[INTRODUCTION TO OPTION STRATEGIES]

November 15, 2017

[Host:]

Hello, everyone, and thank you for joining us today. On behalf of CIBC Investor’s Edge, I would like to welcome you all to this webinar with Conrad Martin and Alexandra Szatan. My name is Dimple, and I will be your host for this event. Now, a few things to know before we get started:

[CONTROLS]

If you wish to view this webinar full screen please click on the expander arrows located on the top right-hand corner of your screen, and should you have any questions during the presentation, kindly take a note and you will have the opportunity to submit your questions after the presentation.

[DISCLAIMER]

Also, CIBC Investor Services Inc. does not provide any investment or tax advice or recommendations, so everything we share today is for educational purpose only. Also, we are recording today's session, and a link will be emailed to anyone that registered online.

[SPEAKERS]

Today, our intention is to quickly review the basics of option trading. From there, we will advance and look at yield-enhancement strategies like overwriting and underwriting, and directional strategies like puts and call spreads. We are so fortunate to have Conrad and Alexandra with us today. Conrad is a director at CIBC Capital Markets, on the sales side of the Institutional Equity Derivative desk. As for Alex, she is an analyst with CIBC Capital Markets and works in the Wealth Solutions Group, specializing in equity derivatives and alternative financing. With great pleasure, please join me in welcoming them both.

[INTRODUCTION TO OPTION STRATEGIES]

[TABLE OF CONTENTS]

[Alexandra:]

So as we just covered, in this webinar, we’ll start by providing a general overview of options, with a refresher on option fundamentals. This knowledge will be the foundation for the next segment, during which we’ll discuss several option strategies, how they’re constructed, how they work, and applicable scenarios. So first, what are options and why use them? Option contracts are contacts that grant specific rights to their buyers, and impose certain obligations on sellers. In option trading, you could be a buyer or a seller; it's quite flexible. It can be both highly speculative trades, or highly conservative, or both, depending on when and how they are used. In general, investors may engage in a more conservative or speculative trade depending on circumstances such as market conditions, stock prices, or even the amount of cash an investor has available in their trading account. With this, and the flexibility of options in mind, we can see that the degree of risk one can take is not fixed. Traders can construct options strategies ranging from simple ones with a single option, to ones that are very complex, involving multiple options positions at once.

[WHY USE OPTIONS?]

Further, they are numerous ways in which they can be used. For example, hedging your portfolio stocks against certain risks, maybe downside risk, having the ability to generate income and enable you to take profits without needing to sell shares in your portfolio, thereby enhancing your returns, providing access to market liquidity as you look to enter or exit certain stock positions, as well as generating Alpha, via event-driven trading, which could be taking advantage of mergers and acquisitions, or maybe earnings announcements. As you can gather, there are a lot of ways you can take advantage of option trading as part of your overall investment strategy.

[CANADIAN OPTIONS ACTIVITY]

Now, before we move into some options jargon, we wanted to show you what has transpired in the options market here in Canada. Over the last decade, the Canadian options market seen a lot of growth, which can be seen quite clearly on the graph in the slide. So, this graph will show you the volume of equity in ETF index options around 2001-2015.

[TYPES OF OPTIONS]

