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September 20, 2019
Options Institute at Cboe Global Markets
Making the most in volatile markets and
downside speculation
Jermal Chandler – Instructor, Cboe Global Markets
Michael Pollock – Regional Brokerage Consultant, Fidelity Investments
2
Volatility Defined
What Constitutes a Volatile Market?
Index Option Trading
• What You Need to Know
• Mini-SPX Index Options (XSPSM)
• XSP versus SPY
Trading Strategies for Volatile Markets
• Long Straddle
• Portfolio Put
Summary
Session II – Making the most in volatile markets and downside speculation
3
Volatility = Measure of the relative degrees of change
Periods of relatively high volatility and low volatility
S&P 500® Index volatility: 1-yr versus 5-yr
• 2018: 4.92% monthly; 17.05% annual
• 2013-2018: 3.82% monthly; 13.23% annual
Ebbs and flows over time due to many factors
Volatility Drivers
• Geopolitical
• Corporate Earnings
• Stock-specific news
• Supply and Demand
Volatility tends to be mean reverting
Volatility Defined
4
What Constitutes a Volatile Market?
Volatility is ever-changing; As volatility increases, so does risk
Can generate above-average profit if on the right side of volatile move
Significant loss in a short period of time can occur if on the wrong sideSource: Cboe Global Markets & Bloomberg
5
What Constitutes a Volatile Market?
???
2020
Index Option Trading
7
Trading Index Options
• Index options may be deployed the same way as equity or ETF options
• Index options have some inherent benefits not associated with equity or ETF option
Directionally: Bullish/Bearish/Range bound
• Example: Calls + Call Spreads/Puts + Put Spreads/Condors
Asset Allocation: Targeted buying/selling/Efficient Rebalance (Fund Managers)
• Example: Buying/Selling Index options to increase/reduce exposure
Hedging/Tail Risk/Defensively
• Example: Puts + Put Spreads/Collars
Income Generation: Yield Enhancement/Buy-Write/Portfolio Overlay
• Example: Own diversified portfolio + Write OTM Index Calls/Short Puts
Index Option Trading – What You Need to Know
8
Unique Characteristics of Index Options
• European Style – NO early exercise
• Cash Settled – NO physical delivery of shares
• 1256 Contracts – Potentially favorable tax treatment*
Index Option Trading – What You Need to Know
*Section 1256 of the United States Tax Code – May not apply for non-domestic traders
9
Indexes TEND to move with less volatility than individual equities (absolute terms)
Volatile times (Jan. 3, 2019)
SPX = 2477; VIX = 25.45
• NFLX 30 day HV = 56%
• AAPL 30 day HV = 50%
• V 30 day HV = 39%
• XSP 30 day HV = 27%
Index Option Trading – What You Need to Know
Non-volatile times (Jul. 3, 2019)
SPX = 2955; VIX = 12.57
• NFLX 30 day HV = 28%
• AAPL 30 day HV = 22%
• V 30 day HV = 16%
• XSP 30 day HV = 12%
10
Index Option Trading – Mini SPX Options (XSPSM)
XSP is an INDEX option designed to track underlying S&P 500 index
XSP’s size (1/10th SPX) is very attractive to individual traders looking to express a market sentiment via options; $3000 SPX = $300 XSP
Smaller size allows for flexibility for traders that are new to index options
SPX = 60 oz. Porterhouse
XSP = 6 oz.Filet Mignon
11
XSP options are all PM settled
• Including standard/weekly/EOM
Early Trading Hours: 7:30am – 8:15am Chicago time
• Accessible after release of economic data
Expiring options stop trading at 3pm Chicago time
Index Option Trading – XSP versus SPY
Trading Strategies for Volatile Markets
13
Purchasing a Straddle
• Consists of purchasing two options: one Call and one Put
• Both options have the same expiration and same strike price
Example:
• XSP trading @ 299.54
• September expiration is 59 days away
• You are expecting a 10% correction in SPX before expiration
• Equivalent expected move in XSP would be ~$30
• XSP Sep 300 call is $5.38; XSP Sep 300 put is $5.63
• Buy 1 XSP Sep 300 Straddle @ $11.01
Trading Strategies for Volatile Markets – Long Straddle
14
Motivation?
