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Cabot Investors Conference 2014www.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
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Cabot Investors Conference 2014 www.cabot.net
Options Primer
Jacob MintzAnalyst, Cabot Options Trader
[email protected] @Jacob_Mintz
Cabot Investors Conference 2014 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 In-the-Money Due to Time
Cabot Investors Conference 2014 www.cabot.net
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
Prof
it an
d Lo
ss
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-the-Money Due to Time
Cabot Investors Conference 2014 www.cabot.net
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
Prof
it an
d Lo
ss
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 LossIPG Covered Call
-400
-300
-200
-100
0
100
200
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
Prof
it an
d Lo
ss
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