FPA Conference Presentation in Anaheim, Ca 10-11-2009

919 views

Published on

Equity Option Strategies

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
919
On SlideShare
0
From Embeds
0
Number of Embeds
40
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

FPA Conference Presentation in Anaheim, Ca 10-11-2009

  1. 1. “Enhance your Practice with Equity Option Strategies” <br />Presented by: <br />Rutgers University; in partnership with <br />Presenters:<br />Sean E. Heron, CFA, Rutgers University <br />and <br /> Eric Cott, The Options Industry Council<br />October 10, 2009<br />
  2. 2. Options Basic<br />
  3. 3. What is a Derivative<br /><ul><li>Something that derives its value from an underlying instrument.
  4. 4. Commonly traded derivatives include options, futures and forwards that trade on equities, commodities, currencies and interest rates.
  5. 5. Calls and Puts are a form of equity derivatives.</li></li></ul><li>Why Use Options? <br /><ul><li>Speculate on price movements.
  6. 6. Reduce risk (Hedging)
  7. 7. Reduce transaction costs (from rebalancing).
  8. 8. Defer Taxes
  9. 9. Avoid market constraints, such as short selling.</li></li></ul><li>Calls and Puts<br /><ul><li>A Call option gives the buyer the right, but not the obligation, to purchase a set amount of stock (usually 100 shares) at a predetermined price (Strike Price) at any time before the options expiration date (American) or at expiration only (European).
  10. 10. A Put option gives the buyer the right, but not the obligation, to sell a stock at a predetermined price for a specified period of time.
  11. 11. The seller (writer) of the option is obligated, if assigned to sell (call) or buy (put) the stock at the predetermined strike price.</li></li></ul><li>Calls and Puts<br /><ul><li>Long or Short a contract </li></ul>Long – Own – Right to buy or sell the underlying<br />Short – Write – Obligated to buy or sell<br /><ul><li>Long or Short the Underlying </li></ul>Longs want the stock to rise<br />Shorts want the stock to fall<br />6<br />
  12. 12. Calls and Puts<br /><ul><li>Americanvs.European Exercise/Assignment</li></ul>American Options can be exercised at anytime<br />European Options can only be exercised at expiration <br /><ul><li>Over-the-Counter (OTC) Options vs. Listed Options
  13. 13. OTC markets consist of financial institutions, corporate treasurers and investment manager trading derivatives over the phone.
  14. 14. Listed Options are traded on an exchange </li></ul>7<br />
  15. 15. Call and Put Prices<br /><ul><li>Exxon Mobil (Ticker – XOM) @ 64</li></ul>Jan’10 Calls and Puts <br />Closing prices on March 6, 2009<br />
  16. 16. Call and Put Prices<br /><ul><li>The price of an option is called the Option Premium.
  17. 17. Option Premium = Time Value + Intrinsic Value
  18. 18. Time Value is a combination of the expected future movement of a stock and the amount of time remaining until the option expires. The longer the timeframe and the greater the expected movement, the higher the Time Value.
  19. 19. Intrinsic Value equals price of the underlying stock minus the strike price. An options value can’t be below its intrinsic value. </li></ul>Source: http://www.optionseducation.org/basics/options_pricing.jsp<br />
  20. 20. Price of a Call and Put<br />For example, XYZ stock is trading at $26. <br />A call with a strike price of 25 is trading at $3. Then the call has an intrinsic value of $1 (=26-25) and a time value of $2 (=premium minus intrinsic).<br />A put with a strike of 30 is trading at $5. Then the put has an intrinsic value of $4 and a time value of $1.<br />
  21. 21. The Money<br /><ul><li>XYZ stock trading at 25
  22. 22. In the money options have intrinsic and time value
  23. 23. ATM and OTM have only time value</li></li></ul><li>Components of an Options Price<br />What options are ITM, ATM or OTM? If the stock is trading at 25<br />
  24. 24. Components of an Options Price<br />What options are ITM, ATM or OTM? If the stock is trading at 25<br />
  25. 25. Call Payoff Graphs <br />Call with a strike of 25 trades at $3 buyer’s max gain (S-X) is unlimited, max loss is 3.<br />Seller’s max gain is $3, max loss is unlimited (S-X).<br />Break-even 28 (strike + premium)<br />
  26. 26. Call Buyer (Long) Payoff Graphs <br />Right to buy the underlying at 25.<br />Pays $3 for the right.<br />Wins with the stock above 28.<br />Effective purchase price 28<br />Options holders don’t have all the rights of shareholders.<br /><ul><li>No rights to dividends
  27. 27. No voting rights</li></ul>Reasons for buying:<br /><ul><li>Bullish on the market or stock.
