1. Mike Torbenson Puget Sound Chapter
115 Options for Dummies
Mike Torbenson
Puget Sound Chapter

2. Disclaimer
The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or the Puget Sound Chapter. The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

3. Disclaimer
Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations. This presentation may contain images of website and products or services not endorsed by BetterInvesting. The presenter is not endorsing or promoting the use of these websites, products or services.

4. Objectives Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium
American Style Options began April 26, 1973 with only CALL options on 16 stocks. By 1975 traded on 32 stocks.

5. Objectives Explain the actions of … Buy a Call Buy a Put Sell a Call
Sell a Put

6. BI Compatible Strategy
Buy and sell stocks using BI principles
Buy units of 100 shares
Improve return by
Price Appreciation
Dividends
Option Premiums

7. Options vs. Stocks Only Stocks Only Options contracts
We already know about stocks
Only Options contracts
Options can be bought & sold but have a time limit (expiration date)
Stocks and Options together
Combined to reduce risk and increase profit
Only Stocks
You already know about stocks. We buy and sell stocks for profit.
Only Options contracts
Options contract can be bought and sold like stocks for profit but unlike stocks have a time limit.
Stocks and Options together
We can combine stocks and options to either increase or reduce risk & reward

8. What is an option?

9. What is an option? Contract Call & Put Buyer & Seller Strike Price
Expiration date
Premium

10. Contracts Agreement between two people Services/Goods provided for fee
Time limits
Conditions for success and failure

11. Call Option Contract Options Seller Options Buyer
I will pay you $2/share now for the right to BUY your shares of XYZ within 3 months if the price RISES to $25 or above.
OK, for $2/share premium today, I promise to SELL you my shares of $25 if the price gets that high and you ask. But I keep the premium either way.
Options Buyer
Options Seller

12. Buy vs. Sell Who is in control? Who is buying stock? Selling stock?
OPTIONS BUYER
OPTIONS SELLER
CALL
I will pay you $2/share now for the right to BUY your shares within 3 months if the price RISES to $25 or more.
OK, for $2/share premium today, I promise to SELL you my shares of $25 if the price gets that high or higher and you ask within 3 months. But I keep the premium either way.
Price goes UP – who wins?
CALL buyer if price goes above break-even, $27
Price goes DOWN – who wins?
PUT buyer if price drops below break-even, $23
Price is FLAT – who wins?
SELLER if option is NOT exercised
Who is in control?
Who is buying stock? Selling stock?
Who is paying a premium? Paid premium?

13. Buy vs. Sell OPTIONS BUYER OPTIONS SELLER CALL
Buy option & may buy stock from options seller
Pays premium
Sell option & must sell stock if asked to options buyer
Paid premium
Price goes UP – who wins?
CALL buyer if price goes above break-even, $27
Price goes DOWN – who wins?
PUT buyer if price drops below break-even, $23
Price is FLAT – who wins?
SELLER if option is NOT exercised

14. Guided Practice
You want to sell a stock and receive an options premium. How will you do that?

15. Put Option Contract Options Seller Options Buyer
I will pay you $2/share now for the right to SELL you my shares of XYZ within 3 months if the price DROPS to $25 or less.
OK, for $2/share premium today, I promise to BUY your shares of $25 if the price gets that low or lower and you ask within 3 months . But I keep the premium either way.
Options Buyer
Options Seller

16. Buy vs. Sell Who is in control? Who is buying stock? Selling stock?
OPTIONS BUYER
OPTIONS SELLER
CALL
I will pay you $2/share now for the right to BUY your shares within 3 months if the price RISES to $25 or more.
OK, for $2/share premium today, I promise to SELL you my shares of $25 if the price gets that high or higher and you ask within 3 months. But I keep the premium either way.
PUT
I will pay you $2/share now for the right to SELL you my shares within 3 months if the price DROPS to $25 or lower.
OK, for $2/share premium today, I promise to BUY your shares of $25 if the price gets that low or lower and you ask within 3 months. But I keep the premium either way.
Price goes UP – who wins?
CALL buyer if price goes above break-even, $27
Price goes DOWN – who wins?
PUT buyer if price drops below break-even, $23
Price is FLAT – who wins?
SELLER if option is NOT exercised
Who is in control?
Who is buying stock? Selling stock?
Who is paying a premium? Paid premium?

