January 2, 2025 • 30 mins
2025 is the year of the snake and with that brings wisdom, intuition and transformation, so kick off this year of personal growth with some new options education. Join show host, Mark Benzaquen, as he welcomes special guest Emily Kurtz of Public.com for a discussion on fundamental concepts and terminology of options including calls & puts, strike price, expiration, exercise & assignment and moneyness.
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This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
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Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
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Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
These strategies discussed are strictly for illustrative and educational purposes only,
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
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used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
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one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquine.
Hello everyone, happy 2025 and welcome to an all new season of OIC's Wide World of
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Options.
I'm your host, Mark Benzoquine.
A new year often brings with it New Year's resolutions, and if your New Year's resolution
includes learning about options, then you've come to the right place.
Each new year OIC begins our programming by going back to the basics and understanding
the fundamental concepts such as what are options and why do people use them, and to
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help us better understand those basic and fundamental concepts.
I'm happy to welcome today's special guest, Emily Kurtz of public.com.
Emily, welcome and thank you so much for joining us today.
Thanks Mark and really excited to be here.
So a bit of context as Mark mentioned, Emily, the head of product at Public.
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Just a bit of context for those listeners who may not be familiar with Public.
Public is an investing platform that makes building a multi-asset portfolio fast, secure,
and frictionless so members can invest in stocks, bonds, crypto, and options, which
is why we're here today.
We launched options I guess at the beginning of this year and it's been a business that
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we've continued to evolve and a product that we've continued to evolve and I was heavily
involved in the ideation of that and the strategy behind that and actually bringing that to
life and so really excited to be here and talk with you about educating investors on
options since education is really important when it comes to options which are a slightly
more complicated asset class than your typical equities.
Well, absolutely.
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And listeners, so Emily and I developed a working relationship back in Orlando of 2024
where we both took part in a conference exposition called the All Stars of Options.
So Emily, if you don't mind, again, welcome back.
It's certainly great to see you again.
Can you tell us just briefly a little bit about yourself and your experience in the
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options space?
Of course.
So probably not necessarily from many of you on this call.
Prior to this year, I actually didn't have a lot of experience in options and so I really
spent this year getting familiar with that, starting with the basics, with the calls and
puts and the simple single leg strategies, understanding how I could use them in my portfolio,
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how I could use them with specific goals in mind, which I'm sure we'll get into, but whether
or not I'm taking an overall stance on the market or I want to generate income or I want
to protect my positions, all different ways that you can use options.
And then since then, as I've gotten more experience, I've started dabbling in more advanced strategies
with specific goals in mind based on my objective of what's going to happen in the market.
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And so it's been a really fun learning process and something that I feel really good about.
And now I use them pretty heavily to strengthen my portfolio and to meet different needs that
I see and expect in the market.
So Emily, I'm glad that you mentioned that your experience in the options space is relatively
new because I think that'll give an interesting perspective as we're talking about these basics
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and fundamentals for those investors just looking to get into options.
So for those investors that we're talking to directly, let's go ahead and get into the
questions.
Investors typically know what it means to buy and sell stock, but when it comes to options,
obviously there's quite a disconnect.
So from somebody new to the options space, can you help us break down the differences
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and even the similarities between trading stock and trading options?
Of course, and that's a great question.
And I think one of the first things you need to familiarize yourself with as you're starting
to invest in options.
And so stocks often referred to as equities really represent a fraction of ownership in
the issuing company.
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So you are a shareholder of that company and with that have certain rights, maybe voting,
dividends, annual meetings, and more.
While there are some similarities, an option is also in the market, also an underlying
asset.
An option does not represent a fraction of ownership and therefore you don't get the
same rate.
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Right.
So instead of representing a fraction of ownership, an option is a financial derivative based
on the value of the company that gives you the right or the option to perform an action.
The most commonly discussed options are calls and puts, which give the investor the right,
but not the obligation to buy or sell shares of the underlying asset.
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And so one of the reasons that investors really love or like options is that options can be
incorporated into your portfolio in a variety of different ways based on your outlook on
the market, your personal worth tolerance, your current portfolio positions, and more.
One thing that is really important to note is options definitely can be riskier and they're
not suitable for all investors, but they can be really valuable to deploy in specific ways
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to bolster your portfolio.
Right.
Absolutely.
And to build on, you had mentioned that options can be used in a variety of ways for a variety
of reasons.
Let's talk about some of those ways and reasons.
Options can be used for a variety of forecasts, bullish, bearish, market neutral, et cetera.
What about objectives?
What are some objectives that investors might have that they turn to options as opposed
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to simply buying and selling stock?
Yeah, of course.
So I think the first is risk, right?
So some investors may use options to hedge your portfolio against losses.
A common way to do this that some more beginning investors use is a long put that says, "Hey,
maybe I own this position, but I want to be protected if the stock price falls below a
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specific price."
And a long put is a way to do that, often referred to as a protective put.
Another objective that people often use options for is income generation.
So selling an option may be a cash-secure put, a covered call to generate income in your
portfolio.
The other area that options can be frequently used is just a little bit more flexibility.
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So as you said, maybe you're bullish, maybe you're bearish, maybe you want to take a
stance, or maybe you have a bit more of a nuanced stance here.
