This is an Introduction to Options and Futures Ryan Nocera Presentation at Meetup on Feb. 2, 2014

1. “INTRO TO OPTIONS & FUTURES”
Ryan Nocera
rnocera@mbatraders.com

2. Options Summary
• Presentation will only include Options strategies that can be used in retirement
accounts.
• Why ??? Limited Risk. Brokers limit the amount of strategies in retirement
account for your protection.
• This does limit your upside but more importantly protects your back side !
• Every strategy described and more can be done inside a regular cash trading
account.

3. What are options ?
• An option is a contract which gives the buyer the RIGHT but not the
OBLIGATION to buy or sell an underlying asset at a specified strike price and
specified date.
• Keep this definition as your foundation for all option products and it will
simplified each product.

4. Uses & Benefits of Options
• Options will give you OPTIONS !
• They will give you flexibility in any investment situation.
• They can protect your current stock holdings
• Benefit from a stocks rise or fall without incurring the cost of buying or selling
the stock out right
• You can increase income from current holdings (My favorite)
• Prepare to buy a stock at a lower price (Also a favorite)

5. Options Contract break down
• Options trade in contracts.
• 1 contract represents 100 shares of the underlying stock
• 1 Microsoft contract represent 100 shares of Microsoft stock
• An option contract has a strike price and an expiration date
• Expiration can be weekly , monthly , quarterly, and depending on the stock a
few years out
• Options can be in the money meaning they are at your strike price to buy or
sell the underlying stock
• They can also be out of the money meaning they above/or below your strike
price

6. Protecting your current holdings
• Another word for protecting can be insurance
• If you have a large paper gain on an individual stock or ETF your choices are
to sell and reap the gain or you can buy a put.
• A Put option gives the holder the right to sell at a given price and date.
• Puts become more valuable as the price of the underlying stock depreciates.

7. Protection Example
• Lets use the largest gainer of 2013 according to Forbes.
• NETFLIX (NFLX)
• Since Jan 25,2013 NFLX is up $192.93
• You have a paper profit of almost $20,000 on 100 shares
• So now you want to protect that profit
• You can purchase a put close to current price and pay more
• Or far away from current price and pay less
• Lets use the cheaper example to have minimum outlay

10. NFLX Trade break down
• You can purchase a put with a strike price of $235 & expiration date of Feb
22,2014 for .78
• A total cost of $78 ( .78 x 100 shares)
• If price were to fall from current price of $368 your puts would actually gain in
value thus cushioning the blow of your stock losing value

11. Positives and Negative of this strategy
• Negatives:
• A)contract expiration: It’s a new cost to buy a new contract each month.
• B) the cost of the contract can and will fluctuate
• Positives:
• A) This is insurance. No reason not to incur minimal cost to preserve
maximum profit. Same concept as insuring a home or car !

12. Benefiting from increase in value of an option
• Using a call: right to buy the stock at the strike price prior to the expiration
•
•
•
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date.
Let use the example that you want to participate in a very expensive stock.
Instead of incurring the cost of buying a high price stock you can purchase the
option and participate in the upward price movement through the an increase
in the price of the option
Lets use Priceline (PCLN)
Current Price $1,113.49

13. PCLN LONG TRADE

15. PCLN Trade Break Down
• 100 shares of PCLN purchased at market would cost $110,254.
•
•
•
•
($1,102.54 x 100 shares=$110,254)
1 Call option represents 100 shares of PCLN
Purchase for $46/ share = total cost - $4600
FEB 22ND EXPIRATION WITH $1100 STRIKE.
Exit strategy

16. PCLN Trade Positives/Negatives
• Now if PCLN reverses & moves higher the call option will also gain in value.
• Positives of this trade: cost is $5000 for what would be a $110K Trade
• Negatives of this trade:
• The option expires Feb. 22nd /when it does you lose your entire investment if
you do not exercise the option-meaning purchase the shares. Or sell back the
option.
• The best route is to just sell the option

17. Update to PCLN ON FEB 4TH
• THE $1100 CALLS EXPIRING ON FEB 22ND
• GAINED VALUE BETWEEN $5 TO $6
• GIVING THE OPTION A $500 TO $600 PROFIT
• NOW YOUR CHOICE IS TO TAKE PROFIT OR SEE IF THEY CAN STILL
GAIN VALUE
• TAKE THE MONEY AND RUN !
• PCLN OPTION CHAIN TO FOLLOW

18. Update to PCLN ON FEB 6TH

19. Update to PCLN ON FEB 7TH

21. Income generation trades
• The covered call: Selling call options on a stock you currently own.
• Think of this much like renting out a piece of real estate.
• You have a $100,000 2 family home you rent out for $2000/month
• The home thus generates you income every month
• Now just replace the home with a block of shares

22. Covered Call on Citigroup

24. Trade Break down
• You currently own 1000 shares of Citigroup
• You now sell the $50 calls for .23 cents that expire on Feb. 22nd
• You take in .23 cents a share… 1000 shares x .23= $230
• What happens next ?
• Optimal scenario is price stays where it is and the options expires worthless.
• The option can also lose value within a few days and you can buy back that
option for less than you paid and keep the difference
• Worst case scenario you have to sell the option for the strike price.

25. Positives/Negatives
• Positive is the income generated passively.
• You can repeat this every week or every month.
• Negative is you may have to sell the stock to the option holder.
• If you do have to sell…it will be at the strike price guaranteed.