  28. 28. Limited downside risk, with unencumbered upside potential.
  29. 29. Stock replacement.
  30. 30. Leverage.</li></li></ul><li>Call Buyer (Long) Payoff Graphs<br />Closing or exiting the position.<br />ITM <br />Sell the contract<br /><ul><li>Take the profit or limit the loss
  31. 31. Before the close of trading on the option’s expiration date.</li></ul>Exercise the call<br /><ul><li>At expiration and pay cash to purchase 100 shares at the strike price.
  32. 32. Early exercise is usually only done to capture the dividend by converting to stock.</li></ul>OTM<br />Let expire – lose rights<br />Max Loss = premium paid <br />
  33. 33. Call Seller (Short) Payoff Graphs <br />Obligated to sell the underlying at 25.<br />Receives $3 premium for accepting the obligation.<br />Risk is unlimited on naked calls<br />Seller must be financially and psychologically able to sell the underlying at 25, regardless of how high the stock is currently trading.<br />Effective sale price if assigned is 28 (25+3).<br />Reasons for selling:<br /><ul><li>Covered Calls – willing to lose the stock at a predetermined price.
  34. 34. Naked Calls – Believes the stock will remain below 28 and full premium will be captured.</li></li></ul><li>Put Payoff Graphs<br />Put with a strike price of 30 trades at $5<br />Buyer’s max gain is 25 (=30-5), max loss is $5<br />Seller’s max gain is $5, max loss is 25 (=30-5)<br />Break-even 25 (=strike minus premium)<br />
  35. 35. Put Buyer (Long) Payoff Graphs<br />Right to sell the underlying at a predetermined price (30 Strike).<br />Pays $5 for the right.<br />Wins with the stock below 25.<br />Reasons for buying puts:<br /><ul><li>Neg. view on the market or a stock.
  36. 36. Protecting another position.
  37. 37. Delay creating a taxable event, but still reduce risk.
  38. 38. Investor would otherwise avoid investing in equity without some downside risk protection.</li></li></ul><li>Put Seller (Short) Payoff Graphs<br />Obligated to buy the underlying at 30.<br />Receives $5 premium for accepting the obligation.<br />Seller must be financially and psychologically able to purchase the underlying. (Margin is usually ½ the strike price).<br />Effective purchase price if assigned is 25 (30-5).<br />Reasons for selling:<br />Willing to own the underlying at a lower entry point.<br />Expects the stock to trade in a tight range (25-35), hopefully above 30 at expiration.<br />
  39. 39. Max Gain/Loss<br />If the stock is trading at 25, what is the max gain/loss<br />
  40. 40. Max Gain/Loss<br />If the stock is trading at 25, what is the max gain/loss for the owner of the option?<br />
  41. 41. Max Gain/Loss<br />If the stock is trading at 25, what is the max gain/loss for the writer of the option?<br />
  42. 42. Max Gain/Loss<br />If the stock is trading at 25, what is the max gain/loss for the writer of the option?<br />
  43. 43. Straddle<br />Call and Put with a strike price of 25 trades at $6<br />Buyer’s max gain is infinite, max loss is $6<br />Seller’s max gain is $6, max loss is infinite<br />Break-even 19 and 31 (=strike +/- premium)<br />
  44. 44. Buy (Long) Straddle<br />Right to buy or sell the underlying at a predetermined price (25 Strike).<br />Pays $6 for the right.<br />Wins with the stock above 31 or below 19.<br />Reasons for buying a straddle:<br />Trading the underlying around the strike.<br />Expects the stock to move a lot in either direction.<br />Court Case<br />Earnings Report<br />FDA Approval<br />Macro Events<br />
  45. 45. Selling (Short) Straddle<br />Obligated to buy or sell the underlying at a predetermined price (25 Strike).<br />Receives $6 for the risk.<br />Wins with the stock between 19 and 31 at expiration.<br />Reasons for selling a straddle:<br /><ul><li>Expect the stock to be range bound.
