moderator for today’s programcontent.mkt51.net/lp/19107/160494/weedkly_options... ·...

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February 2012

The New ICE Weekly Options: Overview and Strategies

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Moderator for Today’s Program

Ray McKenzieVice President, Business Development

ICE Futures U.S.

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Forward-Looking Statements and Disclaimer

This presentation may contain “forward-looking statements” made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Statements regarding our businesses or expectations of trading with respect to theRussell products that are not historical facts are forward-looking statements that involve risks, uncertainties and assumptionsthat are difficult to predict. These statements are not guarantees of future performance and actual outcomes and results maydiffer materially from what is expressed or implied in any forward-looking statement. For a discussion of certain risks anduncertainties that could cause actual results to differ from those contained in the forward-looking statements seeIntercontinentalExchange, Inc.’s filings with the Securities and Exchange Commission (the "SEC"), including, but not limited to,the "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on February9, 2011 and its Form 10-Q for the quarter ended June 30, 2011, as filed with the SEC on August 3, 2011. SEC filings are alsoavailable in the Investors & Media section of IntercontinentalExchange, Inc.’s website. All forward-looking statements in thispresentation are based on information known to us on the date hereof, andwe undertake no obligation to publicly update any forward-looking statements.

You acknowledge that this presentation and the information provided during the conference call does not provide individualizedinvestment advice and does not advise or recommend any particular investment strategies for the individual circumstances ofany person. We recommend that you perform your own due diligence to determine the suitability of any strategy orrecommendation contemplated in this presentation or on this conference call. The determination of suitability and the decisionto engage in various trading activities are your sole responsibility. You understand that information provided by us is forinformation purposes only and is not intended to be and does not constitute financial advice of an individualized nature for yourunique circumstances.

DisclaimerThe views and opinions offered in this presentation are solely those of the presenter: ICE has not verified the informationpresented, and makes no representation about its accuracy or completeness. The views in the presentation are notnecessarily those of IntercontinentalExchange or ICE Futures U.S. and cannot be the basis for any claim against them.Futures and options trading involves substantial risk and is not for everyone.

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Weekly Options on Three ICE Commodities Launch Feb 6 on ICE Futures U.S.

• Sugar No.11 Weekly Options

• Cotton No. 2 Weekly Options

• Coffee Weekly Options

Trading will be available electronically and on the trading floor

Weekly options on other IFUS products will be listed in the future

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What are Weekly Options?

• Short-life, American-style options

• Terms generally match the terms of the regular monthly options on IFUS futures (for example, strike prices, tick size, trading hours, exercise into the underlying futures contract)

• Expire on a different date than the regular monthly option

• For each futures, three weekly options are listed for trading at one time

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Some Facts To Know about ICE Weekly Options

• Each weekly option contract trades for approximately four weeks

• A new weekly option contract is listed for trading on the next business day following the last trading day of another weekly option

• When a Friday is already the last trading day for a regular monthly option contract, the weekly option contract that would expire on that Friday is not listed

• On the last trading day, trading in each weekly option ends at the same time as an expiring monthly option on that futures contract

• Weekly options are treated the same way as other options with respect to trading rules and market regulations

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Links to Useful Documents

• For links to• Contract specifications for each weekly option products specifications • a listing calendar with first and last trading days through July 2012• a weekly options FAQ

http://goo.gl/jnf2a

http://goo.gl/jnf2a�

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Today’s Program

• Trading Weekly Options

• The most important characteristics of short-dated options

• Situations in which traders use weekly options

• Some strategies for trading weekly options

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Presenter

Mark Longo, Founder and CEOThe Options Insider, Inc.

www.TheOptionsInsider.com

• Founder and CEO, The Options Insider, an online options information company

• Hosts “The Long and Short of Futures Options” on OptionsInsider radio

• Creator of The Options Trader and The Options Observer columns in Trader Magazine

• Options market maker and independent options trader for 8+ years

April 14, 2010 The Options Alliance 1February 2, 2012

The Short-Term

Revolution?

