1. Academy 5 Basic Option Trading Get connected to B&R Beurs @ 1

2.  How big is the worldwide exchange-traded derivative market?  A. $70 billion  B. $700 billion  C. $7 trillion  D. $70 trillion  NL GDP: €600 billion (600,000,000,000  US GDP: $14 trillion (14,000,000,000,000) 2

3.  Banks and institutional investors  Size: ~ $600 trillion 3

4.  Right, but not obligation, to buy or sell ◦ Right to buy with a call; right to sell with a put  At a pre-defined price ◦ The strike price  At a pre-defined date ◦ Expiration date: usually the 3rd Friday of the month  A specified amount ◦ Regular size is 100 4

5.  Call – right to BUY  Put – right to SELL 5

6.  Speculation (leveraged)  Risk management (hedging)  Interesting payoff structure 6

7.  ING Groep Call dec-2013 6,40  Underlying: ING Groep  Option type: Call  Expiration date: dec-2013  Strike price: 6,40 7

8. 8  Commodities  Indices  Derivatives

9.  European style options ◦ Cannot be exercised before expiry ◦ Expires Thursday before 3 rd Friday of the month  American style options ◦ May be exercised before expiry ◦ Expires 3 rd Friday of the month  In Europe we trade American style options 9

10.  Called “writing” an option  You do not have a right to buy or sell;  You have the obligation to sell or buy 10

11.  If you own stocks you do not need a margin for a call option (Covered short selling)  Otherwise you need a margin ◦ A portion of your account is set aside as a safety that guarantees you will be able to meet your obligation 11

12.  Buy 100 stocks  Write 100 call options  (1 contract)  You receive the premium!  Limits profits, but reduces losses 12

13. 1)You buy a put option. Stock goes down Profit or loss? 2)You buy a call option. The stock goes up. Profit or loss? 13

14. 14

15. 15 Underlying value Time valueOther  Current stock price-strike price. (Intrinsical value)  The longer away the higer the price  Volatility, risk free rate, dividend yield.

16. 16

17.  Premium = Time Value + Intrinsic Value  Time Value: 17

18. 18

19.  Brokerage fees: ◦ 2,95 or 1,95 per contract  Bid-Ask spread ◦ This may vary over the lifetime of the option 19

20. 20

21. 21 Spread Absolute Relative

22. So, nice to know.. but how does it work?? 22

23.  LongShort  Strike price 23

24.  LongShort  Strike price 24

25. 25

26.  Stock price 30  Buy 1 call 32  Write 1 call 34  Careful: ◦ Before expiry you gain on low call and lose on high call ◦ Net effect? 26

27.  Buy 1 call 26  Buy 1 put 26 27

28.  Strangle  Long strangle  Butterfly spread  Iron Butterfly spread  Iron Condor  Protective collar  Etc. 28

29. “Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital” 29

30. About 90% of private traders lose money on options. 30

31. 31  You can be correct and still lose money ◦ for example: you lose more time value than you gain on a stock increase  You can lose more than your initial investment when you sell an option ◦ Shorting a call can lead to inifinite amount of loss  Markets can become VERY illiquid when you are deep into the money ◦ Bid-Ask spread widens for example

32. 32

33. 33

34. 34

35. 35

36. 36

37. We hope you have enjoyed 37