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OPTIONS /

Options: Understanding & Overcoming Client and Advisor Fears

www.OptionsEducation.org

OIC02 The Options Industry Council

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. To obtain a copy, contact your broker or The Options Industry Council at One North Wacker Drive, Chicago, IL 60606. Individuals should not enter into options transactions until they have read and understood this document.

In order to simplify the computations 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.

LEAPS® is a registered trademark of the Chicago Board Options Exchange, Incorporated. Long-term Equity AnticiPation SecuritiesSM and WeeklysSM are service marks of the Chicago Board Options Exchange, Incorporated.

Copyright © 2017. The Options Industry Council. All rights reserved.

OIC

About OICThe Options Industry Council (OIC) is an industry cooperative funded by OCC, the world’s largest equity derivatives clearing organization and sole central clearinghouse for U.S. listed options, and the U.S. options exchanges. OIC’s mission is to provide free and unbiased education to investors and financial advisors about the benefits and risks of exchange-traded equity options. Managed by OCC, OIC delivers its education through the Options Education Program, a structured platform offering live seminars, self-directed online courses, mobile tools, podcasts, webinars and live help. OIC’s resources can be accessed online at www.OptionsEducation.org or via mobile app for iOS.

About OCCOCC is the world’s largest equity derivatives clearing organization and the foundation for secure markets. Founded in 1973, OCC operates under the jurisdiction of both the U.S. Securities and Exchange Commission (SEC) as a Registered Clearing Agency and the U.S. Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization. OCC now provides central counterparty (CCP) clearing and settlement services to 19 exchanges and trading platforms for options, financial futures, security futures and securities lending transactions. More information about OCC is available at www.theocc.com.

Who We Are

OICExchange Participants

OICAnnual Options Volume(1973-2016)

0.0

0.5

1.0

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1973

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Non-Equity Equity

OCC Annual Contract Volume by Product Type (1973-2016)

OIC06 Today

• Cerulli Study

• Essential Concepts

• Buying Calls and Puts

• Generating Income

• Protective Puts

• Q & A

The Study

Cerulli Associates | www.cerulli.com 7


The Study

Purpose of the Study

• Understand advisors’ options-related behavior• Examine behavior of largest practices• Identify target audiences and educational strategies to

increase adoption of exchange-listed options


The Study

Advisors' Use of OptionsStrong representation in the study of each user type

Analyst Note: Non-options users are divided into three categories: never used, previously used, and considering using.

Source: Cerulli Associates

Options users31%

Never used options32%

Previously used options25%

Considering using options…

Options Users



Options Users

Use of Exchange-Listed vs. OTC Options by Channel, 2017Advisors prefer exchange-listed options


90% 90%

80%

89%81%

86%

50%

60%

43% 41%

52% 52%

0%

20%

40%

60%

80%

100%

Wirehouse National andregional B/D

Independent B/D Independent RIA Hybrid RIA All advisors

Exchange-listed Over the counter


Options Users

Use of Options Strategies by Channel, 2017RIAs demonstrate promising use of specialized strategies


95%

77%

67%60%

49%

41%44%

96%

75%79%

55%60% 57%

51%

96%

78%

66%

49% 49%43% 40%

0%

20%

40%

60%

80%

100%

Covered calls Long calls andputs

Protective puts Option spreads Short calls andputs

Cash-secured puts Collars

Wirehouse Independent RIA All advisors


Options Users

Client influence is a factor, but it is difficult to quantify

Options Users:

• 33% say client demand would increase use

• 24% say client demand has a significant influence on use

• But only 33% think clients are highly familiar with options

Options Non-Users:

• 37% do not feel comfortable explaining options to clients

• But 35% would use options in the future given demand from clients

Options Non-Users



Options Non-Users

Factors That Would Encourage Future Use by Channel, 2017Packaged products and client demand would drive future use


Channel

Factor Encouraging Use Wirehouse National and Regional B/D IBD Independent

RIAHybrid

RIAAll

Advisors

Availability of packaged products 50% 29% 46% 30% 38% 36%

Clients allow use/requests options use 48% 27% 42% 36% 32% 35%

A better personal understanding of how to manage options 24% 24% 39% 28% 41% 30%

Acquiring technology to manage options 43% 22% 28% 19% 32% 26%


Options Non-Users

Firm-Level Promotion of Options by Channel, 2017

Do firms reach non-users?


Channel

Wirehouse National and Regional B/D Independent B/D

Promotion Type Options User

Options Non-User

Options User

Options Non-User

Options User

Options Non-User

Does not promote 20% 30% 20% 66% 40% 61%

Options strategy desk 58% 52% 40% 15% 17% 8%

Education on using options 28% 33% 40% 5% 27% 8%

Compliance support 40% 35% 20% 7% 27% 11%

Technology 43% 24% 35% 12% 13% 4%

Trade ideas 40% 24% 50% 7% 20% 1%

Email or newsletter 38% 26% 25% 5% 3% 1%


Options Non-Users

Confidence Using Instrument Types, 2017

Advisors considering using options are more confident


32%

24%

27%

21%

27%

19%

13%16%

19%

14% 13% 12%

0%

10%

20%

30%

40%

Exchange-listed equity options LEAPS/long-term options ETF options Index options

Considering using Previously used All advisors


Mega Team Options Users

Use of Options by Objective, 2017

Mega team advisors use options for more diverse objectives

Analyst Note: Represents advisors who frequently use options to achieve each objective. Mega team advisors are defined as practices with ≥$500m

in AUM.

