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November 5th 2012
Common Cents Investment GroupNovember, 2012
Agenda
T-Shirt Pre-orders Today in the Market More on options…
Common Cents Investment GroupNovember, 2012
Today in the Market
Presidential Election We’ve discussed our elections have made
impacts in the past A quick video from Bloomberg discussing
the two candidates economic policies http://www.bloomberg.com/news/2012-11-
05/economy-set-for-better-times-whether-obama-or-romney-wins.html
Common Cents Investment GroupNovember, 2012
Today in the Market
Hurricane Sandy Aftermath Experts say overall economic data won’t
change dues to balancing b/w industries Restaurants hurt, but grocery stores thrive
Some impacts on the market… Nation’s airlines cancelled 16,300 Home Depot on the rise Total losses could be upwards of $25 billion
Common Cents Investment GroupNovember, 2012
Today in the Market
Companies we did not mention Loss analysis companies
Kinetic Analysis Corp, Eqecat Cell phone service
Verizon Wireless lost 6% of their towers in the Sandy effected region
Expects to have an impact on fourth quarter earnings
19% of all cell phone towers were effected
Common Cents Investment GroupNovember, 2012
Useful Definitions
Liquidity: The ability to convert an asset to cash quickly Synonym – Marketability
Clearing House: An agency or corporation responsible for settling trading account, clearing trades, collecting and maintaining margin money, regulating delivery and reporting trade data
Quick RecapoDon't worry if this seems confusing - it is!oWe are going to look at options from the point of view of the buyer
Options
Common Cents Investment GroupNovember, 2012
Options
Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder)
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date.
Common Cents Investment GroupNovember, 2012
Options
Can be very risky…usually carry a disclosure “Options involve risks and are not suitable for
everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital”
A sophisticated security with a tremendous amount of versatility and power
Options can be as speculative or conservative as you want
Common Cents Investment GroupNovember, 2012
Options
A Call gives the holder the right to buy an asset at a certain price (hope the stock will increase substantially)
A Put gives the holder the right to sell an asset at a certain price (hope the stock will decrease substantially)
Common Cents Investment GroupNovember, 2012
Options
The total cost (the price) of an option is called the Premium and it is determined by several factors: Stock price Strike price (contract price) Time remaining Volatility
Called a derivative because they derive their value from an underlying asset
Common Cents Investment GroupNovember, 2012
Call Options
Buy a ticket to Ohio State football game
Three different options Go to the game: Like executing option Sell your ticket: Selling your option Let it expire: Don’t use option and let it
expire
University gets the premium either way…so it does not matter to them
Common Cents Investment GroupNovember, 2012
Options – The Call
The right to purchase the security at a certain strike price by a certain date
You want the security to be on an increasing trend (either long-term or short-term) Bullish
Common Cents Investment GroupNovember, 2012
Options – The Put
The right to sell the security at a certain strike price before a certain date
You want to capitalize on a decreasing trend (either long-term or short-term) Bearish *Not necessary to own the asset before acquiring the right to sell it
Common Cents Investment GroupNovember, 2012
Exchange-Traded Option
Exchange-Traded Option: An option traded on a regulated exchange where the terms of each option are standardized by the exchange Also known as “Listed Options”
Benefits: The liquidity of the option The standardized contracts that come with ETOs Quick access to prices and the use of clearing
houses by exchanges
Common Cents Investment GroupNovember, 2012
Standardized Options
Standardized expiration dates The Saturday following the third Friday of
designated months is a common expiration
Investors typically view the third Friday of the month as the expiration date of the ETO
Common Cents Investment GroupNovember, 2012
Standardized Options
The striking price of an option is the predetermined transaction price In multiples of $2.50 (for stocks priced
$25.00 or below) or $5.00 (for stocks priced higher than $25.00)
There is usually at least one striking price above and one below the current stock price
Common Cents Investment GroupNovember, 2012
Standardized Options
Puts and calls are based on 100 shares of the underlying security The underlying security is the security that
the option gives you the right to buy or sell
It is not possible to buy or sell odd lots of options
Common Cents Investment GroupNovember, 2012
Standardized Options
Chicago Board Options Exchange (CBOE) Known as a listed option Fixed strike prices and expiration dates Each listed option represents 100 shares of
company stock (known as a contract)
~$30/share right now…
Common Cents Investment GroupNovember, 2012
Buying and Selling Options
Consider Dell Inc. (DELL) Currently at ~$9.30/share Could buy either a Call or Put option
Use FA or TA to decide what trend is likely
How to read an Option Table… Yahoo! Finance has a good example
Option Table
Strike: The price you want to purchase at later
Last: Recent price of option
Chg: Percent change to current
Bid: What you can sell the option for
Ask: What you can buy the option at
Common Cents Investment GroupNovember, 2012
Option Table
Notice the expiration date This specific standardized
table has expiration dates every month
Not always the same dates
The options highlighted in yellow In-the-Money (ITM)
More advanced tables exist for better analysis
Common Cents Investment GroupNovember, 2012
Buying an Option
Dell Inc. is currently ~$9.30/share A Nov 12th Call option at $9.50 goes for $0.52 The total contract price is $0.52 X 100 = $52
If Dell Inc. shoots up to $11.00/share…
Profit = 100 x (11.00 – 9.50 – 0.52) = $98 100 shares provides a lot of leverage Potential loss was only $52
Common Cents Investment GroupNovember, 2012
A Call option is only worth anything if the stock price rises above the strike price With a premium of $0.52 and a strike price of
$9.50…the breakeven price is $10.02/share
A situation: We buy the $9.50/share option now and 1 day
from now DELL shoots to $11.00/share, BUT we hold it
Before Nov 12th, it drops back down to $9.00/share
Common Cents Investment GroupNovember, 2012
Here’s what happened to the value of our option: Remember: Call option for $9.50/share
Date Now 1 Day later
Nov 12th
Stock Price $9.30 $11.00 $9.00
Premium $52 $52 $52
Contract Value
N/A $150 N/A
Gain or Loss -$52 $98 -$52
Common Cents Investment GroupNovember, 2012
Options
Upside: Profit is unlimited while loss is controlled Call: Profit = Spot Price – Strike Price – Premium Put: Profit = Strike Price – Spot Price – Premium
Downside: The premium you pay will be lost if the option is Out-of-the-Money (OTM) at expiration Considered risky because of how likely this is to
occur
Common Cents Investment GroupNovember, 2012
Membership
Cost is only $20 for the whole year! Benefits:
Member of a very beneficial and informative club that will inevitably be valuable in your future
A network of friends who share a similar interest in investing and personal finance
A virtual portfolio challenge that will strengthen your confidence in investing
Common Cents Investment GroupNovember, 2012
Membership
Make sure to check out our website for the presentations Monday night | ccig.osu.edu
Get on our Facebook page and like us!www.facebook.com/ccigosu
Common Cents Investment GroupNovember, 2012
Questions?
Questions, comments or concerns?