17. Buy vs. Sell OPTIONS BUYER OPTIONS SELLER CALL
Buy option & may buy stock from options seller
Pays premium
Sell option & must sell stock if asked to options buyer
Paid premium
PUT
Buy option &
may sell stock to options seller
Sell option to & must
buy stock from options buyer
Price goes UP – who wins?
CALL buyer if price goes above break-even, $27
Price goes DOWN – who wins?
PUT buyer if price drops below break-even, $23
Price is FLAT – who wins?
SELLER if option is NOT exercised

18. Guided Practice
You want to buy a stock and received an options premium. How will you do that?

19. Strike Price Contract specified price
At which the buyer may execute the contract
CALL contracts – at or above
PUT contracts – at or below

20. Expiration Date Contract expiration date
Last day the buyer may execute the contract
Buyer is not required to execute the contract even if the strike price has been reached

21. Premium Amount paid by the buyer to the seller
Payment is not refundable
Other commissions and other trade fees paid by both buyer and seller

22. What is an option? A CALL or PUT contract for
the buyer of the contract
to buy (call) or sell (put)
a specific stock
at a specific (strike) price
before a specific (expiration) date
for a fee (premium)
from the seller of the contract.

23. CALL Guided Practice Goal = Sell 500 JNJ at $70
Buy 500 JNJ at $67.50 (market price)
Sell 5 JNJ Mar $70 Call at $1.25
Cost for stock?
Premium received?
Options buyer break-even?
Options seller break-even?
Exercised gain?
Un-exercised gain?
Assume 6 month until expiration
Cost for stock? = 500 * $67.50 = $33,750
Premium received = 500 * 1.25 = $625
Buyer break-even = $70 + $1.25 = $71.25
Seller break-even = $ $1.25 = $66.25 (-1.9% downside protection)
Gain if sold = ( )*500 = $1,250 (+3.7%)
Gain w/premium = $1,250 + $625 = $1,875 (+5.5%)

24. CALL Answer

25. PUT Guided Practice Goal = Buy 500 CTSH at market ($64)
Cash = 500 * $65 = $32,500
Sell 5 Oct $65 PUT at $2.90
Cost for stock?
Premium received?
Options buyer break-even?
Options seller break-even?
Exercised gain?
Un-exercised gain?
60 day option
Cost = 500 * $65 = $32,500
Premium = 500 * $2.90 = $1,450 (4.4%)
Option Buyer break-even = = $67.90
Option Seller break-even = 65 – 2.90 = $62.10
Gain = 62.10/$ = 2.3%

26. PUT Answer

27. Independent Practice Buy 500 CTSH at $64.42
Sell 5 CTSH Jan 19 $65 Call at $5
Cost for stock?
Premium received?
Options buyer break-even?
Options seller break-even?
Exercised gain?
Un-exercised gain?
Assume 6 month option.
Cost = 500*64.42 = $32,210
Premium = 500 * 5 = $2500 (+7.7%)
Buyer break-even = $ = $69.42
Seller break-even = $ = $59.42 (7.8% downside protection)
Gain = (65*500) – (64.42*500) = $32,500 – $32,210 = $290 (+.09%)
Gain = (65*500) – (64.42*500) + $2,500 = $32,500 – $32,210 + $2,500 = $2,790 (8.6%)

28. Independent Practice Answer

29. Summary Options Buyer Options Seller Call Option Buy Stock Pay Premium
Controls Exercise
Put Option

30. Summary Options Buyer Options Seller Call Option Buy Stock Pay Premium
Controls Exercise
Sell Stock
Receive Premium
Put Option

31. Summary Options Buyer Options Seller Call Option Buy Stock Pay Premium
Controls Exercise
Sell Stock
Receive Premium
Put Option

32. Summary Options Buyer Options Seller Call Option Buy Stock Pay Premium
Controls Exercise
Sell Stock
Receive Premium
Put Option

33. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

34. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

35. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

36. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

37. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

38. Review Understand the meaning of … Options contract Call & Put
Strike Price
Expiration Date
Premium

39. Thank you

40. Practice Aids

41. CASH Pay to broker for 500 JNJ
$32,500
500 x $67.50 = $33,750

42. Ownership of 500 Shares of JNJ
Stock Certificate
Ownership of 500 Shares of JNJ

43. CASH Pay to broker for 500 CTSH
$32,500
500 x $65 = $32,500

44. Ownership of 500 Shares of CTSH
Stock Certificate
Ownership of 500 Shares of CTSH

45. CALL Options Contract for 500 JNJ at $70/share
The SELLER of this contract agrees to sell 500 $70/share to BUYER of this contract when (1) the market price is $70 or more, and (2) the buyer requests the shares (3) at or before Mar

46. PUT Options Contract for 500 CTSH at $65/share
The SELLER of this contract agrees to buy 500 $65/share from the BUYER of this contract when (1) the market price is $65 or less, and (2) the buyer requests the sell (3) at or before Oct

47. Call Option Premium 500 Mar $70 Call at $1.25
$625.00
500 x $1.25 = $625

48. Put Option Premium 500 Oct $65 Put at $2.90
$1,450
500 x $2.90 = $1,450

49. OPTION BUYER

50. STOCK BUYER

51. OPTION SELLER

52. OPTION BUYER