Download - 910717 2
1
Single Stock Option’s Seminar
Part I Option Trading Overview
By Steve D. Chang Morgan Stanley Dean Witter
Part II Volatility Trading Concept and Application
By Charles Chiang Deutsche Bank A.G.
2
Options Trading Overview
By Steve Chang
3
Introduction
Steve Chang Equity Derivatives Trader at Morgan Stanley
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
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
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
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)
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
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
10
Volatility – 2330
11
Volatility – 1310
12
Volatility – 2882
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
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
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
16
Trading Strategies
Buy call option Expecting more upside
17
Trading Strategies
Sell put option Expecting limited downside
18
Trading Strategies Buy 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
19
Trading Strategies Buy 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
20
Trading Strategies Buy 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
21
Trading Strategies Buy 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
22
Buy/sell Greeks
Buy delta Buy spot (ie, future or stocks) Buy call Sell put
Sell delta – vice versa
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
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
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
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%)
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
28
Q & A