What's the difference between this one and your others? First of all, this is definitely not an update to Options as a Strategic Investment (OSI). In fact, many of the techniques described in this book require no familiarity with options strategies at all.
Contents
The Post-Expiration Effect of Stock Market Futures: A Trading System 149 The Expiration Effect on Individual Stocks 155 Options as an Insurance Policy 157. Expensive Stock Options Can Predict Corporate News 238 Implied Volatility Analysis of Speculative Trades 24124 Predicted Volatility Gap Trading Strategies 253 Implied volatility can predict a trend reversal 256.
OEX 270
1 Option History, Definitions,
UNDERLYING INSTRUMENTS
The best-known index is the Dow Jones Industrial Average, but there are indices of many other groups of stocks; indices with a large number of stocks in them are, for example, the Standard & Poor's (S&P) 500 and the Value Line Index. In addition, there are indexes of bonds and interest rates; these include things like the Short-Term Rate Index, the Muni Bond Index, and the 30-Year Bond Rate Index.
OPTION TERMS
The most traded listed options usually have less than nine months of life left, but there are longer-term options - called LEAPS options when referring to stock options or index options - that can extend to two years or more. Government bond futures at a price of 98, up to and including the expiration of the December options.
THE COST OF AN OPTION
For stock options and most index options, this date is the Saturday following the third Friday of the expiration month (which, by default, makes the third Friday of the month the last trading day). For example, if someone tells you that the IBM July 50 call is trading at 3 (and we know that the option is for 100 shares of IBM), then the actual cost of the option is $300.
THE HISTORY OF LISTED OPTIONS
Thus, upon exercise, the strike price will actually be adjusted for the dividend paid over the life of the option. The first president of the CBOE was Joe Sullivan, who had led the research project for the CBOT.
OPTION TRADING PROCEDURES
If you're trading directly through professional traders on the floor, you probably won't want to use market orders (which give the broker in the crowd the ability to make their own decision, for your account). But you can claim restitution if you handle your end of things right.
ELECTRONIC TRADING
The bottom line is that every aspect of the business should be handled in a professional manner - get the order right, ask for it to be repeated, listen to the repeat. Any errors that occur are necessarily yours because no other people are involved in the order entry process.
EXERCISE AND ASSIGNMENT
Of course, if the option is in-the-money—that is, the price of the underlying is higher than the strike price of a call—then the owner of the call will exercise it because it has value. Futures options are rarely exercised before expiration, except when they are deep in the money.
FUTURES AND FUTURES OPTIONS
For example, coffee options expire on the first Friday of the month preceding the expiration month of the futures contract. So they decided to introduce options that expire in the months between the actual expiration months of the futures contract itself.
INFLUENCES ON AN OPTION’S PRICE
What he didn't realize was that implied volatility jumped to nearly 50 percent for OEX options after the crash. It has previously been shown that each of the six factors has its own influence on option prices.
DELTA
Some traders also think of the delta as a simple way to tell whether the option will be in-the-money at expiration. So, the more time value an out-of-the-money option has, the farther the delta will be from zero.
TECHNICAL ANALYSIS
The article stated that the price of Coke - which had risen sharply after the end of World War II - ruled out any good fortune for the foreseeable future. Since many of the strategies presented in this book are short- to medium-term, we prefer technical analysis for that purpose.
2 An Overview of Option Strategies
PROFIT GRAPHS
The profit table shown here details the potential profits and losses at various XYZ prices at the July expiration. The same information is shown in the profit graph, Figure 2.1, which shows that this position has a limited loss on the downside and can theoretically generate unlimited profits on the upside. Thus, a profit graph can be general or specific, depending on whether or not the axes are significant profit and loss points.
OUTRIGHT OPTION BUYING
In this regard, many beginners buy to keep their costs down. To make matters worse, the typical buyer of out-of-the-money options buys options that have too short a life - he doesn't give the stock enough time to make the big move required. Furthermore, the in-the-money option will most closely match the performance of the underlying stock on a daily basis.
USING LONG OPTIONS TO PROTECT STOCK
Note that the position has limited risk, equal to the initial price of the put (2 points) plus the amount by which the put was out of the money (1 point). Another point is important: Note that the shape of the profit graph for this position is exactly the same as the shape of the profit graph for owning a call. You can consider the amount by which the put is out of the money as "deductible".