  46. 46. Feels the markets price for expected movement is to high.</li></ul>Court Case<br />Earnings Report<br />FDA Approval<br />Macro Events<br />
  47. 47. Straddle<br />Call + Put = Premium. Premium +/- Strike = Breakeven<br />
  48. 48. Straddle<br />Call + Put = Premium. Premium +/- Strike = Breakeven<br />
  49. 49. Strangle<br />Call and Put with a strike price of 22.5 and 27.5 trades at $4.50<br />Buyer’s max gain is infinite, max loss is $4.50<br />Seller’s max gain is $4.50, max loss is infinite<br />Break-even 18 and 32 (=strike +/- premium)<br />
  50. 50. Buy (Long) Strangle<br />Right to buy at 27.5 or sell at 22.5 the underlying.<br />Pays $4.50 for the right.<br />Wins with the stock above 32 or below 18.<br />Reasons for buying a strangle:<br />Trading the underlying around the strike.<br />Expects the stock to move a lot in either direction.<br />Court Case<br />Earnings Report<br />FDA Approval<br />Macro Events<br />Buyer’s max gain is infinite, max loss is $4.50<br />
  51. 51. Sell (short) Strangle<br />Obligated to buy at 22.5or sell at 27.5 <br />Receives $4.50 for the risk.<br />Wins with the stock between 18 and 32 at expiration.<br />Reasons for selling a strangle:<br /><ul><li>Expect the stock to be range bound.
  52. 52. Feels the markets price for expected movement is to high.</li></ul>Court Case<br />Earnings Report<br />FDA Approval<br />Macro Events<br />Buyer’s max gain is $4.50, max loss is unlimited<br />
  53. 53. Call Bull Spread<br />Bull buys the 25 call at 3 and sells the 30 call at 1, net debit $2<br />Buyer sells a higher strike to subsidize the purchase of the lower strike.<br />Max gain $3 and max loss $2<br />Bear sell the 25 call at 3 and buys the 30 at 1, net credit $2<br />Seller buys the higher strike to cap the potential loss on the short lower strike.<br />Max gain $2 and max loss $3<br />
  54. 54. Put Bear Spread<br />Bear buys the 25 put at 3 and sells the 20 put at 2, net debit $1.<br /><ul><li>Buyer sells the lower put strike to subsidize the purchases of the higher strike.
  55. 55. Max gain $4 and max loss $1.</li></ul>Bull sell the 25 put at 3 and buys the 20 at 2, net credit $1.<br /><ul><li>Seller caps loss with the purchases of the put with a lower strike.
  56. 56. Max gain $1 and max loss $4.</li></li></ul><li>Exercise and Assignments<br />90% of options expire worthless. False.<br />Most option positions are closed.<br />Automatic Exercise for ITM options at expiration.<br />OCC notifies the clearing firms, the clearing firm assigns the options to their clients who are short that particular option.<br />Why are American Options exercised early?<br />Deep ITM Calls may be exercised early to capture the dividend the day before the x-div date.<br />Deep ITM Puts may be exercised early if the Put is trading at parity to capture the remaining interest.<br />
  57. 57. Options Industry Council <br /><ul><li>Eric S. Cott, Director, </li></ul> Financial Advisor Education<br /><ul><li>www.optionseducation.org
  58. 58. Help Desk 1-888-Options</li></li></ul><li>Pricing an Option<br />
  59. 59. Pricing an Option<br />Option Price = Time Value + Intrinsic Value<br />Components of an Option’s Price (DIVUTS)<br />Dividends<br />Interest Rates<br />Volatility<br />Underlying Stock<br />Time<br />Strike<br />
  60. 60. Volatility<br />
  61. 61. Volatility<br />An options theoretical price will fluctuate with the price of the underlying stock, but will also fluctuate with changes in implied volatility. <br />Similar to insurance companies raising prices for risk they don’t want, options prices rise when there is no one willing to accept (write) the risk of future price fluctuations.<br />If enough investors believe a stock will have greater volatility going forward, implied volatility and option prices will increase to entice others to write options.<br />If option prices (implied volatility) is perceived to be to high, investors will sell or at least elect not to buy.<br />Implied Vol. can get high if too many investors want to protect a position at the same time and no one is willing to accept the risk of future price fluctuations. <br />
