2015 Equity and ETF LEAPS®  Listing Schedule for All Cycles by Marty Kearney

As the crew from The Options Institute has been giving webinars on-line and travelling around the country this summer (CBOE's Peter Lusk is in Tampa tomorrow for a Scottrade event), a pretty common question comes up - “When will the LEAPS options of 2015 be listed”?   Here’s your answer.

The following schedule will be used to list the 2015 Equity & ETF LEAPS:

Monday, September 17, 2012: 2015 LEAPS begin trading for January cycle option classes.
(for example, IBM is in the JAN, APR, JUL, OCT Cycle)

Monday, October 15, 2012: 2015 LEAPS begin trading for February cycle option classes.
(Home Depot - HD is one of the stocks in the FEB, MAY Cycle)

Monday, November 12, 2012: 2015 LEAPS begin trading for March cycle option classes.
(Wal-Mart - WMT is in the MAR, JUN Cycle)

The week before the new LEAPS are added (e.g. the week of Sep 10 for the Sep 17 LEAPS listings), an Information Circular at cboe.com will list strike prices for LEAPS added Sep 17th.

So get the kids back to school, change your oil and the batteries in your smoke detector let’s get ready to trade LEAPS!  Remember, not all stocks (~1/3) have LEAPS available.

Marty Kearney

PS  This information can be found in CBOE Information Circular #IC 12-060.  New IC’s will list the strikes as I said above.

The stock (or soon to be stock) in the news for the last two weeks is Facebook.  The pricing on the Facebook IPO was announced after the close today, Thursday May 17^th, and came in at the high end of expectations, $38 per share.  The symbol will be FB.

 The Options Institute has received more than a few phone calls and e-mails about Facebook options, and when they’ll be listed.  Let’s make a few assumptions and come up with an educated guess as to when Facebook options will be available to trade. 

 If the Facebook IPO is successful and trading on the shares begins tomorrow, Friday the 18^th, the first trading day for Facebook options will be Tuesday the 29^th (the 28^th would actually be the first day the options would be eligible, but that’s Memorial Day).   

 I have not seen any contracts specs yet, as we usually release info as to which Options Cycle (June-Sep, July-Oct or Aug-Nov), the DPM, strike prices, would Weekly’s or LEAPS be available, etc. after the IPO but a few days before the option listing. 

 Qualifiers in our rules that dictate when we can list any new option:

 •       Minimum of 7,000,000 shares of the underlying security which are owned by persons other than those required to report their stock holdings under Section 16(a) of the Securities Exchange Act of 1934.

 •       Minimum of 2,000 stockholders

 •       Trading volume has been at least 2,400,000 shares in the preceding 12 months (FYI, the security does not have to be trading for 12 months; if they hit that volume level in a day, or two or three, etc., that would qualify).

 •       Market price per share has been at least $3.00 for the previous 5 consecutive business days preceding the date on which the Exchange submits a certificate to the Options Clearing Corporation for listing and trading.

   I don’t think Facebook will have any problem meeting the requirements for listing.  If all goes as planned, We’ll blog more about Facebook options next week in the Scottrade community or the CBOE community.


Marty Kearney
Options Institute at CBOE

 

As soon as the average investor hears the term “Volatility” or “Implied Volatility”, their first reaction is “How did I get into this room, and how do I get out”? 
 
The basics of volatility are easier to understand than you’d think.  Historical volatility is measuring how much movement – higher or lower – a particular stock, ETF or Index has had over the last week, month, year, etc.  Implied Volatility is measuring option prices on that underlying to determine the expected range in the future. Most references to volatility are looking at implied volatility – where do we see stock movement in the future.
 
When does implied volatility rise?  Usually before an earnings announcement, a product release, an FDA announcement which might affect a drug company, a corporate event, etc.   The stock could have big price movement as investors digest the news.

When does implied volatility drop?  Usually after the announcement, whatever it was.  The news is out, the stock may have moved sharply, but since we expect fewer sharp moves in the next few months, options prices tend to drop – lowering the implied volatility.
 
