Succeed in Options Even if you Don't Know Where to Start!

Master secrets of controlled leverage investing. Use techniques employed by masters like Warren Buffet or George Soros.
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Instructed by Dr. Scott Brown Business / Finance
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  • Lectures 11
  • Length 2 hours
  • Skill Level Expert Level
  • Languages English
  • Includes Lifetime access
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About This Course

Published 9/2015 English

Course Description

ATTENTION: Updated Thursday, August 25, 2016, 12:36 P.M.

How's this for Stellar Profits?

  • 6.24% one day profit of $9,760.05 on FB calls [9-2-2014]
  • 2.75% one day profit of $3,430.87 on FB calls [10-21-2014]
  • 9.39% one day profit of $8,054.73 on FB calls [12-18-2014]
  • 26.67% one day profit of $21,607.50 on AAPL calls [1-28-2015]
  • 16.49% one day profit of $16,390.50 on AAPL calls [1-29-2015]
  • 6.47% one day profit of $7,740.00 on APPL calls [2-10-2015]
  • 6.25% one day profit of $15,688.10 on APPL calls [2-23-2015]

They add up.

Had you been one of the lucky few who followed Dr. Brown in 2013 and 2014 you would have watched him extract a 60 and 66% return — not on one lucky trade — on account. These are the returns in his single stock option portfolio. Read on to find out how you may reap these kind of gains this year with this best kept secret from the academic genius side of Wall Street.

In this course you will be introduced to the one perfect option strategy. The buzz is palpable ...

  • [Student email on 1st of October 2015] "On another note, I wanted to tell you how well presented I thought the options course you put on udemy is. I've liked all your productions but this one is probably the best, in my opinion. Very nicely articulated in a relaxed but poignant manner, great graphics that engage the viewers attention while absorbing the audio material, and providing a simple, usable and profitable method for option trading. The best part is you cut right through all the other crap that brokers and charlatans use as their mainstay for option services and slap them down with academic studies that disprove it all. Really, really nice job :) Cheers!" -Mountain Man

Dear fellow investor,

My name is Scott. I am a successful academic expert in options with extensive actual experience as a professional trader for my own account. By successful I mean that I am able to make significant amounts of money for my family. I watch over our finances as a financial steward.

Sometimes I am asked how I was able to become so successful in such a difficult game.

I became obsessed with finance from trading futures. This led me to obtain a Ph.D. in finance from the University of South Carolina.

This was no small feat.

The Ph.D. in finance at the University of South Carolina accepts just two students every two years from large application pools. The two applicants who win admission have tuition waived for free.

Competition is fierce because we live on pensions during the 5 years it takes to earn a doctoral degree in financial economics. Nobody with a finance Ph.D. from an AACSB business school owes student loans.

The American Assembly of Collegiate Schools of Business (AACSB) provides internationally recognized, specialized accreditation for business and accounting programs at the bachelor's, master's, and doctoral level.

Senator Elizabeth Warren shows that a university professor with a highly quantitative Ph.D. such as finance almost never endures bankruptcy because of this. It also helps that we command high pay.

But If You Thought Medical School Was Tough ...

For this reason about a hundred new doctorates in finance become new professors each year at the worlds best business schools.

Another reason we make more is that we are such hard workers in finance. This is one of the last old world style apprentice systems.

We work 365 days per year as research assistance to the brightest financial academics in the world.

The finance faculty from whom we strive to earn a doctorate in finance owns us. After years of grinding through tomes of mathematical derivations half of us become finance professors with medical school faculty sized salaries.

That's because the other half pumps up our market price by starting on Wall Street at $350K per year or more.

One of us in my class did just that. The last family photo we saw was that of his wife draped over the Maserati in front of their mansion in the Hamptons.

When I caught up to him this summer he corrected me. It was not the Maserati, they has sold that the year before.

She was draped over the new Lamborghini.

I chuckle when a Wolf of Wall Street misleads individual retail investors into believing that we teach because we can't trade. The reality could not be further from the truth. Go back and peruse my personal results I have posted above.

These results have been audited by TD Ameritrade and OptionsXpress.

HEADS UP!

Stop reading investment newsletter recommendations written by drunks, con artists and imbeciles. Learn to find your option trades on your own.

Sidestep these bad option trading strategies that will bleed your account dry faster than a one armed bandit on the Las Vegas strip. Losing stock option strategies are routinely touted by marketing cheats, scoundrels and incompetents operating major investment newsletters.

And it's official that I am at the top of the Wolves of Wall Street enemy list. My shocking revelations of Wall Street's investment newsletters have boosted me right up to numero uno.

Now, making #1 on this list is not such an easy feat.

After all, professor Bill Christie of Vanderbilt university stirred up quite a list of “enemy" brokers, directors, presidents and the CEO. Dr. Christie's research revealed that the NASDAQ was ripping off millions of retail investors with illegally excessive transaction costs in the form of an artificially wide bid ask spread.

So how did I — another simple finance professor from a major state university — make it to the top?

Maybe it was my exposé on the investment newsletter industry that was featured in the Certified Financial Analysis CFA Digest. This research was published at the top of financial academia in the prestigious academic journal Financial Management.

  • Brown, Cao and Powers (2013) Do Investment Newsletters Move markets. Financial Management 42(2). 315-338.

This crucial study showed that widely subscribed investment newsletters in the Mark Hulbert Financial Digest offer nothing but loss and emotional pain to their subscribers — despite routine claims of return percentages in the hundreds.

Study This or Go Broke!

It could be for this reason — or a dozen other revelations like them. The kind I publish every month in this course's bulletin, “Strategic Option Intelligence."

In fact, I've been called the “most fearless financial academic in the world today."

But you won't read my writing in any mainstream financial press. They don't have the — well, let's just say the guts — to publish my insights and findings.

In short, I will bring you the financial stories that no one else will touch. These are stories that will shape your financial world of tomorrow.

I will go anywhere and do anything to get the truth. And I will tell it to you, no matter who objects.

My fearless style has made me a lot of enemies — some of them in the highest places in the Wolves of Wall Street pack.

That is why the CFA Digest did a cover piece on my research.

This most prestigious paragon of proper financial conduct felt that getting the word out about my research was of paramount importance to you.

Here Is the Student Response ...

"Dr. Scott Brown is one of the sharpest guys I know. Highly recommended." — Alex Green, New York Times Best Selling author of the “Gone Fishing Portfolio"

Most newsletters and trainers want you just trust them that they will make you money. But Dr. Brown is a unique combination of academic prowess and street smarts skill. He is the man to take you from a mere patriot of others to a knowledgeable trader. If you want to add discernment to your tool box and make money in the process, you must learn from the Doctor." — Joe Martinson, Los Angeles, California, USA

"Keep doing what you're doing. What you are teaching is 100% correct. Marketing is a tough business, especially with the plethora of BS out there on how easy it is to make money trading... Keep it real and grounded in facts and you should attract long term clients who will enhance your service. I really appreciate your efforts in sharing." –F.M.

"Dear Doc Brown, I am writing this email to express my heartfelt gratitude for this course you have put up. I have completed the course and the reading part, and it has brought a lot of light and richness to my perception of viewing markets. I shall come back to you to share with you how well did I fare. That would be another story, another time. As of now, only wanted to tell you that just viewing your lectures has brought me lot of joy in itself. Thank you very much... May the creator bless you with abundance of love, laughter and happiness!" Sincerely, Rajkumar Mehta

"Yep, got it now. Thanks Scott. By the way, the DITM Call strategy seems to be working very well for me...started about two months ago with two positions and both are working well...thanks for that too!" Bob Crandalls.

"My brain is mush right now (I wish I could say it was from beer). IMy brain is mush because I've just went through 280 charts in about 30 minutes. WOW! I am as happy as a fat hog in slop. Was this your brainchild? What a great idea. Not only does it really cut through the burden of time and effort, but it seems to instill confidence in me, knowing I have a great place to start and drill down on these great possibilities that present themselves, and if I just follow along my criteria that you have instilled in me, we should be sailing together on a world cruise in a few years. I'm very happy to have found you," T. Swan

"There are very few people I trust enough to take their blanket recommendations....that is why this is so helpful..... learning to cherry pick the best trades and to run trailing stops or hedge using appropriate shorts ......." RR, California (Retired Radiologist)

Doc Brown Delivers Stories Others Are Afraid to Touch

If you look at my research you can see why the Wolves of Wall Street would like to silence me. My work shows that every penny spent on investment newsletter advice is money flushed down the toilet.

