INVESTORS` OPTIONS TRADING LETTER

INVESTORS’ OPTIONS TRADING LETTER
NOVEMBER 2015
Market Review
Despite strong activity in some of its key sectors, the S&P/TSX Composite
Index ended the month of October on a rather disappointing note, falling
118.09 points to close at 13,529.17 on October 30.
The VICX Volatility Index also took a downturn this month, finishing at
19.55, or a loss of 3.28 points compared with the month of September.
Often perceived as the market “sentiment” indicator, the put-call ratio
closed at 0.716 on October 30, underlining the gloominess of the market
over the past month.
Other securities also ran into trouble - notably those of Bombardier Inc.
(BBD.B.TO), which, on October 29, posted a record $4.9 billion loss for its
third quarter. Its shares closed at $1.32, down about 17% from the day
before.
The day was definitely no walk in the park for investors with any of these
holdings.
Average daily equity option volume rose by 37.93% in October to 100,997
contracts, compared with 73,226 contracts for the September statistics
www.m-x.ca/f_stat_fr/1510_stats_fr.pdf.
Based on the targeted objective, the protective put strategy or the covered
call strategy would make it possible in both these cases to limit the risk
of potential losses or guard against any future temporary share price slide
(since the premium received in the case of the covered call strategy offers
additional protection).
A few highlights!
On a completely different note, investors wishing to participate in the
future recovery of the stock may consider either the put writing strategy
or the long call strategy, which can be used to replace the stock purchase.
The Canadian energy sector experienced a rebound in the month of
October, sustained by the decline in oil and commodity prices and the
publication of better-than-expected financial results.
Conversely, the health sector was in the spotlight after shares of Quebec
firm Valeant Pharmaceuticals, (VRX.TO) fell by just over 46% between
October 16 and 30, following numerous controversies.
The put writing strategy is also aimed at limiting the risk incurred and
generating additional revenue.
For further information, consult our Guides and Strategies section at
www.m-x.ca/education and our blog optionmatters.ca.
Concerned about a correction? Wish to hedge the long stock position? A Collar please!
For the term of the option strategy, the investor is looking for a slight rise
in the stock price, but is worried about a decline.
The call strike sets an upper limit on stock gains. The investor should be
prepared to relinquish the shares if the stock rallies above the call strike.
An investor writes a call option and buys a put option with the same
expiration as a means to hedge a long position in the underlying stock.
Premium received subsidizes the cost of the put option. This strategy
combines two hedging strategies: protective puts and covered calls writing.
In return for accepting a cap on the stock’s upside potential, the investor
receives a minimum price where the stock can be sold during the life of the
collar.
Usually, the investor will select a call strike above and a long put strike below
the starting stock price. There is latitude, but the strike choices will affect
the cost of the hedge as well as the protection it provides. These strikes are
referred to as the ‘floor’ and the ‘ceiling’ of the position, and the stock is
‘collared’ between the two strikes.
To protect or collar a short stock position, an investor could combine a long
call with a short put.
For Futher information, consult our Guides and Strategies section at
www.m-x.ca/educ_guides_strat_fr.php and our blog optionmatters.ca.
The long put strike provides a minimum selling price for the stock, should
the investor need to liquidate in a downturn.
For more information, please contact
Mariame S. Cissé, M.Sc.
Manager, Business Development, Equity Derivatives
[email protected] or +1 514.787-6674
Did you know that…?
The Delta is a theoretical estimate of how much an option’s premium may
change given a $1 move in the underlying.
• Calls have positive Deltas (as generated by model)
-- Positive correlation to underlying stock price change
-- Stock price rises  then call Delta tends to go up 
-- Stock price declines  then call Delta tends to go down 
-- Call Deltas range from 0 to +1.00
Call Delta vs. Time
Time remaining until expiration will also have an effect on Delta. An inthe-money call with longer time until expiration will always have a lower
Delta than the same strike call with less time until expiration. It is just the
opposite for out-of-the-money calls; the call with a longer amount of time
until expiration will have the higher Delta than the option with less time.
Call Delta vs. Time
Here is a look at a call Delta and how it might move:
Delta
On a given day, an XYZ call has a Delta of 0.50 (50%)
Current value $3.50
1.00
XYZ = $60, Vol = 30%
0.80
XYZ stock goes up $1:
Call will theoretically increase by 50% of stock move
$1.00 x 0.50 = $0.50
0.60
Expected call value = $3.50 current + $0.50 = $4.00
0.40
• Puts have negative Deltas (as generated by model)
-- Negative correlation to underlying stock price change
-- Stock price rises  then put Delta tends to go down 
-- Stock price declines  then put Delta tends to go up 
-- Put Deltas range from 0 to –1.00
0.20
0
40
Stock price, days remaining to expiration and implied volatility will impact
Delta.
With an increase in implied volatility, Delta gravitates toward 0.50 as more
and more strikes are now considered possibilities for winding up in-themoney because of the perceived potential for movement in the underlying.
