IntroductiontoOptionsIplacedmyoptionstrade!Nowwhat?

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Optionstradingentailssignificantriskandisnotappropriateforallinvestors.Priortotradingoptions,youmustreceiveacopyofCharacteristicsandRisksofStandardizedOptions,whichisavailablefromFidelityInvestments,andbeapprovedforoptionstrading.Supportingdocumentationforanyclaims,ifapplicable,willbefurnisheduponrequest.

Examplesinthispresentationdonotincludetransactioncosts(commissions,margininterest,fees)ortaximplications,buttheyshouldbeconsideredpriortoenteringintoanytransactions.

CharacteristicsandRisksofStandardizedOption Theinformationinthispresentation,includingexamplesusingactual

securitiesandpricedata,isstrictlyforillustrativeandeducationalpurposesonlyandisnottobeconstruedasanendorsement,recommendation.

Disclosures

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Thegoalofthisseriesistointroduceoptionstothosewhoareoptionnovices.PriorsessionscoveredsomeofthebasicsofoptionsandFidelity’soptionstools.Wewillcontinuethisprocessbyreviewingsomeaspectsofmanaginganoptionstrade.

Reviewofsomeoptionsbasics

Managingoptionstradespriortoexpiration

Managingoptionstradesatexpiration

Tips,tricks,andthingstoconsider

GoalofthiswebinarSeries

Topicsthatwillbecoveredin PartIII

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Therearetwotypesofoptions,CallsandPuts

Call• Call option is a contract that allows the option holder (buyer) to buy 100

shares at the strike price up to the defined expiration date. Said to be LONGthe call. Bullish

• Call options obligate the seller (writer) to sell 100 shares of the underlying at the strike price up to the defined expiration date. Said to be SHORT the call. Bearish

Put• Put option is a contract that allows the option holder to sell 100 shares at

the strike price up to the defined expiration date. Long the put. Bearish• Put options obligate the seller to buy 100 shares of the underlying at the

strike price up to the defined expiration date. Short the put. Bullish

REVIEW‐ CallsandPutsDefined

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REVIEW‐ CallProfitandLossGraphs

LongCall(Buyer)Bullish

ShortCall(Seller)Bearish

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REVIEW‐ PutProfitandLossGraphs

LongPut(Buyer)Bearish

ShortPut(Seller)Bullish

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REVIEW– CalculatingBreakevenPoints

Breakevenisthepricetheunderlyingneedstobetradingatexpirationforyourtradeto“breakeven”,thatis,tonotgainorloseanymoney.

Example:YoubuytheAAPLDecember2015120Callshownbelow.Thepremiumyoupayis$4.45.Yourbreakevenonthistradewouldbe$124.45.Why?BecauseyouhavetherighttobuyAAPLat$120,butyoupaid$4.45fortheright.

Strikeprice+/‐ thepremiumpaidorreceived=breakeven120+4.45=124.45

Remember,mostoptionsareactuallyclosedoutpriortoexpiration!

Apple trading at $121.35 at the time

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ManagingatExpiration

Atexpiration– 3possibilities:‐ Closethetrade‐ Exercise/Assignment‐ Expireworthless

Remember!Ifyouroptionis$0.01inthemoney,itwillautomaticallybeexercised!Onlyallowoptionstobeautoexercisedifitiscommensuratewiththeamountofsharesyouwouldwanttoown/sell.Example:ifyouonlywanttoown100sharesofXYZ,thenyoushouldonlytradeonecontract.

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ManagingatExpiration‐ Exercise

WhatisExercise? Exercisingacalliswhentheoptionholderoptstobuythe

underlyingatthestrikeprice(Typically100shares) Exercisingaputiswhentheoptionholderoptstosellthe

underlyingatthestrikeprice(Typically100shares) Iftheoptionishasintrinsicvalue(isin‐the‐money)ofat

least$0.01,itwillbeautomaticallyexercised. Ifyouraccountcannotsupportthepositionthatwillbe

createdbyautoexercise,youshouldclosetheoptionposition!

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ManagingatExpiration‐ Assignment

WhatisAssignment? Assignmentofacallistheoptionwriterfulfillingtheirobligation

tosellthesharesatthestrikeprice.(Typically100shares) Assignmentofaputistheoptionwriterfulfillingtheirobligation

tobuythesharesatthestrikeprice.(Typically100shares)

Important: Ashortoptioncanbeassignedatanytime!

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Managingatexpiration– Closingthetrade

HowdoyouCloseatrade? Longoptionholderssimply“sell‐to‐close.”Thissellsyourrightto

exercisetheoption. Shortoptionwriterssimply“buy‐to‐close.”Thisclosesyour

obligation.

Important: Someoptionwriterswilllettheircontractssimplyexpireworthlessratherthanclosingout

theircontracts.Whilethisenablesthetradertopickupadditionalprofit,it’sfrequentlyreferredtoas“pickinguppenniesinfrontofasteamroller,”becauseifthetradesuddenlymovesagainstyou,youcouldbeflattened!

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ManagingthetradepriortoexpirationAtraderhas3waystheycanmanageanystrategy:

Trader’sView: Behonestwithyourselfwhenre‐evaluatinganexistingtradeandmanageaccordingly.Don’t

fallintothetrapofmakingadjustmentswithoutconsideringtheendobjectiveofthetrade.

Option1:Leavethestrategyalone MakesSenseWhen:Iwouldputthesametradeontoday Allowexercise/assignment Continuetostayinthetrade

Option2:Closethestrategy MakesSenseWhen:Thestrategynolongeralignswiththeoutlook Tradeoutofthestrategy

Option3:Adjustthestrategy MakesSenseWhen:Theexistingstrategycanbealteredtobetteralignwiththeoutlook Reducingpositionsize Rolling:up,down,orforward?

