1. Trading Strategies & Simulation

2. Working Basic Profiles ► Buy Call ► Sell Call ► Buy Put ► Sell Put

3. First Applications ► Protective Put ► Covered Call

4. Protective Put ► Combine Long Stock with Purchase of Put ► Choose Expiry to match horizon of desired protection of downside. ► Choose Strike around (usually just above) current Stock Price ► Protects Stock Price from loss beyond put premium ► Very Similar to Car Insurance (although everyone’s strike is below the current car value due to deductibles)

5. Covered Calls ► Combine Long Stock with Sale of Call ► Choose Strike around (usually just above) current Stock Price ► Protects Stock Price from loss less than call premium ► Guarantees Sale Price (X + Prem Recv’d)

6. Writing Calls to Generate Income ► Can be very conservative or very risky, depending on the remainder of the portfolio ► An attractive way to generate income with foundations, pension funds, and other portfolios that will always hold the stock used in the cover ► A very popular activity with individual investors

7. Writing Calls to Generate Income (cont’d) ► Writing calls may not be appropriate when  Option premiums are very low  The option is very long-term

8. Simulation

9. ► Brokerage Account and Delayed Data from Exchanges ► Activate Some Strategies ► Document Intent, Execute and Resolve ► Make Some Money, Have Some Fun! Simulation

10. Exchanges ► Chicago Board of Trade  www.cbot.com www.cbot.com ► Chicago Merchantile Exchange  www.cme.com www.cme.com ► New York Board of Trade  www.nybot.com www.nybot.com ► New York Merchantile Exchange  www.nymex.com www.nymex.com

11. CBOT ► Agricultural  Corn (C), Soybeans (S), Soybean Oil (BO), Soybean Meal (BM), Wheat (W), Oats (O) ► Interest Rates  10y Notes (TY), 30y Bond (US) ► Indexes  Dow Jones 30 (DJ)

12. CME ► Meats  Live Cattle (LC), Feeder Cattle (FC), Lean Hogs (LH), Pork Bellies (PB) ► Lumber (LB) ► Indexes  Equity: S&P 500 (SP), NASDAQ 100 (ND) ► Foreign Exchange  British Pound (BP), Canadian $ (CD), Japanese Yen (JY), Swiss Franc (SF), Euro (UR) ► Interest Rates  Euro$ (ED), T-Bill (TB)

13. NYBOT ► Food & Fiber  Cocoa (CC), Coffee (KC), Sugar-World (SB), FCOJ (OJ)  Cotton (CT) ► Indexes (NYFE)  US$-Index (DX)

14. NYMEX ► Energy  Light, Sweet Crude Oil (CL), Heating Oil (HO), Unleaded Gasoline (HU), Natural Gas (NG) ► Metals  Gold (GC), Silver (SI), Copper (HG)

15. Positions ► $500,000 portfolio ► No more than $150,000 in any one position ► At least 4 option and 2 futures trades  4 options as we discuss options  2 futures as we discuss futures ► Each position must have:  Documented opinion  Documented Security information  Initial Trade Price  Daily Closing Prices  Final Closing Price

16. Documented Security Information ► Contract/Position Size ► Contract/Position Value ► Last Trading Day of Contract ► Contract/Position Initial Margin Deposit

17. Trades 1 & 2

18. Multi-Option Trading Strategies Take a position in: ► A mixture of calls & puts  This is known as a combination ► 2 or more options of the same type  This is known as a spread

19. A Long Straddle Combination Figure 4-1: Buy 1 Call & 1 Put @ Same X Profit STST X Prices are expected to move, but don’t know which way.

20. A Short Straddle Combination Profit STST X Prices are not expected to move, either way (RISKY!!!). Get to keep premiums, but possible unlimited losses. Figure 4-2: Sell 1 Call & 1 Put @ Same X

21. A Long Strangle Combination X1X1 X2X2 STST Figure 4-3: Buy 1 Call @ Hi X & Buy 1 Put @ Low X Profit Prices are expected to move BIG, but don’t know which way, and willing to give up some profit to pay less for position.

22. A Short Strangle Combination X1X1 X2X2 STST Figure 4-3: Sell 1 Call @ Hi X & Sell 1 Put @ Low X Profit Prices are not expected to move beyond X 1 or X 2, but not willing to bet they might move between. Get to keep premiums, but unlimited possible losses.

23. Bull Spread Using Calls ► Figure 4.7: Buy 1 Low X Call, and Sell 1 Hi X Call X1X1 X2X2 Profit STST Prices are expected to rise, but only modestly (not above X 2 ). Willing to give up “above X 2 ” to pay less for position (compare to naked call).

24. Bull Spread Using Puts Buy 1 Low X Put and Sell 1 Hi X Put X1X1 X2X2 Profit STST

25. Bear Spread Using Puts Sell 1 Lo X Put and Buy 1 Hi X Put X1X1 X2X2 Profit STST Again, as you are willing to give up move “below X 1 ”, position costs less than naked put.

26. Bear Spread Using Calls Figure 4-8 : Buy 1 Hi X Call, and Sell 1 Lo X Call X1X1 X2X2 Profit STST Prices are expected to fall, but only modestly (not below X 1 ). Willing to give up “below X 1 ” to pay less for position (compare to naked put).