The RiseOf WeeklyOptions

Mark S. Longo Founder & CEO,

www.TheOptionsInsider.com

Host, The Options Insider Radio Network

Former Member, Chicago Board Options Exchange (SPX, INTC, MSFT)

Co-Founder: The Options Alliance

© 2012 The Options Insider Inc. All Rights Reserved. 2

TheOptionsInsider.com

3 © 2012 The Options Insider Inc. All Rights Reserved.

The Weekly Revolution This product category has

revolutionized the options market.

Impacted liquidity and performance across a wide range of option classes.

Created an influx of new volume & new customers.


A Scalpel Not A Shotgun The Surgical Alternative: Weeklys were

designed to hedge specific event risk (earnings announcements, crop reports, etc).

Long premium: Allow customers to protect portfolios without buying a full month’s worth of premium.

Quickies: The name says it all.


A Premium Seller’s Dream The plan was for a near-term

defensive tool.

In practice, weekly options, particularly weekly equity options, have attracted large numbers of premium sellers.

Customer paper in most weekly equity option products leans overwhelmingly toward short premium.


Changing The Curve The influx of short premium has

fundamentally altered the liquidity landscape of many products.

Hitting the bid: Customers routinely sell weekly products as soon as they are listed, causing dramatic premium contraction after the opening bell.

Liquidity Dichotomy: The migration of premium sellers into weeklys accelerated time decay in those products. Leaving longer-term contracts primarily to premium buyers


Maximize Time Decay (Theta) To generate maximum income, you need

to maximize the amount of time decay collected.

Time decay increases exponentially as you approach expiration.

Option writers concentrate on shorter-term options to maximize decay.


Theta In Action IBM Oct 120 Call w/63 Days to Expiration


Theta In Action: Part 2


A Lasting Impact Weeklys have changed the equity

option landscape.

The vast majority of short premium transactions have migrated to the short-duration contracts.


A Buying Opportunity? Overselling: Ignorance of Theta has also

led to many customers overselling weekly products, particularly before weekends.

A Free Weekend: Disciplined traders can often purchase weekly options that have already had the weekends priced out of the contracts.


Futures Change the Game The weekly options rollout has unfolded

much differently in the futures options market.

Polar Opposites: Weekly futures options products exhibit a vastly different use case, utilize a different implementation and attract different customers.

Weekly futures options adhere much closer to the original plan for weeklys –provide short-term protection.


A Different Use Case Long Premium: Weekly futures options are

overwhelmingly used to establish long premium positions.

These long premium positions are intended to hedge against, or speculate on, specific events (crop reports, etc).

Late Bloomers: Most weekly futures options are actually traded at the end of the product’s life cycle. A substantial number of customers are opening long positions on expiration day. This reinforces the desire to hedge specific event risk.

Example: 50% of weekly treasury options trade in the final two days of the expiration cycle.


Different Implementation Short-term equity options are

disseminated on a weekly basis –prompting a flurry of new selling activity each week.

Short-term futures options are disseminated on a monthly basis-providing for more nuanced planning & implementation.


Different Customer Weekly equity options have attracted

a substantial number of retail customers. Primary interest: income generation.

Weekly futures options primarily attract institutional customers and end-users. Primary interest: hedging underlying exposure.


New Customers Are Coming Weeklys are broadening the reach of

futures options: Lower premium levels have reduced the barrier to entry for many retail options traders.

Interest from our Options Insider audience has never been higher.

More options for liquidity: Market makers are attracted to weeklys as new hedging opportunities as well as ways capture edge.


Benefits of Weeklys Low Premium: Cheap sources of

protection/speculation.

Extremely High Gamma: Influenced by small movements in the underlying.

Precision: Hedge specific event risk.

New Users: Lower price point attracts new users and new sources of volume.


Limitations of Weeklys Liquidity: Liquidity and spreads can

become erratic as you move away from front week ATM.