To have a complete understanding of how options provide hedging benefits, we need to understand the terminology. Every option can be defined by four standardized terms. This means that the terms will always work the same, in the same way, and apply to all listed options. So, when you look to buy or sell an option, you know exactly what your contractual terms are for that asset. These four terms include: one, the type of option. This could be a Call option, in which the buyer has the right but not the obligation to buy security at a pre-determined strike price, and it's considered a bullish instrument. Or a Put option, in which the buyer has the right, but not the obligation to sell a security at a pre-determined strike price, and this is considered a bearish instrument.
The second term is the strike price. Now, this is the fixed price at which the call or put can be exercised. This remains unchanged for the entire life of the option and it's independent of the current stock price. The third is the underlying security, and every option references a specific stock or other security, and this also remains unchanged during the life of the option. And the final term is the expiration date, so this is the month and date at which the option ceases to exist, and every option is identified by a specific expiration month. For listed options, these expire on the third Saturday of the specific expiration month, and the last trading day is the Friday preceding that. Separate from, you know, classifying an option as a call or a put option, we can further classify them as European or American. So, this classification pertains to when the option that can be exercised. European options can only be exercised on the expiration date, while American options can be exercised during the life of the option. However, both can be traded any time prior to expiration. Further, when you decide to trade an option, depending on whether you buy or sell, you can be considered to be long or short. So for example, when you buy a call option, you are long, and when you sell, you are short, and whatever side you're on will influence whether or not you want the stock price to move up or down. So, let's say you are long a call, you would like the underlying price to move up, as this will ensure that the option will gain value. However, if you are short a call option, you would hope that the underlying asset either stays the same in price or moves down, so you can just collect the premium and not be assigned. These long positions are opened with what's called a buy to open order, and closed with a sell to close order, while short positions are opened with a sell to open order, and closed with a buy to close order. Now, while the focus of this webinar is on listed options, in which all this standardized terminology that I've just been covering applies, you know, we also wanted to note that options can also trade over-the-counter, what is called OTC. These kinds of trades are typically executed between financial institutions or institutional clients. However, structured products which also can … contain an embedded OTC option are available to retail investors like yourselves.

[OPTION PRICING VARIABLES]

I'm just going to quickly go over some option-pricing information for you guys, and one thing to note is that the term used for price of an option is also called “Premium”, and this premium is not fixed. It actually changes constantly over the life of the option, and the direction and degree of these changes depends on a multitude of factors. The Black-Scholes-Merton Option Pricing Model is the most widely-used pricing tool by professionals who trade equity and equity index options to determine the fair price. For a typical asset like a stock or bond, there's only one variable to actually watch, and this is the price of the asset itself. While we could simply look at the option price or premium, from a risk-management perspective it's important to understand the key drivers of option prices. The Black-Scholes Model indicates that there are six different factors that influence the price of an option. First, strike price, and we look at this relative to the spot price. For example, the higher the strike price is versus the spot decreases the likelihood of being in the money for a call, whereas if you look at puts, a higher strike price versus spot increases the likelihood of being in the money for that put. And this is particularly true for options that are in the money. The second major term is the time to expiry. The more time an option has, the higher the likelihood that it will end up in the money, so greater time to expire means higher option value, higher premium. And the third major input what is implied volatility. Now, this represents the expected volatility of the underlying stock. Higher volatility implies higher likelihood that the option will end up in the money. Now, to be effective at trading options, both buyers and sellers need to develop a view on volatility over the life of the trade, as these volatility expectations will drive option premiums. Other components of option pricing that we have here listed on the slide include the current stock price, interest rates, and dividends. Now, to predict how the price of an option will behave for a change in any of these six factors that I have briefly covered, differential calculus can be applied to the Black-Scholes pricing formula to derive equations to explain the price sensitivity. Now, all of you don’t have to actually do the calculus yourself, they're closed-form formulas that you can use, and actually, they may be calculated for you on these option pricing screens. There are five main sensitivities that traders will use to predict, measure, and understand the behavior of option prices. So, I’ll briefly cover three of these definitions, the three main ones that we typically will look at. The first is Delta. This is a measure of the sensitivity of an option price, given a change in value of the underlying asset that it’s referencing. The second, Gamma, this is a measure of the sensitivity of Delta, given a change in the value of the underlying asset. And the third, Vega, this is a measure of the sensitivity of an option price to a change... to a change in the volatility of the underlying asset.

[OPTION VALUE]

So, the total value of an option, which we have just been referring to of an as option premium or the options price, is the sum of its intrinsic value and time value. Intrinsic value is simply the difference between the price of the underlying and the strike price of the option. Any value that one would pay for an option that’s above its intrinsic value is called its time value. As a side note, time value can also be referred to as time premium or volatility premium, and it's possible for the option, so you know, to have zero intrinsic value, but still have a positive value overall. And now, this represents the time left, when there's still a possibility of the underlying asset having a price movement in your favor. This time value declines over the life of the option, reaching zero by the expiration date. It is a predictable number, and its decay increases towards the end of the option’s life.