That is because those who can make money in the market won't bother with the technical problems of running an investment newsletter. Newsletter editors who make enough writing an investment newsletter do so because they can't make money in the market.

And that is just what the newsletters are trying to get you to do what they say when they write “buy this" or “sell that." Here is an actual line that just hit my mailbox,

The true story of how this trader turned $2,000 into $10 million from his kitchen table, in 9 months." Don't for a moment believe this lie.

If these marketers can get you to take action in your trading account they know one thing for certain.

It will be a snap to get you to buy their next dud of an expensive annual fee investment newsletter, $5,000 course or $20,000 boot camp — glossed up with fancy promises and fancy sales copy writing. These marketers make their money selling shiny ideas without regard to the true returns underlying each strategy.

The underlying economics of the newsletter industry I reveal to you is quite bizarre.

Investment newsletter subscribers lose millions every year investing in bad ideas. Investment newsletter publishers make millions in annual subscription fees.

But now I have uncovered the ultimate lie from the Wolves of Wall Street. This investment fib truly pukes up losses of scandalous proportions.

Which Option Strategies Are Tailor Made For Those Born to Lose?

If you have ever been interested in options there are a few strategies you must immediately become aware of to avoid like the plague. These fundamental options trading techniques are guaranteed to lose straight out of the barrel.

And they form the basis for compound option trading strategies that expose investors to very big losses. Why are these strategies so popular among brokers as well as newsletter editors?

Compound option strategies don't just cause complex losses they also kick out vastly larger brokerage fees.

But the true returns to investors of these strategies have been so hard to calculate that it was impossible to “prove" the danger to investor accounts. So it was easy for investment newsletter marketers to falsely claim that these horrific options trading strategies actually made money.

Until now!

A seminal option trading article came out last year in the #1 ranked Journal of Finance. This probing study proves that most strategies touted by the financial media are a sure ticket to the poor house. And the Wolves of Wall Street are biting their nails in hopes that you never learn the truth that emerges from this article.

Watch Advanced Training 2 — Stock Options as Lotteries

The research is so full of “rocket science" math that the true meaning has never been revealed to the public — until now by me to you. This cutting edge research proves beyond a shadow of a doubt that only one of these options strategies is a winner.

  • Buying index and ETF options.
  • Selling Index and ETF options.
  • Covered Calls
  • Put Selling
  • Short Expiration Call
  • Short Expiration Put
  • Protective Put
  • Bull Spread
  • Bear Spread
  • Iron Condor Spread
  • Butterfly Spread
  • Deep in the Money Far Expiration Call
  • Straddle
  • Strangle

isn't that crazy?

Only one of the strategies above is a winner?! Can you guess which?

Most option strategies c are outright disastrous or produce mediocre returns to the investors who try them.

One strategy alone on the list above actually stands to make investors big money. Do you want to know which?

It truly is the one perfect option strategy. Enroll now and here is what you get…

This course teaches you how to trade the one — perfect — option strategy. I take you by the hand and mentor you through each step of my unique ultra-high beta controlled leverage long term investment process.

Introduction 1 — The Option Mechanics Toolbox Every Savvy Stock Investor Must Master

Benefits to you …

  • Laser impress permanently into your mind the precise mechanics of exercise and strike.
  • See why index options can be very different beasts from plain vanilla stock options.
  • Marvel at the modern American invention of the derivative.
  • How options derive their value from underlying investments.
  • Watch as I reveal to you how the option price is derived from the underlying.
  • Grasp the power of extrinsic time value above and beyond intrinsic option premium price.
  • Develop a strong sense of moneyness.
  • Utilize payoff diagrams for serious real money campaigns.
  • See how a covered call is the same as a bank deposit, a call and a short stock.
  • Employ a time decay chart to clearly see your best option bets for maximal probable profits.

Introduction 2 — Basic Option Pricing with Binomial Outcome Trees for Valuation!

More benefits to you …

  • Model option value on expiration date.
  • Calculate the hedge ratio also known as delta.
  • See how option premium changes for each unit rise of underlying stock.
  • Grasp how options trade in a parallel yet connected universe with equity markets.
  • See risk neutrality as a special case of certainty equivalence.
  • Marvel at how call option payoff is zero in the binomial down state.
  • Reintroduce yourself to Euler's number from high school math.
  • Create a pyramidal matrix of possible share prices.
  • Use the risk free rate of return to model forward up and down share price movements.
  • Plug probabilities of a rise or fall into the binomial model.

Introduction 3 — Black Scholes Option Pricing Theory and the Real World Impacts!

Even more benefits …

  • Recognize the five key variables Fischer Black and Myron Scholes used to model option pricing.
  • Utilize the knowledge of how fluctuations of the underlying stock influence the price of puts and calls.
  • Know when underlying volatility is pumping up option values.
  • Wonder at how increasing interest rates actually increases call values but hammer put prices.
  • Employ the VXN to compare the implied volatility of the NASDAQ to that of any other stock market index.
  • Grasp the value of a call as the share price less a bank loan.
  • Blaze into your mind via a time decay chart the reality that the farther out in expiration an option is the more valuable it becomes.
  • Derive year fractional expiration as days remaining divided by 365.
  • Value any call as delta times the underlying share price less a bank loan.
  • Repulse at how warrants gifted to fat cats dilute your ownership share in private placement investments.

Introduction 4 — Real Options Offer Insights Into Your Real Estate Investments!

Yet still more benefits …

  • Analyze the choice of two real estate option projects under high and low demand.
  • Consider the real option case of oil tankers that can be mothballed when unprofitable.
  • Reflect on the combination-turbine electricity market from a real options perspective.
  • Ponder how large aircraft assembly firms streamline sales with real options.
  • Peruse a graph that proves that the NPV of a real option decision to purchase an expensive asset is about zero with long time to delivery.
  • Why real options are rarely available in practice.
  • See how real options apply to pharmaceutical share pricing as firms move through consecutive FDA approval trails.
  • Examine how real options can change underlying pricing conditions.
  • Build your understanding of how real estate options can help you.
  • Strengthen your economic intuition with knowledge of real options.

Enjoy the Advantage of Superior Information

And this is just a smattering of the total benefits of this program.

If you enroll right now you get the best option training on the web today. To get the same quality of options trading training anywhere else would cost you $185,052 in elite MBA mentoring at a school such as New York University Stern or Harvard Schools of Business.

To enroll now mash that rectangular blue button to the right up there. It has these words “Take This Course."

Invest some of your PayPal electronic pocket change towards a brighter financial future!

-Scott

Dr. Scott Brown, Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico

P.S. This is a risk free offer. Udemy extends to you a 30 day money back guarantee.

What are the requirements?

  • Basic high school math.
  • This is an advanced option course and a basic understanding is helpful but not required.

What am I going to get from this course?