Even if you have never traded an option before, let me give you an example of how one investor I know (let’s call him Ed) uses implied (option) volatility to assist him in his stock picking.
 
Ed is looking at two stocks trading at $50 per share that he thinks may do very well over the next six months. His target on both stocks is ~$60 per share.  Ed is an experienced investor, has a fairly nice sized account and does not shy away from risk.  This is Ed’s trading account.   Ed can’t decide between the two stocks, so he looks at one other item.  He takes a look at the implied volatility on stocks A and B (which you can find on the Scottrade trading platform).    Not every stock has options but in this example they do.   Stock A has an implied volatility of 20% and stock B has an implied volatility of 35%.  Stock A has been in a fairly narrow range lately and will hopefully creep higher over the next six months.  Stock B was up $1 last Friday and is off $1.25 today. So it tends to move around a bit more.
 
So what does higher volatility mean?  I promised you there would be no math today, so I’ll do it for you.   The implied volatility of the options on stock A (20%) tells us the market is expecting that 2/3 of the time, stock A will be between $41.62 and $58.38 in six months.  Stock B with an implied volatility of 35% should be between $35.44 and $64.66  2/3 of the time, also in six months.   Which is the better investment?  Stock B looks like it has higher potential ($64.66 versus $58.38 on stock A), but the potential risk on stock B is far greater (a potential move to the $35.44 range versus a potential drop in stock A down to $41.62).
 
 Ed decides on stock B and buys 100 shares in his trading account.  But how about you?  Are you a more conservative investor than Ed?  Does the increased potential gain in stock B outweigh the additional downside risk?   What if this was Ed’s retirement account?  He tends to do more conservative investments in the retirement account.  Maybe Stock A with lower implied volatility would be a better choice.  In this example, Ed has found useful information by looking at the implied volatility of options on two stocks, and we still haven’t talked about trading options! 
 
Options can be a great tool to reduce risk or enhance return.  Knowing how options are priced can also give you some insight about implied volatility and the price movement expected by investors and traders.   
 
Marty Kearney
Options Institute
CBOE

This is “Triple Witch” week in the option world and at the CBOE.  Are you as excited as I am?  Triple Witch is not as meaningful as it once was. 
 
Options on stocks, ETF’s and indexes expire the third Friday of every month (I know, it’s actually the Saturday following the third Friday, but humor me).  S&P 500 futures expire the third Friday in March, June, September and December.   If we took a time machine (Orson Wells movie with Yvette Mimieux) or way-back machine (Mr Peabody and his pet boy Sherman – you have to be over 45 to remember either) back 20 years or so, all March contracts would expire at the close of trading this Friday.  You may hear some refer to “quadruple witch”, it’s triple witch.  Anyway, professional traders and arbitrageurs might have on massive positions consisting of e.g. long March S&P futures, short March Index options, long shares of ETF’s and short shares of stock.  If they entered orders to buy their short shares back it might drive the stock price sharply higher, costing them additional money.  But they would benefit because their long futures and long ETF shares would move up accordingly.  They were hedged.   This led to spikes in share and basket prices, caused in part by option traders exiting positions.
 
So they changed a few items around.  S&P 500 March futures cease to trade at the close Thursday March 15^th.  Most Index options like the SPX settle Friday morning, March 16^th (this is known as A.M. Settlement).  For SPX the settlement is based on the opening print of all 500 components Friday morning.  Stocks, ETF’s and a few indexes still settle Friday afternoon.  What did this accomplish?  Arbitrageurs do not want part of their position expiring Thursday night, another part Friday morning and the balance Friday afternoon.  Most have “rolled” their March future to June, their March ETF options to April, May or June, and might not need to touch their stock position.
 
Triple Witch week for options is often a little busier than non-expiration weeks.  But very few professionals get excited about Triple Witch, the impact on stock, ETF and Indexes is minimal.   
 
Marty Kearney
Options Institute
CBOE
 
PS  Any resemblance between Mr. Peabody’s pet boy Sherman and Josh Sampson from Scottrade is purely coincidental.

