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Single Stock Option's Seminar: Part I Option Trading Overview
Single Stock Option's Seminar: Part I Option Trading Overview
Seminar
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Options Trading Overview
By Steve Chang
2
Introduction
Steve Chang
Equity Derivatives Trader at
Morgan Stanley
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Topics of Discussion
Basic on Options
Overview on Greeks
Volatility
Impact to TSE
Trading Strategies
Buy/Sell Greeks
Scenario analysis
Q&A
4
Basics on Options
Call – give the holder the right to buy the
stock by a certain date for certain price
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Basics on Options
Expiration date - final date options can be
exercised
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Overview on Greeks
Delta – rate of change of option’s price
w/ change in underlying asset, usually
short dated ATM call/put has ~0.5 delta
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Overview on Greeks
Kappa (vega) - rate of change of option’s
price with change in volatility.
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Volatility
Higher the vol, higher the premium
2mth 100% call at 40% vol ~ 6.75% (0
div, 1.82% Rfr)
2mth 100% call at 70% vol ~ 11.65%
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Volatility – 2330
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Volatility – 1310
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Volatility – 2882
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Why using Options?
Leverage/ gearing effect (like warrants)
Reinforce stop-loss concept when buying
Income enhance when selling
Portfolio hedge for PMs
Short access to single stock names (+P,
-C)
Long access to single stock w/o showing
broker identity
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Impact to TSE
More participation from retails
investors
Enhance market liquidity with delta
hedge
Stock lending system needs to be
developed
Stock lending can increase market
liquidity thru long/short pair trading
Limit-up/limit-down 7% structure
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Trading Strategies
Buy downside put as insurance when
long stocks
Sell upside call to collect premium when
upside is limited
Buy call spread expecting limited upside
Buy put spread expecting limited
downside
Buy strangle or straddle expecting
volatility ahead
Synthetic short – buy put sell call
Most PMs buy options not sell
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Trading Strategies
Buy call option
Expecting more upside
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Trading Strategies
Sell put option
Expecting limited downside
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Trading Strategies
Buy call spread
When?
Expecting more upside, reduce prem by
giving up some upside
For Example:
you buy 100/120 call spread – buy 100%
call, sell 120% call
Max upside = 120 – 100 – prem(%)
Max downside = premium you paid
Sell call spread – vice versa
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Trading Strategies
Buy put spread
When?
Expecting more down, reduce
premium by giving up some downside
protection
For example:
Buy 100/90 put spread – buy 100%
put, sell 90% put
Max upside = 100 – 90 – prem(%)
Max downside = prem you paid
Sell put spread – vice versa
19
Trading Strategies
Buy Straddle
Buy both ATM call and put
Max gain: unlimited
Max loss: time decay (theta)
Buy gamma and kappa, pay theta
Short dated straddle – buy more
gamma
Long dated straddle – buy more
kappa
Sell straddle – vice versa
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Trading Strategies
Buy strangle
Buy both OTM call and put
Max gain: unlimited
Max loss: time decay, theta
You buy gamma and kappa, earn theta
Short dated strangle – buy more gamma
Long dated strangle – buy more kappa
Diversify your risk comparing to straddle
and cheaper
Long straddle – vice versa
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Buy/sell Greeks
Buy delta
Buy spot (ie, future or stocks)
Buy call
Sell put
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Buy/sell Greeks
Buy gamma
Buy call or put
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Buy/sell Greeks
Buy Kappa
Buy call or put
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Buy/sell Greeks
Long theta (receive time decay)
Sell call or put
Short dated options give you more
theta (in the expense of short more
gamma)
ATM options give you more theta
26
Scenario Analysis
If you are long $2mn gamma on a
stock, then stocks –28% thru 4
days of limit-down…what would be
your payout?
$2mn*28 = 56mn you are short
US$28mn which you may cover
@28% discount.
PnL impact:
28mn/2*28%=$7.84mn
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Q&A
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