  • Discover the vast yet small differences between American puts and calls and their European style kissing cousins.
  • Map the span of puts and calls across stocks, futures and forex.
  • Fathom how new financial assets are created from other assets.
  • Master the concept of option premium so similar to insurance payments.
  • Measure the intrinsic value between the strike and underlying price.
  • Clarify complex jargon such as the exercise and strike which have the same meaning.
  • Learn to use position diagrams for deep economic intuition into option trading strategy.
  • Fully visualize the break-even point of any option transaction.
  • Use these keen insights to develop the put-call parity relationship.
  • Map out the valuation limits on both puts and calls.
  • Use the binomial model to solve any option valuation problem.
  • Correctly gauge how up and down underlying movements influence option valuation.
  • Use option delta as the ratio of the spread of possible premium values over share price possibilities.
  • Arrange valuation modeling within a risk-neutral universe.
  • Link the sigma volatility of underlying stock to option premium price.
  • Employ the binomial option pricing model of finance professors Cox, Ross, and Rubenstein.
  • Watch the binomial model converge to the Black-Scholes.
  • Calculate values and probabilities at each node of a binomial model.
  • Estimate the direct measure of rise in a stock.
  • Recall Euler’s number as equal to 2.71828.
  • Harness the ultra-precise power of continuous time mathematics to calculate the true value of your options.
  • Pull delta values from cumulative normal distribution tables of the Excel function NORMSDIST(d).
  • See how increasing the exercise price ramps up put value but hammers calls.
  • Map out each of the components and variable of the Black-Scholes pricing model.
  • See how far times to expiration are more costly but offer far more protection against adverse underlying share price movements.
  • Become wise as to the meaning of the log-normal distribution rightward skew and limited downside.
  • Learn to expect more extreme profitable movements than you would otherwise expect.
  • Calculate call values for employee stock options gifted to dirt bag CEOs and their crony crew.
  • Utilize the VIX to measure aggregate fluctuations in market wide implied volatility.
  • Recognize that there are at least five other option pricing variations in addition to the binomial and the Black-Scholes models for unique market situations.
  • Recognize your real option to wait.
  • Understand real options to expand.
  • View trimming down or abandoning as a real option for corporate managers.
  • See the ability to adjust or vary production and output as a valuable real option.
  • Recognize the value of a real option as the difference between project NPV with and without the option.
  • Use real options to re-value negative NPV projects with vast turnaround potential.
  • Graph out the real option to wait.
  • Diagram the loss in option value if a competitor beats firm managers to the punch.
  • See how the ability to wait and do nothing offer higher real option values.
  • Memorize the relationship that Real Option Value = Intrinsic Value + Time Premium

What is the target audience?

  • This course is for equity investors seeking advanced training in stock options.

What you get with this course?

Not for you? No problem.
30 day money back guarantee.

Forever yours.
Lifetime access.

Learn on the go.
Desktop, iOS and Android.

Get rewarded.
Certificate of completion.

Curriculum

Section 1: These 4 Lectures Cover the Nuts and Bolts of Option Trading Starting from Basics
17:20

A call option allows you to buy the underlying stock or futures or currency contract for a pre-selected strike. The strike is also called the exercise price. Exercise is only allowed on the expiration date in the case of a European style option. You can exercise on or before the expiration date of the option in the case of an American style option.

Some Index Options are European Style!

A put option allows you to purchase an underlying stock, futures or Forex contract at a set level also known as the strike or exercise price.

Option buyers have the right to purchase — in the case of the call — or sell — in the case of a put. But the purchase of the call or put does not carry with it the obligation to buy or sell.

However, the seller of an option — the writer — does have the obligation to sell — in the case of a call — or buy — in the case of a put — the stock, futures or Forex contract underlying the deal.

A call, put, futures or Forex contract is a derivative. These are financial assets created from other financial assets.

In this case the call or put is derived — created — from the shares of stock, futures contract or currency forward contract that underlies the option. For that reason the asset from which a call or put is created is termed as the underlying stock, or underlying futures contract or underlying forward contract.

The option premium is the price paid for an option — call or put. This also called the option price.

The option price is derived from the underlying.

The Intrinsic Value is Your Lifeboat in Raging Equity Seas!

The intrinsic value of a put or call option is the difference between the strike price and the underlying asset price — 100 shares of stock, a single futures contract or a single currency forward contract.

Time premium is also known as the extrinsic value of an option. This is the value of the option in excess of the intrinsic value.

The price at which the underlying asset can be bought or sold is termed the exercise price. This is also known as the strike price.

The last day within which an option can be exercised is known as the expiration date. An American style call can be exercised at any time up to the expiration date of the put or call option.

A European option on the other hand can only be exercised on to the expiration date. You are most likely to see these in the form of equity index options.

The option value at expiration is a function of the stock and strike — exercise — price. I give you the example of a stock call and put option with a strike — exercise — price.

I walk through quotations of stock options — that I have personally profited from.

This allows me to show you that the value at expiration for a call option is zero if the stock price is less than the exercise price at expiration. Conversely I show you that a put option is worthless if the stock price is greater than the exercise price at expiration.

The call option has value if the stock price is greater than the exercise price. The formulation of that value is;

Rule 1 — The Call Intrinsic Value = Stock Price – Exercise Price

The put options has worth if the stock price is less than the exercise price at expiration. This formulation is; stock price < exercise price.

Rule 2 — The Put Intrinsic Value = Exercise Price – Stock Price

Each of these ideas are explained with actual numerical examples.

For instance the value at expiration in the first example is that if the stock price per share is less than the exercise price of per share than the call value is zero since it is out-of-the-money.

The next examples shows you that if the stock price is greater than the exercise price of then the call value is equal to the stock price less the exercise price. This is valuable since the call is in-the-money.

If the stock price per share is greater than the exercise price per share the put is worthless because it is out-of-the-money. But if the stock price falls below the exercise price the put value is equal to the exercise price less the stock price and expires in-the-money.

Then I move on to explain the inner workings of a call option position diagram. This is followed by the explanation of a put option position diagram.

Controlled leverage option investors are most interested in payoff diagrams. These incorporate the initial cost of the option into the payoff.

In the payoff diagram you will discover that the profit to a call buyer is a loss to the seller. Investors who write — sell — calls have unlimited potential for loss. Then you will see that the seller of a put option has a loss limit of the stock becoming worthless.

Deep in the Money Six Month or Longer Expiration Calls Are Your Best Equity Option Investment!

But that amount can be a larger loss than the premium garnered at the sale of the option.

The profit diagram is useful for analyzing the profits of any option transaction. This helps us visualize the timeline of cash flows.

The call buyer loses money if the stock price is below the exercise price. But as the stock price increases the profit potential of the call is unlimited.

Remember this important fact regarding long calls; they are the best option investment.

Then we dissect the profit diagram for the seller of a put. The put writer will profit if the stock price is above the break-even price.

The break-even point of a put write transaction is the exercise price less the price of the put option. The potential profit to a put seller is limited.

Remember this important fact regarding selling options. The profit to option writers is harshly limited.

The profits to a call buyer are unlimited.

Next I give you conclusive evidence that buying a stock and selling a call is not a good strategy. The short call wipes out any upside profits to the stock.

Downside movements wipe out value on both sides of the transactions.

Avoid Investing in Covered Calls, Out of the Money Calls, Put Selling and Protective Puts!

The covered call is a very poor investment strategy. In an upcoming lecture I will show you why out of the money short-term expiration calls are even worse.

Also bad is the strategy of put selling.

And protective puts are bad too. They have been shown to be much overpriced forms of insurance against downside drops in your single stock positions.

This is the combination of buying both a stock and a put option.

This is a long simultaneous position in the stock and a put. The loss due to the fall in the stock price is exactly offset by gains in the put price.

This strategy protects the individual retail single stock investor from loss due to a fall in the stock price. But this preserves the gains if the stock price increases.

Many investors scramble after this as it is touted as insurance against falling stock prices.

Recent top level financial research has revealed the premium needed to purchase these protective puts is grossly overpriced and dissipates the benefit of the insurance component of this highly popular strategy.

At the end of the day I am sure you will conclude that the deep in the money long expiration call is the best option investment in equities.

Why Straddles and Strangles Are Nasty Option Investments

A straddle is formed with the purchase of a call and a put at the same strike and expiration. A closely related method is a strangle where the strikes are above and below the underlying price.

Option investors attempt to extract profits via straddles and strangles when stock price volatility is high.

These too have been shown to be overpriced. This means that the gains to one side of the straddle or strangle are consumed by the losing leg.

Then I walk you through three payoffs.

You can buy a share of stock where you gain or lose as the stock price rises or falls. Another payoff is presented where there is no downside — even if the stock falls you retain your initial capital. Then I show you a third lose-lose payoff where the stock investor loses if the stock price falls and loses if it rises.

The lose-lose strategy can be replicated through a covered call created through the purchase of 100 shares of stock and the sale of a call option against that very same stock.