The Cover Call (or Covered Write) is an option strategy employed by many investors.  As a matter of fact, it is the first option strategy I used.  It involves the owning (or purchase) of 100 shares of an underlying stock or ETF, and the selling of one call option.  The sale of the call is considered "covered" by you owning the underlying shares.

My first real job out of college was in marketing for a large manufacturer of cash registers, teller machines and accounting equipment (let's call it XYZ).  I was buying shares in an Employee Stock Ownership Plan (ESOP).  After a few years of buying shares, I decided to do a covered write.

With 1,800 shares of XYZ at ~$37, I sold (you may see the term "wrote") 5 of the 60-day, 40 strike calls on XYZ and collected $2.00 per contract. Because each option contract typically represents 100 shares of stock, the math goes like this:  $2.00 X 100 shares or $200, times 5 contracts or $1,000 (all examples exclude transaction costs).   I had an obligation to deliver 500 shares of XYZ at $40 per share for the next 60 days. 

I did this trade for two reasons (I think the first is the most important).

#1:  I was willing to sell 500 shares at $40 per share.  I did not want to sell the other 1,300 shares.  By selling the 40-strike call at $2.00, if the stock closed above $40 at expiration and I was assigned to deliver those shares, it would be at an effective sale price of $42 per share (40-strike plus $2 premium received). That is a 13.5% return on those shares (not annualized).

#2:  If XYZ did not rise above $40 at expiration and the shares were not called away, the options I sold would expire and I would retain $1,000.  The way I looked at it, bringing in $1,000 and still owning 1,800 shares was like me getting a special dividend of over $0.55 per share ($1,000 / 1,800 shares).  And depending on my outlook for XYZ, I might want to do the same strategy again, which I did several times! 

Does this strategy work?  The Striking Price column in BARRON's has had two articles since the first of the year on covered writing.  They refer to some benchmarks, research papers and studies widely followed in the industry which can be found at www.cboe.com.  These include the Buy-Write Index (BXM), and buy-write data on the DJIA, the Russell, the NDX and a few more.  

Do you own shares of a stock you wouldn't mind selling at a higher price?  If the shares do not get to that level, would you be happy with the consolation prize ($1,000 in my example above)?  Is a boring option trade worth considering?  Are you approved to trade options at Scottrade?

The Covered Write - sometimes boring, often effective.

Marty Kearney
The Options Institute at The CBOE

I just returned from a three-day conference in New York City geared towards individual investors.  The CBOE had a booth as did Scottrade, stock charting services, software providers, book sellers, etc.  This is one of the larger ones, as I heard over 15 thousand visitors were expected.  The CBOE gave four talks and I was on an options panel with Josh Sampson of Scottrade. 

One of the CBOE talks had a remarkable turnout.  The topic was Weekly Options.  A sign on the wall in the room had  "... no more than 300 people allowed....."  We set it up with 307 chairs.  (if you're a fire marshall skip the rest of this paragraph) We counted 385 attendees in the room.  We turned away over 200 people (we scanned their badges and promised to send them a copy of the presentation).  We don't know how many others saw the crowd trying to get in and turned around.  Why the interest?

When options were first listed years ago, we had 3, 6 and 9 month expirations.  LEAPS Options (going out as far as 30 months) were added about 20 years ago, and are available on about 800 stocks, ETF's and Index options (of the ~3,300 products with options).  We now have the first two month's expirations available on all products.

Investors and traders said they needed Weekly options with some products, as the regular monthly expiration was too far away time-wise.  Enter weekly options. As of today, we have 183 stocks, ETF's or Indexes with Weekly Options.  Weekly options are a "Pilot Program", meaning that this may or may not be permanent. The number of stocks with Weekly Options is limited until the results can be analyzed.  So far the reception has been very good.

So how does this work?  The exchanges and the Options Clearing Corp. get together every Wednesday to decide which stocks will have weekly options for the following week. Some stocks like AAPL, IBM, ETF's like the QQQ's and Indexes like SPX are on the list all the time, but some stocks are occasionally added or deleted.  Why?  XYZ has earnings next Tuesday.  There have been requests for Weekly options on XYZ.  ABC has Weekly options this week, and had an important product announcement today. We may place XYZ on the Weekly list and not have Weekly's (you may see this referred to as Weeklies) on ABC next week.  The CBOE publishes this list late every Wednesday afternoon.  If we have a regular expiration coming up next week, we don't need to add Weekly Options. The Weekly Options are listed Thursday morning the week BEFORE Weekly expiration. So in most cases, there will be 7 trading days for those options.

