Intro To Options Trading

BY BRENT (STOCK INFO)��FOR BURRY EDGE

Topics:

Introduction:

• What are Options?
• An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset.
• Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
• An options contract (most of the time) has an underlying of 100 shares.
• Two types of contracts. Calls and Puts

​

​

Introduction:

• What are the Greeks?
• We aren’t going too in-depth for this initial course as “The Greeks” can get quite confusing early on if you are a beginning options trader. I’ll discuss this more in-depth in a next lesson.
• Delta, gamma, vega, and theta are known as the "Greeks," and provide a way to measure the sensitivity of an option's price to various factors.
• The 2 most important Greeks are Delta and Theta. Delta measures the sensitivity of an option's premium to a change in the price of the underlying asset; while theta tells you how its price will change as time passes.

​

​

​

Introduction:

• Moneyness of Options?
• Moneyness is a term to describe whether a contract is either “in the money” (ITM), “out of the money” (OTM), or “at the money”(ATM)
• Example: stock XYZ trades at $100 per share.

We have 3 different call/put options: Questions for you guys! Which contract has which moneyness?� 1. Strike $95 2. Strike $100 3. Strike $105

​

​

​

The Basic Strategies

• The 4 Basic Strategies
• Buying Calls
• Buying Puts
• Selling Calls
• Selling Puts

​

​

​

The Basic Strategies

• When do we use these Strategies?
• In a simplistic form
• Buying Calls: We are bullish on the underlying
• Buying Puts: We are bearish on the underlying
• Selling Calls: We are (slightly) bearish on the underlying
• Selling Puts: We are (slightly bullish) on the underlying

​

​

​

The Basic Strategies

• Generating Cashflow Through Options
• We aren’t WallstreetBets. We don’t use options to gamble.
• We can generate Cashflow by writing/selling options.
• This is how you can get paid while waiting for a stock to come down. Or to generate some extra cashflow for holding stocks.
• Below we will show some examples.

​

Variations and More

• Double Legs
• We already talked about single legs, in this part we will talk about double legs. So called spreads/straddles/strangles, …
• Call Spreads and Put Spreads
• Butterflies/Iron Condors/

​

​

Bull Call/Put Spread

Bear Call/Put Spread

Volatility Strategies

Straddle�

Strangle�

Butterflies and Condors

Iron Butterfly�

Iron Condor�

Variations and More

• Transformations
• What are transformations?
• Why should we use transformations?

​

Variations and More

• Creating Optimal R/R Opportunities
• Example on Oracle $ORCL
• Opened on 06/21/2022

Variations and More

• The Opening Position
• At the moment of Opening this position we are in a bear market, in which a lot of stocks have suffered. Oracle has a share price of $66 at the moment of opening.
• We decide to buy a $70 call, which expires at 09/15/2023. This is what we call a LEAPS.
• We paid $826,40 for this call option. This call only consist of extrinsic value, there is no intrinsic value as the call is OTM.

​

Variations and More

• 2 Weeks Later
• On 07/05/2022 our call option has risen quite significantly, and we have a profit of 30%. Oracle is currently worth $71.66 per share.
• Our bought call now has an intrinsic value of $1.66 or $166 in total premium, the rest remains extrinsic value.
• If ORCL drops we could lose all of our profits and more! We don’t want that, so what we decide to do fairly early is writing a call against our bought call. We decide to write a $82.5 call with the same expiry.

Variations and More

• 2 Weeks Later
• Thus, we transformed our $70 Call into a bull call spread.
• For this written call we receive $547.60. We now have received 2/3’s of the original paid premium back and thus significantly reduced our risk.
• Our delta exposure has dropped significantly, but we still have a negative theta, which means we lose time value every day.

Variations and More

Variations and More

• 2 Weeks Later
• In this scenario we can (in the worst-case scenario) lose $278.80 and realize a maximum profit of $970. This is already a pretty interesting risk/reward of 3.48.
• We still aren’t satisfied with this, we decide to open a bear call spread against this position.
• We sell a $85 call and buy a $95 call, all with the same expiration. By opening this at $85 we still leave some room for $ORCL to go up.

Variations and More

• 2 Weeks Later
• In the end this whole ORCL trade costed us $69.90
• Bought call strike $70: $826,40
• Written call strike $82.5: - $547,60
• Written call strike $85: - $469,60
• Bought call strike $95: $260,40

Variations and More

• In the end this whole ORCL trade costed us $69.90
• My question for you guys is, what do we call this position now? What strategy does this ORCL trade look like after all its transformations?

​

Variations and More

• This is what we call a “long call condor”
• Our Greeks now look like this

Variations and More

• As you can see, our delta exposure has dropped even further, our theta has become positive. This means we now make money every day just by holding this position.
• Our risk reward curve has become even more interesting as well, which we can see in the next slide.

​

Variations and More

Variations and More

• Worst case scenario we lose $69.6 dollars. Maximum profit is now $1200
• This gives us a risk/reward of 17.25
• This is still a pretty basic transformations, we could have used other expiration dates etc.
• There are also scenario’s possible where we are able to set our maximum loss at a profit. By example: Worst case scenario $300 profit, maximum profit $5000. Etc.

�

The End

� What did we learn?

• We discussed the basics of options very briefly
• We learned that options aren’t only useable as leverage, but also as ways to hedge/ create better R/R Opportunities.
• We learned the basic strategies and the standard double legs
• We discussed transformations

Questions

� Now we can look into more specific questions on option positions, strategies and much more

• If there is any interest in doing more of these, but more specific by example a more in-depth lecture on spreads. I might be able to get this into a monthly course, in which we can cover a different topic each time.

​