It may seem strange that I spend so much time carefully showing you how to create a lose-lose investing scenario. But this allows me to prove to you that a covered call is equivalent to a bank deposit plus the purchase of a call and shorting stock.

This allows you to replicate the purchase of a put.

Put-Call Parity is your Key to the Option Kingdom

This is proof of a very important concept we will use later for the Black Scholes option pricing model. This leads to put-call parity first delineated by Vanderbilt finance professor Hans Stoll.

Then I show you how the option contract specifications can actually shape payoffs through the sale and purchase of two calls. The example is given with a CEO not likely to influence share prices outside of a narrowly defined range.

The time decay chart allows you to see how the option price drops as the time to expiration nears.

This allow us to map out how increases in the underlying stock price, underlying stock price volatility, time to expiration and discount rate increase call values. Increasing the strike price decreases the value of a call but pushes up the price of a put.

Increases in underlying share prices or discount rates drop put values.

This allows me to show you that the upper limit on the value of a call is the stock price. The lower limit is either zero or it is the difference between the stock and exercise price.

This allows you to conclude that the two primary determinants of option values are the strike — exercise price and the stock price.

I show you a diagram of two stocks. One has higher volatility as measured by a probability distribution with a higher standard deviation of stock returns.

You will see that the higher the standard deviation — volatility — of underlying stock returns the higher the premium cost of the call or put option. This can be shown in terms of linear payoffs.

How Underlying Stock Return Volatility Pumps Up Option Prices!

This is a very important characteristic of options that distinguish these derivatives from other financial securities.

A volatility chart shows that the standard deviation of underlying returns impacts option value in much the same fashion as time to expiration. This can be seen by comparing a volatility chart with a time decay chart.

As volatility increases option value increases. As time to expiration increases option value increases.

We will dissect the pricing characteristics of a call option. I will show that an increasing stock price increases the price of a call option. Decreasing the exercise price drops the value of a call option.

An increasing interest rate increases the value of calls. Increasing the time to expiration and the volatility of the stock price — sigma — increases call premium for the same option.

The upper bound of the option price is always less than the stock price. The lower bound of the call price never falls below the payoff to immediate exercise. This is the stock price less the exercise price of zero whichever is greater.

If the stock is worthless so is the call. As the stock price increases dramatically, the call price converges to the stock price less the present value of the strike price.

Finally we analyze the situation of a manager who has been offered the CEO position of two firms. Both offer options in executive bonus compensation.

The exercise price and maturity are identical. The current stock price of each firm is the same.

There is but one difference between the two employee stock option packages — ESOs. The underlying volatility — in terms of standard deviation which is also termed as sigma — of the first firm is lower. That of the second is higher.

Based on the discussion in the lecture video and the text above the manager should conclude that the firm with higher underlying firm equity return volatility offers the highest value for the manager.

14:06

Super Simple Option Valuation

The binomial options pricing model is an iterative method for precisely describing the price of any option developed by three highly influential finance professors in 1979. These are Professor Mark Rubinstein of the University of California at Berkeley and Professors John Cox and Stephen Ross of the Sloan School of Business of the Massachusetts Institute of Technology.

  • Cox, J. C.; Ross, S. A.; Rubinstein, M. (1979). "Option pricing: A simplified approach". Journal of Financial Economics 7 (3): 229.

The binomial model works with each base unit of underlying stock movement. These base movements have just two outcomes at each stage; up or down. The value of a stock in a down state and up state is given in a simple example.

The corresponding option value on the expiration date is then explained.

The example continues with the assumption that the stock investor owns just about half a share of stock and also borrows the present value of the remainder of the state value in the case of a drop.

This leads to a value of 0 if the stock drops to $320 or $100 if the equity share price rises to 500.

These two payoff scenarios allow us to calculate delta. This is the hedge ratio.

It tells you how much the option value will increase for each unit rise in the underlying share price in the case of a call — or premium reduction in the case of a put.

You will discover that this vastly important number — for controlled leverage option investors — is easy to calculate. The option delta is simply the spread of possible option prices divided by the spread of possible share prices.

You will use the concept of delta throughout this course. Please make sure you take the time now to fully understand it.

Options trade in a parallel market derived from the underlying share price. This means that the law of one price says that arbitrage will kick option prices back in line .

Surprisingly this process is independent of firm economics of the underlying stock — since the option price is given — derived from the underlying.

Hence arbitragers can be assumed as risk neutral. This allows us to derive a simple binomial outcome within a risk neutral framework. Risk neutral is a special case of certainty equivalent.

I then show that the expected return to call option arbitragers is equal to the risk free rate of return.

Expected return is equal to the probability of a rise times the magnitude of a possible up move plus one less the likelihood of a rise times the size of an estimated down move. That's is equal to the risk free rate.

The magnitude of up or down moves in the underlying stock is related to the volatility of equity returns. This is measured by standard deviation termed sigma.

Then I show you that a put option can be valued with the same approach. I start by showing you two possible terminal values for each case.

Once you know the likely price moves for an iteration you must calculate delta. You will sometimes see delta denoted by the letter h.

This symbolizes the fact that delta is also termed the hedge ratio.

The binomial option pricing model of Cox, Ross, and Rubenstein requires that you sell shares and lend the proceeds. This allows you to price the option.

Then I walk you through an example with three nodes. Those nodes are now, month 3 and month 6.

This illustrates possible present and future values of a stock.

Then I work you through the math to calculate the option value. I give you the direct measure of the probability that a stock will rise.

This is calculated as the ratio of the risk free interest rate less the size of a downside change and the upside change less the downside change.

This is easily plugged into the valuation formula. Remember that the binomial model valuation formula is the probability of a rise times the associated option payoff in that state plus the probability of a fall times the associated payoff in a drop.

The payoff to a call option in any down state is zero since each example begins with an at the money call.

Next we explore the general formula for the binomial option pricing model. This is probability up = p = [ad]/[ud]. And probability down = 1 – p

The term “a” is Euler's number to the power of the interest free rate and delta. The term “d” is Euler's number to the power of negative standard deviation — sigma — times the square root of the time to expiration expressed as a percent of the year.

Euler's number "e" is a constant equal to 2.71828

The time to expiration is denoted by the letter “h.”

The term “u” is Euler's number raised to the power of sigma times the square root of the time to expiration. This explanation is followed with a numerical example.

Possible share prices are calculated forward from the present in two iterations.

This creates a pyramidal matrix of possible share prices forecast into the future. The value at each node on the slide is the greater of the present value of the two branches or the intrinsic value.

Once forward looking share prices are established the option values are calculated backwards at each node.

Then you will discover that as the time interval is shortened, the binomial model converges to the Black-Scholes model. Cutting the time interval creates more steps and more potential price changes. Binomial price results differ a lot from Black-Scholes value with very few steps.

When you calculate the binomial option pricing model with many steps you get closest to the Black Scholes Option Pricing Model. This is shown with a numerical example.

17:14

The Black-Scholes Pricing Model Is Your Option Money Map!

Your exploration of the continuous math option pricing model begins with a review of the components of option prices.

The option price for the Black-Scholes model depends on these five variables;

  1. Increasing underlying stock price increases the price of a call but reduces the price of a put.
  2. Increasing exercise price decreases the value of a call yet increases the value of a put.
  3. Increasing share volatility pushes up call prices but can increase or drop put prices.
  4. Longer times to expiration equate into higher call and put prices.
  5. Increasing interest rates increase call values but reduce put values.

The value of a call is now seen as equal to delta times the share price less the bank loan.
In other words the value of a call = (delta)(price) – (bank loan). This is equivalent to N(d1)×(P) – N(d2) ×[PV(EX)]. N(d1) and N(d2) are pulled from cumulative normal distribution tables or from the NORMSDIST(d) Excel function.

Key Model Variables That Impact Real World Option Prices!

In order to understand the Black-Scholes option pricing model I must define for you the key variables that are inputs into the model.

