Options on Stocks

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Options on Stocks

• Buying Options offers
• Profit Potential with Limited Risk
• A good way to economically place your bet or a
  good way to lose your shirt?
• 1/12/15 Santa Fe Meetup
• aaii.albuquerque_at_gmail.com
• George Proctor, AAII-NM, Pres. 1/12/15 Santa Fe
  Meetup

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Second Tuesday Monthly Investing Group Meetings

• Jan. 13 Mark Holmen of John Stewart Asso., a
  commodity trader in Albq.  His Technical
  Analysis expertise  can benefit anyone interested
  in how markets move whether involved with
  commodities or not. 
• Feb. 10 Brad Yablonsky on Medicare.

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Thursday, January 15  MCM Elegante _at_ 7PM

• "Top Themes for Growth and Income"
• by John Vazquez, UBS Financial, Santa Fe
• Cross-asset ideas for yield and income,
• UBS dividend ruler strategy.
• Also - top themes for growth in the current
  environment.
• Strategies for income in a low-interest-rate
  world
• How demographics are likely to affect investments
  in the coming decades

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Puts Calls in everyday life

• Your auto and home insurance are put options
  (long)
• The coupons in the Sunday paper are call options
  (long)

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Options Are Simple, Right?
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Types of Options

• Call Option The right to buy a stock
• The buyer has the right but not the obligation to
  buy a stock
• The seller has the obligation to sell the stock
  at the Strike Price
• Put Option The right to sell a stock
• The buyer has the right but not the obligation to
  sell a stock
• The seller has the obligation to buy the stock at
  the Strike Price

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Long Buy/Own

• Short Sell/Owe

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Option Strike vs Stock Price

• At the Money (ATM) Option Strike Stock Price
• In the Money (ITM) For a call option, when the
  option's strike price is below the market price
  of the underlying asset. For a put option, when
  the strike price is above the market price.
• Out of the Money (OTM) For a call option, when
  the option's strike price is above the market
  price of the underlying asset. For a put option,
  when the strike price is below the market price.

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How are options priced

• Options prices (costs) are calculated using four
  main elements
• Strike Price
• Expiration date
• Stock Price
• Volatility

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Definitions

• Strike price This is stock price where the
  action happens. There are many strike prices for
  each stock for each month.
• Expiration The day that a particular option is
  over. Generally the third Friday of each month.
  (note there are weekly options on a few stocks
  and ETFs)
• Volatility Based on how much the stock price
  moves over time.

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The name of the game is

• Volatility
• Historical (Can be measured)
• vs.
• Implied (is Observed)
• The calculated difference btwn
• HV and IV
• shows the supply/demand balance

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Shows the supply/demand balance?

• There are many ways to interpret HV / IV
• For me its - expensive vs cheap
• After the basic research is done to arrive at a
  candidate stock,
• most of the analysis goes here.

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Calculaters Volatility Info

• www.ivolatility.com
• www.cboe.com
• And many Brokerage Accounts

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Option Pricing Calculators

• These provide you with a Theoretical value of an
  option.
• Commonly based on formulas such as
• The Black-Scholes Options Pricing Model

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Option Pricing Models

• Another way to look at it is that
• The difference between the Theoretical value of
  an option
• and the actual price is the difference between HV
  IV.

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Option Pricing Calculators Inputs

• Stock Price
• Strike Price
• Expiration (days to)
• Volatility
• Also
• Dividends, Risk Free i, Euro or Amer Style

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SPX from iVolatility.com
In a sense, Historical vs Implied Volatility is
the WHOLE point.
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Another Powerful Tool

• Delta
• -represents the rate of change between the
  option's price and the underlying asset's price -
  in other words,
• Price Sensitivity.

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Delta

• For example, with respect to call options, a
  delta of 0.7 means that for every 1 the
  underlying stock increases, the call option will
  increase by 0.70. Put option deltas, on the
  other hand, will be negative, because as the
  underlying security increases, the value of the
  option will decrease.

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Think of Delta as the probability of success

• A Delta of 0.27 suggests you have about 1 chance
  in 4 (25) of the stock price even reaching the
  Strike Price, not to say Breaking Even
• Why? The 30 days until this option expires,
  possibly worthless.

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Note the Delta - 0.27
There is a 27 chance this option will expire At
the Money
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Buy a Put Option (Long Put)
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Notice the Delta.
Only 20 chance of winning