Transcription
Short Option StrategiesRussell Rhoads, CFAInstructor – The Options Institute
CBOE DisclaimerOptions involve risks and are not suitable for all investors. Prior to buying or selling options, an investor mustreceive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contactingyour broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive,Suite 500, Chicago, Illinois 60606. In order to simplify the computations, commissions, fees, margin interestand taxes have not been included in the examples used in this presentation. These costs will impact theoutcome of all transactions and must be considered prior to entering into any transactions. Multiple legstrategies involve multiple commission charges. Investors should consult their tax advisor about any potentialtax consequences. The information in this presentation, including any strategies discussed, is strictly forillustrative and educational purposes only and is not to be construed as an endorsement, recommendation, orsolicitation to buy or sell securities. Supporting documentation for any claims or data in this presentation isavailable by calling 1-888-OPTIONS, or contacting CBOE at www.cboe.com/Contact. CBOE and ChicagoBoard Options Exchange are registered trademarks of Chicago Board Options Exchange, Incorporated.CBOE is not affiliated with Interactive Brokers.Copyright 2012 Chicago Board Options Exchange, Incorporated. All rights reservedCHICAGO BOARD OPTIONS EXCHANGE2
Outline Option Basics ReviewBuying Options versus Selling OptionCovered CallCash Secured PutsSpread TradeTime DecaySummary / Q&ACHICAGO BOARD OPTIONS EXCHANGE3
Option BasicsAn equity call buyer:Has the right to buy 100 shares of stockAn equity call seller:Has the obligation to sell 100 shares of stock*Options typically represent 100 shares. Corporate actions such as splits or specialdividends may change the deliverable.CHICAGO BOARD OPTIONS EXCHANGE4
Option BasicsAn equity put buyer:Has the right to sell 100 shares of stockAn equity put seller:Has the obligation to buy 100 shares of stockCHICAGO BOARD OPTIONS EXCHANGE5
Buying versus SellingBuying options – Pay a premium Receive a rightShould be bullish or bearishSelling options – Receive premium Get an obligationMay be bullish, bearish, or neutralCHICAGO BOARD OPTIONS EXCHANGE6
Covered CallOverview – Covered Call is a combination of long stock andshort a call option Short call option position results in obligation to sellshares Obligation to sell shares is covered by long positionin stock Motivation may be as an exit strategy and/or toenhance portfolio incomeCHICAGO BOARD OPTIONS EXCHANGE7
Covered CallExample – Own 100 shares of XYZ at 43.50 Would be a willing seller of XYZ at 45.00 over thenext four to five weeks Today is February 15th March expiration is March 16thSell 1 XYZ Mar 45 Call at 1.15CHICAGO BOARD OPTIONS EXCHANGE8
Covered CallPayoff Table –Long 100 XYZ at 43.50Short 1 XYZ Mar 45 Call at 1.15XYZ atLongShort 1 XYZExpiration XYZ Stock Mar 45 00)6.5050.00(10.00)11.5055.00CHICAGO BOARD OPTIONS EXCHANGEIncome Profit / Loss(7.35)1.15(2.35)1.152.651.152.651.152.651.159
Covered CallPayoff Table –Long 100 XYZ at 43.50Short 1 XYZ Mar 45 Call at 1.154.002.00Max Profit 2.650.00-2.00Break Even 42.35-4.00-6.00-8.0035.00CHICAGO BOARD OPTIONS EXCHANGE40.0045.0050.0055.0010
Covered CallAt Expiration –XYZ over 45.00Option AssignedSell 100 XYZEffective Price 46.15XYZ below 45.00Option ExpiresCHICAGO BOARD OPTIONS EXCHANGE11
Cash Secured PutOverview – Combination of Short Put and Cash Short Put results in obligation to purchase shares Cash on hand to fulfill obligation to purchaseshares Short Put is ‘covered’ by CashCHICAGO BOARD OPTIONS EXCHANGE12
Cash Secured PutExample – XYZ Trading at 51.50 Would be like to be long 100 shares of XYZ below50.00 in 30 days Today is February 15th March expiration is March 16thSell 1 XYZ Mar 50 Put at 1.35CHICAGO BOARD OPTIONS EXCHANGE13