  • Oc is the Call option price
  • P is the Stock price
  • N(d1) is the Cumulative normal probability density function of (d1)
  • EX is the strike or exercise price.
  • PV(EX) is the Present value of strike or exercise price
  • N(d2) is the cumulative normal probability density function of (d2)
  • R is the discount rate — the 90 day commercial paper rate or risk-free 3 month t-bill rate.
  • t is the time to maturity of option — as % of year.
  • v is the volatility-annualized standard deviation of daily returns

Next I introduce you to the log-normal distribution. The log-normal distribution is skewed to the right.

This reflects the fact that a stock can only drop by a hundred percent. But that same stock can rise by far more than 100%.

This says that we can expect far more extreme profitable movements than we would otherwise expect.

Expect The Unexpected in Our Log-Normal Stock Markets!

The variable d1 in this case is equal to the natural logarithm of P/X plus t times r plus one half v squared divided by v times the square root of t. Once this is crunched d2 is calculated as d1 less v times the square root of t.

Then I work you through a numerical example where t should be expressed in years — time to expiration divided by 365 days in a year — and r is a decimal plugged-in the formula.

Then d2 and N(d2) are calculated in the second step. The option price is calculated and you will see that it is a fraction of the stock price.

I show you how this maps into the time decay chart. This shows you that the option price we calculated declines as the time to expiration drops.

We work through another problem for practice. Once again you will see that the value of a call = (delta)([stock price) – (bank loan) = N(d1)×(P) – N(d2) ×[PV(EX)]. Here PV(EX) = (EX) (e– (r) × (t ) ) is calculated with the continuous time discounting formula.

Other Option Topics That are Interesting to Value and Private Placement Investors — ESOs and Warrants!

Then I show you how to calculate the call values for two different managerial employee stock option — ESO — packages. With Black Scholes pricing values the correct choice becomes clear — all things equal.

The next important tool I introduce you to is the VIX.

This indexes implied volatility fluctuations on in and out of the money SPX puts and calls trading on the S&P futures contract. But I don't stop there. I also show you how to measure volatility fluctuations on the NASDAQ using the VXN.

Then I show you have Put – Call Parity can be used to calculate the put price given the call prices we just calculated. The put price = OC + EX – P – carrying cost + dividend. Here the carrying cost = r × EX × t.

There are many variations of pricing models for options,

  • American calls with no dividends
  • European puts with no dividends
  • American puts with no dividends
  • European calls and puts on dividend-paying stocks
  • American calls on dividend-paying stocks

Next we revisit the convergence of the binomial to the Black-Scholes model. When few steps are used the binomial outcome will differ more from the Black–Scholes price.

But the numbers are close after 100 steps.

The final topic of this discussion is to show you that the exercise of a warrant increases the number of shares outstanding. The dilution factor reflects that fact.

18:24

There are four types of real options. This includes the;

  1. option to expand.
  2. option to wait.
  3. option to trim down or abandon.
  4. option to vary the mix of output or the firm's production methods

The value of a real option is the project NPV with the real option less the NPV without the real option.

What can we do with negative NPV projects that might possibly become big turnarounds? I walk you through an NPV analysis with a negative value.

But the project offers management the option to expand into an industry that may also expand in profitability. If the industry expands in profitability the NPV of the project would become positive.

These insights allow us to value a call option on a negative NPV project.

We have to consider the forward distribution of possible present values. These present values are assumed to be log-normal in distribution.

Log-normal distributions are skewed to the right.

This means that expected outcomes can be far greater than the most likely outcome on average. The most likely average — or median — outcome is at or near the highest point on the probability distribution graph.

The distribution shows a wide range of possible present values for the negative NPV project in future years. It shows the expected value where the option to invest pays off in the shaded area of the chart.

The option to wait is graphed next. The call option is more valuable the longer the wait. That is as long as a competitor does not catch up with the idea.

Then the option would have a lot less value. The longer the wait, the higher the real option value sans same project competition. The time premium is the value of being able to wait.

Option Value = Intrinsic Value + Time Premium

We can obtain the option to wait and invest later only if there is high demand. Take the choice of two different commercial real estate projects.

Take for instance the opportunity to develop either a corporate office building or a small hotel on vacant land the firm owns.

This is a very difficult choice.

What if another investor builds the same structure nearby while you wait? The cash flow potential would be much diminished.

The area in the development option graph below wait would reduce drastically.

Real options can be extended to temporary abandonment in a graph I present to you as evidence. Imagine these outcomes for oil tankers that could be mothballed;

  • If the maritime shipping rate is less than R then reactivate the tanker
  • If the maritime shipping rate is less than M then mothball the tanker

These are reasonable temporary abandonment rules.

How about combination-turbine electricity from natural gas plants? I show you a graph of how the price of electricity in the United Kingdom spikes from time to time.

If you owned a combination-turbine plant you could turn it on when electricity prices spike. Sure enough these operations run about 5% or the time.

But how the heck do you value an operation like that if you want to invest in one? I'll show you how the investor ends up with a call option to produce power where the strike is the cost it takes to run the plant.

Big aircraft companies like Boeing, Embraer and AirBus pre-sell by writing corporate covered call real options on their sky vessels.

The option buyers are airlines interested in purchasing aircraft. Airline buyers gain the ability to get a lower price or guarantee the delivery of the aircraft without the obligation to purchase. There are other industry specific conditions.

The option if exercised in year three, option guarantees fixed price and delivery at year four, for instance.

Managers in AirBus do not have the same risk as a covered call writer in the secondary equity market. That is because the firm is producing and selling to another firm the underlying asset; the passenger jet.

A Main Street investor engaged in covered calls has to come out of pocket for the full cost of the underlying asset. For this reason the covered call strategy is very bad for the individual retail investor.

But a covered call in real options allows a buying — consuming — and selling — producing — fortune 500 firm work out a deal on a very large financial transactions otherwise not possible. This stimulates sales for the aircraft manufacturer.

And competitors don't get the shaft as easily in adverse market conditions.

Without the option, the plane can still be ordered in year three but with an uncertain price tag and delivery terms into year four. A real option to purchase a jet liner reduces the uncertainty of negative cash flows associated with the initial investment in a new passenger plane.

I will show you a graph that describes why the real purchase option is worth the most when the NPV of the decision to purchase now is about zero and the forecast wait for delivery is a long way out in time.

Pharmaceutical forward cash flows are best described with real options to estimate the firm's present value of growth opportunities. New medical compounds are very hard to pass through the Federal Drug Administration.

There exists a series of FDA trials.

If phase II trials succeed there is a recall option to invest more. If exercised, there is much higher chance of launching approved drug. The present value of the drug, forecast in year five is the underlying asset of the real call option to the firm and its shareholders.

Real options often are not available in practice.

And even when accessible real options can be complex and offer no exact answer. A lack of clear structure of operational or tactical path and obfuscated state contingent cash flows can confound the real option pricing process.

And the problems with real options don't stop there. The firm's competitors also have real options.

Real options of other firms change the underlying pricing conditions and the nature of the industry used for valuation. This training will help you understand how to get a better deal if you invest in or write real options.

But, if you are like most Main Street investors you will likely never purchase or sell real options. But this unique perspective will make you a much better stock, futures or currency option trader by sharpening your derivative intuition!

Section 2: Quizes
Challenge 1 - An Option Mechanics Toolbox Every Savvy Stock Investor Must Master
10 questions
Challenge 2 - Basic Option Pricing with Binomial Outcome Trees for Valuation!
10 questions
Challenge 3 - Black Scholes Option Pricing Theory and the Real World Impacts!
10 questions
Challenge 4 - Real Options Offer Insights Into Your Real Estate Investments!
10 questions
Section 3: Doctoral Level Training Show Exactly Which Option Investments are Bad or Good!
11:16

Columbia University Study Shows Implied Volatility Fluctuations Forecast Equity Returns!

Get this insider trick to spotting stocks on the rise by watching the implied volatility levels of calls. Track puts for your crystal ball to stocks on the brink of collapse from “The Joint Cross Section of Stocks and Options.” This cutting edge options study is from Columbia, Georgetown and Fordham University Professors Beyong-Je An, Andrew Ang, Turan G. Bali and Nusret Cakici.