  62. 62. Volatility <br />Option Buyers<br />Want volatility to expand after their purchase.<br />Volatility is the cheapest when there is a perception that the coast is clear with regards to events that may cause future price fluctuations.<br />Option Sellers<br />Want volatility to contract or subside after their sale.<br />Implied Volatility tends to be highest just ahead of events that move stocks, i.e. Court Cases, Clinical Trials/FDA Approvals or Earnings Reports.<br />
  63. 63. Volatility – Historical vs. Implied<br />
  64. 64. Volatility – Expected vs. Implied<br />
  65. 65. Current Environment<br />Current Environment<br />Stock Valuations - High or Low<br />Implied Volatility - High or Low<br />What strategy works well in the current environment?<br />When to buy options<br />When to sell options<br />When to use spreads<br />When to implement a collar <br />
  66. 66. Investment Strategies with Options<br />
  67. 67. Investment Strategies with Options<br />Portfolio Income Strategy – Covered Call Writing<br />Portfolio Protection Strategy – Buy Puts, Put Spreads or Implement a Collar<br />Portfolio Recovery Strategy– Increase upside potential without increasing downside risk<br />
  68. 68. Index Options<br />Advantages<br />Diversification<br />Taxes<br />Lower Transaction Cost<br />Broad Hedging <br />Disadvantages<br />Not single stock specific<br />May have higher tracking error to hedged position<br />
  69. 69. Portfolio Income Strategy<br />
  70. 70. Portfolio Income Strategy<br /><ul><li>Initial Investment $500,000
  71. 71. Buy 5000 Shares at $100 (total $500,000)
  72. 72. Sell 50 one year 100 Calls at $11 (Total $55,000)
  73. 73. Received dividends equal to $2.25 per year</li></li></ul><li>Portfolio Income Strategy<br />Expiration 1 year: Potential Outcome # 1 – SPY is Unchanged<br />SPY is trading at $100<br />Calls expire worthless<br />Client keeps the call premium received of $55,000<br />Premium received taxed as short-term capital gains<br />Taxed at 35% - After tax return of $35,750<br />Dividends received $11,500 <br />Total Return -$66,250 <br />$66,250/500,000 = 13.25%<br />
  74. 74. Portfolio Income Strategy<br />Expiration 1 year: Potential Outcome # 2 –SPY Has Risen Sharply<br />SPY is trading at $120<br />Repurchase all options at $20 per underlying share ($120,000 total)<br />Short-term loss on options sold at $9, repurchased at $20 = loss of $45,000 <br />Sell 375 shares of SPY at $120 per share, to raise funds to repurchase above options (capital gain = $7,500)<br />Net realized short-term capital loses = $37,500; Taxes due = $0<br />(in this example we offset short-term losses against gains. Additional tax benefits may be gained by offsetting against short-term gains elsewhere in the portfolio)<br />Value of remaining 4,625 shares of SPY = $555,000<br />Plus Dividends $11,250 <br />Total Return $66,500 (66.25K/500K = 13.25%)<br />
  75. 75. Portfolio Income Strategy<br />Expiration in 1 year: Potential Outcome # 3 – SPY Has Risen Less Sharply<br />SPY is trading at $110<br />Repurchase all options at $1 per underlying share ($5,000 total)<br />Short-term gain on options sold at $11, repurchased at $1 = $50,000 <br />Sell covered calls at a higher strike price with a further expiration<br />Strike Price = $110, options will expire in a year<br />Premium received: $10 per underlying share ($50,000 total)<br />While corrective action was taken to prevent having stock called at $100 per share, by rolling the option strike price to $110 and the option expiration out to another year, the client has for the moment retained full stock ownership and has received net option premium of $20 per share ($11 - $1 + $10) or $100,000 total (5000*20).<br />Realized short-term capital gain from options - $50,000<br />Plus Dividends $11,500 <br />Value of the 5000 shares of SPY = $550,000<br />Total Return $66,500 (66.5K/500K = 13.25%)<br />
