1. November 5 th 2012

2. Common Cents Investment Group November, 2012 Agenda  T-Shirt Pre-orders  Today in the Market  More on options…

3. Common Cents Investment Group November, 2012 Today in the Market  Presidential Election  We’ve discussed our elections have made impacts in the past  A quick video from Bloomberg discussing the two candidates economic policies  http://www.bloomberg.com/news/2012-11- 05/economy-set-for-better-times-whether- obama-or-romney-wins.html

4. Common Cents Investment Group November, 2012 Today in the Market  Hurricane Sandy Aftermath  Experts say overall economic data won’t change dues to balancing b/w industries Restaurants hurt, but grocery stores thrive  Some impacts on the market… Nation’s airlines cancelled 16,300 Home Depot on the rise Total losses could be upwards of $25 billion

5. Common Cents Investment Group November, 2012 Today in the Market  Companies we did not mention  Loss analysis companies Kinetic Analysis Corp, Eqecat  Cell phone service Verizon Wireless lost 6% of their towers in the Sandy effected region Expects to have an impact on fourth quarter earnings 19% of all cell phone towers were effected

6. Common Cents Investment Group November, 2012 Useful Definitions  Liquidity: The ability to convert an asset to cash quickly  Synonym – Marketability  Clearing House: An agency or corporation responsible for settling trading account, clearing trades, collecting and maintaining margin money, regulating delivery and reporting trade data

7. Quick Recap o Don't worry if this seems confusing - it is! o We are going to look at options from the point of view of the buyer Options

8. Common Cents Investment Group November, 2012 Options  Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder)  An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date.

9. Common Cents Investment Group November, 2012 Options  Can be very risky…usually carry a disclosure  “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”  A sophisticated security with a tremendous amount of versatility and power  Options can be as speculative or conservative as you want

10. Common Cents Investment Group November, 2012 Options  A Call gives the holder the right to buy an asset at a certain price (hope the stock will increase substantially)  A Put gives the holder the right to sell an asset at a certain price (hope the stock will decrease substantially)

11. Common Cents Investment Group November, 2012 Options  The total cost (the price) of an option is called the Premium and it is determined by several factors:  Stock price  Strike price (contract price)  Time remaining  Volatility  Called a derivative because they derive their value from an underlying asset

12. Common Cents Investment Group November, 2012 Call Options  Buy a ticket to Ohio State football game  Three different options  Go to the game: Like executing option  Sell your ticket: Selling your option  Let it expire: Don’t use option and let it expire  University gets the premium either way…so it does not matter to them

13. Common Cents Investment Group November, 2012 Options – The Call  The right to purchase the security at a certain strike price by a certain date  You want the security to be on an increasing trend (either long-term or short-term)  Bullish

14. Common Cents Investment Group November, 2012 Options – The Put  The right to sell the security at a certain strike price before a certain date  You want to capitalize on a decreasing trend (either long-term or short-term)  Bearish *Not necessary to own the asset before acquiring the right to sell it

15. Common Cents Investment Group November, 2012 Exchange-Traded Option  Exchange-Traded Option: An option traded on a regulated exchange where the terms of each option are standardized by the exchange  Also known as “Listed Options”  Benefits:  The liquidity of the option  The standardized contracts that come with ETOs  Quick access to prices and the use of clearing houses by exchanges

16. Common Cents Investment Group November, 2012 Standardized Options  Standardized expiration dates  The Saturday following the third Friday of designated months is a common expiration  Investors typically view the third Friday of the month as the expiration date of the ETO

17. Common Cents Investment Group November, 2012 Standardized Options  The striking price of an option is the predetermined transaction price  In multiples of $2.50 (for stocks priced $25.00 or below) or $5.00 (for stocks priced higher than $25.00)  There is usually at least one striking price above and one below the current stock price

18. Common Cents Investment Group November, 2012 Standardized Options  Puts and calls are based on 100 shares of the underlying security  The underlying security is the security that the option gives you the right to buy or sell  It is not possible to buy or sell odd lots of options

19. Common Cents Investment Group November, 2012 Standardized Options  Chicago Board Options Exchange (CBOE)  Known as a listed option  Fixed strike prices and expiration dates  Each listed option represents 100 shares of company stock (known as a contract)  ~$30/share right now…

20. Common Cents Investment Group November, 2012 Buying and Selling Options  Consider Dell Inc. (DELL)  Currently at ~$9.30/share  Could buy either a Call or Put option Use FA or TA to decide what trend is likely  How to read an Option Table…  Yahoo! Finance has a good example

21. Option Table

22.  Strike: The price you want to purchase at later  Last: Recent price of option  Chg: Percent change to current  Bid: What you can sell the option for  Ask: What you can buy the option at

24. Common Cents Investment Group November, 2012 Option Table  Notice the expiration date  This specific standardized table has expiration dates every month  Not always the same dates  The options highlighted in yellow In-the-Money (ITM)  More advanced tables exist for better analysis

26. Common Cents Investment Group November, 2012 Buying an Option  Dell Inc. is currently ~$9.30/share  A Nov 12 th Call option at $9.50 goes for $0.52  The total contract price is $0.52 X 100 = $52  If Dell Inc. shoots up to $11.00/share… Profit = 100 x (11.00 – 9.50 – 0.52) = $98  100 shares provides a lot of leverage  Potential loss was only $52

27. Common Cents Investment Group November, 2012  A Call option is only worth anything if the stock price rises above the strike price  With a premium of $0.52 and a strike price of $9.50…the breakeven price is $10.02/share  A situation:  We buy the $9.50/share option now and 1 day from now DELL shoots to $11.00/share, BUT we hold it  Before Nov 12 th, it drops back down to $9.00/share

28. Common Cents Investment Group November, 2012  Here’s what happened to the value of our option:  Remember: Call option for $9.50/share DateNow1 Day laterNov 12th Stock Price$9.30$11.00$9.00 Premium$52 Contract ValueN/A$150N/A Gain or Loss-$52$98-$52

29. Common Cents Investment Group November, 2012 Options  Upside: Profit is unlimited while loss is controlled  Call: Profit = Spot Price – Strike Price – Premium  Put: Profit = Strike Price – Spot Price – Premium  Downside: The premium you pay will be lost if the option is Out-of-the-Money (OTM) at expiration  Considered risky because of how likely this is to occur

30. Common Cents Investment Group November, 2012 Membership  Cost is only $20 for the whole year!  Benefits:  Member of a very beneficial and informative club that will inevitably be valuable in your future  A network of friends who share a similar interest in investing and personal finance  A virtual portfolio challenge that will strengthen your confidence in investing

31. Common Cents Investment Group November, 2012 Membership  Make sure to check out our website for the presentations Monday night | ccig.osu.edu  Get on our Facebook page and like us! www.facebook.com/ccigosu

32. Common Cents Investment Group November, 2012 Questions?  Questions, comments or concerns?