Okay, Professor Geof, just thought
I'd give you a real quick rundown on how to use
this spreadsheet, it is very simple,
but there are a lot of scary-looking formulas
and formatting and what-have-you.
But you can ignore 90% of this,
I'm just gonna show you the important bits.
Section One is just where I keep notes
on whether I like an investment or not
and you can ignore that obviously.
Section Two is where most of the action will take place,
and I'll just quickly run through this.
I have all this filled in with the SNAP info,
for now use I've used BHP as a stock
that should hopefully grab your attention.
This is probably gonna show "n/a"
if you don't have the same brokerage software
that I use, but you can ignore it.
This is all hard-coded.
The two areas you want to focus on here,
the maximum loss you are willing to take
on the options, I've used $5,000,
if you're willing to lose $10,000 or more,
just punch that in here, in cell D20.
Capital at risk is only relevant to
the size of your stock investment,
and it determines many shares you will buy (NOT short, I mispoke).
Sorry, in this example, it's all gonna be buying BHP.
Didn't want to send a negative message about your employer,
so it's all buying and calls instead of shorting and puts.
The principles for using this spreadsheet are the same.
So just again, if you get a quick comparison
of whether you should buy or use calls
just punch in those two numbers.
These numbers will be fixed although feel free to change
any of these highlighted or shaded areas.
The other things you might want to consider
are when you use a call spread or not,
you can just turn that to "no" if you don't.
And the spread on that, call spread.
Not sure what the strike price is gonna be yet
on the SNAP puts, but you can use varying
increments here in cell I19, and then the data
will automatically update for how
big a spread you wanna try.
And then this will probably all be fixed
but again, you can change it, nothing bad will happen.
The other thing you may wanna change,
what I've loaded is different expiration dates,
so you can change how far out you wanna go.
I've only put in two examples here of the BHP,
long dated calls, January 2018 and January 2019.
The model will update that.
And then the last thing you many wanna change,
I usually leave this on mid,
particularly for someone like BHP that has
good trader coverage, you get good liquidity,
and the mid is probably close to what you'll pay,
but for other companies like SNAP,
it may be that the mid-price doesn't make any sense,
you may wanna use the last.
I know some guys look at the bid or the ask,
'cause they're pretty confident they can
get whatever price they push for.
But for our purposes, either the mid or the last,
I'm just gonna leave it on the mid.
So they're the main changes, just to recap,
are gonna be how much you're willing to lose,
the amount of stock that you'd be willing to buy,
and I think you can ignore all of this,
and then just whether you wanna do a call spread or not.
And the expiration.
So that's the section.
I'm gonna leave that open, 'cause that's sort
of the main thing that you'll wanna change.
Section Three, summarizes what's in Sections Four and Five,
so I'll just quickly show you,
not that you need to worry about it,
Section Four just has all the different pricing
alternatives for the January 2018 call expiration.
And like I said, that'll be pre-loaded
with the SNAP data, and then Section Five
is for the longer dated expiration, which is
January 2019, and it puts everything you need
for the spreads or just, if you go into a call spread,
you can just buy the call, and it does that as well.
So Sections Four and Five - unless the pricing changes or updated -
you probably won't need to look at that.
Like I said, Section Three just summarizes
based on what you've chosen in Section Two,
it just summarizes the scenarios,
and has a lot of data about time value.
When I use long-dated options, I'm always
trying to get a lot of residual time values,
so if I sell the options a year from now,
they've still got a lot of time value
left in the premiums.
But you can probably ignore that for now.
Okay, so you don't need to do anything,
in Section Three you can look at it and see which scenario
you've chosen, I'll just change this
back to the shorter expiration (January 2018),
and you'll see this all updates.
So Section Six is where all the fun happens,
and I know it looks God-awful, but it really
is not, you can ignore most of it.
The only things you need to change here,
once you've set up Section Two,
the only things you need to change
are the stock price changes you want to consider
for deciding whether options or stock
are the best way to go.
So I've started here with a negative 10% stock price change in E103,
and positive 25% return in E104,
and what the model does is it, a couple of things,
it highlights those stock price movement levels for you,
in yellow and green, and just so you can see,
if you change this to say I wanna look
at the 50% stock price change for BHP and 100%,
it automatically moves these lines for you.
So you can go to the lines and say what's the
alternative I feel most comfortable with.
The other thing... and that's the main thing
you'll need to use...
The other thing that it does is,
on the side it has asterisks indicating
where the current stock price is roughly.
(there's some rounding error going on there)
but just so you can quickly focus your eye,
and it does that on both sides.
Not particularly relevant, unless you wanna know
your returns if the stock does nothing,
but what is relevant is up here in, what's that,
rows 102 and 104, these asterisks actually
move depending on what is the best risk/reward
for the stock price movements you've plugged in.
So you plug in these numbers, and the
colored lines move down to show you
what the various alternatives would yield,
and then this little asterisk thingy
will move along to say, "all right,
your best alternative is buying the stock,
or buying this call spread"
And actually it's gonna be tough to find (laughs),
it looks like based on the current pricing for BHP,
you're almost always better doing a call spread.
Which does happen, just a bit surprising
given how low the VIX index is.
But yeah, anyway.
So it automatically adjusts, it says,
all right, if you expect the stock price
was going to decline 10%, then your best alternative
is to use this call spread.. which I don't think
this pricing is right, I think the option pricing
is not realistic, they're not gonna let you
make $5,000, but you know, this is a theoretical exercise,
so let's not worry about it.
And then it says if the price goes to your
other stock price target of a 50% gain,
then your best alternative is this
$47.50 / $52.50 call spread.
And you can see that it gives you a risk/reward
of 9.6 times, and that's reflected here
with the green highlighting.
So like I said, just play around
with these two numbers here.
Do whatever you think, if you think BHP's stock price is
gonna go up 200%, it will tell you that
it's still the best alternative and you
go down here and it'll show you what
kind of returns you would have made
if the stock price does go up that much.
you can see, you would have made $48,000,
using calls and $20,000 using stock.
Surprisingly, quite often I find stocks
are a much better alternative than using calls,
but I think part of that is because we're
doing call spreads rather than straight calls.
But anyway.
That's the basic mechanism, just to recap,
play around with the expected stock price change
and follow the asterisks, and the shaded lines.
And the other thing you may need to change,
if you want, is the call expiration,
and whether you use calls spreads at all,
and maybe you just wanna use a call
with no selling of the higher expiration call,
I'm sorry, selling of the higher strike call.
And how much you are willing to lose,
and that should be all you have to do.
So a lot of ugliness, but it is
pretty simple to use, I hope.
If not, let me know, and I'll give you
a phone call and talk through it.
All right, hope that was helpful.
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