["MONEYNESS"]

The final concept in this options refresher portion of the webinar is on "Moneyness". This is the likelihood that the option will be exercised. This likelihood is impacted by the relationship between the market price of the underlying asset and the strike price of the option. Taking the call option as an example, a call option is said to be in the money if the price of the underlying asset is greater than the strike price. The value of an option increases as it moves further in the money, since its intrinsic value increases. If far enough in the money, the option price will closely mimic the price movement of the underlying asset itself, and this means that the Delta, which we referred to earlier, will be equal to or close to one. Second, a call option is at the money when the price of the underlying asset is trading at the strike price. These options have zero intrinsic value, but derive their value from the fact that there is a 50-50 chance that the option will trade in the money by expiry. And the third, a call option is said to be out of the money if the price of the underlying asset is less than the option’s strike price. Like at-the-money options, these out-of-the-money options will have no intrinsic value, and its value comes from the probability that the option may trade in the money by option expiry.

[Conrad:]

[LONG CALLS]

Thanks, Alex. As mentioned earlier, I work on the Institutional Equity Derivatives sales desk. My role is to help provide institutions, pension funds, hedge funds, asset managers, and life insurance companies with option strategies that best meet the needs of their portfolios, whether that's hedging out a current position, using fundamental analysis to help uncover opportunities that can derive incremental alpha, or providing insights into opportunistic ways that can enhance yield through overwriting and underwriting. One thing I really want to emphasize in this presentation is that our institutional investors don't stray far from the strategies I’m going to walk through, walk you through today. In fact, I think 95% of them use these strategies and only these strategies. So, first off, long calls. As Alex mentioned earlier, this gives the buyer the right, but not the obligation to buy security at a predetermined strike price. This is a leveraged way to add upside exposure with limited downside risk. The outlay of capital is significantly less than if you wanted the same exposure to the underlying equity. What we consider when we look at… When we look at going long on a call is the following, an upcoming catalyst such as earnings, or a Central Bank announcement, cheap volatility. As Alex mentioned, volatility is the most common factor to look at in any of the following strategies, because volatility is directly correlated with the value of an option. We need to be acutely aware of where it's trading on both an implied and relative basis. Implied volatility is the market’s estimate of future volatility at a pre-determined timeframe, one month, three months, a year, etc. So, you want to compare implied to realized or historical - which are terms used interchangeably - as that would paint the picture as to the relative value of the stock’s current volatility. And in the case of going on a long call, we're looking for volatility that is undervalued. Looking at the chart in the right, the red line indicates where volatility trades on a one-month basis, relative to where it has traded historically. As you can see, it’s traded at the bottom end of it's range, which would imply that the call is cheaper on a volatility basis that it would be… Than it would have been historically. For us, this is a critical “buy” signal. The reason the risk/reward is so intriguing for long calls is that your risk is capped at what you are willing to put in, i.e., your premium paid.

[EXAMPLE: LONG AIR CANADA MAY $14 CALLS]

Here's a successful trade idea we put together for a few clients. Fundamentally, we had confidence that Air Canada's management would execute on the upcoming quarter. It was cheap on evaluation basis, and we felt comfortable pitching it to our clients pitching it to our clients that that they should be adding additional long exposure in their earnings. In turn, we suggested buying May $14 call options, on April 9th, for 17 cents. This represented 1.3% of the spot price, which was $13.30 at the time. With one-month implied volatility at lows relative to historic levels - the chart you saw on the previous page - the risk/reward was intriguing. In this case, we made a good call. The stock moved from 13.03 to 16.48 while the value of the option moved from 17 cents to 3.40. This equates to a return of 20 times the original investment. I can’t pretend this happens every day. In fact, you will rarely ever see clients capitalize on trades like this. The reason we bring it up as to exemplify the upside exposure that can be obtained on the back of such a miniscule initial investment.

