General Use

www.OptionsEducation.org

Options Basics: What you need to know

Edward J ModlaDirector of Retail EducationOptions Industry Council (OIC)

Michael RugerRegional Brokerage ConsultantFidelity

Disclaimer

Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized

Options, available by visiting OptionsEducation.org or by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200, Chicago, IL 60606.In order to simplify the calculations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.

Copyright © 2020. The Options Clearing Corporation. All rights reserved.

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3 DisclaimerDisclaimer

The information provided in this communication is solely for educational purposes and should not be construed as advice or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with The Options Industry Council. There is no form of partnership, agency affiliation, or similar relationship between The Options Industry Council and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by The Options Industry Council and does not guarantee or assume any responsibility for its accuracy or completeness.

Annual Options Volume 1973-2019

0.0

1.0

2.0

3.0

4.0

5.0

6.0

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Cle

are

d C

ontr

acts

(B

illio

ns)

OCC Annual Contract Volume by Contract Type

Equity Non-Equity

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Presentation Outline

• Options Defined

• Calls & PutsoRights

oObligations

oBasic Strategies

• Account Balances

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Options Defined

General Use

Defining an Option

• Options are contracts that give:

• the buyer the right to buy or sell an underlying asset

• the seller an obligation to buy or sell an underlying asset

at a specified price, on or before a given date in the future.

• Buyers have rights

• Sellers have obligations

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Option Contract Terms

• Equity option contracts have standardized terms:

• Underlying stock/ETF

• Unit of trade (e.g. 100 shares)

• Strike (exercise) price

• Expiration month

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Calls and Puts

Why Options?

• Options give you more ways to implement your market research

• Options make it possible to target a variety of investment objectives:• Risk Reduction

• Income Generation

• Stock Acquisition

• Leverage

• Options offer FLEXIBILITY!

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Equity Call Options

• An equity call buyer:• Owns the right to buy underlying stock/ETF

• “Holder” or long the contract

• An equity call seller:• Has the obligation to sell underlying stock/ETF

• “Writer” or short the contract

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Call Buying Example

Break-even at Expiration:Strike Price + Call Premium Paid

$60.00 + $3.00 = $63.00

Maximum Loss:$3.00 Call Premium Paid

$300.00 Total

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Buy 60.00 strike call at $3.00

+

–

0

5

5BEP $63.00

55 60 65

Long Stock

at $60.00

-$300

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Call Selling Example (Covered Call)

Own 100 shares XYZ at $52.00

Sell 1 XYZ 55 call at $1.75

Maximum Profit:Effective Stock Sale Price –

Stock Price Paid($55.00 + $1.75) – $52.00 = $4.75

$475.00 Total

Break-even at Expiration:Stock Price Paid –

Call Premium Received$52.00 – $1.75 = $50.25

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5

5

50 55 60

0

–

+

Long stock at $52.00

BEP $50.25

Equity Put Options

• An equity put buyer:• Owns the right to sell underlying stock/ETF

• “Holder” or long the contract

• An equity put seller:• Has the obligation to buy underlying stock/ ETF

• “Writer” or short the contract

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Put Buying Example (Speculate)

Break-even at Expiration:Strike Price – Put Premium Paid

$35.00 – $2.25 = $32.75

Maximum Loss:$2.25 Put Premium Paid

$225.00 Total

15

+

–

0

5

5

BEP $32.75

30 35 40

Buy 35.00 strike put at $2.25

Short Stock at $36.00

-$225

Protective Put (Hedge)

Buy 100 shares XYZ at $42.00

Buy 1 60-day XYZ 40 put at $1.55

Break-even at Expiration:

Stock Price Paid + Put Premium Paid

$42.00 + $1.55 = $43.55

Maximum Loss:

Stock Price – Break-even for Put

$42.00 – ($40.00 – $1.55) = $3.55

$355.00 Total

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5

5

35 40 45

0

–

+

Long stock at $42.00

BEP $43.55

Does not include commissions, fees, margin interest or taxes.

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Cash Secured Put Example

Break-even at Expiration:

$80 – $3.90 = $76.10

Maximum Profit:

$3.90 premium received

$390 total

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5

− 5

75 80 85

0

–

+

BEP $76.10

$3.90 premium

is profit/income

If assigned, long stock

at $76.10

Not including commissions

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Account Balances

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How Does Your Trade Affect Your Account Balance? (Buying Example)

Position

Account Balance

Excluding commissions, fees, etc.

Cash

-$130($1.30 x 1 x $100)

Sept 90 call quoted $1.20b/$1.30aBuy 1 Sept 90 call at $1.30

+1 Sept 90c($1.20 x 1 x $100)

-$10($120 - $130)

After a market rally, the quote for the Sept 90 call is $3.50b/$3.70a

-$130 +1 Sept 90c($3.50 x 1 x $100)

+$220($350 - $130)

No option position

+$170($300 - $130)

The market weakens and you sell the Sept 90c for $3.00

-$130

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How Does Your Trade Affect Your Account Balance? (Selling Example)

Position

Account Balance

Excluding commissions, fees, etc.

Cash

+$275($2.75 x 1 x $100)

June 35 put quoted $2.75b/$2.85aSell 1 Jun 35 put at $2.75

-1 Jun 35p($2.85 x 1 x $100)

-$10($275 - $285)

Three weeks later, the market for the Jun 35 put is $1.55b/$1.65a

+$275 -1 Jun 35p($1.65 x 1 x $100)

+$110($275 - $165)

No option position

+$275June options expire and the 35 putexpires out of the money & worthless

+$275