfolio composed of just to stocks, but the generalization to worth 100 000 Euros by buying 4 September put the case of n stocks is straightforward. options with a strike price of 2575 thus costs 676 Euros. A portfolio consist of two stocks, A and B, valued at 40 Euro and 60 Euro respectively. The manager Unlike selling Futures, buying put options allows the holds 1 100 shares of A, which has a beta of 1.20 hedger to profit from any rise in the index. relative to the Eurostoxx50 index, and 600 shares of B, which has a beta of 0.75. (Beta: a measure of the If the value of the index at expiry is 2335,50 (-10 sensitivity of an asset X to a benchmark index Y. pct.), exercising the put options bought 47 days earlier provides a gain of 9 580 Euros ((2575 – His portfolio is therefore worth 80 000 Euro (1 100 2335,5) X 4 (number of contracts) X 40 Euro + 600 X 60 Euro). The Eurostoxx50 index X 10 Euros(multiplier)) which offsets the 10.000 is quoted at 2330 points. This portfolio is perfectly Euros loss on the portfolio correlated with the index, since the combination of (100 000 EUR X -10 pct. = - 10 000 Euros.) each stock’s beta weighted by its capitalization in the basket gives an aggregate beta of 1.00. Total: - 676 Euros (premium) + 9580 Euros (gain on the put options) For this portfolio, the number of call options to be -10.000 Euros (loss on the portfolio) sold is obtained in the following fashion:

= - 1.096 Euros or -1.01 pct. as opposed Portfolio value = 80 000 Euro = 3.43 as- 10 pct. without the options . ––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––– Index value X multiplier 2330 X 10 If, on the other hand, the index closes at 3114 (+20 pct.), the options are not exercised and the portfolio is worth 120 000 Euros (100 000 Euros X (1+20pct)) less the premium paid for the options (676 Euros)

28 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 The manager, being conservative, chooses the For day trading purposes, we want to use options DEC11 2600 Call at 38.70.Sell 4 eurostoxx50 Dec11 with as little time value as possible and with delta as 2600 calls at 38,70 each for an immediate gain of close to 1.0 as we can get. So if you are going to day 1 548 Euro ( 38,70 X 4 (number of contracts) X 10 trade options, then you should day trade the near (multiplier)). month in-the-money options of highly liquid stocks.

Results: We day trade with near month in the money Depending on the case, having sold call options options because in the money options have the three months earlier enables the manager to: least amount of time value and have the greatest • Limit losses on the portfolio when the delta, compared to at the money or out the money eurostoxx50 index falls options. • Make a profit when the eurostoxx50 index moves sideways Furthermore, as we get closer to expiration, the • Increase the return on the portfolio when the option premium is increasingly based on the eurostoxx50 index rises only slightly. intrinsic value, and so the underlying price changes will have a greater impact, bringing you closer Above 2638,70 points (strike price + premium), the to realizing point for point movements of the assignment resulting from the short position in call underlying stock. Near month options are also more options limits the portfolio return to about 13.25 heavily traded than longer term options, hence they pct. even if the index closes up to 20 pct. are also more liquid.

Day trading using options The more popular and more liquid the underlying With options offering leverage and loss-limiting stock, the smaller the bid-ask spread for the capabilities, it would seems like day trading options corresponding options market. would be a great idea. In reality, however, the day trading option strategy faces a couple of problems. When properly executed, day trading using options allow you to invest with less capital than if you Firstly, the time value component of the option actually bought the stock, and in the event of a premium tends to dampen any price movement. For catastrophic collapse of the underlying stock price, the near the money options, while the intrinsic value you loss is limited to only the premium paid. may go up along with the underlying stock price, this gain is offset to a certain degree by the loss of time Another Day trading Option: The Protective Put value. If you are planning to day trade a particular stock Secondly, due to the reduced liquidity of the options for short upside moves for the next few months, market, the bid-ask spreads are usually wider than you can purchase protective put options to insure a for stocks, sometimes up to half a point, again devastating stock crash. cutting into the limited profit of the typical day trade.

So if you are planning to day trade options, you must overcome these two problems.