[OVERWRITING: SELL CALLS TO ENHANCE YIELD]

Overwriting: Sell calls to enhance yield. The most common strategy that I deal with on a daily basis is called overwriting. This is when an investor will sell a call on an existing equity position to generate incremental yield at a cost of committing to a pre-determined exit price. If the stock doesn't reach its designated strike price, then you collect the premium you received for the sale of the call. If the stock trades up through the strike price, then you're required to sell the stock that you currently hold. The question is, what do investors look for when it comes to a good overwrite opportunity? Again, the higher the volatility, the more valuable the call, the more money you get for selling the call. The second point, Flat Call Skew. At a very high level, puts are worth more than calls. Typically, we like to analyze skew on a ratio basis, and the most common ratio analysis we compare is puts relative to calls at the same strike and same maturity.
When we refer to flat skew, what we're simply saying is that we would prefer to overwrite when call volatility, that acts as the denominator, is of almost equal value to put volatility, that is, almost equal value to put volatility, which is the numerator, in turn giving us a flatter skew than normal. The third point: Target higher call-away probability. The further out of the money you go, the lower the premium you receive for selling the call, so ideally, you're looking for the highest rate possible. That prevents you from having to sell your stock, which also garners the premium that is still advantageous. Overwriting is an art. It's a very… It's very challenging to pick the right strike, tenor, and still get a worthy premium. In a lot of cases, our clients will systematically overwrite 30% of their position size on a handful of liquid stocks in their portfolios every month. I work a lot with CIBC’s Technical Analyst, Sid Mokhtari, to make sure I have a good hand on where moving averages reside, and what the momentum indicators are showing. Overwriting opportunities are most lucrative when stocks have had an exaggerated move up, and are running into levels of resistance. From an institutional perspective, one of the major benefits to overwriting is that you guarantee yourself a liquidity event at a certain price. For a stock that is thinly traded, you don’t have to worry about the market impact when looking to sell the stock, because you've already committed to an exit price through the option market. The major risk to overwriting is an unforeseen positive event taking place that causes the stock to gap higher. Because you have committed to sell at a certain price, if the stock moves substantially past that price, then you would be missing out on potential gains because you'd be required to sell at a lower price than where the stock is currently trading. So, it's beneficial to have the awareness of future earnings releases and other binary events that could transpire.

[LONG PUTS]

Moving on to long puts. Puts are the right, but not the obligation to sell a security at a pre-determined strike price. The most common reason to buy a put would be to gain downside protection for a stock you currently own and don't want to sell. The second most common reason would be that you simply want to capitalize on a negative view you have over a given time horizon. Much like dealing with calls, tactical levels are very important. Understanding where support levels... where support levels are will help you gauge the best strikes to implement. Again, comparing implied volatility to historic volatility is exactly the same scenario we looked at on the long call example. We want to buy cheapest possible, buy as cheap as possible, which means we want to purchase our puts on stocks that have low volatility. Finally, comparing out of the money puts to at the money puts with respect to what you are willing to spend in order to give yourself proper protection. The closer the stock price is to at the money, the more expensive it is. That said, the further out of the money you go, the more exposure you have to downside. Like Air Canada, you can see the chart on the right that highlights volatility, where volatility sits on a relative basis. This is a chart for Saputo. Even though it's not the cheapest it can be, it doesn't give us reason to avoid the trade, given where it's traded in the past.

[EXAMPLE: LONG SAP AUG $42 PUTS]

Here we got a pitch that was inspired by our technical analyst. Sid highlighted that Saputo had been on a great run, but momentum indicators and support levels seemed to be showing signs of weakness. Our view was that the headline risk looming regarding NAFTA left these support levels in danger. At the end of the day, we thought our clients who owned should be prudent and add protection. We recommend buying… We recommended buying the August $42 put option for $1.05 when the stock was trading at $44. The break-even on this would be 7% lower or $40.95. Technically, we thought the stock had hit low levels, close to 39 or 40 bucks. That said, we also believed the sell-off could be magnified, given the recent run-up. With volatility trading low, it made sense for us to advise our clients to put on this cost-effective hedge.