  76. 76. Portfolio Income Strategy<br />Expiration in 1 year: Potential Outcome # 4 – SPY is Lower<br />SPY is trading at $86.75 (SPY down 13.25%)<br />Calls expire worthless<br />Client keeps the call premium received of $55,000<br />Premium received taxed as short-term capital gains<br />Dividends received $11,500 <br />Sell 5000 shares of SPY at $86.70 per share, to harvest losses.<br />Net realized short-term capital loses on SPY = $66,250; Taxes due = $0<br />Total Return = $ 0<br />
  77. 77. Portfolio Income Strategy<br />S&P Buy-Write Composite (Simple Holding Period Returns)<br />Performance Since Inception 12/31/03 – 8/31/09 <br /><ul><li>SPY Buy-Write Composite +11.23% Est. Stand Dev. 11.9%
  78. 78. S&P 500 Total Return -7.65% Est. Stand Dev. 14.9%</li></ul>Down Market Performance 8/31/08– 2/28/09<br /><ul><li>SPY Buy-Write Composite -34.3%
  79. 79. S&P 500 Total Return -41.8% </li></ul>Rapid Rising Market Performance 2/28/09 – 6/30/09<br /><ul><li>SPY Buy Write Composite 21.1%
  80. 80. S&P 500 Total Return 26.1% </li></li></ul><li>Advantages of Covered Call Writing<br />Potential for additional return from option premiums<br />Writing out-of-the-money options offers possibility of selling stock at higher prices<br />Capital gains tax on option is not realized at time of sale*<br />Capital gains tax on stock is not realized unless option is called*<br />Possible to delay realization of capital gains into a further tax year by writing covered calls*<br />Example: In December, the investor might be more likely to write covered calls expiring in the next tax year than to sell stock<br />Continue to receive dividends unless stock is called<br />Covered call premium provides partial downside protection for stock<br />Somewhat favorable tax treatment of qualified covered call premiums*<br />If stock is called, covered call premiums received may adopt underlying nature of stock, long or short-term*<br />It may be possible to write a 60-day option and receive long-term capital gains treatment*<br />Simplicity; covered calls do not require a margin account<br />
  81. 81. Disadvantages of Covered Call Writing<br />Incomplete downside protection<br />Expired or repurchased options may be taxed at short-term rate*<br />It is possible for options to be exercised prior to expiration<br />Occurs infrequently and is largely predictable<br />Corrective trades may be implemented if an early exercise appears likely and is undesirable <br />Options can and will be exercised if the written stock is above the option strike price at expiration<br />Triggers sale of the underlying stock<br />Triggers realization of capital gains or losses to repurchase the option to prevent expiration<br />“Unqualified” covered calls that are deep in-the-money or have less than 31 days to expiration when written may cause dividends on the underlying stock to be ineligible for the new 15% dividend tax rate*<br />
  82. 82. Portfolio Protection Strategies<br />
  83. 83. Portfolio Protection Strategies<br />Hedging – Strongest to Weakest<br />Sell SPX Index Futures – Full Protection<br />Buy SPX Index Put – Floor Downside Risk<br />Buy SPX Index Put Spreads – Less protection at a reduced cost (High Vol. Skew is better for put spreads)<br />Buy VIX Futures – Inverse price relationship with SPX Futures<br />Buy VIX Calls (Sell VIX Puts)<br />Write SPX Index calls<br />
  84. 84. Portfolio Protection<br />Buy SPX Index puts, if protection is cheap.<br />Captures Upside / Limits Downside<br />Implement a collar <br />Caps Upside / Limits Downside<br />Buy SPX Index put spreads, if skew is high or puts are expensive.<br />Captures Upside / Cushions Downside <br />Buy VIX futures when vol. is low and forward volatility term structure is flat.<br />Negatively Correlated to SPX<br />Write SPX Index calls when volatility is elevated.<br />Caps Upside / Cushions Downside<br />
  85. 85. Portfolio Protection<br />What a difference a year can make.<br />When implied volatility is low purchasing puts may be the best option. <br />In Jan’07, an ATM 1yr put cost 4.5%<br />Limited downside risk<br />Known maximum drag on upside performance<br />In Jan’07, a 10% OTM put cost 1.75%<br />In Jan’08, implied volatility was too high to warrant the purchase of puts.<br />1yr ATM puts on the SPX cost 8% (115/1450)<br />1yr 10% OTM put on the SPX cost 4.3% (63/1450)<br />1yr ATM straddle on the SPX cost 18% (260/1450)<br />