Your Day Trading Options: Near month and in the Money

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 29 APPENDIX 8: OPTIONS GLOSSARY

American Option: Closing Index: An option that can be exercised, at the holder’s The last index calculated and published when choice, at any time until the option expires. the markets close, used as the basis of margin calculation. Assignment: The obligation incumbent on an option seller to Closing settlement price/Delivery settlement fulfill his contractual requirements (purchase or sale price: of underlying instrument), in response to a buyer’s Computed on the expiration date (options) or the decision to exercise an option. last day of trading (futures), the closing settlement price is the reference price for expiring options and At the money: for final payment of variation margin on futures. An option is at the money when the value of the underlying instrument is the same or almost the Contract size/Multiplier: same as the strike price of the option contract. The amount of the underlying asset in an option or future contract. Beta: A measure of the sensitivity of an asset X to a Contract value: benchmark index Y. Obtained by multiplying the premium’s quoted price by the contract size (multiple). Call: An option contract granting the holder the right to Cross-margining: buy the underlying asset at the agreed strike price. A facility whereby initial margin is computed on A call obliges the writer too sell the underlying at the the basis of a portfolio comprising either options agreed strike price if he is assigned against. and futures on the same product (option cross- margining) or several contacts (inter contract cross- Cash settlement: margining). A portfolio is sometimes exposed to risk Cash settlement is equivalent to a final margin from diverging market movements: cross-margining call on the maturity date. Exercise give rise to the captures this fact, making it possible to reduce initial payment of: risk. Call options: the difference between the closing settlement price and the call option strike price. Daily price limit: Put options: the difference between the put option The maximum permitted price movement relative strike price and the closing settlement price. to the previous daily settlement set by the market operator. When the daily price limit is reached, Class (of options): trading can be suspended, a new price limit is set, A set of traded options of the same category variation margin is called and trading resumes. (American or European) within the same maturity range (short-term or long-term) and pertaining to Daily settlement price: the same instrument. Computed and disseminated each trading day, the daily settlement price is used to determine variation Clearing house: margin for futures contracts and fluctuation limits An organization that registers transactions and for the following trading day. It is also used as a provides members with a guarantee of final reference for early exercise of American equity settlement. options.

30 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 Delta: Out of the money: A measure of how much an option’s price will vary A call option is out of the money when the market for a change in the price of the underlying. Delta price of the underlying is below the option strike ranges from 0 to 1 for call options, and between -1 price. A put option is out of the money when and 0 for put options. its strike price is below the market price of the underlying. European option: An option that can be exercised by the buyer only Premium: on the contract expiration date. The option price resulting from matching of buy and sell orders submitted to the market. Exercise: A decision, reserved for the option holder, to Put: request execution of the contract. An option contract granting the purchaser the right to sell the underlying asset at the agreed strike Expiration date: price. A put obliges the seller to purchase the The day on which an option contract expires, or the underlying at the agreed strike price if he is assigned last trading day for a futures contract. against.

Futures/Futures contract: Series (of options): A legally binding agreement between a buyer All options of the same class, the same type (call or and a seller on a market for financial put) bearing on the same quantity of the underlying instruments. Contract specifications are instrument, and having the same strike price and standardized. They include a firm and final price for the same expiration date. payment – and, where appropriate, delivery of the underlying asset – at a fixed date in future. Strike price/Exercise price: The price at which the option holder may purchase In the money: (in the case of a call) or sell (in the case of a put) the A call option is in the money when the market price underlying asset. of the underlying is above the option strike price. A put option is in the money when the strike price is Underlying/Underlying asset: above the market price of the underlying. The asset on which a futures or option contract is based. Initial margin: Initial payment paid by members to the clearing Variation margin: house and by clients to clearing house members to At the end of each trading day, trader’s positions open a futures position or to write options. Initial are marked to market on the basis of the daily margin covers the risk of default and is adjusted settlement price, thereby producing a potential loss daily by calls for variation margin. or gain that is paid into the account or collected from it. Option: An option gives the buyer (holder) the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) a set quantity of the underlying asset at a specified price (strike price) for a given period of time.

BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 31 32 BinckBank is a tradename of Binckbank N.V. - Licensee Dutch National Bank - Registered at the Authority of Financial Markets (A.F.M.) - Chamber of Commerce Amsterdam 33162223 BinckBank NV Barbara Strozzilaan 310 1083 HN Amsterdam The Netherlands

BinckBank Spain Urb. La Carolina Edf. Aries Local N 29602 Marbella

+ 34 951 56 56 56 [email protected] www.BinckBank.com

BB/AS/HACO/0118