You're bullish between point A and point B, or you're bearish between point A and point
B. And so it gives you a little bit more ability to target a specific cross-sector of the market
based on your interest.
I think the last thing that is also helpful to note is it can give you leverage.
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So that works on both sides.
It can amplify your returns.
It can also amplify your losses because options take a similar stance that you'd have to take
with equities typically require smaller upfront capital.
And so those are some of the various ways folks use options to strengthen their objectives.
Well, excellent.
And I like that you pointed out that options may not be suitable for everybody.
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And that is one of the first lines in our disclaimer that we use because options are
complex instruments.
They are more difficult to understand and they may not be for everybody, which is where,
for example, OIC comes in, we like to provide the education, give people the knowledge of
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how options work and why people use them for them to then make a decision as to the suitability
of the investment for their own portfolio.
So I'm glad that you touched on that point because it definitely is an important one.
Something that I want to touch on next is terminology.
Options terminology, as you mentioned, options are a derivative.
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Not a lot of people understand what that exactly means.
But there's other terminology as well that people don't have in their normal, everyday
vernacular.
So let's go ahead and talk a little bit about that.
You mentioned calls and puts.
There are rights and obligations that go along with those.
Buyers have rights.
Sellers have obligations.
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Strike price, for example, what is that?
That's a very, very common term that people use certainly in the option space.
How do you explain to an investor what a strike price is?
No, you nailed it.
And I actually was thinking about it right before this call.
There are -- options has a lot more terminology than the equity space.
There's the type, calls and puts, which you just talked about.
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There's the underlying.
There's a strike price, an expiration, a contract multiplier.
I'm going to quickly go over each of them because I think they're important as sort
of we talked about options.
And underlying typically refers to the shares under the basis for that option.
So say, Mark, we're going to use your name.
Say I have, you know, I'm interested in the Mark Corporation.
I want to buy an option on the Mark Corporation.
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That in that instance would be an underlying.
A strike price.
So as we mentioned, right with calls and puts, you have the right but not -- if you're the
holder of that call or put, you have the right but not obligation to perform an action.
Let's think about a call, for instance, right?
You have the right to buy that underlying.
The strike price and expiration are really important for each of that option contract.
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The strike price is the price at which you have the opportunity to perform that action.
So in the instance of a call, right, that's the price at which you can buy the option.
And to say, right, Mark Corporation is trading in the market at $50, but my strike price
for the call is $45, I have the right to buy that Mark Corporation call at $45 because
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that is what's specified in my option contract.
Exploration is also a really important thing.
Very different ways than equity.
Options have an expiration assigned to them, right?
They expire.
They could become in the money.
They could become out of the money.
They could expire worthless.
Something happens at that expiration point, but they don't live into perpetuity.
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And so that expiration, because a lot of what we deal with in America, especially for stocks
and ETFs, are American-style options.
What the expiration means is that that is the opportunity where you can perform that
action anytime between now and that expiration date.
So that's really important to note because as you get closer to expiration, it's really
important to manage your positions, understand where the strike price is at relative to that
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underlying price, and really make sure you're effectively managing your risk.
The last one, and then I know we may want to dive into some of those a little bit more,
which I think is really important, is the contract multiplier.
And so this is really important because when you buy one option, right, say I buy that
one call, I'm actually buying the right to buy 100 shares of that underlying, not just
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one.
And so this is really important when you think about what will happen at exercise if the
option gets that service after assigned.
It also is important in determining how much it's going to cost you to open that position,
right?
The price of an option contract may be $3, but you're actually going to pay $300 because
of that 100X multiplier.
So that's really important as you think about options.
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Those are sort of the key dimensions that come into play and you'll frequently hear
people talking about.
Right, absolutely.
You had mentioned American style options.
So I just want to clarify something that the two option styles, they relate to exercise
style, if you will.
There's American and European, neither of which relate to geography, oddly enough.
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But American style options, as Emily had mentioned, you can exercise at any time for any reason
and only buyers of options can exercise.
The flip side of that coin is European style.
Those can only be exercised on expiration day.
Emily, something you mentioned earlier, one of the objectives that people use options
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for typically is income generation.
And when we're talking income generation, as you know, we're not talking about a steady
paycheck.
What we're talking about is income derived from selling options, the premium that goes
along with that option price.
As you had mentioned, a $3 option is really $300 in the real world due to that multiplier.
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So with that $3 option, for example, where does that number come from?
Who creates those option prices?
And more importantly, how do we know whether or not that option price is fair?
No, great question.
And so, option prices are typically thought of in two components, the intrinsic value
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of the option contract and the extrinsic value.
So let's go into both of those because those words may sound unfamiliar to folks.
The intrinsic value is the inherent worth of that option.
So basically, the amount that could be gained or lost by immediate exercise.
The extrinsic value, which is often referred to as time value, is the added premium for
any potential change that could happen between now and expiration.
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Let's take an example.
So say that same example, you know, with our mark call.
Say mark the corporation is, you know, trading at $50.
I have a call option, you know, that has that $45 strike price.
This inherently has $5 of intrinsic value, right?
It's currently trading at $50.
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My strike price is $45.
And so if this were to exercise immediately, that's a $5 delta between my strike price
and what the current price is in the market that I could profit from immediately.
