CBOE - Jim Bittman - Trading Spreads With the New Binary Options - August 7 2008

8/6/2019 CBOE - Jim Bittman - Trading Spreads With the New Binary Options - August 7 2008

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Trading Spreads with

New Binary Options

Presented by:

Jim Bittman, Senior Instructor

The Options Institute at CBOE

CHICAGO BOARD OPTIONS EXCHANGECHICAGO BOARD OPTIONS EXCHANGE


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Trading Spreads with

New Binary Options

Presented by:

Jim Bittman, Senior Instructor

The Options Institute at CBOE



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Disclosures & DisclaimersIn order to simplify the computations, commissions have not been included in the

examples used in these materials. Commission costs will impact the outcome of allstock and options transactions and must be considered prior to entering into anytransactions.

Any strategies discussed, including examples using actual securities and pricedata, are strictly for illustrative and educational purposes only and are not to beconstrued as an endorsement, recommendation, or solicitation to buy or sell securities.

Options involve risks and are not suitable for all investors. Prior to buying or

selling an option, an investor must receive a copy of Characteristics and Risks ofStandardized Options. Copies may be obtained from your broker or by calling 1-888-OPTIONS, or from The Options Clearing corporation, One North Wacker Drive, Suite500, Chicago, Illinois 60606. Investors considering options should consult their taxadvisor as to how taxes may affect the outcome of contemplated options transactions.

SPX is a servicemark and VIX is a registered trademark of CBOE.

Copyright 2008. Chicago Board Options Exchange, Incorporated. All rights reserved.


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Session Outline

Binaries What the #@&% are They? Product specs

Pricing concepts Simple Strategies

Spread Strategies


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What are Binaries?

Yes or No options At Expiration: Payout = $100 or $0

Prices reflect the perceived probabilitythat the underlying will reach or

exceed the strike price at expiration.


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CBOE Binary Call Options

Pay $100 if settlement value isat or above the strike price.

European-style exercise (automatic) Can only be exercised at expiration

Can be traded on any business day Expire and settle same as underlying


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Long SPX Binary 1250 Call at $0.40

][ ][ ][ ][ ][

1200 1225 1250 1275 1300

+0.80

+0.60

+0.40

+0.20

0.00

(0.20)

(0.40)

(0.60)

Profit/(

Loss)

Below strike: Binary Expires Lose $40At or Above: Payout = $100 make $60


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Short SPX Binary 1250 Call at $0.40

][ ][ ][ ][ ][

1200 1225 1250 1275 1300

+0.80

+0.60

+0.40

+0.20

0.00

(0.20)

(0.40)

(0.60)

Profit/(

Loss)

Below strike Keep $40At or Above Pay $100 Lose $60


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Binary Options on SPX

Same as SPXExpirationSame as SPXSettlement

Same as SPXLast Trading Day5 PointsStrike Intervals

SPXUnderlyingBSZTicker Symbol


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Binary Options on VIX

Same as VIXExpirationSame as VIXSettlement

Same as VIXLast Trading Day1 PointStrike Intervals

VIXUnderlyingBVZTicker Symbol


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Binaries More Facts

Quotes in Pennies

3 Expirations Available

Settlement Amount $100

Cash Settlement

European Exercise (Automatic)


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Binaries Margin Requirements

Short Binaries:

Margin equals max risk

($100 premium)

Long Binaries:

Pay Premium


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Pricing Impact of Index Level

SPX 1240 1250 1260Days to Exp 15 15 15Volatility 20% 20% 20%1250 Binary Call 0.42 0.50 0.58

O-O-M A-T-M I-T-M


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Pricing Impact of Index Level

1250 Binary Call vs. 1250-1251 Call Spread

0.00

0.20

0.40

0.60

0.80

1.00

SPX

1220

1230

1240

1250

1260

1270

1280

SPX

Value 1250-51 Call Spread

1250 Binary


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Pricing Impact of Time A-T-M

SPX 1250 1250 1250Days to Exp 15 10 5Volatility 20% 20% 20%1250 Binary Call 0.50 0.50 0.50A-T-M


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Pricing Impact of Time O-O-M

SPX 1240 1240 1240Days to Exp 15 10 5Volatility 20% 20% 20%1250 Binary Call 0.42 0.41 0.37O-O-M


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Pricing Impact of Time I-T-M


I-T-M


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Pricing Impact of Time

DecreaseDecreaseO-O-M

No ChangeDecreaseA-T-M

IncreaseDecreaseI-T-M

Binary OptionsStandard Options

Time affects binary options differently

than standard options.


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Pricing Impact of Volatility A-T-M


A-T-M


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Pricing Impact of Volatility O-O-M

SPX 1240 1240 1240Days to Exp 10 10 10Volatility 20% 25% 30%1250 Binary Call 0.41 0.42 0.43O-O-M


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Pricing Impact of Volatility I-T-M


I-T-M


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Pricing Impact of Rising Volatility

IncreaseIncreaseO-O-M

No ChangeIncreaseA-T-M

DecreaseIncreaseI-T-M

Binary OptionsStandard Options

Volatility affects binary options differently

than standard options.


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Binary Spreads Example:

Buy SPX Binary 1225 Call @ 0.70

Sell SPX Binary 1275 Call @ 0.30

Net Cost 0.40

Constructed similar to a Bull Call Spread

Payout at expiration within a range.

Note: spreads involve extra commissions.


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1225-1275 Binary Call Spread at $0.40

][ ][ ][ ][ ][

1200 1225 1250 1275 1300

+0.80

+0.60+0.40

+0.20

0.00

(0.20)

(0.40)(0.60)

Profit/(Loss)

Payout within a range.1225 Binary Pays $100 1275 Binary Expires profit = $60


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Summary

Binary Calls on SPX & VIX Payout at expiration if index at/above strike

Price behavior similar to vertical spreads

Time and volatility affect prices differently

Binary vertical spreads payout within a range

CBOE The Innovation Exchange


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Thank You for Attending Visit us at: www.cboe.com

Questions? [email protected]

Options Institute courses:

http://www.cboe.com/LearnCenter/Seminars.asp


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CBOE - Jim Bittman - Trading Spreads With the New Binary Options - August 7 2008