Reference:

  • An, Beyong-Je, Andrew Ang, Turan G. Bali and Nusret Cakici. 2014. The Joint Cross Section of Stocks and Options. Journal of Finance 69(5). 2279-2337.

Background:

Prior studies have used high-frequency intra-day or daily data to measure a lead-lag effect between option and stock markets. These older studies show that options and stocks are fairly priced over very short term time intervals.

This new study finds that option implied volatility predict the cross section of stock returns. Stock returns also predict future option volatility. Both of these findings run counter to predictions based on the original Black-Scholes pricing model.

Model:

The intuition behind the model is that informed traders will trade the stock and option markets interchangeably and simultaneously. The amount of trading is contingent to the level of noise in each market.

A dealer stands ready to arbitrage thus linking the stock and option markets.

The market moves on the trades of the marginal informed investor. But the information from informed option trading does not fully adjust in the stock market to a fully revealing rational expectations economy.

This allows for predictability from option prices to stock returns and vice versa. Periods of high demand from noise trading increase this predictability. The two closest related models are those of Easley, O'Hara and Srinivas [1998] and that of Garleanu, Pedersan, and Poteshman [2009].

Hypothesis:

The first hypothesis that emerges from the model is that option volatility can predict future stock returns. The second hypothesis is that this predictability is highest with high underlying stock – and option – volume.

The third hypothesis is that informed trading gives rise to stock level information predicting option returns.

In other words there is simultaneous predictability between both markets; stock and options. Their fourth hypothesis is that past stock returns predict future increases in option volatility and impending weakness in underlying stock returns.

Data:

The data is obtained from the Ivy OptionMetrics database. Portfolios are created on the first trading day and the second Friday of the month. Variables include the underlying stock price, time to maturity, strike, and price of the option as well as volume and open interest.

Table 1 shows the descriptive statistics of data.

There are 1,261 option-able stocks per month in 1996. This rises to 2,312 stocks per month by 2011. Call and put implied volatility is the highest in 2000 and 2001 during the centennial crash. The most recent crash in 08' and 09' denoted a period when CVOL and PVOL implied volatility increased from about 40% to 60% respectively.

Methodology:

The construction of variables is listed on page 2284. These include Beta, Book to Market, Momentum, Liquidity, Short-Term Reversal, Implied Volatility Innovations (ΔCVOL and ΔPVOL), Call/Put Volume (C/P Volume), Call / Put Open Interest (C/P OI), Realized Implied Volatility Spread (RVOL-IVOL) and Risk-Neutral Skewness (QSKEW).

Portfolios are sorted on ΔCVOL and ΔPVOL.

Bivariate portfolio sorts are studied for long term predictability by constructing overlapping holding periods following the methodology of Jagadeesh and Titman (1993). A Fama McBeth cross-sectional regression analysis is performed using the Newey West (1997) t-statistic for significance of findings.

Results:

The key results are,

  • Stocks with large increases in call implied volatility predict future increases in share price.
  • Stocks with large increases in put implied volatility predict future decreases in share price.

Table V reports the long-term predictability results of the study. The risk-return adjusted and average return differences from low to high ΔCVOL are statistically significant for one to six month time frames.

The predictability of ΔPVOL persists for up to three months. Thus the predictive effect of large increases in implied call volatility is of higher intensity and longer duration than in the case of the imputed volatility of puts.

Panel A of table VI shows that the mean slope of the ΔCVOL coefficient is 1.57. The associated t-statistic is 3.13. The average slope coefficient of ΔPVOL is -1.85 with a t-statistic of -3.78. Thus the effect of large changes of implied volatility in call pricing correctly forecast with high statistical significance positive Jensen's Alpha in the underlying equity in a Fama-McBeth Cross-Sectional Regression.

Many underlying variables that impact the cross section of stock returns impact the implied volatility of options.

Forward spreads of about 1% per month arise from decile ranked implied volatile portfolio sorts. These returns persist for up to six months. This is consistent with informed participants arriving to the option market before movements occur in equities.

Implied option volatility is shown to forecast the cross section of stock returns. Conversely, firm level characteristics such as momentum, value (book to market) and liquidity are shown to impact option implied volatility.

Lagged excess stock return is a particularly strong prediction variable for implied volatility changes in both calls and puts. Increases in call option implied volatility predict high underlying stock returns over the following month.

Increases in put option implied volatility forecast poor stock returns into the following month. This relationship is especially strong for puts with implied volatility that moves against the direction predicted by put-call parity.

The persistence over time and economic strength of the underlying share return predictability from call and put implied volatility is "remarkable." The lead-lag option-stock relationship is statistically very strong and economically large. This is because the change in levels of implied volatility is a simple measure of the arrival of new option investors.

This is strongest for the next month but persists up to 6 months forward.

Decile portfolios of stock spreads relative to past fluctuations in call implied volatility exhibit returns of about 1% per month in raw return with similar Jensen's Alpha in multi-factor CAPM models. Results for put options generate spread returns greater than 1% percent per month within the most extreme spread deciles.

The second reason that this result is fascinating is because many common market strategies have reversed sign or weakened during the 08' and 09' crash. Yet this lead-lag option implied volatility underlying return relationship continues through and into the most recent data.

This result is consistent with models where informed traders enter first into the option markets. See Chowdry and Nanda (1991) and Easley, O'Hara and Srinivas (1998). Stocks with abnormal returns of 1% relative to CAPM tend to show an increase in call (put) implied volatility over the next month of 4% for calls and 2% for puts.

Informed trading partially adjusts prices, this resolves future uncertainty of firm cash flows. Option open interest is shown to be highly correlated with implied volatility.

Finally I show you where to access implied volatility charts of any stock with traded options.

Additional References:

  • Chowdhry, Bhagwan and Vikram Nanda (1991) Multimarket Trading and Market Liquidity. Review of Financial Studies 4 (3). 483-511.
  • Easley, David, Maureen O'Hara and P. S. Srinivas. 1998. Option Volume and Stock Prices: Evidence on Where Informed Traders Trade. The Journal of Finance 53(2). 431-465.
  • Garleanu, Nicolae, Lasse H. Pedersen, and Allen Poteshman. 2009. Demand-Based Option Pricing. The Review of Financial Studies 22(10), 4259-4299.
  • Jagadeesh, Narisiman and Sheridan Titman. 1993. Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. The Journal of Finance 53(5). 63-91.
  • Newey, Whitney and Kenneth West. 1997. A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica 55(3). 703-08.
  • Fama, Eugene, and Kenneth French. 2012. The Cross-Section of Expected Stock Returns. The Journal of Finance 47(2). 427–465.
14:53

Top Scientific Study Proves Selling Puts (or Covered Calls) to Be Very Bad Idea!

And the bad news doesn't stop. Buying out of the money options are shown as the worst investments on Wall Street. The clear lesson is that deep in the money late expiration calls are best investments.

Reference:

Boyer, Brian and Keith Vorkink. 2014. Stock options as lotteries. Journal of Finance 69(4). 1485-1528.

Background:

Individual investors have been shown to routinely make losing investments. See Kahneman and Tversky (1979) and ODean (1998). Certain lottery-like option strategies such as buying out-of-the money short term expiration calls are known to be losing investments. Prior studies have shown losses to lottery-like option preferring investors to be in the magnitude of 12% per year on out-of-the money call options.

This study shows losses to as high as 50% per week.

Hypothesis:

Out-of-the-money options are losing investments.

Data:

The data is obtained from the Ivy OptionMetrics database. Portfolios are created on the first trading day and the second Friday of the month. Variables include the underlying stock price, time to maturity, strike, and price of the option as well as volume and open interest. This covers 194,822 option quotes over 24 portfolio dates per year.

Methodology:

Returns are calculated and a Newey West (1997) t-statistic is used to test if the differences are equal to zero. CAPM is used to measure pricing errors. Fama-McBeth regressions are utilized.

Results: Out of the money options exhibit more return skewness than in-the-money options. In fact, in the money options exhibit almost no skewness.

Moneyness is defined as the strike price divided by the stock price (X/S). The deepest in-the-money call would have moneyness of zero. The farthest out of the money put would have a moneyness of zero.