Obviously, you wouldn't get the full profit because you did have to pay something to enter
into the position, which would be, you know, removed from your profit.
But that's the intrinsic value.
The extrinsic value is basically anything that, you know, could change that price of
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that, you know, mark the $50 between now and that expiration date.
And so likely that option contract is not going to be priced at $5 or a $5 premium, but
it could be priced at, you know, $6 or $7.
And basically that delta is the extrinsic value or that time value of something, you
know, the opportunity for that option to become more valuable over time.
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And so what you typically see is that the further out the expiration date, the more
extrinsic value there is in that contract because there's more of an opportunity for
that contract to change, for it to become valuable, for it to become invaluable, but
there's just more opportunity for something to change that, you know, changes the status
of that contract.
Right.
Something that, you know, one of the basic phrases that I'm sure everybody's familiar
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with is time is money.
And with options, you had mentioned that longer term options, for example, there's more time
for things to change.
So from a seller's perspective, the seller is accepting more risk by selling a longer
dated contract.
We may have an idea where the stock is going to close at the end of today or the end of
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tomorrow, but knowing where that stock is going to close six months from now or two
years from now as a seller, I'm going to be accepting a tremendous amount of risk to sell
that contract.
So in order to accept that risk, I want to get paid for it.
So it's certainly one of the reasons why that time is money phrase applies to options.
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So so inherently, and speaking of inherent, you were talking about intrinsic value, extrinsic
value.
The components that go into both intrinsic value, it's really the, as you mentioned,
the difference between the stock price and the strike price extrinsic value or time value
is going to be everything else.
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That's going to be the time until expiration, interest rates, dividends, and something called
implied volatility.
All of those inputs are observable and quantifiable with the exception of implied volatility.
Can you give us a high level overview of exactly what that means, implied volatility, and what
it might mean for investors?
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Yeah, of course.
And I think that's a great question, right?
The most frequent two factors that impact the price of that option, there are a million,
as you said, it's time value and implied volatility.
And so implied volatility is basically the volatility in the stock price, right?
How much do investors think that a price may swing in the future?
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And so there are a variety of factors that drive implied volatility.
Some of them are just basics like supply and demand, but there's also specific factors
related to the company or broader market trends that can also impact that, whether it be an
upcoming earnings announcement, an upcoming unemployment figure, a Fed rate.
And so there's a lot of different factors, both directly related to a company and related
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to overall market trends that can impact implied volatility.
One thing that is important to note that you mentioned is the higher the implied volatility,
typically that means investors expect bigger price moves, both up and down, and it typically
means that there will be more of a premium baked in.
And so what a lot of investors do look at is for the same contract, all apples to apples,
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one with higher implied volatility, one with lower implied volatility, most likely for
the buyer of that option contract, the contract with the higher implied volatility will cost
them more because there's just more opportunity to drive that change.
Right.
And as implied volatility increases, so do prices.
There's a lot of different concepts and options, some of which have a positive correlation
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to the stock price, some have a negative correlation.
Calls, for example, as the price of a stock goes up, more expensive the calls get, that's
a positive correlation.
Shorts are going to be the opposite, so a negative correlation.
And same thing with implied volatility.
Implied volatility goes up, it's positively correlated to prices, and vice versa.
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When it comes to pricing, when it comes to premium, and kind of back to the terminology
that we were talking earlier, there's this concept of moneyness.
And what I mean by that is that investors are probably hearing these terms of in the
money, at the money, out of the money, and having no idea what it means.
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So can you explain that to them, please?
Yes, of course.
And actually funny that you say that we longed the option, we wanted to show moneyness inside
our app because obviously it is quite important to understand and be able to effectively manage
your risk.
And I was like, there's no way moneyness doesn't work.
Well, it isn't a word.
It is a real thing.
It just sounds quite funny.
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So what moneyness is, is basically, let's start within the money.
So an option is in the money if it would be profitable to exercise it today.
So that means it's in the money even if it's only a penny in the money.
And so what that means is that option has intrinsic value, as we talked about, and the
current market of the underlying is favorable for the option owner or the option holder.
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At the money, right, means you're exactly at the money, the price of the underlying
is in line with the strike price, and out of the money means it would not be favorable
for you to exercise it.
You will get better terms in the market.
And if it remains out of the money, it likely will expire worthless.
I'm going to give an example because I still think that can be a little bit hard to visualize.
So thinking about a call option, right, as you talked about, the call option is in the
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money if the stock price is higher than the strike price.
And the reason for that is, right, you can typically then buy the shares of whatever
that underlying is using your option for cheaper than you could buy directly in the market.
So it's in the money.
However, say the opposite were true, right?
Your stock price is lower than the strike price.
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You would never really choose to exercise that right because you could buy it for cheaper
in the market.
And so in that instance, when it's out of the money, you would probably, most likely
there are other scenarios why you wouldn't, but you would most likely let that option
expire worthless because you can get better terms for that same thing in the market.
And so those terms, you know, in the money, at the money, out of the money are really
important as we get to expiration and understanding what will happen if you do nothing based on
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just, you know, the pure strike price relative to the underlying stock price and what that
will happen to your portfolio.
Right, exactly.
And that's not to say that out of the money contracts don't have their value or at the
money.
