Stock Options 101 Jul28 10

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Illustrates the basic concepts for trading stock options

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Stock Options 101 Jul28 10

  1. 1. CFO STRATEGIES INC OPTIONS 101 JULY 28, 2010
  2. 2. What is an Option <ul><li>A security that represents the right </li></ul><ul><li>But not the obligation </li></ul><ul><li>To buy the underlying security (shares) </li></ul><ul><li>At a specified price </li></ul><ul><li>Within a specified period of time </li></ul><ul><li>Each call represents 100 shares </li></ul>
  3. 3. The Options Quadrant <ul><li>Buy a Call </li></ul><ul><li>You expect the underlying stock price to increase in value, you can buy a call option, giving you the right to purchase the shares at a price anticipated to be below the market price on or before the expiration date. This will be a net debit to your account. </li></ul>
  4. 4. The Options Quadrant <ul><li>Sell (Write) a Call </li></ul><ul><li>You expect the underlying stock price to increase in value and you are prepared to sell shares at a predetermined price on or before the expiration date. You will earn cash by selling a call which results in a net credit to your account. DO NOT SELL NAKED CALLS </li></ul>
  5. 5. The Options Quadrant <ul><li>Buy a Put </li></ul><ul><li>You expect the underlying stock price to decline in value, you can buy a put option to sell the shares at a predetermined price, anticipated to be above the then market price on or before the expiration date. This will result in a net debit to your account. </li></ul>
  6. 6. The Options Quadrant <ul><li>Sell (Write) a Put </li></ul><ul><li>You expect the underlying stock price to increase in value, you can sell a put at a lower price in anticipation of the put option expiring worthless. You will earn cash by selling a put, which results in a net credit to your account. Margin or cash reserve of about 30% will be required. If the stock price declines to the strike price, you will be required to purchase the shares at the reduced price. </li></ul>
  7. 7. Types of Options <ul><li>Buy a call option - expect price to increase </li></ul><ul><li>Sell a call option – reduce net cost </li></ul><ul><li>Buy a put option – expect price to decline </li></ul><ul><li>Sell a put option – desire to buy lower or </li></ul><ul><li> -- expect price to increase </li></ul><ul><li>Implement a spread option strategy </li></ul><ul><li>Multiple leg options </li></ul>
  8. 8. Risk Factor <ul><li>Options can be less risky than stocks </li></ul><ul><li>They require a smaller investment </li></ul><ul><li>They can be self correcting </li></ul><ul><li>The profit potential is exceptional </li></ul><ul><li>It forces to you to take profits </li></ul>
  9. 9. Caterpillar – July 23, 2010
  10. 10. Why Options??? <ul><li>Let’s Look at Caterpillar (CAT-N) </li></ul><ul><li>Buy 100 shares @ $70.00 = $7,000 risk </li></ul><ul><li>OR </li></ul><ul><li>Buy 1 C Sep $70 @ $3.10 = $ 310 risk </li></ul><ul><li>If by Sep 17 CAT @ $75 </li></ul><ul><li>Option could be worth $5.00 = $ 500 </li></ul><ul><li>Profit $ 190 </li></ul><ul><li>% Return 61% </li></ul>
  11. 11. Amazon – July 23, 2010
  12. 12. Why Options??? <ul><li>Let’s Look at Amazon (amzn-Q) </li></ul><ul><li>Sell 100 shares short @ $119.00 = unlimited </li></ul><ul><ul><ul><ul><ul><li> risk </li></ul></ul></ul></ul></ul><ul><li>OR </li></ul><ul><li>Buy 1 P Jan $120 @ $12.45 = $ 1,245 risk </li></ul><ul><li>If by Jan 21, 2011 AMZN @ $100 </li></ul><ul><li>Option could be worth $20.00 = $ 2,000 </li></ul><ul><li>Profit $ 755 </li></ul><ul><li>% Return 57% </li></ul>
  13. 13. WAYS TO REDUCE COST <ul><li>Buy shares & sell a call at a higher price </li></ul><ul><li>Buy call option at one strike & Sell another call option at a higher strike </li></ul><ul><li>This is called a bull/call spread </li></ul><ul><li>Enter bull/call & sell a put at a lower strike </li></ul>
  14. 14. Conclusion <ul><li>Options are safer than stocks </li></ul><ul><li>Options require lower investments </li></ul><ul><li>Lower investment reduces risk exposure </li></ul><ul><li>Options provide higher potential returns </li></ul><ul><li>Buying calls & puts are RRSP eligible </li></ul><ul><li>Covered calls are RRSP eligible </li></ul>
  15. 15. <ul><li>Thank you for your attention </li></ul><ul><li>Contact CFO Strategies Inc. </li></ul><ul><li>David Saxe – Investment Strategist </li></ul><ul><li>613-563-1085 </li></ul><ul><li>[email_address] </li></ul>

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