September 20, 2019

Options Institute at Cboe Global Markets

Trade Analysis: Don’t leave money on the table

Jermal Chandler – Instructor, Cboe Global Markets

Michael Pollock – Regional Brokerage Consultant, Fidelity Investments

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Trade Assumptions

Scenario #1

Scenario #2

Scenario #3

Scenario #4

Summary

Session I – Trade Analysis: Don’t leave money on the table

Always Have a Trading Plan!

• Identify your outlook

• Decide how to trade that outlook

• Evaluate the trade idea

• Monitor and re-evaluate the trade at specific points

• Have an exit strategy in place• Profit targets• Loss threshold

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Opinion for overall market

• Variable

Outlook for underlying

• Variable

Timeframe for outcome

• Constant - 30 day optionsVolatility component

• Variable – Based on Underlying

Strategy determination

• Variable - Four Different Scenarios

Exit Strategy

• Variable – Based on Trade Scenarios

Trade Assumptions

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ABC stock is a Chinese tech company

Large Cap – $40.5B

Stock is -57% year-over-year

Ongoing U.S.-China trade war has been a factor for stock price

Scenario #1

Stock has earnings in 15 days

Fair volatility is ~33% over past year

Large spike in vol in May with stock move

IV = 38 and HV = 26

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Scenario #1

ABC stock trading $114.23

No existing ABC stock positionVolatility on (upside) calls high – but typical for earnings

Looking for bullish trade; Feel the stock is going to bounce back

Would prefer to be long calls vs short puts. No desire to own stock

Appears to be plenty of open interest in calls

115/125 Call spread for $3.40

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Scenario #1 – Long Call or Call Spread

Purchase ABC 115/125 call spread for $3.40; Breakeven is $118.40 in ABC

• Maximum profit is $6.60/spread; Maximum loss is premium paid

Risks/Rewards

• Stock has struggled with trade war; Still ongoing – stock continues slump

• Could see a rebound in shares but not past Long Strike – expire worthless

• Stock could rebound above breakeven – winning trade

Exit: Pre-determined stock level or 50% premium loss in spread

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DEF is a Media content streaming company

Mid Cap – $9.8B

Stock is +118% over last 52 weeks

Forecasted to add much more content over the next year

Scenario #2

Stock has earnings in 22 days – not confirmedFair volatility is ~69% over past yearStock moved 28% on earnings in MayIV = 80 and HV = 47

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Scenario #2

DEF stock trading $111.94

No existing stock positionHas been known to have large volatile moves on earnings: Positive & negative

Earnings move: 13.6% Implied vs. 24.2% Actual for 1-yr

Would like a trade that can potentially profit from big, unpredictable move

100/125 strangle for $11.00

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Scenario #2 – The Strangle

Purchase the DEF 100/125 strangle for $11.00

• Maximum gain: Upside is unlimited/Downside limited; Maximum loss: premium paid

Risks/Reward

• Hard collapse in volatility likely to occur post earnings – diminish option values

• Break-evens are $89.00 or $136.00 – expires worthless without huge move

• Big move on earnings in one direction and continues momentum – winning trade

Exit: Binary event dependent – OR – Close position prior to earnings based on P&L or uncertainty

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GHI is a cloud-based e-commerce platform

Large Cap - $35B

GHI just IPO’ed 4 years ago

Performance since IPO: +1,033%

Scenario #3

Stock is up +129% YTD

Scheduled to have earnings in 15 days

Fair volatility is ~45% over past year

IV = 46 and HV = 50

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Scenario #3

GHI stock trading $317.39Purchased 1000 shares of stock on 12/24/18 at $119.10Personal return of 166% (198k)Stock has been on a steady climb so far this yearLooking for a trade to protect gains from downside move; Particularly worried about earningsEarnings move: 14% Implied vs. 25% Actual for 1-yr315 put for $15.50

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Scenario #3 – Long Put

Purchase 10-Lot of 315 puts for $15.50; Breakeven is $299.50 in GHI• Maximum profit is substantial but limited; Maximum loss is premium paid ($15,500)Risks/Rewards• Stock continues to climb – lose premium paid• GHI has a 5% correction ($301.52) by expiration – expires worthless; not enough• Stock moves below breakeven – good for positionExit: a)hold until expiration b)roll before expiration c)expire worthless

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JKL is an franchise restaurant company

Large-cap – 20.7B

Stock is up 76% YTD

JKL has earnings in 7 days

Scenario #4

Restaurants had bacteria concerns in 2018Strong rebound and has outpaced sinceAverage volatility is 30% over past yearIV = 38 and HV = 21

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Scenario #4

JKL stock trading $761.85Bacteria fears saw stock drop 50%Purchased 1000 shares of stock in Feb 2018 at $250Personal return of 205% (512k)Would like protection from such an event if/when it happens againLooking for a trade that could protect downside at relatively low cost715/800 Collar for $2.50 credit

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Scenario #4 – The Collar

Trade a Collar (10x) – Buy 715 puts for $15.50 and Sell 800 calls for $18.00• Collect $2.50 for protection; Breakeven is $802.50 for upside gainsRisks/Rewards• Stock stays between $715 and $800 – expire worthless, keep premium• Put strike establishes downside exit and maximum loss; Call strike sets upper limit on gains• Upside and Downside position – rights versus obligations – MUST UNDERSTANDExit: Determined by direction and size; Be aware of early assignment

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Scenario # 1 – Long Call or Call Spread Scenario

Scenario # 2 – The Strangle Scenario

Scenario # 3 – Protective Put Scenario

Scenario # 4 – The Collar Scenario

Summary: Session I – Trade Analysis: Don’t leave money on the table

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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 construedas a recommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities or futuresprice data, are strictly for illustrative and educational purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not beenincluded in the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions.Multiple leg strategies involve multiple commission charges. Investors should consult with their tax advisors to determine how the profit and loss on any particular optionstrategy will be taxed. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in thispresentation is available from Cboe upon request. Cboe Exchange, Cboe Volatility Index, CFE and VIX are registered trademarks and Cboe Futures Exchange, Cboe Short-TermVolatility 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 CboeGlobal 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 FuturesExchange, 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 representationregarding the advisability 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-Cboeproduct or service 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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