Extremely High Gamma: Influenced by small movements in the underlying.

Limited Adjustments: The short time horizon provides few opportunities to adjust or repair a trade.


Popular Weekly Strategies


Hedging Specific Event Risk The #1 use case for weekly futures

options. Takes different forms depending on product class.

Defend against upside crash: Hedging activity in weekly commodity options focuses on long OTM calls. Sugar, coffee and cotton should follow suit.

Defend against downside crash: Hedging in weekly futures options on equity indices typically focuses on long OTM put positions.


Upgrade Your Hedge: Part 1 Renewed focus on premium reduction: Repeated hedging in

weeklys can become expensive over time.

Upgrade to Verticals: Defensive players looking to reduce premium outlay have shifted liquidity into call verticals vs. buying OTM calls outright.

Buy ATM/Sell OTM Calls: Reduces net premium outlay. Allows trader to migrate hedge closer to the ATM strike, providing more immediate return on their hedging dollar.

Con: Reduces protection against extreme movements.

Ideal for: Customers looking for modest protection at a reduced cost.

Popular in: Most product classes.


Upgrade Your Hedge: Part 2 Zero Cost Hedge: Premium-conscious

customers have also begun implementing spreads with the goal of zero premium outlay.

Buy ATM/Sell OTM Calls On A Ratio: Reduces net premium outlay to zero.

New Risk Profile: Protects against small movements, but magnifies crash risk.

Ideal for: Customers looking for minimal protection at no cost. Not appropriate for customers looking for maximum protection.


Trading Term Structure Generate directional exposure at a reduced

cost.

Example: Long front month ATM coffee call, short week one ATM coffee call.

Maximize Theta: Finance long delta position with three subsequent short weekly positions.

Some Flexibility: Short strike can be adjusted each week to account for underlying movement.


Long Ratio Diagonal Spread Generate directional exposure at a dramatically

reduced cost (credit).

Example: Long front month ATM coffee call, short three week one OTM coffee calls.

Ratio Reduces Costs: Net premium outlay for long delta position is nominal.

Heavily Short Gamma: Subject to minute underlying swings.

Heightened Risk Profile: Dramatic near-term movements will be costly.


Reverse Collar/Risk Reversal Collars are typically constructed with a long

put financed by a covered call. Used to hedge long equity positions.

For sugar, cotton, coffee and other futures options products, the risk is to the upside.

Reverse Collar/Bullish Risk Reversal: buy OTM Call, sell OTM put. Can be done with or without underlying exposure.


Multiple Implementations Weekly Bullish RR: Long Week 1 OTM Call, Short

Week 1 OTM Put - Near-term long delta position ahead of crop report.

Reverse Collar: Long Week 1 OTM Call, Short Week 1 OTM Put, Short Futures - Hedge short delta exposure ahead of crop report, etc.

Bullish RR: Long Front Month OTM Call, Short Week 1 OTM Put: Maximize decay to finance a long delta position.

Ratios, Long Underlying, etc: Many ways to customize this strategy to your needs.


Trading Volatility Gamma & Theta, not Vega: Weeklies are not ideal for

volatility trading. But they can be an excellent way to finance a volatility position.

Example: Long 1 Dec 2012 ATM Coffee Call, Short 1 Week One OTM Coffee Call, Short Dec 2012 Coffee Futures on delta neutral basis.

Ideal for: Trader with bullish long-term volatility outlook who believes coffee will remain stable in the near-term. Repeated implementation will allow trader to collect theta while waiting for profits on his volatility position.

Short Gamma: Not ideal for a commodity market that is prone to violent swings in the near-term.


Other Weekly Strategies Short Weekly OTM Put: Generate income

and/or establish long positions in underlying commodities. Highly directional in nature.

Long Weekly ATM Butterfly/Iron Condor:Allows hedgers to offset long premium exposure with non-directional strategy. Short time horizon limits adjustments/gamma scalping.


Questions?
