Transcript D1-Jacob-Mintz-Using-options-to-gain-leverage1.ppt

Options Primer
Jacob Mintz
Analyst, Cabot Options Trader
[email protected]
Cabot Investors Conference 2014
@Jacob_Mintz
www.cabot.net
Options Primer
• Calls
• Puts
• Market Leverage
• Using Options to Create Yield
• How to Trade Like a Hedge Fund
Cabot Investors Conference 2014
www.cabot.net
About Me
•
•
•
•
•
How did I become a Trader?
My Uncle “Knew a Guy”
Learned under Two CBOE Legends
Became a Market Maker
Designated Primary Market Maker on
CBOE and Pcoast
• Took my Team off the Trading Floor in
2010
• What I’m Doing Now
Cabot Investors Conference 2014
www.cabot.net
Call Option
• A Call Option gives its Holder the
Right to BUY 100 Shares of the Stock
at the Strike Price Anytime Prior to
the Option’s Expiration Date
• Equity Option Contracts Represent
100 Shares of the Underlying Stock
Cabot Investors Conference 2014
www.cabot.net
FB Call
• Buy 1 FB September 75 Call for
$2
Cabot Investors Conference 2014
www.cabot.net
FB Call
• Symbol: FB
• Month of the Call’s Expiration:
September
• Date of Expiration: September 20,
2014
• Strike: 75
• Price: $2
Cabot Investors Conference 2014
www.cabot.net
An Option’s Price
• The Potential Loss for the Holder
of an option is LIMITED to the
Initial Premium Paid for the
Contract
Cabot Investors Conference 2014
www.cabot.net
How is the Price of the Call
Determined?
 Supply and Demand
 Likelihood the Call will Finish Inthe-Money Due to Time
Cabot Investors Conference 2014
www.cabot.net
Profit and Loss
Facebook Call
900
800
700
Profit and Loss
600
500
400
300
200
100
0
-100
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
-200
-300
Stock Price
Cabot Investors Conference 2014
www.cabot.net
Power of Options
• Instead of Paying $7,300 to Buy
100 Shares of FB, you can Pay
$200 for the Opportunity to Buy
100 Shares at $75
Cabot Investors Conference 2014
www.cabot.net
Put Option
• A Put Option gives its Holder the
Right to SELL 100 Shares of the
Stock at the Strike Price at Any
Time Prior to the Option’s
Expiration Date
Cabot Investors Conference 2014
www.cabot.net
AAPL Put
• Buy one AAPL September 95 Put for
$2.50
• Symbol: AAPL
• Month of the Put’s Expiration:
September
• Date of Expiration: September 20
• Strike: 95
• Price: $2.50
Cabot Investors Conference 2014
www.cabot.net
How is Price of Put
Determined?
• Hurricane Insurance
• Likelihood of Finishing In-theMoney Due to Time
Cabot Investors Conference 2014
www.cabot.net
Profit and Loss
AAPL Put
1400
1300
1200
1100
Profit and Loss
1000
900
800
700
600
500
400
300
200
100
0
-100 80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
-200
-300
-400
Stock Price
Cabot Investors Conference 2014
www.cabot.net
The Power of Options
• Unless you have Special
Arrangements, Brokers won’t let
you Short Stocks without paying
Significant Margin due to the Risk
With Options, you only have to
Pay $250 to have the Ability to
Short 100 Shares of AAPL at 95
Cabot Investors Conference 2014
www.cabot.net
Creating Yield
Cabot Investors Conference 2014
www.cabot.net
Buy-Write/Covered Call
Writing
• A Covered Call Write consists of
Buying or Owning a Stock and
Selling (i.e., Shorting) a Call
Option on that Stock
Cabot Investors Conference 2014
www.cabot.net
IPG Covered Call
• You can Write One Call on Each
100 Shares of Stock you own.
Your Short Option position is
“Covered” by the Stock.
A Short Call on Stock in your
Account (a Covered Call) is a
Very Conservative Strategy and
requires No Margin.
Cabot Investors Conference 2014
www.cabot.net
IPG Covered Call
• On May 29, we Bought 100 IPG at
$19.07
• Sold IPG June 20 Call for $0.40
Cabot Investors Conference 2014
www.cabot.net
Profit and Loss
IPG Covered Call
200
Profit and Loss
100
0
15
15.5
16
16.5
17
17.5
18
18.5
19
19.5
20
20.5
21
21.5
22
22.5
23
23.5
24
24.5
25
-100
-200
-300
-400
Stock Price
Cabot Investors Conference 2014
www.cabot.net
Rolling
• Sold IPG June 20 Call for $0.40
• Sold IPG July 20 Call for $0.63
• Sold IPG August 20 Call for $0.48
• Cost Basis now 17.56
Cabot Investors Conference 2014
www.cabot.net
Net Yield Created
• Stock at 19.50, we have
Created a 10.39% Yield
• Stock at 20, we have Created
a 13.06% Yield
Cabot Investors Conference 2014
www.cabot.net
Order Flow Reading
• Tracking Hedge Fund Options
Trading Activity
• Calls are the Weapon of Choice
• Puts are the Stealth Way
• Becoming a Detective
• Market Tone
• It’s a “Feel”
Cabot Investors Conference 2014
www.cabot.net
How Do I Determine Which
to Follow?
• Size of Trade vs. Typical Trade
Volume
• Repeated Buys
• Price is Not an Issue
Cabot Investors Conference 2014
www.cabot.net
Size of Trade: HSH
• Average approximately 250 Options/Day
• Buyer of 11,000 June 40 Calls for $0.45
• $495,000
• Worth $22.08 or a Profit of $21.63 per
Call
• $24 Million Profit
• 4,800% Return in One Month
Cabot Investors Conference 2014
www.cabot.net
HSH Risk Reversal
• Buyer of 3,000 October 38 Calls for $1.20
• Sale of 3,000 October 34 Puts for $1.625
• Net collected $0.425 or $127,500
• Call Worth $25 or Profit of $7 Million
• Put Expired Worthless so Collected
$487,500
• Profit of $7.5 Million
Cabot Investors Conference 2014
www.cabot.net
Repeated Buys: AMAT
• 70,000 January 20 Calls: $16,800,000
• 15,000 January 21 Calls: $2,850,000
• 140,000 January 22 Calls: $21,000,000
• 120,000 January 24 Calls: $9,600,000
• 55,000 January 25 Calls: $3,850,000
• 15,000 January 26 Calls: $750,000
• 415,000 Calls or 41,500,000 shares
• Capital at Risk: $54,850,000
Cabot Investors Conference 2014
www.cabot.net
Price is No Issue: CSCO
• June 30: Bought 55,000 Calls for $0.15
• July 1: Bought 40,000 Calls for $0.27
• July 3: Bought 15,000 Calls for $0.34
• July 21: Bought 30,000 Calls for $0.48
Cabot Investors Conference 2014
www.cabot.net
Market Tone
• Where is the Fast Money Going?
Cabot Investors Conference 2014
www.cabot.net
It’s a Feel
• Blink
• Clorox
• July 11, 2011: 16,000 July 70 and 72.5 Calls
• 4 days until expiration
• 50x Volume
• July 14, 76.50
• 600% Return
Cabot Investors Conference 2014
www.cabot.net