1. Options
December 2015

2. Options-An Overview
An option is a contract to buy or sell a specific underlying asset (such as a stock or index), at a specified price, within a specified time frame.
Options are called “derivatives” because the value of the option is “derived” from the underlying asset.
When you buy or sell option contracts, you are trading the potential to buy or sell the underlying stock. You don’t actually establish a position in the underlying unless the option is exercised.
This slide is quite lengthy. Can you generate main points and explain the terms listed?

3. Options Terms
The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date.
An option that is traded on a national options exchange such as the Chicago Board Options Exchange (CBOE) is known as a listed option. These have fixed strike prices and expiration dates. Each listed option represents 100 shares of company stock (known as a contract).
For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value.
The total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility. Because of all these factors, determining the premium of an option is complicated and beyond the scope of this tutorial
General pricing of an option = contracts * price * contract size
BEP= Break Even Point- The market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the stike price plus the premium paid. For a put, it is the strike price minus the premium paid.
This is great information, but you may want to spend some time walking through some of these data points since they’re important for setup.

4. Apple Call Option -Apple Call Option -BUYCAL
-Assuming the price of Apple will go higher
than $635 by expiration date 02/16/2013

5. Apple Call Option – DEOP Screen

6. Apple Call Option Cont.
-Since the price of Apple stock is $ on 8/30/12, the option
is said to be in-the-money.
-This option can be exercised for a profit at this point, since it is an American
option. If it were European (OTC), it would only be able to be exercised at
the end of its life.

7. More Terms
People who buy options are called holders and those who sell options are called writers
Buyers are said to have long positions, and sellers are said to have short positions.
Important distinction between buyers and sellers:
Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.
Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell.
OTC Options- Exotic options traded on the over-the-counter market, where participants can choose the characteristics of the options traded.
Exchange Traded Options-An option traded on a regulated exchange where the terms of each option are standardized by the exchange.
Two main types of Options:
American option can be exercised at any time between the date of purchase and the expiration date.
European option are different from American options in that they can only be exercised at the end of their lives.

8. Buying Puts/Calls

9. Writing Puts/Calls

10. Basic Put Option Example
Put gives owner the right (not the obligation) to sell shares at an agreed upon price (strike) within an agreed upon period of time.
In this example the agreed upon price (strike) is $47.50.
The purchaser of the Put is betting the price of the stock will go down (So they get to sell it for a higher than market rate)
The seller (Writer) of the Put is betting that the price goes up on the stock and the option isn’t exercised and they simply collect the premium that was paid to them to purchase the Put.

11. Basic Call Option Example
Call option gives the investor the right (Not obligation) to purchase a security at a specific price (strike) in an agreed upon period of time.
In this example the agreed upon price is $52.50
The Call investor is betting that the price of the security will go up (so that they get to purchase the security for below market value)
The seller of the Call is hoping the price goes down so that the option isn’t exercised and they pocket the premium which was paid for the right to purchase the call by the investor.

12. What is Hedging?
Making an investment to reduce the risk of adverse price movements in an asset.
Normally, a hedge consists of taking an offsetting position in a related security.
Hedging, for the most part, is a technique not by which you will make money, but by which you can reduce potential loss.
If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.
Options are used primarily as Hedging Instruments in Mutual Funds

13. Hedging Strategy: Covered Calls
Long Stock Position and Short Calls in Equal Quantity
Produces profit in flat to mildly uptrending markets
Generally best to sell options with a strike price equal to or greater than the price you paid for the equity
If the stock remains flat, declines or even increases a little, an at-the-money or out-of-the-money call will likely expire worthless and you’ll get to keep the premium you received when you sold the covered calls.
If by expiration date, the stock has appreciated in value to slightly above the strike price, you’ll probably have your stock called away at the strike price. This isn’t necessarily a bad thing. If you sold at-the-money or out-of-the-money calls, this will generally result in a profit on the trade. That profit will usually exceed the profit you would have made from simply buying the stock and selling at the appreciated value.
©2011 Charles Schwab & Co., Inc. All rights

14. Covered Call: Chart at Expiration
Price
Break even calc. STOCK (-$2* 1,000= $2,000 loss). OPTIONS ($2*10*100) The Calls will not be exercised at a value higher lower than strike.
Written Call: For a premium you give someone the right to buy securities from you at a specific price for a specific time period.
$72
$77
Buy 1000 shrs of 72. Sold (wrote) 10 XYZ Apr 75 Calls. Profit is capped at $5,000 for all prices beyond $75: (3*1,000 [shares stock] + $2 *10 [options contracts] * 100 [options multiplier])
©2011 Charles Schwab & Co., Inc. All rights