They're certainly going to be cheaper, as you had mentioned, at the money and out of
the money only have extrinsic or time value, whereas in the money has intrinsic value as
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well as extrinsic typically.
But out of the money options, you know, still can have any use and many investors do trade
out of the money options.
And one of the reasons that you had mentioned again earlier when it came to objectives is
leverage.
If you can buy an out of the money contract, that turns in the money.
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And again, if you're bullish and you're buying some calls, you can buy, if stocks trading
50, I like Mark Corporation by the way, I like that very much, thank you.
If stock is trading 50, you can buy an in the money $45 call and let's say that costs
$6, the at the money might cost $3 and out of the money $55 strike call might cost $0.50.
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So if you're of the opinion that the stock is going to increase from say 50 to 60, then
that in the money call, the 45 strike call, that's going to be worth $15, but you paid,
what did we say, $6 or so for that.
So that would be a $9 profit.
The at the money call, maybe you paid $2 and it's now worth $10.
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So that would be an $8 profit.
The out of the money, it's worth $5, but you only paid 50 cents for it.
So $4 and a half dollar profit off of a 50 cent investment, your return, your ROI is
going to be significantly higher with those out of the money options.
So they do have a place and people do trade out of the money options often, whether it's
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for leverage or you'd mentioned earlier, the protective put strategy where you're long
a put against your stock.
Really you buy an out of the money put because you're looking for protection should things
fall.
So I guess what I'm saying is all of those levels or concepts of moniness all have uses
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in different scenarios, which again, it's just the versatility of options.
The other thing I was going to say that I think is helpful, right?
Is as you think about options and liquidity in the market, which I think is really important,
right?
Because when you are investing in options, it's also important, the more liquid the option
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is the easier it will be for you to get out of that position if you deem, if you sell
what you want to.
And so, you know, typically not always, but typically the values right around the, you
know, at the money have more liquidity than when you go far on either extremes, you know,
super in the money, super out of the money.
And so that is also helpful.
A lot of investors do use, you know, what is the current price as a reference point
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in deciding, you know, what is the current option that they would like to purchase or
own taking into consideration, as you said, maybe that the out of the money option contract
based on their perspective and based on the current price and sort of that extrinsic
value may look more interesting to them at that given time.
Right.
Exactly.
Yeah.
We always talk about how most of the action, if you will, is around the at the money near
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term expiry.
The contract that's expiring soonest centered around that stock price.
That's where most of the trading occurs.
Before we close things out, let's talk about education.
So you had mentioned that you're relatively new to the option space.
How do you feel or where do you put the value of education in understanding how options
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work in terms of the potential for success that one might have as a trader?
Yeah.
So I think with options, like education is really crucial, right?
As we kind of talked about, there is more nuance, there is more complexity.
And so the more you can educate yourself and build upon your foundation, right, is important.
And so I think that's something that I focused on a lot when I was learning is getting started
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with the fundamentals, understanding the long calls and long puts, then, you know, adding
on some of the income generated strategies and then really building up that multi-leg
strategies that have more nuances because once you start understanding the fundamentals,
you can really understand how they build together.
This is also really important for us at public when we launched options.
One thing that we spent a lot of time on is, you know, building an experience directly
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baked into the platform that educated investors as they went because as you mentioned, there
are so many nuances, there's a lot of terminology, there's a lot of different objectives that
you can derive.
So continuing to, you know, create a foundation and building upon that is crucial.
You know, I also think there's a lot of resources out there.
You know, there's a lot of brokerages that have educational information.
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There's podcasts like this.
And you know, if it makes sense for your intolerance, I also think there's not necessarily the harm
in starting small and sort of learning and trying, but really, like, you know, growing
into that, I wouldn't, you know, all of a sudden start opening iron condors, but really
figuring out, you know, how the fundamentals work that you can then build upon that foundation.
Right.
Investing in options is definitely a walk before you run endeavor.
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Certainly the more you know, hopefully the, you know, greater potential for success that
you might have.
Emily, really, I appreciate you joining us today.
Thank you so much.
This was terrific.
It was great to have, to be here.
I appreciate it.
And good to see you again from Florida.
You do as well.
You too as well.
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Thank you so much.
Ladies and gentlemen, that's going to do it for today's episode.
Before we sign off, I want to encourage our listeners to visit our website, optionseducation.org,
to register for our two upcoming and Back to Basics events this January.
And I invite each of you to reach out to our investor education team at options@theocc.com
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with all your options related questions.
I also again want to thank our special guest, Emily Kurtz of public.com, for joining us
today and sharing her special insight into how options work.
And thank you to our listeners for your continued support of Wide World of Options and all that
we at OIC provide.
Happy New Year to everyone.
Emily, happy new year to you.
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And we'll be talking with you again very soon.
Thank you.
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(29:01):
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Subscribe to the OIC YouTube channel, like them on Facebook, follow them on Twitter at
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Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
(29:22):
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(30:13):
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You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Most programs are also available via livestream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the hosts at twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider, or via questions
(00:52):
at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
(01:13):
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
These strategies discussed are strictly for illustrative and educational purposes only,
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
(01:58):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquine.
Hello everyone, happy 2025 and welcome to an all new season of OIC's Wide World of
(02:49):
Options.
I'm your host, Mark Benzoquine.
