1. Intro to Options

2. What is an Option? An option is a contract that gives the owner the right, but not obligation, to buy or sell a specified number of shares of a particular stock, at a fixed price (strike price), by a specified date (expiration date). Types of Options Call Option - A Call option is a contract that gives the buyer of the option the right, but not the obligation, to purchase a fixed number of shares of the underlying stock at a fixed price, on or before a set expiration date. The buyer pays a premium to a seller for this right. Put Option - A Put option is a contract that gives the buyer of the option the right, but not the obligation, to sell a fixed number of shares of the underlying stock at a fixed price, on or before a set expiration date. The buyer pays a premium to a seller for this right. Note : An Options Trader can buy and/or sell an options contract anytime during the lifetime of the option until it expires a the expiration date. For both Puts and Calls, 1 Options contract represents 100 shares of stock.

3. Why Trade Options? Leverage - Options give you the ability to control larger amounts of stock with less capital. - “More Bang for the Buck” Flexible - Markets are said to up and down, but they also go sideways! - Some option trades can make money if the stock does not move. Risk Control - Options allow you to control the risk of stock positions, Protection - Options can act as insurance against stocks you already own Traders Edge – The options market allows for inefficiencies in pricing to occur which can be exploited for profit. Replacement for stock trading – Cheaper way to actively trade stock

4. Options Terminology Bid – The price of which the market is currently willing to buy Ask – The price of which the market is currently willing to sell Mid Market – The price point in between the Bid and the Ask Long – To be a owner of a security and profit if the price goes up Short – To be a seller of a security and profit if the price goes down Options Chain – The table in which all options prices are listed Open Interest – The contracts outstanding that currently exist Volume – The amount of contracts that traded per a given time period Strike Price – the agreed upon price that the buyers and sellers of options have traded Premium – The Part of the total option price that is not considered “intrinsic” Stop Loss – a predefined price which you construct trades to cap your losses Blow Out Risk – The exposure of a trade that puts your account at risk of catastrophic loss Expiration – The last day on which an option can be exercised Exercise – the actual buy or sell of the underlying security after expiration Assignment – having to take a stock position based on the expired option

5. Important Options Terminology Moneyness (ITM) In-The-Money : A Call option is said to be In- The-Money if the stock price is above the strike price. A Put Option is said to be In-The-Money if the stock price is below the strike price. (ATM) At-The-Money : A option is said to be “at-the- money” when the stock price is equal to the strike price. (OTM) Out-of-the-Money: A Call option is considered Out-of-the-Money if the underlying asset price is lower than the strike price. A Put option is considered Out-of-the- Money (OTM) if the underlying asset price is higher than the strike price. STOCK PRICE = $20.00 CALL OPTION Strike Price Put Option OTM30ITM OTM25ITM ATM20ATM ITM15OTM ITM10OTM

6. Basic Risk Graph – Long Stock

7. Basic Risk Graph – Unlimited Loss Potential

8. Options Risk Graphs

12. Options Quote Ticker SymbolExpiration Month/YearStrikeTypeQuote Price AAPLAugust 2015600Call$7.45 MthJanFebMarAprMayJunJulAugSeptOctNovDec CallsABCDEFGHIJKL PutsMNOPQRSTUVWX

13. Options Chain Calls Strikes Puts

14. 6 Elements of Options Pricing Element 1: American or European Style American Style = early exercise and physical delivery European Style = exercise at expiration and cash settlement Element 2: Intrinsic Value Do not confuse intrinsic value with premium Element 3: Time Time tends to add value to options (insurance analogy) Exceptions: American style options may have no added time value European style options may even have negative time value Element 4: Interest rates The higher the interest rate the higher the call price and the lower the put price. “Cost of Carry” Interest rates also gives the signal when to expect early put assignment Element 5: Dividends As opposed to interest rates, the higher the dividend, the higher the put price and the lower the call price. Dividends also create extra hidden expirations Element 6: Volatility There are two types of volatility: Historical (looking backwards) and implied (predicted). Volatility is about fluctuation and not where options expire. Volatility is always zero at expiration. In, at and out of the money options have different volatilities; this difference is called the skew.

15. Options Value An options “premium” or value is made up of two components: intrinsic value and extrinsic value. The Intrinsic value is the difference between the strike price and the current price of the stock for a Put, and the difference between the stock price and the strike price for a Call. The Extrinsic value portion is made up of several factors: 1. Stock Price 2. Strike Price 3. Time Till Expiration 4. Interest Rate 5. Dividends 6. Implied Volatility = Final Options Price

16. Pricing Models Theoretical Options Models 1. Black-Scholes 2. Binomial Tree Pricing Model 3. Monte Carlo Models 4. Finite Difference Models 5. VSK 6. Adaptive Mesh 7. Trinomial Theory vs. Reality Calculating an options value through the use of a pricing model allows you to determine on the “theoretical value”, keep in mind the assumptions of many of these models only work in a ideal world in a theoretical sense this can often deviate from what actually happens in the real world.

17. Into To Options Review What is an Option? An option is a contract that gives the owner the right to buy or sell a specified number of shares or contracts of a particular stock, at a fixed price (strike price), by a specified date (expiration date). Why trade Options? Leverage, Risk Control, Flexibility & Traders Edge Types of Options? Calls (right to buy) – Puts (right to sell) Moneyness – Is this option worth anything (OTM, ATM & ITM) Risk Graphs – Are my losses capped / unlimited. Are my profits capped / unlimited Option Quote – How can I read a quote? Pricing Models – What factors go into how options are valued? What are factors of intrinsic and extrinsic option values? Six Elements of Option Pricing – American or European Style, Intrinsic Value, Time, Interest Rates, Dividends, Volatility Extras Where do options trade? Index vs Stock vs Future Options How / Why I started trading options

18. Into To Options Review What is an Option? An option is a contract that gives the owner the right to buy or sell a specified number of shares or contracts of a particular stock, at a fixed price (strike price), by a specified date (expiration date). Why trade Options? Leverage, Risk Control, Flexibility & Traders Edge Types of Options? Calls (right to buy) – Puts (right to sell) Moneyness – Is this option worth anything (OTM, ATM & ITM) Risk Graphs – Are my losses capped / unlimited. Are my profits capped / unlimited Option Quote – How can I read a quote? Pricing Models – What factors go into how options are valued? What are factors of intrinsic and extrinsic option values? Six Elements of Option Pricing – American or European Style, Intrinsic Value, Time, Interest Rates, Dividends, Volatility Extras Where do options trade? Index vs Stock vs Future Options How / Why I started trading options

19. Intro to Options Complete Recordings and Slides Get ALL the Slides and the Recording Viewable 24/7 for Only $7 www.keeneonthemarket.com/optionseducation