• Profit from sharp move in underlying
• Benefit from increased volatility
Breakeven(s)? Two
• Downside: Strike – Premium = $288.99
• Upside: Strike + Premium = $311.01
Maximum gain?
• Upside profit is theoretically unlimited
• Downside profit is limited
Maximum loss?
• Limited to premium paid for both options
Volatility?
• Strategy would be fueled by increase in volatility; Conversely, would suffer if volatility decreased
Trading Strategies for Volatile Markets – Long Straddle
15
Buy XSP Sep 300 Straddle for $11.01; Implied volatility is 11.5%
Scenario 1: Stock trading 300; vol. change = 0; IV = 11.5%
Scenario 2: Stock trading 300; vol. change = +20%; IV = 13.8%
Scenario 3: Stock trading 300; vol. change = -20%; IV = 9.2%
Trading Strategies for Volatile Markets – Long Straddle
Sou
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16
Determine # of SPX contracts (based on portfolio size):
Portfolio $Value to be Hedged
Notional Value of Index Contract (Strike x $100)
$500,000
3000 x $100
1 SPX Put protects $300,000
Buy 2 SPX January 2020 3000 Put @ $100 (Total $20,000 – 4% of portfolio)
Trading Strategies for Volatile Markets – Portfolio Put
1.6 SPX Puts
=
17
Trading Strategies for Volatile Markets – Portfolio Put
BEP
$500,000 portfolio
SPX @ 3,000
Buy 2 SPX January 2020 3000 Puts @ $100
Cost = $100 x 2 x 100 = $20,000
1 SPX Put protects $300,000
Breakeven Point is SPX @ 2900
18
Assume SPX at 2,700
Market is -10% so Portfolio is -10%
$480,000 stock portfolio (500k – 20k options) is now $432,000
But since we hedged:
SPX trading 2,700 → Jan 3000 puts are now worth $300
Value of 3000 strike Puts: $300 x 2 x 100 = $60,000
Portfolio: Value of Equities + Value of 3000 strike puts
Portfolio Value @ SPX 2700: $432,000 + $60,000 = $492,000
Due to hedging:
Market -10% but Portfolio ONLY -1.6%
Trading Strategies for Volatile Markets – Portfolio Put
19
Volatility Defined
What Constitutes a Volatile Market?
Index Option Trading
• What You Need to Know
• Mini-SPX Index Options (XSPSM)
• XSP versus SPY
Trading Strategies for Volatile Markets
• Long Straddle
• Portfolio Put
Summary: Session II – Making the most in volatile markets and downside speculation
20
Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of StandardizedOptions. Copies are available from your broker or from The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors and involves risk ofloss. The information in this presentation is provided solely for general education and information purposes. No statement within this presentation should be construed as arecommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities or futures price data,are strictly for illustrative and educational purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in theexamples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Multiple legstrategies involve multiple commission charges. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will betaxed. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation isavailable from Cboe upon request. Cboe Exchange, Cboe Volatility Index, CFE and VIX are registered trademarks and Cboe Futures Exchange, Cboe Short-Term Volatility Index,Cboe 3-Month Volatility Index, Cboe Mid-Term Volatility Index, Execute Success, SPX, The Options Institute VXST, VXV and VXMT are service marks of Cboe Global Markets,Incorporated (Cboe). S&P 500® is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by Cboe and Cboe Futures Exchange, LLC(CFE). Cboe's and CFE’s financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding theadvisability of investing in such products. This presentation should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe product orservice described in this presentation.
Copyright © 2019 Cboe Global Markets. All rights reserved
The information provided in this communication is solely for educational purposes and should not be construed as advice or an investment recommendation. FidelityInvestments is a separate company, unaffiliated with Cboe Global Markets. There is no form of partnership, agency affiliation, or similar relationship between Cboe GlobalMarkets and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of thecontent supplied by Cboe Global Markets and does not guarantee or assume any responsibility for its accuracy or completeness.
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