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www.OptionsEducation.org

What to consider before trading optionsEdward J ModlaDirector of Retail EducationOptions Industry Council (OIC)

Michael RugerRegional Brokerage Consultant Fidelity Investments

DisclaimerOptions involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized

Options, available by visiting OptionsEducation.org or by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200, Chicago, IL 60606.In order to simplify the calculations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.

Copyright © 2020. The Options Clearing Corporation. All rights reserved.

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General Use

3 DisclaimerDisclaimerThe information provided in this communication is solely for educational purposes and should not be construed as advice or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with The Options Industry Council. There is no form of partnership, agency affiliation, or similar relationship between The Options Industry Council 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 the content supplied by The Options Industry Council and does not guarantee or assume any responsibility for its accuracy or completeness.

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• Exercise and Assignment

• ‘Moneyness’ of Options

• Option Premium

• Delta vs Theta

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Presentation Outline

General Use

Exercise and Assignment

General Use

• After opening an options position, an investor have several choices when managing the position:

o Exit Complete a closing transaction

o Expire Allow the option to expire worthless

o Exercise Purchase or sell shares

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Position Management

General Use

Example: XYZ trading $79.00Investor buys 1 XYZ September 20, 2020 80 call paying $1.50On September 20th, XYZ now trading $84.00 & buyer exercises:• Investor pays strike price x $100 (80 x $100) or $8,000 and takes delivery

of 100 shares XYZ (valued at $8,400)• Investor now has risk/reward of being long 100 shares from $81.50

—OR—• Option now worth $4.00 and investor sells back to market to close

position (est. profit $250)

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What is Exercise?

General Use

Example: XYZ trading $79.00Investor sells 1 XYZ September 20, 2020 80 call at $1.50On September 20th, XYZ now trading $84.00 & seller is assigned:• Investor collects strike price x $100 (80 x $100) or $8,000 and

delivers of 100 shares XYZ (valued at $8,400)• Investor now has risk/reward of being short 100 shares from $81.50 • If shares were previously owned, the shares would be called away

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What is Assignment?

General Use

Moneyness of Options

General Use

Calls: In-the-Money, At-the-Money, Out-of-the-Money

• Call is in-the-money (ITM)• Strike price below stock price

• Call is at-the-money (ATM)• Strike price same as stock price

• Call is out-of-the-money (OTM)• Strike price above stock price

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OTM

Jan 40.00 callFeb 40.00 callApr 40.00 callJan 45.00 callFeb 45.00 callApr 45.00 callJan 50.00 callFeb 50.00 callApr 50.00 callJan 55.00 callFeb 55.00 callApr 55.00 callJan 60.00 callFeb 60.00 callApr 60.00 call

ATM

ITM

StockPrice

$50.00

General Use

Puts: In-the-Money, At-the-Money, Out-of-the-Money

• Put is in-the-money (ITM)• Strike price above stock price

• Put is at-the-money (ATM)• Strike price same as stock price

• Put is out-of-the-money (OTM)• Strike price below stock price

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ITM

Jan 40.00 putFeb 40.00 putApr 40.00 putJan 45.00 putFeb 45.00 putApr 45.00 putJan 50.00 putFeb 50.00 putApr 50.00 putJan 55.00 putFeb 55.00 putApr 55.00 putJan 60.00 putFeb 60.00 putApr 60.00 put

ATM

OTM

StockPrice

$50.00

General Use

Option Premium

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Option Premium: Intrinsic Value (if any) + Time Value• Intrinsic value

• in-the-money amount• Time value

• any premium in excess of intrinsic value• decays with time as expiration approaches (“time decay”)

• At expiration option worth only intrinsic value• no time remaining• when exercised, only the intrinsic value of an option is received/delivered—

time value (if any) is lost

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Intrinsic Value vs. Time Value

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Intrinsic Value vs. Time Value

Intrinsic Value Time Value

Stock Price Strike Price Time Volatility Interest Rate/Dividends

Option Premium

General Use

Delta vs Theta

Options vs. Stock

• In contrast to stock, options:• Do not offer the benefits of share ownership• Have an expiration date (Timing is critical)• Incorporate variables including market volatility

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Introduction to the Greeks – Delta

The expected change in an option’s price (up or down) for each 1-point move in underlying stock price

Deep in-the-money options• High deltas approaching 100% (or 1)

At-the-money options• Deltas around 50% (or .50)

Far out-of-the-money options• Low deltas approaching 0% (or 0)

Delta: Value’s sensitivity to stock price

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Introduction to the Greeks – Delta

Calls have positive (long) deltas• Positive correlation to underlying stock price change• Stock price → call price • Stock price → call price• Call deltas range from 0 to +1.00

Puts have negative (short) deltas• Negative correlation to underlying stock price change• Stock price → put price • Stock price → put price• Put deltas range from 0 to –1.00

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Introduction to the Greeks – ThetaTheta: Option value’s sensitivity to time

Expected time decay in option value:

• With the passage of 1 day

• Expressed in decimal form (-.080)

• Represents cash amount per option

• Decay is per calendar day, not per trading day

• Assumes all other pricing factors constant

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Introduction to the Greeks – Theta

Overall rate of time decay is exponential (accelerates towards expiry)

ATM = decay exponential = volatility is key decay factor

ITM = decay linear = cost-to-carry is key decay factor

At-the-MoneyOption

In-the-MoneyOption

Time ►

TimeValue$$$► Theta

Amounts