Cash Secured PutPayoff Table –Short 1 XYZ Mar 50 Put at 1.35XYZ atExpiration40.0045.0050.0055.0060.00CHICAGO BOARD OPTIONS EXCHANGEShort 1XYZ Mar50 1.35Profit /Loss(8.65)(3.65)1.351.351.3514
Cash Secured PutPayoff Diagram –Short 1 XYZ Mar 50 Put at 1.352.00Max Profit 1.350.00-2.00Break Even 48.65-4.00-6.00-8.00-10.0040.00CHICAGO BOARD OPTIONS EXCHANGE45.0050.0055.0060.0015
Cash Secured PutAt Expiration –XYZ over 50.00Option ExpiresXYZ below 50.00Option AssignedBuy 100 XYZEffective Price 48.65CHICAGO BOARD OPTIONS EXCHANGE16
Spread TradeOverview – Option spread trade can be a wide variety ofstrategies Many involve a short option position A spread may be superior to a pure long optiontradeCHICAGO BOARD OPTIONS EXCHANGE17
Spread TradeExample – XYZ is trading at 37.50 Believe XYZ should trade to 40.00 Move should occur over the next two months Today is February 15 April expiration in two monthsBuy 1 XYZ Apr 35 Call @ 4.15Sell 1 XYZ Apr 40 Call @ 1.75Net Debit 2.40CHICAGO BOARD OPTIONS EXCHANGE18
Spread TradeLong 1 XYZ Apr 35 Call @ 4.15Short 1 XYZ Apr 40 Call @ 1.75XYZ at Long 1 XYZ Short 1 XYZ35 CallExpiration40 040.0010.00(5.00)45.0015.00(10.00)50.00CHICAGO BOARD OPTIONS ofit / Loss(2.40)(2.40)(2.40)2.602.602.6019
Spread TradeLong 1 XYZ Apr 35 Call @ 4.15Short 1 XYZ Apr 40 Call @ 1.753.00Max Profit 2.602.001.000.00-1.00Max Loss 2.40Break Even 37.40-2.00-3.0025.00CHICAGO BOARD OPTIONS EXCHANGE30.0035.0040.0045.0050.0020
Spread TradeAt Expiration –XYZ below 35.00Both Options ExpiresXYZ between 35.00 and 40.00Long 35 Call In The MoneyXYZ above 40.00Long 35 Call In The MoneyShort 40 Call In The MoneyCHICAGO BOARD OPTIONS EXCHANGE21
Spread TradeWhy use the spread trade?Buy 1 XYZ Apr 35 Call @ 4.15XYZ at 40.00 – 0.85 ProfitXYZ Apr 35 – 40 Spread @ 2.40XYZ at 40.00 – 2.60 ProfitCHICAGO BOARD OPTIONS EXCHANGE22
Spread TradeWhy use the spread trade (part 2)?Buy 1 XYZ Apr 35 Call @ 4.15Break Even 39.15XYZ Apr 35 – 40 Spread @ 2.40Break Even 37.40CHICAGO BOARD OPTIONS EXCHANGE23
Spread TradeWhy use the spread trade (part 3)?Buy 1 XYZ Apr 35 Call @ 4.15Potential profit unlimitedXYZ Apr 35 – 40 Spread @ 2.40Potential profit 2.60CHICAGO BOARD OPTIONS EXCHANGE24
Time Decay When we sell options we can benefit from the timevalue of an option decaying This contributes to selling options possibly being aneutral strategy The nature of time decay varies based on a varietyof factorsAt the Money Optionsexperience non-linear time decayCHICAGO BOARD OPTIONS EXCHANGE25
Time DecayAt the Money vs. Out of the Money (180 days) –.4.00At The Money3.002.00Out of The Money1.000.00180CHICAGO BOARD OPTIONS EXCHANGE150120906030026
Time DecayAt the Money vs. Out of the Money (60 days) –.3.002.00At The Money1.00Out of The Money0.0060CHICAGO BOARD OPTIONS EXCHANGE453015027
Time DecayThings to know about time decay – Short option positions can benefit from the passageof time The benefit received from a short position can varybased on the selected option contract Strike price relative to stock price and time toexpiration both influence the potential time decaybenefitCHICAGO BOARD OPTIONS EXCHANGE28
Summary A short option trade results in receiving a premiumbut also taking on an obligation Selling a call option results in the obligation to sella stock A short put option position results in the obligationto purchase shares When short an option position often the benefit isthe passage of time. Time decay should be taken into account whenconsidering a short option positionCHICAGO BOARD OPTIONS EXCHANGE29
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Short Option Strategies Russell Rhoads, CFA Instructor – The Options Institute. CHICAGO BOARD OPTIONS EXCHANGE CBOE Disclaimer. Options involve risks and are not suitable for all investors.Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of S
