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910717 2

  1. 1. Single Stock Option’s SeminarPart I Option Trading Overview By Steve D. Chang Morgan Stanley Dean WitterPart II Volatility Trading Concept and Application By Charles Chiang Deutsche Bank A.G. 1
  2. 2. Options Trading Overview By Steve Chang 2
  3. 3. Introduction Steve Chang Equity Derivatives Trader at Morgan Stanley 3
  4. 4. Topics of Discussion Basic on Options Overview on Greeks Volatility Why using options? Impact to TSE Trading Strategies Buy/Sell Greeks Scenario analysis Q&A 4
  5. 5. Basics on Options Call – give the holder the right to buy the stock by a certain date for certain price Put – give the holder the right to sell the stock by a certain date for certain price Premium - cost of options (call or put) Strike price - the price at which an option contract gives the holder the right to buy/sell 5
  6. 6. Basics on Options Expiration date - final date options can be exercised Volatility – risk factor of an option that determines the premium (40 vol = 2.5% intraday gap) American options - options can be exercised before expiry European options - options can only be exercised at expiry 6
  7. 7. 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 Gamma - rate of change of delta w/ the change in underlying asset, usually quoted in % term (+$1mn gamma, mkt +3%, +$3mn delta) 7
  8. 8. Overview on Greeks Kappa (vega) - rate of change of option’s price with change in volatility. Theta – rate of change of option’s price with change in time, the price of gamma/kappa Rho – rate of change of option’s price with change in interest rate 8
  9. 9. 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% Market implied vol vs. asset vol  Implied usually higher than asset (Hang Seng, S&P)  Implied vol at 40% -> 2.5% gap risk 9
  10. 10. Volatility – 2330 10
  11. 11. Volatility – 1310 11
  12. 12. Volatility – 2882 12
  13. 13. 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 13
  14. 14. 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 14
  15. 15. 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 15
  16. 16. Trading StrategiesBuy call option  Expecting more upside 16
  17. 17. Trading StrategiesSell put option Expecting limited downside 17
  18. 18. Trading StrategiesBuy 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 18
  19. 19. Trading StrategiesBuy 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
  20. 20. Trading StrategiesBuy 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 20
  21. 21. Trading StrategiesBuy 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 21
  22. 22. Buy/sell Greeks Buy delta  Buy spot (ie, future or stocks)  Buy call  Sell put Sell delta – vice versa 22
  23. 23. Buy/sell Greeks Buy gamma  Buy call or put  Short dated options give you more gamma  ATM options give you more gamma Sell gamma – vice versa 23
  24. 24. Buy/sell Greeks Buy Kappa  Buy call or put  Long dated options give you more kappa  ATM options give you more kappa Sell kappa – vice versa 24
  25. 25. 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 Sell theta – vice versa Buy/sell Rho – N/A for Taiwan, usually hedged by eurodollar futures or swaps 25
  26. 26. Scenario Analysis If you have $1mn to buy a stock ($100). Option vs. stock strategy? (assume no funding cost) Buy 10k at $100, +30% after 2mth, PnL = $300k If you buy 10k of 2mth $100 strike call paying 7% or $70k (40%vol) If stock +30% in 2mth, then you have the right to buy 10k shares at $100 which will give you the PnL of $230k ($300k – $70k) …also less funding. Max loss using option is $70k, but loss is unlimited buying stocks If you spend $1mn on option, PnL = $3.3mn = $1mn/7%*(30%-7%) 26
  27. 27. 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 27
  28. 28. Q&A 28