  86. 86. Portfolio Protection<br />What a difference a year can make.<br />In Jan’09, implied volatility was too high to warrant the purchase of puts.<br />1yr ATM puts on the SPX cost 14.5% (130/900)<br />1yr 10% OTM put on the SPX cost 10.5.% (95/900)<br />1yr ATM straddle on the SPX cost 28% (253/900) <br />Jan’09 with the SPX trading at 900, 1 yr ATM /10% OTM put spread <br />ATM 900 Put – 14.5%<br />10% OTM 810 Put – 10.5%<br />Put Spread Cost – 4%<br />Upside drag 4%, Downside Cushion 6% <br />
  87. 87. Portfolio Protection<br />Estimated Price of a 1-Year Put Option, 10% Out-of-the-Money<br />As a Percent of the S & P 500 Index<br />Estimated Prior to 2004<br />
  88. 88. Portfolio Protection<br />Protecting a well diversified portfolio with a beta of 1 (with the same div. yield).<br />Each contract is equal to 100 times the index. <br />$1mm portfolio, index value 1000<br />Portfolio is 1000 times the index.<br />Protect the portfolio from losing more than 10% ($900,000) over the next year<br />Strike/Index - (Put) + Div = Floor<br />OTM 95% - 8.5% + 3.5% = 90% Floor<br />ATM 100% - 13.5% + 3.5% = 90% Floor<br />$1mm/ (1000*100) = 10 Contracts <br />Buy 10 one year 5% OTM Puts at 8.5% to limit the downside loss to 10%<br />
  89. 89. Portfolio Protection (Weakest)<br />Write SPX Index calls when vol. is elevated.<br />When implied volatility is high writing covered calls may be the best option.<br />Loss in down markets reduced by premium received <br />Limits upside potential to premium received<br />In the beginning of 2009<br />1yr ATM calls on the SPX sold @ 13.5%<br />1yr ATM straddle on the SPX sold @ 28%<br />
  90. 90. Portfolio Protection<br />Implement a Collar to reduce risk when options are expensive, but downside risk is high.<br />Implement a Collar<br />Short call will cover the cost of the long put<br />Risk/Return profile has a Cap/Floor <br />Source: OIC<br />
  91. 91. Advantages of Listed Option Collars<br />Collars are an excellent way to delay the sale of underlying stock into future tax years while offering downside protection against catastrophes and allowing some measure of upside participation in the stock<br />Simplicity; listed zero-cost collars require no opening of a margin account<br />Competitive pricing and transparency of transactions for listed options<br />Widespread availability of information; listed options prices are published on the Internet and in newspapers<br />After collar has been executed, opportunistic trades can be made to take profits, adjust strike prices, or get out of the collar altogether<br />we strongly recommends taking some profits on collars when they exist and maintains a full-time options trading desk to take advantage of these opportunities<br />Adjusting positions is difficult or impossible with over-the-counter collars<br />
  92. 92. Advantages of Listed Option Collars<br />No minimum number of contracts necessary to execute a listed options collar (listed collars may be executed on as few as 100 shares of stock; we usually recommends trades covering at least 1,000 shares)<br />A collared stock has not been diversified, only hedged<br />Purchase of a put option may cause those shares of the underlying stock to be ineligible for the reduced dividend tax rate of 15%*<br />Generally, no money is received from the collar transaction to purchase other diversified securities; it is possible to borrow partially against the collared stock<br />
  93. 93. Disadvantages of Listed Option Collars<br />While a collar “locks-in” a range of returns for the underlying stock, the amount of upside return locked in may prove unattractive relative to other opportunities<br />The put option portion of a collar receives disadvantageous tax treatment; losses on the put option may not be realized prior to disposition of underlying stock<br />The amount of put protection is constrained by the IRS*<br />we considers it advisable to purchase protective puts that are out-of-the-money (where the strike price is lower than current stock price)*<br />It is believed that the IRS could treat the purchase of protective puts that offer too much protection as a constructive sale of the underlying stock*<br />Because collars are partially covered call options, the upside covered call part of a collar may be exercised early (this can be a positive outcome, and is also possible under many circumstances with over-the-counter collars, including takeovers or tender offers)<br />