Objective Practices with ≥$500m AUM

Practices with <$500m AUM

Income generation 51% 57%

Downside risk protection/hedging 57% 37%

Portfolio diversification 39% 25%

Create an entry or exit point 14% 29%

Alpha generation 21% 26%

Preserve capital 18% 24%

Stock alternative/substitute 13% 23%

Short-term speculation 21% 20%

Replacement of a limit order 8% 15%


Mega Team Options Users

Advisors' Use of Options in Personal Accounts, 2017

88% of mega team users implement options in personal accounts

Analyst Note: Mega team advisors are defined as practices with ≥$500m in AUM.


7%5%

88%

Mega Team Options Users:Options Use in Personal Accounts

No No, but considering in the future Yes

18%

7%

75%

Non-Mega Team Options Users:Options Use in Personal Accounts

No No, but considering in the future Yes


Conclusions

• Preference for exchange-listed over OTC options

• Advisors are open to more than plain vanilla strategies

• Time consumption = greatest objection

• Advisors lack confidence

• Attractive audience: advisors considering using options

How Financial Advisors Use and Think About Exchange-Listed Options

• Download the entire 15-page Cerulli Associates research study at www.optionseducation.org

[email protected]

http://www.optionseducation.org/

Essential Concepts

OIC08 Options Are Tools

• Options give an investor more ways to implementmarket research

• Options make it possible to target a variety ofinvestment objectives:• reduce risk• increase income• unique tradeoffs

Terminology and Mechanics

OICRights and Obligations

Option contracts give…

• 100 shares of theunderlying

• at the strike price

• any time before expiration

Call Put

Rightto buy

Rightto sell

Obligationto buy

Obligationto sell

Short(seller)

Long(buyer)

10

OIC11 Option Example

XYZ• XYZ = underlying stock

• 100 XYZ shares change hands if exercised

• January = expiration month• expiration day = third Friday in January

• 50.00 = strike (exercise) price• price per share if exercised = $50.00

January 50.00 Call at $4.20

OIC12 Option Example

XYZ January 50.00• Call = option type

• $4.20 = quoted premium• total premium paid by buyer to seller =

$4.20 x 100 shares = $420.00• excluding commissions

Call at $4.20

OIC13 Intrinsic Value vs. Time Value

Option Premium:Intrinsic Value (if any) + Time Value

• Intrinsic value• in-the-money amount

• Time value• any premium in excess of intrinsic value• decays with time as expiration approaches (“time decay”)

• At expiration option worth only intrinsic value• no time remaining

OIC14 Intrinsic Value vs. Time Value

XYZ at $53.00 per shareXYZ January 50.00 call at $4.20

Call is in-the-money by $3.00(stock price $53.00 – strike price $50.00)

Time Value = $1.20

Intrinsic Value = $3.00

Total Premium = $4.20

Time Value = Total Premium – Intrinsic Value

For a 60.00 call at $2.10:What is the intrinsic value?What is the time value?

$0$2.10

Buying Calls and Puts

Buying Calls

OIC17 Why Buy Calls?

• Investor:• bullish on a particular stock• small cash outlay with limited risk• expects to exercise and buy stock• focus on number of contracts

• Trader:• leveraged profits with risk capital• no expectation to exercise• focus on total premium paid and be willing to lose it

OIC18 The Call Buyer

Call Buyer:• Has the right to buy underlying stock

• 100 shares• at the strike price• at any time until expiration

• For this right the call buyer pays premium

OIC19 Call Buying Example

• Stock XYZ is trading at $60.00• Investor is bullish on the stock• Investor wants limited downside risk

• Investor buys a three-month, 60.00 strike call at $3.00• total premium paid = $3.00 x 100 shares = $300.00

Not including commissions

OIC

+

20 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

Maximum Gain:Unlimited–


0

5

5BEP $63.00

55 60 65

Long Stockat $60.00

Buy 60.00 strike call at $3.00

OICCall Buying Example

Buy 60.00 strike call at $3.00

Long 60.00 CallValue at Expiration

Stock Priceat Expiration

Long 60.00 CallInitial Cost

TotalProfit/(Loss)


$63.00 $3.00 ($3.00)

$70.00

$65.00

$10.00$5.00

($3.00)($3.00)

$7.00$2.00

0

$60.00

$55.0000

($3.00)($3.00)

($3.00)($3.00)

31

OIC22 The Investor

• XYZ stock is trading at $60.00

• Ryan has $6,000.00

• Ryan buys 1 XYZ 60.00 call at $3.00 ($300.00 total)and deposits $5,700.00 in money market

• What is Ryan’s goal? Risk?• goal: to buy stock at $60.00 with limited risk• risk: $300.00 premium paid (5% of capital)


OIC23 The Investor

Three months later:

• What could Ryan do if XYZ is above $60.00?• exercise the call and buy the stock• re-evaluate – possibly sell call

• What could Ryan do if XYZ is below $60.00?• call expires out-of-the-money with no value• re-evaluate• maybe buy stock at lower price• maybe look for another investment

Buying Puts

OIC25 Why Buy Puts?