  • Figure 1 shows skewness as a function of moneyness for calls and puts. Out-of-the-money options are the most heavily skewed.
  • Figure 2 shows that the magnitude of the impact of volatility on skewness is mediated by maturity and moneyness. Moneyness of X/S = 0.9 is a in the money call option where high underlying volatility leads to just sightly higher skewness. But higher underlying volatility leads to less skewness for 0.9 moneyness out of the money put options. High underlying volatility leads to lower skewness for out-of-the-money call options.

Skewness increases with maturity for in the money options. It decreases with out of the money options.

Moneyness nearly fully explains skewness. In the money options are virtually devoid of return skewness. After that the second most important variable to explain option return skewness is underlying volatility.

  • Table II shows that skewness increases over quintiles by construction. For example seven day to expiration call option skewness ranges from 0.40 to 29.94.
  • Table III shows that average bid-ask spreads are large and increase with increasing skewness.
  • Table IV shows that returns decrease sharply across skewness bins and especially among the shortest expiration options.
  • Table V shows that CAPM alphas decrease across skewness quintiles.
  • Table VI shows that large differences in CAPM alpha across option return skew quintiles is not driven by underlying stock characteristics.
  • Table VII shows that low average option returns cannot be explained by co-skewness or volatility risk.
  • Table VIII shows that ex-ante skewness and expected option returns are related. This relationship is independent of underlying risk factors.
  • Table IX shows large spreads in alphas between portfolios of low versus high skewness.
  • Table X indicates that total skewness is priced.
  • Table XI reveals that option writing investors who sell either puts or calls earn CAPM alphas that are statistically insignificant and indistinguishable from zero.

Hence any investors who pays to learn to write options is surely losing on their put selling premium income "investment." The premiums that investors pay to buy out-of-the-money options with high ex-ante skewness are not passed on to option writers.

All out-of-the money portfolios exhibit negative returns to buyers. Positive returns are only associated with in-the-money options for investors buying options. In-the-money call portfolios are shown to offer higher returns than in-the-money put portfolios.

Large differences in option portfolio CAPM alphas between out-of-the money and in-the-money option portfolios are not attributed to differences in underlying stock characteristics. Out-of-the money options are consistently shown to offer poor returns to investors. The study shows that the vast majority of option buying [selling] is at the ask [bid] of very wide spreads. Worse yet over hopeful investors are shown to rush to buy options incurring losses of up to 50% per week due to astronomically high costs incurred from transacting at the extremes of these wide spreads. They do this to gain exposure to out-of-the money options with high lottery like payoffs.

Losses incurred by out of the money option buyers are not recovered by covered call or put sellers. These sellers are investors who write options.

References:

  • Kahneman, Daniel and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision under Risk. Econometrica 47(2), 263-291.
  • Terrence Odean. 1998. Are investors Reluctant to Realize their Losses? The Journal of Finance 53(5). 1775-1798.
Section 4: FREE BONUS: Doc Brown's Strategic Option Intelligence Maximum Profit Potentials!
14:19

In this edition I show you step-by-step how I buy deep in the money calls. Then I show you how I place a doomsday good-til-close GTC stop loss order sell to close.

Facebook (FB) has been on an upward tear on earnings.

Hence I show you in a live trading account how I buy to open 28 FB Jun16 100 Call contracts for more than $40,000. The only way I can really teach you how I trade options is to show you what I do when I trade.

But I trade very infrequently.

So make sure you watch this video right now. It is a big opportunity for you to advance your learning. :-) -Doc Brown

20:11

PREMIUM CONTENT By Dr. Scott Brown, September 21, 2015, 11:54:00 EDT

SAN JUAN, 2015 Sep. 18 (UDEMY) – Dr. Brown reports hot stock option picks for this third Monday of September in live video market update. Here are the four stock options that passed this month's screen…

| Strike | Symbol | Bid | Ask | Imp. Vol | Theo. Value | Delta |

| 100 | AAPL Apr 15 2016 100 Call | 19.3 | 19.6 | 34.649 | 19.45 | 0.735 |

| 80 | FB Mar 18 2016 80 Call | 19 | 19.35 | 37.353 | 19.18 | 0.795 |

| 24 | JBLU Mar 18 2016 24 Call | 4.6 | 5 | 43.472 | 4.8 | 0.705 |

| 28 | ATVI May 20 2016 28 Call | 4.9 | 5.3 | 32.954 | 5.1 | 0.707 |

Always remember that you will have fewer deep in the money far expiration call opportunities as compared to investing in the underlying shares of stock.

Sometimes it may not make much sense to invest in the option. This is certainly the case if you are considering investing in a stock with a share price below $10 or $20.

One of the nice features of far out deep in the money calls is that you can acquire a stock at a deep discount. A $5 option on a $20 stock could be wiped out in an adverse move.

Owning the underlying shares of a cheap stock rather than the option gives you staying power.

Don't forget to place limit stop orders on each option position you take. What is the right width of the stop?

I don't trade the underlying stock with a stop much wider than 5%.

The gearing on the calls I buy is usually around 4:1 or 6:1. In other words I expect to control a $100 stock for between $15 to $25 in deep in the money far expiration call premium.

This implies a 2% to 30% stop. How do you calculate this?

Take a look at the APPL Apr 15 100 Call. Let's assume that I purchase this call for $20 in premium value. The most conservative limit order option stop would be 20% of this value.

That is equal to $20 X (1 – 0.2) = $20 X 0.8 = $16 stop on APPL Apr 15 100 Calls using a 20% of premium algorithm.

A more aggressive limit order stop would be at 30% of value.

This is calculated as $20 X (1 – 0.3) = $20 X 0.7 = $14 stop on APPL Apr 15 100 Calls using a 30% of premium algorithm money

Section 5: [Bonus Lectures] Concepts that May Help Boost Lifestyle, Comfort & Family Fun!
02:21

Discover the inspiring true story of how professional dancer Nicolas Darvas started with $36,000 in savings. He grew his bankroll into $2.5 million in just 5 years.

And this was in the 1950s.

This vital part of Smithsonian American financial history was verified and documented by financial journalists from Time Magazine. Watch this important bonus lecture now.

01:54

Use this 6 step checklist to spot fortune building value and momentum stocks before Wall Street's Ivy League analysts. This methodology helped me identify Facebook in the forties.

I made $96,000 in Facebook options in the last week of January.

Discover how inside. Remember, I am a finance professor. Welcome to my sandbox, -Doc Brown

Section 6: Live Examples of Both Stocks and Options
02:00

Argan is a publicly traded holding company (NYSE:AGX) rising on strong earnings and sustained volume.  The conglomerate portfolio of wholly owned subsidiaries includes Gemma Power Systems, LLC and affiliates, Atlantic Projects Company LimitedSouthern Maryland Cable, Inc. and The Roberts Company. Dr. Scott Brown explains the reasons that this is an interesting stock worth digging deeper into. 

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Instructor Biography

Dr. Scott Brown, Major State University Finance Professor, Investments Expert

"There is no one like you that I know of who is this transparent, that is what makes your service and education so valuable. Please keep on." -L.B. A Washington State Stock Investor

Dr. Scott Brown and “Intelligent Investing” — helping you get the most out of your hard earned investment capital.

As an investor, I have spent over 35 years reading anecdotal accounts of the greatest investors and traders in history. My net worth has grown dramatically by applying the distilled wisdom of past giants.

I have researched and tested what works in the world’s most challenging capital markets — and I teach you every trick I know in my Udemy courses!

>>>Learn from leading financial experts!

>>> How about discovering how I have tripled family member’s accounts in six years with simple stock picks?

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(In the last six years we have exploded our net worth and are absolutely debt free, we live a semi-retired Caribbeanlifestyle in atriple gatedupscale planned community from a spacious low maintenance condo looking down on our tropical beach paradise below).

My Curriculum Vitae:

Investment Writing and Speaking:

I am an internationalspeaker oninvestments. In 2010 I gave a series of lectures onboard Brilliance of the Seas as a guest speaker on their Mediterranean cruise. Financial topics are normally forbidden for cruise speakers. But with me they make an exception because of my financial pedigree.