A new year often brings with it New Year's resolutions, and if your New Year's resolution
includes learning about options, then you've come to the right place.
Each new year OIC begins our programming by going back to the basics and understanding
the fundamental concepts such as what are options and why do people use them, and to
(03:12):
help us better understand those basic and fundamental concepts.
I'm happy to welcome today's special guest, Emily Kurtz of public.com.
Emily, welcome and thank you so much for joining us today.
Thanks Mark and really excited to be here.
So a bit of context as Mark mentioned, Emily, the head of product at Public.
(03:33):
Just a bit of context for those listeners who may not be familiar with Public.
Public is an investing platform that makes building a multi-asset portfolio fast, secure,
and frictionless so members can invest in stocks, bonds, crypto, and options, which
is why we're here today.
We launched options I guess at the beginning of this year and it's been a business that
(03:53):
we've continued to evolve and a product that we've continued to evolve and I was heavily
involved in the ideation of that and the strategy behind that and actually bringing that to
life and so really excited to be here and talk with you about educating investors on
options since education is really important when it comes to options which are a slightly
more complicated asset class than your typical equities.
Well, absolutely.
(04:14):
And listeners, so Emily and I developed a working relationship back in Orlando of 2024
where we both took part in a conference exposition called the All Stars of Options.
So Emily, if you don't mind, again, welcome back.
It's certainly great to see you again.
Can you tell us just briefly a little bit about yourself and your experience in the
(04:38):
options space?
Of course.
So probably not necessarily from many of you on this call.
Prior to this year, I actually didn't have a lot of experience in options and so I really
spent this year getting familiar with that, starting with the basics, with the calls and
puts and the simple single leg strategies, understanding how I could use them in my portfolio,
(04:59):
how I could use them with specific goals in mind, which I'm sure we'll get into, but whether
or not I'm taking an overall stance on the market or I want to generate income or I want
to protect my positions, all different ways that you can use options.
And then since then, as I've gotten more experience, I've started dabbling in more advanced strategies
with specific goals in mind based on my objective of what's going to happen in the market.
(05:21):
And so it's been a really fun learning process and something that I feel really good about.
And now I use them pretty heavily to strengthen my portfolio and to meet different needs that
I see and expect in the market.
So Emily, I'm glad that you mentioned that your experience in the options space is relatively
new because I think that'll give an interesting perspective as we're talking about these basics
(05:43):
and fundamentals for those investors just looking to get into options.
So for those investors that we're talking to directly, let's go ahead and get into the
questions.
Investors typically know what it means to buy and sell stock, but when it comes to options,
obviously there's quite a disconnect.
So from somebody new to the options space, can you help us break down the differences
(06:08):
and even the similarities between trading stock and trading options?
Of course, and that's a great question.
And I think one of the first things you need to familiarize yourself with as you're starting
to invest in options.
And so stocks often referred to as equities really represent a fraction of ownership in
the issuing company.
(06:28):
So you are a shareholder of that company and with that have certain rights, maybe voting,
dividends, annual meetings, and more.
While there are some similarities, an option is also in the market, also an underlying
asset.
An option does not represent a fraction of ownership and therefore you don't get the
same rate.
(06:49):
Right.
So instead of representing a fraction of ownership, an option is a financial derivative based
on the value of the company that gives you the right or the option to perform an action.
The most commonly discussed options are calls and puts, which give the investor the right,
but not the obligation to buy or sell shares of the underlying asset.
(07:09):
And so one of the reasons that investors really love or like options is that options can be
incorporated into your portfolio in a variety of different ways based on your outlook on
the market, your personal worth tolerance, your current portfolio positions, and more.
One thing that is really important to note is options definitely can be riskier and they're
not suitable for all investors, but they can be really valuable to deploy in specific ways
(07:34):
to bolster your portfolio.
Right.
Absolutely.
And to build on, you had mentioned that options can be used in a variety of ways for a variety
of reasons.
Let's talk about some of those ways and reasons.
Options can be used for a variety of forecasts, bullish, bearish, market neutral, et cetera.
What about objectives?
What are some objectives that investors might have that they turn to options as opposed
(07:58):
to simply buying and selling stock?
Yeah, of course.
So I think the first is risk, right?
So some investors may use options to hedge your portfolio against losses.
A common way to do this that some more beginning investors use is a long put that says, "Hey,
maybe I own this position, but I want to be protected if the stock price falls below a
(08:19):
specific price."
And a long put is a way to do that, often referred to as a protective put.
Another objective that people often use options for is income generation.
So selling an option may be a cash-secure put, a covered call to generate income in your
portfolio.
The other area that options can be frequently used is just a little bit more flexibility.
(08:40):
So as you said, maybe you're bullish, maybe you're bearish, maybe you want to take a
stance, or maybe you have a bit more of a nuanced stance here.
You're bullish between point A and point B, or you're bearish between point A and point
B. And so it gives you a little bit more ability to target a specific cross-sector of the market
based on your interest.
I think the last thing that is also helpful to note is it can give you leverage.
(09:02):
So that works on both sides.
It can amplify your returns.
It can also amplify your losses because options take a similar stance that you'd have to take
with equities typically require smaller upfront capital.
And so those are some of the various ways folks use options to strengthen their objectives.
