1. Option Strategies and Greeks
Diving deeper into the rabbit hole

3. Naked vs. Covered

4. Advantages

5. Black Scholes Formula

6. 1st Greek Delta Think ‘directional’ when visualizing delta
Larger the delta, the more money you make or lose when the underlying moves $1
Positive Delta
Negative Delta
1st Greek

7. 2nd Greek Gamma Option prices do not move in an up or down line
Gamma is an acceleration measurement
2nd Greek

8. Theta
Time is always working against you when trading options
Picture of flowing stream and a fish either choosing to swim against the current or with the current
Positive Theta means you will be making money as time passes
Time decay is based on the number of days left in the contract
3rd Greek

9. Vega
Vega is an estimate of how much the theoretical value of an option changes when volatility changes 1%
Higher volatility = higher option premium
Implied volatility is a perception
Forward looking
4th Greek

10. Higher interest rates typically result in higher call premiums
Due to present value of the strike price
Higher interest rates correspond to lower present values
Recall the interest rate to present value inverse relationship
Other Greek: Rho

11. Implied Volatility

14. Vertical Spread Two options
A short option (above the long)
A long option (below the short)
Both options have the same expiration date and quantity
One option makes money, while the other losses
Offsetting in theory but not equally
Vertical Spread

15. PE Ratio Over or Undervalued?

16. What is the P/E Ratio? Its simple, Price over Earnings Per Share (EPS)
Stock A is currently trading at $43 per share and has an EPS of $1.95
43/1.95= 22.05
You must compare this ratio to other companies within the same sector
Tech Sector tends to have high PE Ratios and Utilities tend to have low PE Ratios
The average PE of the S&P 500 is 18
What is the P/E Ratio?

18. Lets Compare… Tech Sector Average PE Ratio: 17HP
PE Ratio: 7.72
Apple
PE Ratio: 13.66
Google
PE Ratio: 28.64
Adobe
PE Ratio: 54.85
Lets Compare… Tech Sector Average PE Ratio: 17

19. Stocks with high PE Ratios relative to their sector indicate high expectations for company growth
These companies are high growth companies that trade at high prices relative to current earnings, because investors expect their earnings to grow substantially in the future.
The downfall is that they also serve as a warning that a stock may be over priced... Where are these growth expectations coming from?
Stocks with low PE Ratios relative to their sector indicate that the company may be undervalued or is doing extremely well in comparison to past performance and other firms.
These tend to be more established mature firms that are no longer experiencing intense growth… or on the other side, they can be small firms where their future is vague
What does it mean?

20. Which PE Ratio will you choose?
Trailing: Based upon earnings in the most recent four quarters
Current: Based upon earnings in the most recent financial year
Forward: Based upon expected earnings in the next financial year
Which PE Ratio will you choose?

21. Dig deeper than the surface Don’t take things as they appear In other words… Stop and think!

23. If high PE Ratios indicate expectations for growth & with growth comes risk, why do low PE Ratios historically have higher returns?

24. Are things really as they seem?
Remember, the PE ratio indicates what an investor is willing to pay for a firms earnings…
An investor requires compensation for taking on risk
Are things really as they seem?

25. Companies A & B are in the same industry, their industry has an average PE of 27
If Company A is currently trading at $40 and has an EPS of $1, that gives it a PE Ratio of $40
Company B is currently trading at $20 and has an EPS of $1, that gives it PE Ratio of $20
This would seem like the better choice… think again
Company A can grow earrings and revenue faster with a PE of 40 than a company with a PE of 20… thus commanding a higher price to pay
Company A MAY have reliable estimates on future growth and B’s growth MAY be questionable.
Think About It…