26. Cash Secured Puts
• In this example you are using cash to secure your option instead of stock.
• In the event the stock is put to you the cash is there to purchase it.
• You are selling a put in order to guarantee you can buy a stock at your desired
price.
• When you sell the put you take in premium as you do with a covered call.
• If the stock never gets to your desired price you keep the premium !

27. Example using the IWM ETF
• IWM OFFERS GOOD PREMIUM
• Now you can have two goals sell for premium or guarantee yourself shares at
the lower price.

30. IWM Trade Break down
• Sell the $103 strike Feb 22nd expiration Puts
• Take in .59 cents in Premium. (.59 x 1000 shares= $590)
• If price reaches $103 strike you will have to purchase the shares at $103 but
you do keep the premium.
• If price never reaches $103 by expiration they expire and your keep the
premium.

31. IWM Positives/Negatives
• Negatives: You may have to incur the cost of buying the shares.
• Positive: If option expires you keep the premium and can do this every week
or month to generate income.
• The option also lose some value and you will be able to buy it back at a lower
price keeping the difference as profit.
• Also if you are looking to buy into IWM the premium helps minimize the cost.

32. Option Brokers
• Trade Station
• TD Ameritrade (think or swim)
• Options Express
• Light Speed

33. E- MINI FUTURES
• Electronic Miniature Futures contract
• One contract represents ownership in the underlying
• These contracts also have expiration dates
• They are leveraged products
• You post a bond to control a certain amount of the underlying
• Take the current price then multiply it by its point value
• For Example the S&P 500 FUTURES are $50 per point. Current price is 1751.
($50 x 1751=$87,550)
• You now control $87,500 for a day rate of as low as $500.

34. Futures Benefits
• No $25,000 account minimum. (pattern day trader requirement)
• Account min $5000.
• Plenty of leverage
• Low margin req. ( you can day trade 1 contract for as little as $500)
• Cheap commissions ($2.50 per trade) Varies per broker.
• Almost 24 hour trading ( Less gap risk)
• Low risk if you use stops for protection
• Strong liquidity, large volume

35. Futures Markets
• Many different markets but not so many to be overwhelming.
• You can pick the market that best fits your budget, strategy,
• You can trade high volume, size of the market, session time you want to trade
such as over night, opening rush, close of market.
• Pick the best price point for safety with profitability. For example S&P Futures
are $50 a point but Dow Futures are $5 and tend to move slower.
• Correlate to other markets. For example EURO futures tends to be inverse to
Dollar futures. Dow futures tend to follow GS/IBM.

36. Equity Index futures
• S&P 500 FUTURES (@ES) THE LARGEST
• NASDAQ FUTURES (@NQ)
• DOW JONES FUTURES (@YM)
• RUSSELL 2000 (@TF)

37. ENERGIES/METALS
• CRUDE OIL (@CL)
• NATURAL GAS (@NG)
• GOLD (@GC)
• SILVER (@ZI)
• COPPER (@HG)

38. CURRENCY FUTURES
• US DOLLAR FUTURES ($DXY)
• EURO FUTURES (@EC)
• JAPANESE YEN (@JY)
• SWISS FRANC (@SF)
• BRITISH POUND (@BP)
• AUSTRALIAN DOLLAR (@AD)

39. Best times of day to trade futures
• Opening rush/most liquid time 9:30 AM to 11 AM ET
• TRADING TENDS TO SLOW TO A CRAWL AT 12 PM
• WHY ????? LUNCH TIME !
• MARKET PICKS UP AGAIN AT 3 TO THE 4:00 CLOSE.
• I FIND THE OPEN & CLOSE TOO VOLITILE SO I JUST DON’T THEM

40. Futures trades
• EURO TRADE
• 8 PTS RISK ($12.50 X 8= $100 OF RISK )
• EXIT AT PROFIT TARGET OF 16 PTS ($200)
• SMALL GAP (GAPS TEND TO CLOSE THEN REVERSE)
• GAP CREATED DURING 9:30 OPENING RUSH
• TRADE HIT AT 10 AM (KNOWN AS A REVERSAL TIME )

42. Dow Futures
• YM SHORT ON 1 CONTRACT
• RISK IS 11 TICKS ($5 X11= $55)
• REWARD 30 TICKS ($5 X 30= $150)
• AREA OF A STRONG MOVE DOWN DURING OPEN
• PRICE RETESTES THAT AREA MAKES A STONG MOVE DOWN

44. Futures brokers
• Trade Station
• Think or swim
• AMP futures
• Light speed

45. RISK MANAGEMENT
• RISK MANAGEMENT IS YOUR SURVIVAL GUIDE
• RULE #1 DON’T GO BROKE DAY TRADING !!!!!
• WHEN STARTING OUT DON’T RISK MORE THAN 1 TO 2% OF ACCOUNT
IN ANY ONE TRADE
• GIVE YOURSELF A DAILY MAX LOSS
• I ALWAYS ENTER A TRADE WITH AN ENTRY, STOP, AND PROFIT TARGET
• IF YOU GET OUT OF TRADE AND IT GOES YOUR WAY LIVE WITH IT !
THERE WILL BE ANOTHER TRADE !

46. Any Questions and Feedback please email: rnocera@mbatraders.com
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