OPTIONS
Explore Your Options
Got a question about options? Tom Gentile is the chief
options strategist at Optionetics (www.optionetics.com), an education and
publishing firm dedicated to teaching investors how to minimize their risk
while maximizing profits using options. E-mail your questions for Gentile
to Editor@Traders.com, with the subject line directed to "Tom Gentile
Question."
OPTIONS INFO
I am new to options, although I have been trading stocks for several
years. Does the technical analysis I use for stocks also apply to options?
Is there anything (such as the parameters of MACD, RSI, and DMI) I need
to change in order to adapt to the options market? Do you know of any websites
that provide charts of options? Thanks. - Richard Wilson
First, you can use any analysis you want, because the option is a surrogate
for the stock. I suggest changing time frames to reflect a longer period
of analysis. Trading options longer-term (30 days or longer) seems to work
better than daytrading them, mainly because of liquidity and slippage issues.
No site I know of charts options prices. To chart options prices, a
company would have to collect data for every option every day, and that
would get to be a big file. Our company, Optionetics.com, collects options
data every day, but we don't look at charts on options. They basically
run the same way that stocks do, give or take the options delta, and whether
you trade calls or puts. We use the data to determine options strategies,
but only after we have determined direction, just as a stock or futures
trader would.
LEVERAGED TRADING
Trading the S&P 500 takes a few forms. You can trade the index-tracking
stock SPY, you can trade the S&P futures, or you can trade options
on the S&P futures. What are the advantages and disadvantages to trading
futures or options futures versus trading the underlying commodity? Do
people trade futures just because they are more leveraged, and futures
options to be even more leveraged? - Michael McClellan
You hit it right on the head. In some cases, trading options on index
futures gives more leverage than the underlying or even the index options.
Depending on the underlying futures contract size, some trade as high as
$500 per point move, and so the options do too. The only problem with these
is the slippage concerns (the difference between the bid and offer). It's
best to consider these factors carefully before you choose your trades.
COMMODITIES OPTIONS
I have an interview for a commodities options trader position, and
I know nothing about the commodities market! Do commodities options work
the same way as equity options? Are there only futures contracts in the
commodities market? Any info you can provide would be greatly appreciated.
- Niki Gibbs
That's a lot to answer in this forum! Yes, options are always options,
which means they confer the right to buy or sell the underlying (for the
purchaser of an option), or for options sellers, the obligation to deliver.
When it comes to stocks and commodities, there are differences, especially
for traders who like to spread options with different months, because each
options contract for futures may or may not pertain to a certain delivery
date. I suggest you get as much information as possible beforehand; there
are good books available on the subject in bookstores or online.
STOCK OPTIONS AND STOCK SPLITS
I was wondering what happens to stock options when the underlying
stock splits. Does the call's strike price go down? An example would really
help me out. - James Kramer
When a stock declares a split, the options will remain the same until
the date the split is to take place. On that date, your option in most
cases will split too, just like the stock, so rest assured you won't be
losing anything. There are some instances where the option prices will
remain normal, but that's rare. You should consult with your broker on
specific cases. In addition, note that the option symbols will more than
likely change as well.
BUY-WRITE STRATEGY
I came across the buy-write strategy on the CBOE website. Is this
a feasible strategy for individual options traders? - Name withheld
A buy-write is also called a covered call, in which you buy the
stock and write call options against it. This strategy is best implemented
in a bullish to neutral market, where a slow rise in the market price of
the underlying stock is anticipated. This technique allows traders to handle
moderate price declines, because the call premium reduces the position's
breakeven. Since you are counting on the time decay of the short option
to render the short call worthless, you don't want to sell a call more
than 45 days out. However, since the profit on a covered call is limited
to the premium received, the premium needs to be high enough to balance
out the trade's risk.
Got a question about options? E-mail your questions for Gentile
to Editor@Traders.com, with the subject line directed to "Tom Gentile
Question."
Originally published in the June 2002 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2002, Technical Analysis, Inc.
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