Cabot Investors Conference 2014 Options Primer Jacob Mintz Analyst, Cabot Options Trader

Cabot Investors Conference 2014 www.cabot.net

Options Primer

Jacob MintzAnalyst, Cabot Options Trader

[email protected] @Jacob_Mintz


Options Primer• Calls• Puts• Market Leverage• Using Options to Create Yield• How to Trade Like a Hedge Fund


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


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


FB Call• Buy 1 FB September 75 Call for

$2


FB Call• Symbol: FB• Month of the Call’s Expiration:

September• Date of Expiration: September 20,

2014• Strike: 75• Price: $2


An Option’s Price• The Potential Loss for the Holder

of an option is LIMITED to the Initial Premium Paid for the Contract


How is the Price of the Call Determined?

Supply and Demand

Likelihood the Call will Finish In-the-Money Due to Time


Profit and LossFacebook Call

-300

-200

-100

0

100

200

300

400

500

600

700

800

900

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

Stock Price

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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


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


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


How is Price of Put Determined?

• Hurricane Insurance

• Likelihood of Finishing In-the-Money Due to Time


Profit and LossAAPL Put

-400-300-200-100

0100200300400500600700800900

10001100120013001400

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

Stock Price

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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


Creating Yield


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


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.


IPG Covered Call• On May 29, we Bought 100 IPG at

$19.07• Sold IPG June 20 Call for $0.40


Profit and LossIPG Covered Call

-400

-300

-200

-100

0

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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

Stock Price

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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


Net Yield Created•Stock at 19.50, we have

Created a 10.39% Yield•Stock at 20, we have Created

a 13.06% Yield


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”


How Do I Determine Which to Follow?

• Size of Trade vs. Typical Trade Volume

• Repeated Buys• Price is Not an Issue


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


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


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


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


Market Tone• Where is the Fast Money Going?


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

Documents

Cabot Investors Conference 2014 Options Primer Jacob Mintz Analyst, Cabot Options Trader