Well, excellent.
And I like that you pointed out that options may not be suitable for everybody.
(09:24):
And that is one of the first lines in our disclaimer that we use because options are
complex instruments.
They are more difficult to understand and they may not be for everybody, which is where,
for example, OIC comes in, we like to provide the education, give people the knowledge of
(09:45):
how options work and why people use them for them to then make a decision as to the suitability
of the investment for their own portfolio.
So I'm glad that you touched on that point because it definitely is an important one.
Something that I want to touch on next is terminology.
Options terminology, as you mentioned, options are a derivative.
(10:08):
Not a lot of people understand what that exactly means.
But there's other terminology as well that people don't have in their normal, everyday
vernacular.
So let's go ahead and talk a little bit about that.
You mentioned calls and puts.
There are rights and obligations that go along with those.
Buyers have rights.
Sellers have obligations.
(10:29):
Strike price, for example, what is that?
That's a very, very common term that people use certainly in the option space.
How do you explain to an investor what a strike price is?
No, you nailed it.
And I actually was thinking about it right before this call.
There are -- options has a lot more terminology than the equity space.
There's the type, calls and puts, which you just talked about.
(10:51):
There's the underlying.
There's a strike price, an expiration, a contract multiplier.
I'm going to quickly go over each of them because I think they're important as sort
of we talked about options.
And underlying typically refers to the shares under the basis for that option.
So say, Mark, we're going to use your name.
Say I have, you know, I'm interested in the Mark Corporation.
I want to buy an option on the Mark Corporation.
(11:13):
That in that instance would be an underlying.
A strike price.
So as we mentioned, right with calls and puts, you have the right but not -- if you're the
holder of that call or put, you have the right but not obligation to perform an action.
Let's think about a call, for instance, right?
You have the right to buy that underlying.
The strike price and expiration are really important for each of that option contract.
(11:35):
The strike price is the price at which you have the opportunity to perform that action.
So in the instance of a call, right, that's the price at which you can buy the option.
And to say, right, Mark Corporation is trading in the market at $50, but my strike price
for the call is $45, I have the right to buy that Mark Corporation call at $45 because
(11:56):
that is what's specified in my option contract.
Exploration is also a really important thing.
Very different ways than equity.
Options have an expiration assigned to them, right?
They expire.
They could become in the money.
They could become out of the money.
They could expire worthless.
Something happens at that expiration point, but they don't live into perpetuity.
(12:16):
And so that expiration, because a lot of what we deal with in America, especially for stocks
and ETFs, are American-style options.
What the expiration means is that that is the opportunity where you can perform that
action anytime between now and that expiration date.
So that's really important to note because as you get closer to expiration, it's really
important to manage your positions, understand where the strike price is at relative to that
(12:39):
underlying price, and really make sure you're effectively managing your risk.
The last one, and then I know we may want to dive into some of those a little bit more,
which I think is really important, is the contract multiplier.
And so this is really important because when you buy one option, right, say I buy that
one call, I'm actually buying the right to buy 100 shares of that underlying, not just
(13:01):
one.
And so this is really important when you think about what will happen at exercise if the
option gets that service after assigned.
It also is important in determining how much it's going to cost you to open that position,
right?
The price of an option contract may be $3, but you're actually going to pay $300 because
of that 100X multiplier.
So that's really important as you think about options.
(13:23):
Those are sort of the key dimensions that come into play and you'll frequently hear
people talking about.
Right, absolutely.
You had mentioned American style options.
So I just want to clarify something that the two option styles, they relate to exercise
style, if you will.
There's American and European, neither of which relate to geography, oddly enough.
(13:46):
But American style options, as Emily had mentioned, you can exercise at any time for any reason
and only buyers of options can exercise.
The flip side of that coin is European style.
Those can only be exercised on expiration day.
Emily, something you mentioned earlier, one of the objectives that people use options
(14:07):
for typically is income generation.
And when we're talking income generation, as you know, we're not talking about a steady
paycheck.
What we're talking about is income derived from selling options, the premium that goes
along with that option price.
As you had mentioned, a $3 option is really $300 in the real world due to that multiplier.
(14:30):
So with that $3 option, for example, where does that number come from?
Who creates those option prices?
And more importantly, how do we know whether or not that option price is fair?
No, great question.
And so, option prices are typically thought of in two components, the intrinsic value
(14:52):
of the option contract and the extrinsic value.
So let's go into both of those because those words may sound unfamiliar to folks.
The intrinsic value is the inherent worth of that option.
So basically, the amount that could be gained or lost by immediate exercise.
The extrinsic value, which is often referred to as time value, is the added premium for
any potential change that could happen between now and expiration.
(15:14):
Let's take an example.
So say that same example, you know, with our mark call.
Say mark the corporation is, you know, trading at $50.
I have a call option, you know, that has that $45 strike price.
This inherently has $5 of intrinsic value, right?
It's currently trading at $50.
(15:35):
My strike price is $45.
And so if this were to exercise immediately, that's a $5 delta between my strike price
and what the current price is in the market that I could profit from immediately.
Obviously, you wouldn't get the full profit because you did have to pay something to enter
into the position, which would be, you know, removed from your profit.
But that's the intrinsic value.