On day 6 the topic I discussed was “Free and Clear: Secrets of Safely Investing in Real Estate!“ The day 7 topic was “Investment Style and Category: How the Stock Market Really Works!” Then on day 8 I spoke about “The 20% Solution: How to Survive and Thrive Financially in any Market!” The final talk on day 11 was “Value Investing for Dummies: When Dumb Money is Smart!

Gina Verteouris is the Cruise Programs Administrator of the Brilliance of the Seas of Royal Caribbean Cruise Lines. Regarding my on-board teachings she writes on June 19th, “You have really gone above and beyond expectations with your lectures and we have received many positive comments from our Guests.”

I sponsored and organized an investing conference at Caesars Palace in Las Vegas in 2011 under my Wallet Doctor brand. This intimate conference was attended by 14 paying attendees.

As such many strides were made in financial education that week. For instance I met a woman who is a retired engineer from the Reno, Nevada area.

She made a fortune on deep in the money calls during the bull markets of the 90s.

This humble and retired engineer inspired me to look more seriously at deep in the money calls with far expiration. She also gave me an important clue regarding trading volume.

Her call option and volume insights have been confirmed in the Journal of Finance.

In 2012 I gave a workshop at the FreedomFest Global Financial Summit on stock investing at the Atlantis Bahamas Resort. I was also a panelist on a discussion of capital markets.

My course “How to Build a Million Dollar Portfolio from Scratch" at the Oxford Club is an international bestseller. In 2014 I co-authored “Tax Advantaged Wealth” with leading IRS expert Jack Cohen, CPA. This was the crown jewel of the Oxford Club Wealth Survival Summit.

I have been a regular speaker at the Investment U Conferences.

In 2012 I gave a workshop entitled “How to Increase Oxford Club Newsletter Returns by 10 Fold!” The conference was held at the Grand Del Mar Resort in San Diego, California. This resort destination is rated #1 on TripAdvisor.

In 2013 I spoke at the Oxford Club’s Investment U Conference in San Diego California. The talk was entitled “The Best Buy Signal in 103 Years!” Later in the summer I spoke at the Oxford Club Private Wealth Conference at the Ojai Valley Inn.

This was at the same time that Jimmy Kimmel married Molly McNearney in the posh California celebrity resort. It was fun to watch some of the celebrities who lingered.

I also operate a live weekly investment mentorship subscription service under the Bullet-Proof brand every Monday night by GoToWebinar.

Academic Research:

I am an associate professor of finance of the AACSB Accredited Graduate School of Business at the University of Puerto Rico. My research appears in some of the most prestigious academic journals in the field of investments including the Journal of Financial Research and Financial Management. This work is highly regarded on both Main Street and Wall Street. My research on investment newsletter returns was considered so important to investors that it was featured in the CFA Digest.

The Certified Financial Analyst (CFA)is the most prestigious practitioner credential in investments on Wall Street.

Prestigious finance professor Bill Christie of the Owen School of Business of Vanderbilt University and then editor of Financial Management felt that our study was valuable to financial society. We showed that the average investment newsletter is not worth the cost of subscription.

I am the lead researcher on the Puerto Rico Act 20 and 22 job impact study. This was signed between DDEC secretary Alberto Bacó and Chancellor Severino of the University of Puerto Rico.

(See Brown, S., Cao-Alvira, J. & Powers, E. (2013). Do Investment Newsletters Move Markets? Financial Management, Vol. XXXXII, (2), 315-338. And see Brown, S., Powers, E., & Koch, T. (2009). Slippage and the Choice of Market or Limit orders in Futures Trading. Journal of Financial Research, Vol. XXXII (3), 305-309)

Graduate Degrees:

I hold a Ph.D. in Finance from the AACSB Accredited Darla Moore School of Business of the University of South Carolina. My dissertation on futures market slippage was sponsored by The Chicago Board of Trade. Eric Powers, Tim Koch, and Glenn Harrison composed my dissertation committee. Professor Powers holds his Ph.D. in finance from the Sloan School of Business at the Massachusetts Institute of Technology [MIT]. Eric is a leading researcher in corporate finance and is a thought leader in spin offs and carve outs.

Dr. Harrison is the C.V. Starr economics professor at the J. Mack Robinson School of Business at Georgia State University.

He holds his doctorate in economics from the University of California at Los Angeles. Glenn is a thought leader in experimental economics and is the director of the Center for the Economic Analysis of Risk.

Tim Koch is a professor of banking. Dr. Koch holds his Ph.D. in finance from Purdue University and is a major influence in the industry.

My dissertation proved that under normal conditions traders and investors are better off entering on market while protectingwith stop limit orders. The subsequent article was published in the prestigious Journal of Financial Research now domiciled at Texas Tech University — a leading research institution.

I earned a masters in international financial management from the Thunderbird American Graduate School of International Business. Thunderbird consistently ranks as the #1 international business school in the U.S. News & World Report, and BloombergBusinessWeek.

Academic Conferences:

I spoke at the 2010 annual conference of the International Association of Business and Economics (IABE) conference in Las Vegas, Nevada. The research presented facts regarding price changes as orders flow increases in the stock market by advisory services.

I spoke at the 2010 Financial Management Association [FMA] annual conference in New York on investment newsletters. The paper was later published in the prestigious journal “Financial Management.”

I presented an important study named “Do Investment Newsletters Move Markets?” at the XLVI Annual Meeting of the Consejo Latinoamericano de Escuelas de Administración (CLADEA) in 2011 in San Juan, Puerto Rico. The year before that I presented my futures slippage research at a major renewable energy conference in Ubatuba, Brazil.

I spoke at the Clute International Conferences in 2011 in Las Vegas, Nevada. The research dealt with the price impact of newsletter recommendations in the stock market.

I presented a working paper entitled “The Life Cycle of Make-whole Call Provisions” at the 2013 Annual Meeting of the Southern Finance Association in Fajardo, Puerto Rico in session B.2 Debt Issues chaired by Professor LeRoy D. Brooks of John Carroll University. Luis Garcia-Feijoo of Florida Atlantic University was the discussant. I chaired the session entitled “Credit And Default Risk: Origins And Resolution.” Then I was the discussant for research entitled "NPL Resolution: Bank-Level Evidence From A Low Income Country" by finance professor Lucy Chernykh of Clemson University and Abu S Amin of Sacred Heart University and Mahmood Osman Imam of the University of Dhaka in Bangladesh.

That same year I presented the same study to the Annual Meeting of the Financial Management Association in Chicago, Illinois. I did so in session 183 – Topics in Mergers and Acquisitions chaired by James Conover of the University of North Texas with Teresa Conover as discussant. I chaired session 075 – Financial Crisis: Bank Debt Issuance and Fund Allocation. Then I was the discussant for TARP Funds Distribution: Evidence from Bank Internal Capital Markets by Elisabeta Pana of Illinois Wesleyan University and Tarun Mukherjee of the University of New Orleans.

Academic Service:

I am a member of the MBA Curriculum Review Committee, the MBA Admissions Committee, The Doctoral Finance Admissions Committee, the Graduate School Personnel Committee, and the Doctoral Program Committee of the School of Business of the University of Puerto Rico.

Financial Journalism:

I am the editor of Momentum Investor Magazine. I co-founded the magazine with publisher Daniel Hall, J.D. We have published three issues so far. Momentum Investor Magazine allows me to interview very important people in the finance industry. I interview sub director Suarez of the DDEC responsible for the assignment of Puerto Rico act 20 and 22 licenses for corporate and portfolio tax reduction in the third edition. Then I interview renowned value investor Mohnish Prabia in the upcoming fourth edition — to be made available via Udemy. Valuable stock market information will be taught throughout.

Charity:

In October of 2010 I arranged for the donation to The Graduate School of Business of the University of Puerto Rico of $67,248 worth of financial software to the department that has been used in different courses. This was graciously awarded by Gecko Software.

I have guided thousands of investors to superior returns. I very much look forward to mentoring you as to managing your investments to your optima! –Scott

Dr. Scott Brown, Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico.

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