  94. 94. Portfolio Recovery Strategy<br />Getting your money back is as easy as 1 2 3<br />Long Stock 1x, Long 2x ATM Calls @ 3 and Short 3x OTM Calls @2 (Leverage with known risk).<br />Portfolio potential levered 3x to the upside, capped at OTM call strike.<br />Portfolio risk limited to 1x the downside.<br />
  95. 95. Speculation and Leverage<br />Initially Purchased 100 shares @ 40 and Now Trading @ 25, Down $1500<br />Investment now worth $2500.<br />B 2 25 Calls at $3 (-6)<br />S 3 30 Calls $2 (+6)<br />Capped at 30<br />Max Gain - $1500 over the 30 strike<br />Max Loss - $2500 at zero<br />
  96. 96. Speculation and Leverage<br />Investment 2500.<br />100 shares of stock at $25 per share.<br />B 2 25 Calls at $3 (-6)<br />S 3 30 Calls $2 (+6)<br />Capped at 30<br />Max Gain - $1500 over the 30 strike<br />Max Loss - $2500 at zero<br />
  97. 97. Additional Benefits of Options<br />Reduce cost or risk<br />Contain risk and redeploy capital.<br />Monetize Collars<br />Buy options to cap risk of loss<br />Lock in profits without creating a taxable event<br />Stock replacement to limit downside<br />Diversification<br />Target buy/sell price<br />Rebalance asset allocation<br />Reduce transaction cost<br />
  98. 98. Sell<br />Hold<br />Hedge<br />Hold<br />Sell<br />Portfolio Management with Options<br />Old investment solution for managing a portfolio:<br />New investment solution for managing a portfolio:<br />
  99. 99. Why Hedge?<br /><ul><li>True risk management, absolute returns
  100. 100. Tax deferral
  101. 101. Want to sell, but at a higher price
  102. 102. Don’t want to sell, but want less risk
  103. 103. Can’t sell
  104. 104. Raise cash (“monetize”) today, defer sale (and taxes)
  105. 105. Incremental return (e.g. covered calls)</li></li></ul><li>When NOT to Hedge?<br />When selling is better<br />When hedging is too expensive (including fees)<br />When time period is too long<br />When time period is too short<br />When hedge is not understood by client<br />Relative return considerations<br />
  106. 106. Risk Management Products Matrix<br />Utility of Strategy to Meet These Objectives<br />= Yes, strong  = Yes, weak No = No<br />
  107. 107. Start Using Options to Enhance Your Practice<br />Trading Options In-house<br />Trading Desk<br />Operational Support<br />Listed Options vs. OTC Options<br />Anyone can trade listed options<br />OTC contracts require internal legal review<br />Hire Third Party Investment Manager<br />Learn enough about options to advise clients about the many benefits of using options.<br />Focus on clients and partner-up with a money management firm that specializing in options.<br />
  108. 108. Benefits of a Partner <br />Am I an asset manager or asset gatherer?<br />Build a recurring fee-based revenue stream <br />Gain access to institutional-quality solutions<br />Leverage expertise through partnerships<br />FA can find a SMA Partner for accounts as small as $100k<br />Strategies offered by asset managers<br />Portfolio Protection<br />Portfolio Income<br />Portfolio Recovery<br />Custom strategies for concentrated equity positions<br />
  109. 109. Looking for answers<br />Clients:<br />How can I recapture some of my losses without taking the risk of significant equity exposure?<br />How can I increase the yield on my portfolio?<br />How can you help me prevent this from happening again?<br />Advisors:<br />I trade options for my personal account, but I don’t have the resources to trade them for my clients.<br />Can using options really help me grow or retain business?<br />How can I get my clients/prospects off the sidelines?<br /> How do convince a skeptical client to use options?<br />

×