What strategies do we see investors using?  pretty much everything.  Buying Calls and Puts to take advantage of expected events. Calendar Spreads where an investor might own a 45-day Option and sell a Weekly option against it.  We see Credit Spreads and Debit Spreads.

So are investors using Weekly Options?  I hear that 10%  and on a few occasions approaching 18% of option trading is in the Weekly options.

Why trade Weekly options?  If you're a buyer, in most cases there is not much time-premium in those options.  Shorter-term options are much more sensitive to movement, the Gamma kicking the Delta up.  Provided you are correct on your assumption, the percentage return could be great. But if you're wrong on your time-frame, you could lose the whole investment. For sellers, there isn't that much time to worry about. Selling an option with 8-days or less doesn't obligate you for that long of a time period.  But some of that is reflected in the premium that sellers receive.

So are Weekly's the right vehicle for me?  Well, there are only 183 products with Weekly's so they might not be available - this week.  If available, your time-frame may or may not be that short.  But if you see a February option on a stock expiring on February 24th and today is Wednesday February 22nd, it's probably not a computer glitch on The CBOE, Scottrade or OptionsFirst web-site or platform.

Maybe we should do a "Weekly" presentation on one of our noon (Chicago and St. Louis time) Scottrade webcasts. 

Marty Kearney
Options Institute at The CBOE

Four times a year public companies in the United States are required to release their financial results to the public.  This is commonly referred to as an earnings release since the first piece of information that usually comes out is a firm’s earnings per share.  However, there is much more to the release than the EPS.
 
Other pieces of information that a company releases along with earnings may include -

• Revenues
• Profit margins
• Product trends
• A projection of future earnings.

Why should you care about all this?  A recent study shows the average stock moves 30% more the first day of trading after an earnings release than on a ‘non-earnings’ trading day.  This is a great quantification of the impact of earnings related news so you always want to be aware when to expect the next earnings release from a stock you may own.
 
Russell
CBOE - The Options Institute
www.cboe.com/LearnCenter/

A common question we get at the Options Institute at the CBOE involves the price changes that occur with option contracts.  If a trader purchases a call option on a stock, they expect the contract to increase in value when the underlying stock moves higher.  However, how much of a price change that occurs may be a mystery.  That is unless they have an understanding of option pricing factors which are the Greeks.
 
Option price changes may result from changes in the price of the underlying stock, the passage of time, a change in interest rates, or a change in the market’s outlook of the riskiness of the underlying stock.  The option Greeks will offer an estimate of how much the price of an option will change based on a change in any of these pricing factors.
 
At the end of this month, the CBOE in conjunction with Scottrade will expand on the Greeks in a new webinar.  Join us Wednesday, February 23^rd to learn more about option price behavior and the Greeks. Register now at https://scottrade.webex.com/scottrade/onstage/g.php?t=a&d=668229617

Russell
CBOE

You'd think we never saw a little snow before in Chicago.  The CBOE opened on time this morning. Traders fought through 20" of snow and a few snowdrifts to get to the floor, and found a flat opening (and were probably thinking "why did I come in"?  Over half of our market makers are making markets remotely so a little bad weather shouldn't be a problem.
 
Good trading, safe travel if you're out in the weather, and Happy Groundhog Day!
 
Marty Kearney
Options Institute at The CBOE
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One of my functions as an Instructor for the Options Institute is the pleasure of representing the CBOE at Scottrade User Summits.  I attended User Summits in Indianapolis, Denver, Minneapolis, Atlanta, and Philadelphia this past year.  Each speaker representing the CBOE at these events participates in a question and answer session with the audience.  “When an option is exercised, how is it determined what account is assigned on the option?” is a question I answered at every Scottrade User Summit I participated in this year.
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