Option Spreads

download Option Spreads

of 95

  • date post

    22-Nov-2014
  • Category

    Documents

  • view

    1.590
  • download

    0

Embed Size (px)

description

 

Transcript of Option Spreads

  • 1. Spreads Barrington Capital Management, Inc . A Registered Investment Advisor (800) 944 2410 (952) 835 1000 THE OPTIONS INDUSTRY COUNCIL C O I
  • 2. Understanding and Trading Options Spread Strategies C O I
  • 3. The Options Industry Council 2 Understanding and Trading Options Spread Strategies For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy. Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies have been provided for you today and may be obtained from your broker, one of the exchanges or The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606 or call 1-888-OPTIONS or visit www.888options.com. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and education purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Supporting documentation will be supplied upon written request.
  • 4. Presentation Outline
    • Review of Basics
    • Introduction to Spreads
      • Bull Call Spread
      • Bear Call Spread
      • Bear Put Spread
      • Bull Put Spread
    • The Options Invest igator
    • Trading Spreads
      • Diagonal Spreads
      • Straddles and Strangles
      • Stock and Options Spreads
    3
  • 5. Review of Basics C O I
  • 6. Unique Aspects Of Options
    • Options are
    • Options buyers get
      • A call buyer gets
      • A put buyer gets
    • Options sellers get
      • A short call is
      • A short put is
    4 contracts rights the right to buy the right to sell obligations an obligation to sell an obligation to buy
  • 7. Options Mechanics
    • The exercise of a call option creates
    • A stock purchase transaction
    • The exercise of a put option creates
    • A stock sale transaction
    • Assignment of a call option creates
    • A stock sale transaction
    • Assignment of a put option creates
    • A stock purchase transaction
    5
  • 8. Options Require Planning 1
    • If I buy an option today, do I plan to:
      • Sell the option?
      • Exercise the option?
      • Let it expire worthless?
    • What is my back-up plan if the market goes against me?
    6
  • 9. Options Require Planning 2
    • If I sell an option today, do I plan to:
      • Repurchase the option?
      • Live with assignment?
      • Carry the position until expiration and hope it expires worthless?
    • What is my back-up plan if the market goes against me?
    7
  • 10. Review of Options Pricing C O I
  • 11. The Impact Of Stock Price Change
    • STOCK PRICE
    • $50.00 $51.00
    • DAYS TO EXPIRATION
    • 90 90
    • PRICE OF 50 CALL
    • $3.00
    • Your estimate of a new 50 Call price?
    8 $3.50 Stock price up $1.00 Call price increases less than $1.00 (Assumes time is unchanged) ?
  • 12. The Impact Of Changing Time
    • STOCK PRICE
    • $50.00 $50.00
    • DAYS TO EXPIRATION
    • 90 45
    • PRICE OF 50 CALL
    • $3.00
    • Your estimate of a new 50 Call price?
    9 $2.00 Time decreases by 50% Call price decreases less than 50% (Assumes stock price is unchanged) ?
  • 13. Delta
    • Options prices generally change less than stock prices.
    • The delta estimates how much an options price will change for a one-unit change in stock price.
    • Delta > 50% if option is I-T-M
    • Delta < 50% if option is O-T-M
    • Delta = 50% (approximately) if option is A-T-M
    10
  • 14. Time Decay
    • Options prices decrease as expiration approaches.
    • This is known as time decay or time erosion.
    • Options prices do not decrease at the same rate that time passes to expiration.
    • For A-T-M options, there is less decay initially and more as expiration nears.
    • For I-T-M and O-T-M options, time decay is more linear.
    11
  • 15. Introduction to Spreads C O I
  • 16. What Does Spread Mean?
    • The term spread is a loosely used term than can describe any multiple-part strategy.
    • Some spreads involve only options.
    • Some spreads involve stocks and options.
    12
  • 17. Why Are Spreads Important?
    • Spread strategies offer investors and traders unique sets of trade-offs.
    • For a particular market forecast, a spread strategy may offer a better risk/reward ratio or a higher profit potential.
    13
  • 18. The Bull Call Spread C O I
  • 19. Bull Call Spread Defined
    • A bull call spread involves the purchase of one call and the sale of another call with a higher strike price. Both options have the same underlying and the same expiration date.
    • Bull call spreads are also known as debit call spreads. They are one type of vertical spread.
    14
  • 20. Bull Call Spread Example
    • With XYZ stock trading at $63.00:
    • (Stock forecast: Up 10% by expiration)
    • Buy 1 XYZ 60 Call at $5.50
    • Sell 1 XYZ 70 Call at $2.00
    • Net cost: $3.50
    • The 60-70 Call spread is purchased for $3.50, or $350.00, plus commissions.
    15
  • 21. Bull Call Spread Profit/Loss Table 16 $75.00 $70.00 $65.00 $63.50 $60.00 $55.00 Stock Price 60 Call Profit/(Loss) 70 Call Profit/(Loss) Combined Profit/(Loss) $9.50 ($3.00) $6.50 ($5.50) ($2.00) ($0.50) $4.50 ($5.50) $2.00 $2.00 $2.00 $2.00 $2.00 ($3.50) 0 $1.50 $6.50 ($3.50)
  • 22. Bull Call Spread Diag