15. Hedging Strategy: Covered Calls Example
Let's assume you buy 1,000 shares of XYZ 72, and sell 10 XYZ Apr 75 2 (Premium). Because you bring in 2 points for the covered call, it provides 2 points of immediate downside protection. In other words, you will not have a loss unless the stock drops below $70.
As you know, there's always a downside, and in this example, the trade-off is that we limit the upside profit potential beyond a price of $77. You would only want to do this if you thought the price of XYZ would not exceed $77 by the April expiration. If XYZ did increase above $77, the stock purchase alone would have been more profitable.
If we put this combined trade example on a graph, you can see that the breakeven price is $70, and the profit is capped at $5,000 for all prices beyond $75 ($3 x 1,000 [shares stock] + $2 x 10 [option contracts] x 100 [options multiplier]). You can also see that even though the stock can drop 2 points before you go into the red, losses will be incurred below $70, all the way down to a price of zero. The losses will always be $2,000 less than the stock trade alone, but could be as much as $70,000 if the stock drops to zero (compared to $72,000 if you had simply bought the stock)
©2011 Charles Schwab & Co., Inc. All rights

16. Hedging Strategy: Covered Puts
Short Stock and Short Puts in Equal Quantity
Work essentially the same way as covered calls, except that the underlying equity position is a short stock position instead of a long stock position, and the option sold is a put rather than a call.
A covered put writer typically has a neutral to slightly bearish sentiment.
Selling covered puts against a short equity position creates an obligation to buy the stock back at the strike price of the put option.
Just like with covered calls, the best time to sell covered puts is either at the same time a short equity position is established (sell/write), or once the short equity position has begun to move in your favor.
©2011 Charles Schwab & Co., Inc. All rights

17. Covered Puts: Chart at Expiration
Price
Break even point at $70: Calculation: STOCK (-2 * 1,000= $2,000 loss). OPTIONS (($2*10)* 100=$2,000 gain). Put will not be exercised.
Written Put: For a premium you give someone the right to sell securities to you at a specific price for a specific time period.
Buy 1000 shares 72 and sell 10 XYZ Apr 70 2 (premium). Profit is capped at $4,000 for all prices below $70:] ($2 * 1,000 [share stock] + $2 * 10 [option contracts] * 100 [options multiplier)
©2011 Charles Schwab & Co., Inc. All rights

18. Hedging Strategy: Covered Put Example
Buy 1,000 shares of 72, and sell 10 XYZ Apr If we put this combined trade example on a graph, you can see that the breakeven price is $74, and the profit is capped at $4,000 for all prices below $70 ($2 x 1,000 [shares stock] + $2 x 10 [option contracts] x 100 [options multiplier]).
You can also see that even though there are 2 points of price protection against an increase in the stock price, losses will be incurred above $74, all the way up indefinitely. The losses could be unlimited if the stock continues to increase. In each case though, the losses would always be $2,000 less than the stock trade alone.
You would want to employ this strategy only if you thought the price of XYZ would not fall below $70 by the April expiration. If XYZ did fall below $70, the short stock trade alone would have been more profitable.
©2011 Charles Schwab & Co., Inc. All rights

19. Transaction booking screens:
Options in SunGard
Option Setup Screens:
#1) OPSD
#2) OPSO
#3) OPDE
#4) SAUD
Transaction booking screens:
Book: DEOP
Change: DAOP

20. OPSD: Security Definition

21. OPSO: Step 2: Security Definition

22. OPSO: Definitions

23. OPDE: Security Long Description

24. DEOP: Transaction Entry

25. Commonly Used Transaction Codes

26. Example of American Exchange-Traded Option
The ticket that follows will show a call option being bought at a strike price of 40
Following this example, the different setup screens are given.
This option is American, as opposed to European, and is not Over-The-Counter (OTC).

27. GG C40 BUYCAL -This option is still held In the fund, so we don’t
USD = A
CA = B
American = C/D
CALL = E
Expiration = F
Option/Equity = G
Underlyer = H
Contract Size = I
Strike = J
-This option is still held
In the fund, so we don’t
know yet if it will be exercised
or if it will expire.
-As of 8/30/12, Goldcorp was priced
at $39.50, so they would not yet want to
exercise it.

28. OPSD: GG C40
Issue Currency = A
Country of Risk = B

29. OPSO: GG C40 European Processing = C Over the Counter Flag = D
Put or Call Indicator = E
Expiration Date = F
Contract Type = G
Underlying Security = H
Contract Size = I
Strike Price = J

30. OPDE: GG C40

31. DAOP: GG C40

32. EMS Rules
jnlBlank_Reporting_Category - Checks if reporting category is blank.
jnlReporting_Category_Options - To catch any incorrect reporting category(segment) based on a security’s asset group.
jnlDerivative_Trans - Checks for derivative transactions with a significant price change and NAV impact.
jnlExpired_Worthless_Options - If an option hits its expiration date and is worthless we will allow it to expire in the system without receiving instructions from the Sub-Adviser. Rule will generate if the prior price of the option is more than $0.05.
jnlTran_Realized_Gain_Loss - Checks for movement from unrealized gain/loss to realized gain/loss. Exception generated if the realized gain/loss less the prior days apportioned unrealized gain/loss impacts the NAV by more than $0.001.