[UNDERWRITING: SELL PUTS TO ENHANCE YIELD]

Underwriting: selling puts to enhance yield. Conceptually, this is similar to overwriting. However, instead of locking in a guaranteed exit price, you're committing to get to a guaranteed entry price. You are receiving money while you wait for the price of a stock to get to a level that you feel comfortable buying. The risk here is that if you're not short the stock, which very few of you probably will be, then you have downside risk from the strike price minus the premium, which is zero. What we're looking for, volatility… Again, the number one factor that we analyze when looking at opportunities to underwrite. A high implied volatility relative to historic volatility means that the premium received will be more now than it has been in the past. The second thing we always look at: higher steep skew. Our put value relative to our call value will be higher, which means that our ratio of put volatility to call volatility that we discussed in the overwriting section will not be flat, but instead steep, meaning that puts are at a specific strike, and maturity can be more valuable to sell than calls. Successful option traders are those who can tactfully pick a strike, tenor, and premium. You want to focus on slightly out of the money in shorter dated options to get the most premium. You ideally want to sell the put at the highest price you're willing to buy the stock at, and then of course, tactical support levels are crucial when looking at picking a certain level.
Price trends in underwriting are as important as overwriting. Using moving averages that act as support levels can be very helpful. Picking stocks with a low downside build up versus a specific sector or market are also ideal, as they shouldn't be as affected by an unforeseen correction. That's the give and take with over and underwriting. Less beta means less volatility, which means less premium for selling. The more liquid the stock, the better pricing you're going to get, and in that underwriting scenario, earnings are the most crucial risk to be aware of. Not to say that there aren’t other risks, short reports, political decisions, geo-political instability, but an earnings report is one that you know is a pending catalyst, so it's important to have a handle going into a quarterly report what street expectations are. Now, the risk with puts is that you can be forced to buy higher than where the stock is trading, with downside all the way to zero. Being aware of market catalysts is very important.

[UNDERWRITING: SELLING PUTS TO SET ENTRY POINTS]

So just to reinforce the point of underwriting, why do it? Generate income… You do it to generate income while you wait for a stock to fall to a level you feel comfortable buying. What we consider a directional view… Excuse me. …a directional view recent stock move in momentum, a big drop in which support levels found would be ideal, quite frankly. Be cautious with respect to any macro corporate news on the horizon. You want high implied volatility and you want a high put skew. Here's an example of an underwriting idea we got traction with. When SHOP was trading at a US quote of $93.69 in June, we suggested selling at August $70 put for $1.30. This was intriguing to us because at the money vol two months from the time we were pitching it - works out to an August expiry - it was trading at a 20 volatility premium to where it had been historically, you can see, 60 versus 40. This inflated the price of the put, in our opinion, representing a 1.35% premium. The put-away discount, which is how we refer to the effective entry point, is 25% lower in this case, so our clients were committing to buy the stock that every analyst on the street loved 25% lower. In the meantime, they would collect $1.30 per contract while they waited. So, if someone sold, say 500 contracts, they would receive $65,000. We come to that math because by taking 500 contracts multiplied by $1.30 multiplied by 100 shares, as each individual contract is representative of 100 shares. And they commit to buying a three-and-a-half million dollar position in a good stock 25% lower. Now clearly, this is a more institutional-size trade, but it gives you the idea of the type of yield that can be generated if done efficiently. Now, again, the risk is that something out of nowhere, like a short seller going public with its views does cause a stock fall significantly below your entry point. This is why it's crucial to have a good fundamental understanding of the stock, so you understand what valuation the market will support it at.

[CALL SPREADS]

Call spreads. Call spreads are useful when an investor wants to add an upside exposure, but is fine capping the upside in an effort to make it cheaper. Specifically, this means buying a call and concurrently selling one that is further out of the money to help finance the purchase. The max payoff will be the difference between the two strikes minus the premium paid. Yet the risk, much like the purchase of a call, or the put, is subject to only the premium paid. The chart on the right side is an analysis of call skew. In this case, we’re analyzing the difference between the value of a call that is 110% out of the money, relative to a call that is 102.5% out of the money. See, in the past, we compared puts to calls. However, in this case, we care more about the relative value of calls at different strikes versus where the call stack up relative to puts. When you compare the spread of volatilities relative to where it's traded historically, the call skew points in the direction of buying upside exposure through a call spread.

