1. Single Stock Option’s Seminar
Part I Option Trading Overview
By Steve D. Chang Morgan Stanley Dean Witter
Part II Volatility Trading Concept and Application
By Charles Chiang Deutsche Bank A.G.

2. Options Trading Overview
By Steve Chang

3. Introduction
Steve Chang Equity Derivatives Trader at Morgan Stanley

4. Topics of Discussion Basic on Options Overview on Greeks Volatility
Why using options?
Impact to TSE
Trading Strategies
Buy/Sell Greeks
Scenario analysis
Q & A

5. Basics on Options
Call – give the holder the right to buy the stock by a certain date for certain price
Put – give the holder the right to sell the stock by a certain date for certain price
Premium - cost of options (call or put)
Strike price - the price at which an option contract gives the holder the right to buy/sell

6. Basics on Options
Expiration date - final date options can be exercised
Volatility – risk factor of an option that determines the premium (40 vol = 2.5% intraday gap)
American options - options can be exercised before expiry
European options - options can only be exercised at expiry

7. Overview on Greeks
Delta – rate of change of option’s price w/ change in underlying asset, usually short dated ATM call/put has ~0.5 delta
Gamma - rate of change of delta w/ the change in underlying asset, usually quoted in % term (+$1mn gamma, mkt +3%, +$3mn delta)

8. Overview on Greeks
Kappa (vega) - rate of change of option’s price with change in volatility.
Theta – rate of change of option’s price with change in time, the price of gamma/kappa
Rho – rate of change of option’s price with change in interest rate

9. Volatility Higher the vol, higher the premium
2mth 100% call at 40% vol ~ 6.75% (0 div, 1.82% Rfr)
2mth 100% call at 70% vol ~ 11.65%
Market implied vol vs. asset vol
Implied usually higher than asset (Hang Seng, S&P)
Implied vol at 40% -> 2.5% gap risk

10. Volatility – 2330

11. Volatility – 1310

12. Volatility – 2882

13. Why using Options? Leverage/ gearing effect (like warrants)
Reinforce stop-loss concept when buying
Income enhance when selling
Portfolio hedge for PMs
Short access to single stock names (+P, -C)
Long access to single stock w/o showing broker identity

14. Impact to TSE More participation from retails investors
Enhance market liquidity with delta hedge
Stock lending system needs to be developed
Stock lending can increase market liquidity thru long/short pair trading
Limit-up/limit-down 7% structure

15. Trading Strategies Buy downside put as insurance when long stocks
Sell upside call to collect premium when upside is limited
Buy call spread expecting limited upside
Buy put spread expecting limited downside
Buy strangle or straddle expecting volatility ahead
Synthetic short – buy put sell call
Most PMs buy options not sell

16. Trading Strategies
Buy call option
Expecting more upside

17. Trading Strategies
Sell put option
Expecting limited downside

18. Trading Strategies Buy call spread
When?
Expecting more upside, reduce prem by giving up some upside
For Example:
you buy 100/120 call spread – buy 100% call, sell 120% call
Max upside = 120 – 100 – prem(%)
Max downside = premium you paid
Sell call spread – vice versa

19. Trading Strategies Buy put spread
When?
Expecting more down, reduce premium by giving up some downside protection
For example:
Buy 100/90 put spread – buy 100% put, sell 90% put
Max upside = 100 – 90 – prem(%)
Max downside = prem you paid
Sell put spread – vice versa

20. Trading Strategies Buy Straddle
Buy both ATM call and put
Max gain: unlimited
Max loss: time decay (theta)
Buy gamma and kappa, pay theta
Short dated straddle – buy more gamma
Long dated straddle – buy more kappa
Sell straddle – vice versa

21. Trading Strategies Buy strangle
Buy both OTM call and put
Max gain: unlimited
Max loss: time decay, theta
You buy gamma and kappa, earn theta
Short dated strangle – buy more gamma
Long dated strangle – buy more kappa
Diversify your risk comparing to straddle and cheaper
Long straddle – vice versa

22. Buy/sell Greeks Buy delta Buy spot (ie, future or stocks) Buy call
Sell put
Sell delta – vice versa

23. Buy/sell Greeks Buy gamma Buy call or put
Short dated options give you more gamma
ATM options give you more gamma
Sell gamma – vice versa

24. Buy/sell Greeks Buy Kappa Buy call or put
Long dated options give you more kappa
ATM options give you more kappa
Sell kappa – vice versa

25. Buy/sell Greeks Long theta (receive time decay)
Sell call or put
Short dated options give you more theta (in the expense of short more gamma)
ATM options give you more theta
Sell theta – vice versa
Buy/sell Rho – N/A for Taiwan, usually hedged by eurodollar futures or swaps

26. Scenario Analysis
If you have $1mn to buy a stock ($100). Option vs. stock strategy? (assume no funding cost)
Buy 10k at $100, +30% after 2mth, PnL = $300k
If you buy 10k of 2mth $100 strike call paying 7% or $70k (40%vol)
If stock +30% in 2mth, then you have the right to buy 10k shares at $100 which will give you the PnL of $230k ($300k – $70k) …also less funding.
Max loss using option is $70k, but loss is unlimited buying stocks
If you spend $1mn on option, PnL = $3.3mn = $1mn/7%*(30%-7%)

27. Scenario Analysis
If you are long $2mn gamma on a stock, then stocks –28% thru 4 days of limit-down…what would be your payout?
$2mn*28 = 56mn you are short US$28mn which you may discount.
PnL impact: 28mn/2*28%=$7.84mn

28. Q & A