BUYING BOTH A PUT AND A CALL
If you wanted a position that was similar to owning a long call on any of the other stock options, you would have to short the stock and buy a call. One of the most famous was the cheap price of index options just before the crash of 1987, but there are many other cases, both in stocks and futures. However, two of the fastest rallies we've had since index options were listed were both preceded by very cheap options—one rally was in August 1983 and the other in the first half of 1995—and the buyers of the lag benefited greatly. .
SELLING OPTIONS
One of the worst put debacles of all time occurred during the crash of 1987. If the stock rises, you will benefit from the amount of the premium you receive from selling the put. A less costly approach would be to buy (very) out-of-the-money puts for the individual songs you own or have written naked puts for.
SPREADS
This additional feature makes the credit form of the spread more attractive to many investors. Whereas in the IBM example only IBM stock underlies both options in the calendar spread. There is another consideration in any spread, and that is the relative pricing of the two options involved in the spread.
RATIO STRATEGIES Ratio Writing
This strategy has little, if any, downside risk - only equal to the initial debit of the spread plus commission. Normally, a call back spread is established when the underlying is somewhere in the close vicinity of the upper strike. There is limited upside profit potential, equal to the amount of the initial credit taken when the spread is set.
SUMMARY
There are more expensive calculation programs that are usually tied to the data source so you don't need to enter anything other than the trading symbol of the underlying security. Just make sure you actually have access to the model and are using it before you make trades. If it's expensive, that's fine, but at least you know you're buying an option that could lose value if the implied volatility goes down, even if the underlying goes up slightly.
3 The Versatile Option
OPTIONS AS A DIRECT SUBSTITUTE FOR THE
In the preceding Microsoft example, the profit was exactly the same whether you bought the stock or used the option strategy. He figures he will cover the option after the stock falls to 60 and make a fortune. One viable use of single stock futures is to replace the options-oriented strategies described in the previous pages.
OPTIONS AS A PROXY FOR THE UNDERLYING
The costs to the stock owner who decides to use this strategy are commissions, the time value premium of the call and the loss of dividends. If the stock is currently held at a loss, the purchase of the call would constitute a wash sale and the loss could not be taken at this time. In the preceding strategy, the stock owner paid a portion of the cost to limit the risk of his stock holding to a fixed price.
THE EFFECT OF STOCK INDEX FUTURES ON THE STOCK MARKET
The premium of the futures contracts against the cash index fluctuates during the trading day as supply and demand forces the market. Furthermore, he notes that the futures are trending upwards, and they are currently selling at 563.75. It can all be over in a matter of minutes, depending on what causes the futures to be mispriced in the first place.
THE EFFECT OF INDEX FUTURES AND INDEX OPTION EXPIRATION
If there is 40,000 open interest in in-the-money, then sales programs are possible. At the start of the day, most of that open interest is probably in the hands of customers. Note that the market makers sell stock in the open market (100 shares at 46.92 in this example).
OPTIONS AS AN INSURANCE POLICY
Simply buy the slightly out-of-the-money offers for the individual releases you have. If you were to buy out-of-the-money puts, their protective quality would not kick in until the index falls below the strike price of those puts. If he wants cheaper protection, he can buy no-money-down or short-term deposits.
THE COLLAR
In general, the higher the volatility of the stock and the longer the time horizon involved, the greater the difference will be in the striking prices between the call and put trades for the same. Using the Black-Scholes option pricing model, one can establish a general guideline for how far apart the striking prices of the put and call would be for different volatilities and expirations. In any case, it is imperative that the stock owner understands the effect dividends, volatility and interest rates can have on the cost of the collar.
HEDGING WITH OVER-THE-COUNTER OPTIONS
Suppose the stock owner says, “I want to protect my portfolio if the market falls by more than 8 percent. This type of exotic option is obtained for free, initially, and must be paid for only if it is the option. He doesn't get a completely free ride, of course, because if the market falls and he has to pay, it will be much more expensive than a regular listed sale would have been.
USING VOLATILITY FUTURES AS PORTFOLIO INSURANCE