[EXAMPLE: GLD $130/$140 DEC CALL SPREAD]

Here's an example using the gold ETF in the US, GLD. What we are saying is that one should buy a $130 call and sell a $140 call with December expiry, while spot was trading at $125.50. This cost would be $1.22. Now, the value of the call spread is that if you were to just buy the $130 call outright, it would cost you $1.59. So you are getting a 23% discount in premium paid by selling the upstraight call and capping your upside beyond $140, which is 12% higher. The max return for a structure like this would be the difference in the call strikes minus the premiums paid, and the max payout would typically be referred to as the difference in strikes divided by the premium paid, which in this case represents a payoff ratio of eight times. The great thing is that your risk is limited to the premium paid.

[PUT SPREAD]

The counter to the call spread is the put spread. These are advantageous when you have a moderately bearish view, and you're looking to hedge the beta exposure, yet outright puts are too expensive. What we are considering here is the directional view, outright implied volatility, put skew, looking at where the out of money puts stack up relative to the at the money puts, cheaper the better, and whether the net premium paid and max payout profiles makes sense.

[EXAMPLE: $17/$15 ABX JAN18 PUT SPREAD]

So, our final example is one that has yet to expire that is working in our clients’ favor. This is slightly different from a regular vanilla put spread, because in this case, the client decided to sell two times the number of puts they bought. The reason they did this was so that they could receive money while they wait. So, the client went long 10,000 January $17 puts, and used the sale of 20,000 $15 puts to finance the purchase. At the time, Barrick was trading at $19. They received 34 cents a contract, or $340,000. The payoff profile was such that the stock is trading at $15… If the stock is trading at $15 in the third week of January, then the max payoff will be $2 million, plus the original $340,000 they received initially, totaling $2.34 million. If the stock is above $15 at expiry, the return will be the collected premium, the $340,000, and the amount that it's in the money. The effective entry point of ABX in this case is $12.66, which equates to approximately a 30% discount from spot. That's our final example. We've thrown a lot at you here today, and although it may seem daunting, I just want to reinforce that this presentation encapsulates the majority of strategies major institutions implement every day. We're now available to take your questions. Thank you.

[Host:]

Thank you. That was an amazing presentation.

[Q and A]

So while the presenters review the question, I wanted our audience who joined in later to know you can type your questions in the Q and A panel located on the right-hand side of the screen. And if you wish to listen to this webinar again, a link will be mailed to anyone that registered. I would like to request the audience that since our last presentation today, it pertains to options strategies, we would encourage you to ask questions more explicit to this topic, and to avoid asking questions that are specific to security or a company. Also, we do recognize our clients are inconvenienced, not having the flexibility of placing certain option strategy trades online, but if you get in touch with our traders here at CIBC Investor Services, we would be more than happy to assist you on the phones. We have some great questions coming in, so without any further delay, let me turn this to our presenters.

[Conrad:]

So we have a question here asking the difference between buying a put and selling a put. If you're buying a put, you’re effectively owning the right, but not the obligation to sell at a strike price… At a predetermined strike price. So, think about having a negative view on a stock that's trading at $20, and you want to buy a put with an $18 strike. You’re effectively saying that you believe the stock will trade down below $18, and you're willing to sell a stock at that price. Whereas selling a put, you’re effectively thinking about locking in an entry point, so if you sold that same put at $18, you're saying, “Okay, I would sell that put at $18 and actively and openly buy that stock if the price happened to fall from 20 down to 18.” So, our next question here is, “How do stock dividends affect the price of an option?”

[Alexandra:]

So, we briefly talked about some of the major pricing inputs, and one of the less, I guess, influential components is the dividends of an equity. Now, the first thing to take into consideration is that the underlying stock price typically will drop by the amount of any cash dividend on the ex-dividend date. So, this means that basically the expected price of that underlying asset will go down, or maybe it will have a lower trajectory. So basically, with an increase in dividends, this will result in the call price or call value to decrease, while as for a put, if you’re long a put, this would result in the put price to decrease if the dividend was to increase.

