Spread Trading using Options -  A simple guide for traders and investors

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Spread Trading using Options - A simple guide for traders and investors

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Spread trading can have some significant advantages for traders and investors, and with education and practise, the full potential of trading options can be utilised. ...

Spread trading can have some significant advantages for traders and investors, and with education and practise, the full potential of trading options can be utilised.

By understanding spread strategies, a trader has the ability to profit from up, down and sideways moving markets. Spread strategies can even be utilised when a trader doesn’t know which way the market will move, as long as it moves either up or down.

Depending on the strategies, with spreads we can:
• Design trades for varying market conditions
• Use strategies that minimise risk
• Trade with smaller amounts of capital

This presentation will help you unlock the full potential of options, by understanding puts, calls and spread trading.

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  • 1. EXCHANGE TRADED OPTIONS Part 2: Puts, Calls and Spread Trading TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au
  • 2. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Puts and Calls 1 There are two different types of options available: 1 2Put Options Call Options
  • 3. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Put Options 2 Put options gain value as the share price of the underlying asset falls...
  • 4. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Put Options 3 it will give the buyer the right but not the obligation to sell a parcel of shares for a greater value than it is worth on the market.
  • 5. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Put Options 4 The more the share price falls the more the put option will gain.
  • 6. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Call Options 5 Call options gain value as the share price of the underlying asset rises.
  • 7. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Call Options 6 Call options give the buyer the right but not the obligation to buy a parcel of shares for a lessor value than it is worth on the market.
  • 8. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Call Options 7 The more the share price rises the more the call option will gain.
  • 9. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Puts and Calls increase in value when... 8 Call Option Underlying value of share price increases.
  • 10. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Puts and Calls increase in value when... 9 Call Option Underlying value of share price increases. Put Option Underlying value of share price decreases.
  • 11. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Options Expiry 10 All options have an expiry date and a trader or investor has the ability to choose an expiry month.
  • 12. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Options Expiry 11 The more time until expiry, the more time value that the investor will need to pay.
  • 13. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Options Expiry 12 An option buyer has two choices:
  • 14. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Options Expiry 13 Either - Sell the option contract before the expiry to realise a profit or loss. (Trading the option)
  • 15. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Options Expiry 14 Or - Choose to exercise their right to buy or sell stock at any time up until the expiry day of the option. This is often used by investors as a strategy to buy or sell shares.
  • 16. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Spread Trading 15 Spread trading uses a combination of different options contracts to allow a trader to tailor their trade to a specific view of a stock, or market direction.
  • 17. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Spread Trading The clear benefits of spread trading over just trading single options is the ability to profit from different market conditions not just direction. 16
  • 18. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Spread Strategies An options trader has the ability to profit from a rising, a falling and a neutral or sideways market. 17
  • 19. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au With spreads you can use: 18 Directional strategies for a falling market. Time decay strategies in a sideways or channeling market. Directional strategies for a rising market.
  • 20. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au With spreads you can use: 19 There are spread strategies that can even profit if the market either rises or falls, as long as it moves in either direction.
  • 21. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Spread Strategies This is a great alternative if you don’t have a directional view but your view is that the market will move. 20
  • 22. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit and Debit Strategies 21 There are two main types of spread strategies, which can be set up in many different ways to create different strategies in the market.
  • 23. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit and Debit Strategies 22 The two main spread strategies are:
  • 24. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit and Debit Strategies 23 1 Credit Spreads The two main spread strategies are:
  • 25. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit and Debit Strategies 24 1 2Credit Spreads Debit Spreads The two main spread strategies are:
  • 26. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit Spreads In a credit spread, we receive money from the market to open a trade. 25
  • 27. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit Spreads The best-case scenario is for the options to be out-of-the-money on expiry day so that they expire worthless and you keep the credit received. 26
  • 28. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Credit Spreads An example of strategies which you will receive a credit upon entry are the: 1. Bull Put Spread 2. Bear Call Spread 27
  • 29. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Put Spread 28 This is a chart of CBA, where the overall trend is up. We expect the share price to move sideways to slightly bullish. Trend Line Support Resistance
  • 30. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Put Spread 29 To set up bull put spread, we simultanesouly buy one put option and sell another put option at a higher strike price.
  • 31. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Put Spread 30 Sell Put 80.00 Buy Put 79.00 To set up bull put spread, we simultaneously buy one put option and sell another put option at a higher strike price.
  • 32. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Put Spread 31 Sell Put 80.00 Buy Put 79.00 We receive a credit on entry on this strategy. The ideal outcome will be the share price remaining above the higher strike, meaning the options expire worthless and we keep the credit received.
  • 33. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Put Spread 32 Max Profit 100% Breakeven 79.79 Credit to enter: 0.21c Risk of the trade: 0.79c Maximum Profit: 26.5% Sell Put 80.00 Buy Put 79.00
  • 34. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Credit Spread Investors commonly use credit spreads as they can use the collateral value of their portfolio to cover the risk. 33
  • 35. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Debit Spreads A debit spread is where we pay to enter the trade, and the money paid to enter is the maximum at risk. 34
  • 36. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Debit Spreads A debit spread has a bought and a sold option. The bought leg is more expensive, which results in paying money to open the trade. 35
  • 37. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Debit Spreads The sold option will offset the cost and the effects of time decay of the bought. 36
  • 38. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Best Case Scenario The best case scenario is for the options to be in-the-money on expiry day. 37
  • 39. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Best Case Scenario That means we close the trade and receive back from the market more than we paid. 38
  • 40. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Debit Spread Strategies Examples of strategies that we pay to get into: 1. Bull Call Spread 2. Bear Put Spread 39
  • 41. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Call Spread 40 This is a chart of SUN, where the overall trend is up. We expect the share price to rise moderately.
  • 42. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Call Spread 41 To set up a Bull Call Spread, we sell one call option and buy another call option at a lower strike price.
  • 43. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Call Spread 42 Sell Call 14.00 Buy Call 13.50
  • 44. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Call Spread 43 Profit 100% Breakeven 13.78 Loss 100% Entry Price: 0.28c Debit Potential Profit: 0.22c or 78%
  • 45. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Example Bull Call Spread 44 We pay to enter this strategy. To realise a profit from this strategy, the share price needs to be above your break even point on expiry day. A large movement higher before expiry will also result in a profit. Breakeven 13.78
  • 46. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Why traders use debit spreads Time decay is offset by the sold leg They reduce the capital needed to trade There is more flexibility to switch or repair a trade. 45
  • 47. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Conclusion By setting up strategies with more than one strike price, we can help reduce risk and trade a variety of market conditions. 46
  • 48. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au Conclusion It is vital that before entering the market, you learn the skills and gain the experience to trade confidently. 47
  • 49. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041 PH: 03 8080 5788 WEB: www.traderscircle.com.au EMAIL: admin@traderscircle.com.au 48 Interested in becoming a trader? The right education is essential if you want to reach your trading goals. Register with us today to learn more about our trading education programs.
  • 50. 32 Warnings and important information. Any advice contained in this communication is general only and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) at www.traderscircle.com.au and the relevant Product Disclosure Statement (if there is one available) first. Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only act on our recommendations if you are confident that you fully understand what you are doing. Past returns do not reflect future returns, and it is also possible to make significant losses. We employ expert traders and use strategies that maximise returns and minimise risk. However, there is always a risk of loss when trading and investing. This is general information, and is not prepared for your specific investment objectives, financial situation or needs. Consult a licensed investment adviser before making investment decisions. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate authorised representative of OzFinancial Pty Ltd, AFSL number 241041.