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.
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2. Options Trading Overview
By Steve Chang
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3. Introduction
 Steve Chang
Equity Derivatives Trader at
Morgan Stanley
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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
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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
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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
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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)
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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
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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
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10. Volatility – 2330
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11. Volatility – 1310
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12. Volatility – 2882
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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
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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
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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
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16. Trading Strategies
Buy call option
 Expecting more upside
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17. Trading Strategies
Sell put option
 Expecting limited downside
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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
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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
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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
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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
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22. Buy/sell Greeks
 Buy delta
 Buy spot (ie, future or stocks)
 Buy call
 Sell put
 Sell delta – vice versa
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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
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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
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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
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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%)
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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 cover
@28% discount.
 PnL impact:
28mn/2*28%=$7.84mn
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28. Q&A
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