[Conrad:]

We have another question here. “If the volume on calls and puts seem low, is this a risk?” So, Robert, this is definitely a risk, and as the Canadian market gets up and going, and you saw the chart… And I believe it was slide three or four that Alex talked to the Canadian options market is actively growing, but you noticed that in the Shopify example that I used, I quoted the U.S. ticker versus the Canadian one, and that does have to do with liquidity, so… you can see the volume on those calls and puts as being very low. It doesn't mean there's not an active market, it just does mean that the pricing that you may see on the bid and the ask is… It might not actually be reflective of a true market price, so this is something that we, you know, we constantly run into as a problem even with our institutional investors. However, that's why we recommend sticking to the larger cap stocks that have more actively traded option markets.

[Alexandra:]

So, we have another question here. “What are the potential risks involved with options trading?” So Conrad and I, we briefly covered some of this, so it really depends on what strategies you're putting on. So, for example, if you are putting on strategies where you are long options, like long a call or put, your risk in terms of how much cap, you know, of your investment capital you can lose, it’s capped at the amount of premium that you have to pay for the option itself. So, the number of contracts you decide to put on would be a factor, whether it is one, two, five, ten. It's really how much you're willing to risk, but you know that risk. It's an asymmetric payoff. However, if, let's say, you were going to sell a call, or sell a put and not do anything with the underlying asset itself, like a covered call in overwriting, then basically you run the risk of unlimited loss if you have to… If, let's say, you sell a call and the spot price at expiry is well above the strike price, then you risk, you know, buying that or selling that, effectively selling the underlying at a much lower price than what you could receive in the market. So it really depends on what side you decide to take on. If you're more conservative, and let’s say you want to use options to hedge your portfolios, then you might be more interested in buying puts where you know your costs of protection, and you don't have to worry about unlimited downside from the option strategy itself.

[Conrad:]

Our next question here asked. “On the last example, it had a ratio of puts that was not one-to-one. Why wouldn’t you always sell more options than you buy when doing spread trades?” It's a good question. Offsetting options are advantageous when it comes to pricing, but you do open yourself to incremental risk, because they are no longer perfectly offset. In that Barrick example, if the stock were to fall significantly below that lower strike price of $15, then I would be required, or the client would be required to purchase an incremental 10,000 contracts at a price of $12.66, so even though it's far from current levels, it only takes one time to get caught offside in this case, and that's... ...and that's the downside to selling more call… Selling more puts in that situation than keeping it at a simple one-to-one ratio.

[Alexandra:]

So, we have another question here. “If I sell a call, and I want to close my position because I don't intend to sell the stock, what can I do?” So, as I mentioned in one of my earlier slides, we talked about the different types of orders that you can put on, so let's say you decide that you don't want to wait till expiry. It’s a European option, so you can't… The person who bought the option that you sold hasn’t exercised it, or isn't able to exercise it, you can actually do an order buy to close, and this will effectively… Your payoff from trading will be the difference in the price that you earned for selling or writing the option, and the price you paid to buy it back. So it's as simple as that, and the thing is, if you notice, for example, that you can sell, and let's say volatility moves lower, the underlying asset moves lower, then that means the call value moves down where you can just lock in a profit just from trading options itself. You don’t have to hold it, hold on to it until expiry, or until it’s exercised, in the case of an American option. So, we got a question here. It’s a situational one, and that's, “What would you suggest if you bought a call out of the money that is now in the money, purchased at $1.50, and is now $10, and expires in January?” So, the question you really have to ask yourself is, “Did you have a target of how much you thought the price would move up, and are you happy with the return now?” So, that's a very personal question. It seems like it's moved up. And you’ve got a good return. But it's really, did you have a target, and do you think that this underlying is going to move up even further?

[Host:]

[THANK YOU]

Conrad and Alex, thanks again. It looks like that's all the time we have for today. I'm sure I speak on behalf of all the audience that I thoroughly enjoyed listening to both your insights. Thank you for such a great presentation and your precious time. On behalf of CIBC Investor's Edge, I would like to thank the audience. We really appreciate you being here. Should you have any questions or comments, please visit the Investor’s Edge website, or please feel free to get in touch with us by phone, chat, or email. Thank you for joining us today, and we will see you next time.