Cabot Investors Conference 2013www.cabot.net Options Primer Jacob Mintz Analyst, Cabot Options Trader

Cabot Investors Conference 2013www.cabot.net Options Primer Calls Puts Market Leverage Using Options to Create Yield Using Options to Protect Your Portfolio

Cabot Investors Conference 2013www.cabot.net About Me How did I become a trader? My unlce “knew a guy” Learned under two CBOE legends Became a Market Maker Designated Primary Market Maker on CBOE and Pcoast Took my team off the trading floor in 2010 What I’m doing now

Cabot Investors Conference 2013www.cabot.net Call Option A call option gives its holder the right to BUY 100 shares of the stock at the strike price, anytime prior to the options expiration date The seller of the option has the obligation to sell the shares Equity option contracts represent 100 shares of the underlying stock

Cabot Investors Conference 2013www.cabot.net TSLA Call Buy 1 TSLA September 155 Call for $10

Cabot Investors Conference 2013www.cabot.net TSLA Call Symbol: TSLA Month of the Call’s Expiration: September Date of expiration: September 21, 2013 Strike: 155 Price: $10

Cabot Investors Conference 2013www.cabot.net Premium An option’s price The potential loss for the holder of an option is LIMITED to the initial premium paid for the contract On the other hand, the seller of the call has UNLIMITED potential loss, which is somewhat offset by the initial premium received

Cabot Investors Conference 2013www.cabot.net How is the Price of the Call Determined?  Volatility Supply and demand: If I want to buy this call, you will sell some at $10, then when you see I want more, you will raise the price to $10.05 You want more? Now the price is $10.10

Cabot Investors Conference 2013www.cabot.net How is the Price of the Call Determined?  Likelihood the call will finish in-the- money due to time Generally, the longer the time remaining until an option’s expiration, the higher the premium— because the longer an option’s lifetime, the greater the possibility the underlying share price will move to make the option in-the-money

Cabot Investors Conference 2013www.cabot.net Profit and Loss Graph Insert Graph here

Cabot Investors Conference 2013www.cabot.net Power of Options Instead of paying $ 15,500 to buy 100 shares of TSLA, you can pay $1000 for the opportunity to buy 100 shares at $150

Cabot Investors Conference 2013www.cabot.net Order Flow Reading Following a large order from a hedge fund or trading desk who may have more information

Cabot Investors Conference 2013www.cabot.net Using Long-Term Options

Cabot Investors Conference 2013www.cabot.net Put Option A put option gives its holder the right to SELL 100 shares of the stock at the strike price, at any time prior to the option’s expiration date The seller of the option has the obligation to buy the shares

Cabot Investors Conference 2013www.cabot.net AAPL Put Buy 1 AAPL September 450 Put for $8 Symbol: AAPL Month of the put’s expiration: September Date of expiration: September 21 Strike: 450 Price: $8

Cabot Investors Conference 2013www.cabot.net How is Price of Put Determined? Volatility in puts is like a hurricane coming at your house: When the hurricane is coming, you want as much insurance as possible—so you buy protection (puts) in case the storm hits your home Likelihood of finishing in-the-money due to time

Cabot Investors Conference 2013www.cabot.net Profit and Loss Graph

Cabot Investors Conference 2013www.cabot.net The Power of Options Unless you have special arrangements, brokers won’t let you short stocks without paying significant margin due to the risk With options, you only have to pay $800 to have the ability to short 100 shares of AAPL

Cabot Investors Conference 2013www.cabot.net The Flash Crash

Cabot Investors Conference 2013www.cabot.net Creating Yield

Cabot Investors Conference 2013www.cabot.net Covered Call Writing A Covered Call Write consists of buying or owning a stock and selling (i.e., shorting) a call option on that stock

Cabot Investors Conference 2013www.cabot.net Facebook Covered Call Buy 100 Facebook at $38 Sell 1 FB September 40 Call at $1.75 Expires 9/21/2013

Cabot Investors Conference 2013www.cabot.net FB Covered Call You can write one Call on each 100 shares of stock you own. Your short option position is “covered” by the stock. A short Call on stock in your account (a Covered Call) is a very conservative strategy and requires no margin.

Cabot Investors Conference 2013www.cabot.net Profit and Loss Graph

Cabot Investors Conference 2013www.cabot.net Net Yield Created Stock at 38 we have created a 4.6% yield Stock at 40 we have created a 9.8% yield

Cabot Investors Conference 2013www.cabot.net Portfolio Protection Covered Call Put Purchase Risk Reversal

Cabot Investors Conference 2013www.cabot.net SPY Covered Call Buy 100 SPY at $170 Sell 1 SPY September 172 at $2 Expires 9/21/2013

Cabot Investors Conference 2013www.cabot.net PNL Graph

Cabot Investors Conference 2013www.cabot.net SPY Put Purchase Buy 100 SPY at 170 Buy 1 SPY September 168 Put at 2.50 Expires 9/21/2013

Cabot Investors Conference 2013www.cabot.net PNL Graph

Cabot Investors Conference 2013www.cabot.net “It’s better to be lucky … than good.”

Cabot Investors Conference 2013www.cabot.net