For example, the 20 strike call in XYZ may have a 0.60 Delta with the stock
at $21 and implied volatility at 30%. If implied volatility was to increase
to 40%, the Delta may decrease to 0.55 as traders perceive an increased
likelihood that the strike might be out-of-the-money at expiration.
45
50
55
60
65
Strike Price
CALL: 1 MONTH
70
CALL: 3 MONTH
75
80
CALL: 6 MONTH
As expiration nears, in-the-money call Deltas increase toward 1.00, at-themoney call Deltas remain around 0.50 and out-of-the-money call Deltas fall
toward 0 provided other inputs remain constant.
It is important to remember that Delta is constantly changing during
market hours and will typically not accurately predict the exact change in
an option’s premium.
Source OIC.
What’s new at Montreal-Exchange?
Multiple Weekly Options Expiries
The Bourse will gradually introduce the listing of multiple weekly options expiries on Thursday November 26, 2015; that is, weekly options with maturities
that extend forward several weeks. For more details, visit www.m-x.ca/f_circulaires_en/133-15_en.pdf
Expanding User Defined Strategies
The new four-legged strategies* types mentioned below are now available. For more details, visit www.m-x.ca/f_circulaires_en/069-15_en.pdf
TWO-LEGGED STRATEGIES
THREE-LEGGED STRATEGIES
FOUR-LEGGED STRATEGIES*
Call spread
Call Butterfly
Condor
Put spread
Put Butterfly
Iron Condor
Straddle
Call Ladder
Iron Butterfly
Strangle
Put Ladder
Double Diagonal
Synthetic position
Synthetic position with split strikes
1:2 ratio call spread
1:2 ratio put spread
1:3 ratio call spread
1:3 ratio put spread
1:4 ratio call spread
1:4 ratio put spread
Top 10 Most Active Option Classes (Oct. 2015)
Options Trading Volume by Sector
MONTHLY
VOLUME
NAME
SYMBOL
1
iShares S&P/TSX 60 Index Fund
486 788
2
iShares S&P/TSX Capped Energy Index Fund
3
Royal Bank of Canada
4
Suncor Energy Inc.
5
Canadian Oil Sands Trust
6
Toronto-Dominion Bank (The)
XIU
XEG
RY
SU
COS
TD
7
First Quantum Minerals
Bank of Nova Scotia (The)
9
Canadian Natural Resources Limited
FM
BNS
CNQ
MFC
160 673
8
10
Manulife Financial Corporation
49 519
20 800
40 235
1% Health Care
2% Telecommunication Services
42 264
54 937
2% Consumer Staples
2% Information Technology
3% Utilities
4% Consumer Discretionary
37% Energy
5% Industrials
37 709
35 340
23 483
22% Financials
22% Materials
News Equity Options Classes
NAME
SYMBOL
Alamos Gold Inc.
AGI
Equity and ETF Options
Total Monthly Volume and Open Interest
TITLE
AUTHOR
» Will Gold Miners Glitter Again?
Patrick Ceresna
» 2 Ways To Use a Weekly Option
For Teck Resources Earnings
Jason Ayres
3,000,000
2,000,000
2,000,000
1,000,000
1,000,000
0
0
TOTAL MONTHLY VOLUME
Oct. 15
Blog Posts
3,000,000
Sept. 15
»Acquisition
Aug. 15
» Plan of Arrangement
Canadian Oil Sands Limited
4,000,000
July 15
CUS
COS
Canexus Corporation
4,000,000
June 15
» CUSIP and Name Change
May 15
ZPR
Apr. 15
ANNOUNCEMENTS
Mar. 15
SYMBOL
BMO S&P/TSX Laddered
Preferred Share Index ETF
5,000,000
Feb. 15
NAME
5,000,000
Jan. 15
Announcements
OPEN INTEREST
Weekly Option Volume (Jan.1 – Oct. 25, 2015)
Options Trading Volume by Sector (Oct. 2015)
YRI
Health Care
MFC
CVE
Consumer Staples
CNQ
NA
CNR
Utilities
SLW
POT
Information Technology
BCE
COS
BTE
Telecommunication Services
BB
TCK.B
Consumer Discretionary
DGC
CM
CPG
Industrials
XIU
BNS
BMO
Materials
ABX
ECA
Financials
G
SU
TD
Energy
RY
12,000
0
24,000
36,000
48,000
60,000
0
1,500,000
3,000,000
OCT. 2015
4,500,000
6,000,000
YTD 2015
Useful Links
GUIDES
MX INDICES
OTHERS
» Equity derivatives
» S&P/TSX 60 VIX Index (VIXC)
» Options List
» Index derivatives
»M
X Covered Straddle Writers’
Index (MPCX)
» Put/Call Ratios
» Currency derivatives
» Equity options tax regime
»M
X Covered Call
Writers’ Index (MCWX)
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