The extrinsic value is basically anything that, you know, could change that price of
(15:59):
that, you know, mark the $50 between now and that expiration date.
And so likely that option contract is not going to be priced at $5 or a $5 premium, but
it could be priced at, you know, $6 or $7.
And basically that delta is the extrinsic value or that time value of something, you
know, the opportunity for that option to become more valuable over time.
(16:22):
And so what you typically see is that the further out the expiration date, the more
extrinsic value there is in that contract because there's more of an opportunity for
that contract to change, for it to become valuable, for it to become invaluable, but
there's just more opportunity for something to change that, you know, changes the status
of that contract.
Right.
Something that, you know, one of the basic phrases that I'm sure everybody's familiar
(16:46):
with is time is money.
And with options, you had mentioned that longer term options, for example, there's more time
for things to change.
So from a seller's perspective, the seller is accepting more risk by selling a longer
dated contract.
We may have an idea where the stock is going to close at the end of today or the end of
(17:08):
tomorrow, but knowing where that stock is going to close six months from now or two
years from now as a seller, I'm going to be accepting a tremendous amount of risk to sell
that contract.
So in order to accept that risk, I want to get paid for it.
So it's certainly one of the reasons why that time is money phrase applies to options.
(17:30):
So so inherently, and speaking of inherent, you were talking about intrinsic value, extrinsic
value.
The components that go into both intrinsic value, it's really the, as you mentioned,
the difference between the stock price and the strike price extrinsic value or time value
is going to be everything else.
(17:50):
That's going to be the time until expiration, interest rates, dividends, and something called
implied volatility.
All of those inputs are observable and quantifiable with the exception of implied volatility.
Can you give us a high level overview of exactly what that means, implied volatility, and what
it might mean for investors?
(18:11):
Yeah, of course.
And I think that's a great question, right?
The most frequent two factors that impact the price of that option, there are a million,
as you said, it's time value and implied volatility.
And so implied volatility is basically the volatility in the stock price, right?
How much do investors think that a price may swing in the future?
(18:32):
And so there are a variety of factors that drive implied volatility.
Some of them are just basics like supply and demand, but there's also specific factors
related to the company or broader market trends that can also impact that, whether it be an
upcoming earnings announcement, an upcoming unemployment figure, a Fed rate.
And so there's a lot of different factors, both directly related to a company and related
(18:54):
to overall market trends that can impact implied volatility.
One thing that is important to note that you mentioned is the higher the implied volatility,
typically that means investors expect bigger price moves, both up and down, and it typically
means that there will be more of a premium baked in.
And so what a lot of investors do look at is for the same contract, all apples to apples,
(19:16):
one with higher implied volatility, one with lower implied volatility, most likely for
the buyer of that option contract, the contract with the higher implied volatility will cost
them more because there's just more opportunity to drive that change.
Right.
And as implied volatility increases, so do prices.
There's a lot of different concepts and options, some of which have a positive correlation
(19:38):
to the stock price, some have a negative correlation.
Calls, for example, as the price of a stock goes up, more expensive the calls get, that's
a positive correlation.
Shorts are going to be the opposite, so a negative correlation.
And same thing with implied volatility.
Implied volatility goes up, it's positively correlated to prices, and vice versa.
(19:59):
When it comes to pricing, when it comes to premium, and kind of back to the terminology
that we were talking earlier, there's this concept of moneyness.
And what I mean by that is that investors are probably hearing these terms of in the
money, at the money, out of the money, and having no idea what it means.
(20:21):
So can you explain that to them, please?
Yes, of course.
And actually funny that you say that we longed the option, we wanted to show moneyness inside
our app because obviously it is quite important to understand and be able to effectively manage
your risk.
And I was like, there's no way moneyness doesn't work.
Well, it isn't a word.
It is a real thing.
It just sounds quite funny.
(20:42):
So what moneyness is, is basically, let's start within the money.
So an option is in the money if it would be profitable to exercise it today.
So that means it's in the money even if it's only a penny in the money.
And so what that means is that option has intrinsic value, as we talked about, and the
current market of the underlying is favorable for the option owner or the option holder.
(21:05):
At the money, right, means you're exactly at the money, the price of the underlying
is in line with the strike price, and out of the money means it would not be favorable
for you to exercise it.
You will get better terms in the market.
And if it remains out of the money, it likely will expire worthless.
I'm going to give an example because I still think that can be a little bit hard to visualize.
So thinking about a call option, right, as you talked about, the call option is in the
(21:29):
money if the stock price is higher than the strike price.
And the reason for that is, right, you can typically then buy the shares of whatever
that underlying is using your option for cheaper than you could buy directly in the market.
So it's in the money.
However, say the opposite were true, right?
Your stock price is lower than the strike price.
(21:49):
You would never really choose to exercise that right because you could buy it for cheaper
in the market.
And so in that instance, when it's out of the money, you would probably, most likely
there are other scenarios why you wouldn't, but you would most likely let that option
expire worthless because you can get better terms for that same thing in the market.
And so those terms, you know, in the money, at the money, out of the money are really
important as we get to expiration and understanding what will happen if you do nothing based on
(22:14):
just, you know, the pure strike price relative to the underlying stock price and what that
will happen to your portfolio.
Right, exactly.
And that's not to say that out of the money contracts don't have their value or at the
money.