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Managingthetrade– youroutlook

Doyoustillhavethesameoutlookonthesecurity?Hasthatoutlookchanged?

Wereyoubullishandarenowneutral?Bearish? Hasyourtimehorizonchanged?

Aswementionedbefore,behonestwithyourselfwhenre‐evaluatinganexistingtrade

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Whatfactorsaffectthepremium?1. Money‐nessoftheoptionbeingsold(StrikeSelection)

• Outofthemoneyoptionsofferlowerpremiums,lowerprobability• Atthemoneyoptioncontractshavethemosttimevalue• Inthemoneyoptionsofferhigherpremiums,higherprobability

2. Timetoexpiration(ExpirationSelection)• Nearertermexpirationsofferthepotentialforthehighestannualizedreturnbutalowerupfrontpremium

• Longerdatedexpirationsdecayataslowerrate,buthavehigherpremiums

3. ExpectedMovementfromtheUnderlying(ImpliedVolatility)• Higherimpliedvolatility(expectedpricemovement)resultsinhigherpremiums• Lowerimpliedvolatilityresultsinlowerpremiums

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Managingpriortoexpiration– earlyexercise/assignment

Earlyexercise MakesSenseWhen:Youcannotselltheoptionintheopenmarketforatleastintrinsic

(exercise)value. Typicallytheoptioniseitherverydeepin‐the‐money,closetoexpiration,orboth

Let’slookatanexampleonABC

YouareLong(Own)1ABCcallexpiringthisFridaywithastrikeof100.ABCisat105.

YourABCcontractiscurrentlytradingat4.50x5.50andyouwishtoclosetheposition.

Ifyousoldyourcontracttothebid,youwouldonlyreceive$4.50.But,ifyouexerciseyouroptiontobuyABCat$100andthensellthestockontheopenmarketfor$105,you’dreceivethe$5.00difference.

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Managingpriortoexpiration– earlyexercise/assignment

Earlyassignment Thelesstimeuntilexpiration(closertoexpiration),thegreatertherisk Thedeeperin‐the‐moneytheoption,thegreatertherisk Earlyassignmentalsofrequentlyoccursarounddividends,payspecialattention!

Thinkaboutitfromtheperspectiveoftheoptionholder:whenitstartstomakemoresensetoexerciseinsteadofsellingontheopenmarket,yourriskofassignmentgoesup!

Whenanunderlyingpaysadividend,callsinparticularhaveahigherassignmentrisk.Why?Theoptionmaybeatorslightlyinthemoneyandonlytradingfor$0.20oftimepremiumwhentheunderlyingispayinga$0.50dividend.Ifthecustomerwasplanningonowningthestock,itwouldmakemoresenseforthemtoexercisetheoptionjustpriortotheEx‐Dividenddatesothattheyreceivethe$0.50dividend.

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Managingpriortoexpiration– “rolling”

Whatis“rolling?”• Rollingisplacingonetradetosimultaneouslycloseoutacurrent

positionandopenupanewonewitheitheradifferentexpirationdate,strikeprice,orboth.

• “Rollingout”isplacingatradetopushtheexpirationtoafurtheroutdate.

• “Rollingup/down”isplacingatradetoeitherincreaseordecreasethestrikeprice.

Trader’sView: Itsimportanttorealizethatby“rollingout”atrade,youarenot“kickingthecandownthe

road…”Youareclosingonetradeandopeningupabrandnewone!Besurethenewtrademakessenseonitsownmerit!

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Managingpriortoexpiration– “rolling”

Example– “Rollingout”Youaresimplyclosingthecurrenttradeandopeninganewonewithalaterexpirationdate.

Closingonecallat$.91andsellinganewonefor$2.50 Thisisusuallydoneatacredit

Aninvestorwouldconsiderrollingoutashortoptioniftheiroutlookhasnotchangedandtheywanttotakeadvantageofadditionaltime

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Managingpriortoexpiration– “rolling”

Example– “Rollingup”

Youaresimplyclosingthecurrenttradeandopeninganewonewithadifferentstrikeprice.

Closingonecallat$4.00andsellinganewonefor$.87

Thisisfrequentlydoneatadebit

Aninvestorwouldconsiderrollingupashortoptioniftheiroutlookhaschangedandtheywanttotakeadvantageofadditionalstockpricemovement

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PositionManagement

Positionsizing: Reduceconcentrationinindividualpositionsandsectors Keepitsmallandinproportiontoyourportfolio Gointoeachtradeknowingwhatyoucanandarewillingtolose Ifyoucan'tsleepatnight,yourpositionistoolarge!

Minimizeemotionaldecisionsthroughriskandpositionsizemanagement!

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Securityselectioniscritical– areyoucomfortablewiththeunderlyingsecurity?

Doesyourtradestillmatchyouroutlook?Theimportanceofthe“honestymoment”

Avoidcostlymistakesbyadoptingarisklevelyoucanlivewith• Diversifyamongstmarketcapitalization,sectors,geographyandstyle• Watchoutforconcentratedpositions(don’triskmorethanyouarewillingtolose)• ETF’smaybeatoolforincreasingdiversification

Ifitappearstoogoodtobetrue,thenitprobablyis!‐ watchoutforearningsannouncements,dividends,orothereventsthatcouldleadtosignificantmoves

Havinganexitstrategyatthetimeoftradeentrygivesayouareferencepointwhenevaluatingthetradedowntheroadandreducesemotionaldecisions

Usetheresourcesatyourdisposaltoseekoutandanalyzenewopportunities

KeyTakeaways

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Thisconcludestoday’spresentation.

IntroductiontoOptionspart3

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