• Bearish on the underlying stock

• Profit from a decline in stock price

• Safe alternative to selling stock short• small cash outlay• leveraged profits• limited upside risk• no short stock margin

OIC26 The Put Buyer

Put Buyer:• Has the right to sell underlying stock

• 100 shares• at the strike price• at any time until expiration

• For this right the put buyer pays premium

OIC27 Put Buying Example

• Stock XYZ is trading at $36.00• Investor is bearish on the stock• Investor wants limited upside risk

• Investor buys a three-month, 35.00 strike put at $2.25• total premium paid = $2.25 x 100 shares = $225.00


OIC28 Put Buying Example

Buy 35.00 strike put at $2.25

Long 35.00 PutValue at Expiration


Long 35.00 PutInitial Cost

NetProfit/(Loss)


$32.75 $2.25 ($2.25)

$40.00

$35.00

00

($2.25)($2.25)

($2.25)($2.25)

0$30.00

$25.00

$5.00$10.00

($2.25)($2.25)

$2.75$7.75

OIC

+

29 Put Buying Example

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

Maximum Gain:Strike Price – Put Premium Paid

$35.00 – $2.25 = $32.75–


0

5

5

BEP $32.75

30 35 40

Buy 35.00 strike put at $2.25

Generating Income

Selling Covered Calls

OIC32 Covered Calls

• Covered call:• own underlying stock• sell calls on a share-for-share basis (short contracts)

• Investor owns 100 XYZ shares trading at $52.00• neutral to moderately bullish over next few months• want to generate income in a stable market• investor has target sale price for stock

• Sell 1 90-day XYZ 55.00 call at $1.75• total premium received = $175.00


OIC33

Long StockProfit/(Loss)at Expiration

NetProfit/(Loss)

Short CallProfit/(Loss)at Expiration


Own 100 shares XYZ at $52.00Sell 1 XYZ 55.00 call at $1.75


Covered Call Example

$52.00 0 $1.75

$60.00

$55.00

$8.00$3.00

($3.25)$1.75

$4.75$4.75$1.75

$50.00

$45.00

($2.00)($7.00)

$1.75$1.75

($0.25)($5.25)

OIC

+

34 Covered Calls

Break-even at Expiration:Stock Price Paid –

Call Premium Received$52.00 – $1.75 = $50.25

Maximum Profit if Assigned:Effective Stock Sale Price –

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

$475.00 Total

Maximum Loss:Same as break-even–


0

5

5

BEP $50.25

55 60

Long Stockat $52.00

Own 100 shares XYZ at $52.00Sell 1 XYZ 55.00 call at $1.75

50

OIC35 Covered Call Summary

• Strategy is appropriate for a neutral to moderately bullish stock outlook.

• Investor is looking to increase income in a stable market.

• Profits are limited when the stock price rises above the strike price of the call.

• Losses occur in the stock price if the stock falls below the break-even point.

• Investor is obligated to deliver shares until the optionexpires or the investor closes the position.

Protective Puts

OIC37 Protective Put

• Investor owns 100 shares of XYZ stock at $42.00• concerned about the downside, investor purchases

protection• buy puts on a share-for-share basis (long contracts)

• Protective put: buy 1 XYZ 40.00 strike put• right to sell the shares at $40.00• at any time before expiration

• Is investor bullish or bearish?

OIC38 Protective Put

• XYZ stock at $42.00

• Buy 1 60-day XYZ 40.00 put at $1.55• total premium paid = $155.00

• What is the investor’s risk?• stock price – break-even point for put• $42.00 – $38.45 ($40.00 – $1.55) = $3.55

• Potential upside gain = unlimited


OIC

+

39 Protective Put

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

Maximum Gain:Unlimited (long stock)

–


0

5

5BEP $43.55

35 40 45

Long Stockat $42.00

Buy 100 shares XYZ at $42.00Buy 1 60-day XYZ 40.00 put at $1.55

OIC40 Protective Put Summary


Protective puts act as insurance

Establish a minimum selling price until expiration

Choose your strike price and expiration month to fit your expectation

Maximum loss is the premium paid

OICSummary

• Be sure to understand profit, loss and break-even points for your trade

• Be sure the strategy is in line with your expectations• Options have trade offs, be certain that you

understand them• Have an exit plan for profits and losses

41

OIC42 For More Information

• www.OptionsEducation.org

• Investor Services: [email protected]

• OIC YouTube Channel

Thank youfor attending

www.OptionsEducation.org

options / options: understanding & overcoming client and ... › downloads › 2017_wmc ›...

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