They're certainly going to be cheaper, as you had mentioned, at the money and out of
the money only have extrinsic or time value, whereas in the money has intrinsic value as
(22:37):
well as extrinsic typically.
But out of the money options, you know, still can have any use and many investors do trade
out of the money options.
And one of the reasons that you had mentioned again earlier when it came to objectives is
leverage.
If you can buy an out of the money contract, that turns in the money.
(22:58):
And again, if you're bullish and you're buying some calls, you can buy, if stocks trading
50, I like Mark Corporation by the way, I like that very much, thank you.
If stock is trading 50, you can buy an in the money $45 call and let's say that costs
$6, the at the money might cost $3 and out of the money $55 strike call might cost $0.50.
(23:21):
So if you're of the opinion that the stock is going to increase from say 50 to 60, then
that in the money call, the 45 strike call, that's going to be worth $15, but you paid,
what did we say, $6 or so for that.
So that would be a $9 profit.
The at the money call, maybe you paid $2 and it's now worth $10.
(23:44):
So that would be an $8 profit.
The out of the money, it's worth $5, but you only paid 50 cents for it.
So $4 and a half dollar profit off of a 50 cent investment, your return, your ROI is
going to be significantly higher with those out of the money options.
So they do have a place and people do trade out of the money options often, whether it's
(24:07):
for leverage or you'd mentioned earlier, the protective put strategy where you're long
a put against your stock.
Really you buy an out of the money put because you're looking for protection should things
fall.
So I guess what I'm saying is all of those levels or concepts of moniness all have uses
(24:28):
in different scenarios, which again, it's just the versatility of options.
The other thing I was going to say that I think is helpful, right?
Is as you think about options and liquidity in the market, which I think is really important,
right?
Because when you are investing in options, it's also important, the more liquid the option
(24:50):
is the easier it will be for you to get out of that position if you deem, if you sell
what you want to.
And so, you know, typically not always, but typically the values right around the, you
know, at the money have more liquidity than when you go far on either extremes, you know,
super in the money, super out of the money.
And so that is also helpful.
A lot of investors do use, you know, what is the current price as a reference point
(25:14):
in deciding, you know, what is the current option that they would like to purchase or
own taking into consideration, as you said, maybe that the out of the money option contract
based on their perspective and based on the current price and sort of that extrinsic
value may look more interesting to them at that given time.
Right.
Exactly.
Yeah.
We always talk about how most of the action, if you will, is around the at the money near
(25:38):
term expiry.
The contract that's expiring soonest centered around that stock price.
That's where most of the trading occurs.
Before we close things out, let's talk about education.
So you had mentioned that you're relatively new to the option space.
How do you feel or where do you put the value of education in understanding how options
(26:03):
work in terms of the potential for success that one might have as a trader?
Yeah.
So I think with options, like education is really crucial, right?
As we kind of talked about, there is more nuance, there is more complexity.
And so the more you can educate yourself and build upon your foundation, right, is important.
And so I think that's something that I focused on a lot when I was learning is getting started
(26:27):
with the fundamentals, understanding the long calls and long puts, then, you know, adding
on some of the income generated strategies and then really building up that multi-leg
strategies that have more nuances because once you start understanding the fundamentals,
you can really understand how they build together.
This is also really important for us at public when we launched options.
One thing that we spent a lot of time on is, you know, building an experience directly
(26:49):
baked into the platform that educated investors as they went because as you mentioned, there
are so many nuances, there's a lot of terminology, there's a lot of different objectives that
you can derive.
So continuing to, you know, create a foundation and building upon that is crucial.
You know, I also think there's a lot of resources out there.
You know, there's a lot of brokerages that have educational information.
(27:10):
There's podcasts like this.
And you know, if it makes sense for your intolerance, I also think there's not necessarily the harm
in starting small and sort of learning and trying, but really, like, you know, growing
into that, I wouldn't, you know, all of a sudden start opening iron condors, but really
figuring out, you know, how the fundamentals work that you can then build upon that foundation.
Right.
Investing in options is definitely a walk before you run endeavor.
(27:35):
Certainly the more you know, hopefully the, you know, greater potential for success that
you might have.
Emily, really, I appreciate you joining us today.
Thank you so much.
This was terrific.
It was great to have, to be here.
I appreciate it.
And good to see you again from Florida.
You do as well.
You too as well.
(27:55):
Thank you so much.
Ladies and gentlemen, that's going to do it for today's episode.
Before we sign off, I want to encourage our listeners to visit our website, optionseducation.org,
to register for our two upcoming and Back to Basics events this January.
And I invite each of you to reach out to our investor education team at options@theocc.com
(28:17):
with all your options related questions.
I also again want to thank our special guest, Emily Kurtz of public.com, for joining us
today and sharing her special insight into how options work.
And thank you to our listeners for your continued support of Wide World of Options and all that
we at OIC provide.
Happy New Year to everyone.
Emily, happy new year to you.
(28:38):
And we'll be talking with you again very soon.
Thank you.
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(29:01):
Interested in connecting with OIC on social media?
Subscribe to the OIC YouTube channel, like them on Facebook, follow them on Twitter at
options.edu and follow their page on LinkedIn.
Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
(29:22):
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(29:43):
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(30:13):
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