For a while the major Oil Companies and Drillers were drifting out of the news. The nasty leak from the BP well was not getting constant attention any more as a mostly successful cap was put in place. Four of the largest Oil Companies are beginning a program for rapid response to a spill, all of which is very good. The problem is part of the market is not buying this, yet.
I was recently asked a question about option trading and the placing of stops. Although I answered that question right there and then, I felt that the topic of stop losses and options needed to be explained in more detail...
A recent discussion on options was started when this question was asked:
If I want to buy a PWER stock option with its high growth because I don’t have the money to buy it outright. What things in such a option should I look for and what should I avoid?
Time to expiration, price of the underlying, implied volatility, historical volatility, puts, calls, delta, gamma, theta, vega, in the money, at the money, out of the money, intrinsic value, extrinsic value, higher commissions, egregious bid ask spreads, no options traded on a stock with a beautiful technical set up, multiple potential beasts and physiologies, LEAPS; why would one even bother with options? If I retain a shred of rationality, an open question to be sure, there must be some reason to complicate my life with these additional variables.
I learned about one risk of buying LEAPS the hard way.
LEAPS (Long-Term Equity Anticipation Securities) are options that expire in a year or more. That means they generally have a lot of time premium built into them.
Implied volatility is a major determinate of the magnitude of the extrinsic option premium. Considered together with time, these two factors act in concert to define the pricing of the time value (extrinsic value) of options.
A friend of mine in the futures pit had been having a rough time of late when he asked me a typical question among us traders – How do I come back from a loss? Since he had been having a "rough patch" and not just one bad trade, I gave him the following advice that is to be used over a period of time...
Options offer a number of unique advantages to the trader, but perhaps the single most attractive characteristic is the ability to control risk precisely and to do so with surgical precision. Much of this advantage derives from the ability to control positions equivalent to stock with far less capital commitment.
In my most recent option class in Milwaukee, Wisconsin, I was asked a very specific question by one of the students. He was assigned on the sold option even though on the April's expiry Friday the position, technically speaking, should not have been assigned to him. He asked me the same question that he has asked his broker: "Why was I assigned?!?"
One of the questions that often comes up in many of my option classes when teaching the credit spread strategy is what to do with the short leg. This entire article will focus on providing a clear answer to that question, while covering all other relevant details.
The recent massive oil spill that now threatens major wildlife areas along the Gulf Coast is a reminder of how "black swan" events can impact our lives in unforeseen and unforeseeable ways.
This article, on the topic of Covered Calls, will address three things: Buy-Write, Legging In, and the use of the MACD histogram as a timing tool for the sale of Covered Calls.
Iron condors are a relatively straightforward in the pre-trade analysis and order entry process. It is a high cost strategy to trade so most options-centered brokers have made it easy for traders to execute easily. The difficulty of an iron condor is in the trade management and adjustment process. Effectively managing an iron condor trade when the market is moving is ambiguous and subject to your own personal risk tolerance.
An iron condor can be designed to accommodate your risk tolerance and account objectives but those adjustments will always have a trade off. As with most option selling strategies this means there is an exchange of a higher probability of a successful outcome and lower premiums or higher risk and larger premiums.
There are more option strategies than option strategists but at their heart they are all modifications of basically two ideas - buying or selling options. The proliferation of options strategies come from the infinite ways that these two concepts can be combined. Some of these combinations can be great ideas but others are just commission generators with the difference usually resting on how you implement them as a trader. In this article we will start discussing one such combination strategy that is becoming more and more popular with option investors all the time - the iron condor. An iron condor is a combination of a long and short strangle, which is also the same as two credit spreads.
Every time we sell a call option contract, we take upon ourselves the obligation to sell our long stock. So how can our OTM covered call allow us to have greater potential to hold onto our long stock for greater participation on a move upside than if we had sold an ATM call, while still being protected from not just some, but the majority of the downside risk? Trade a collar...
In my most recent option class, I was asked to cover the topic of Covered Calls in greater detail than what is normally covered in the class presentation. As always, I pulled up an example thrown at me by my students and started studying the chart. The next step becomes an issue whether to enter into the trade at the same time (buying the stock and selling the call) or in two parts...
Register for Our Free Newsletter and Become an Insider Today!
The Comment Letter is a no-holds-barred look at the world of options. If you want dry industry content, then look somewhere else. If you want an informed perspective on the options markets, delivered straight from the founder of The Options Insider.com, then you've come to the right place. [ Read the letter ]
