Q&A
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. To submit a question,
post it on the STOCKS & COMMODITIES website Message-Boards.
Answers will be posted there, and selected questions will appear in future
issues of S&C. |
Tom Gentile of Optionetics
|
CALENDAR STRATEGY
How dependent is a calendar strategy on sideways movement?
A sideways-moving market is important, but not as important as the volatility
of the options that are being used to create the calendar spread. The best
calendar spreads I have seen in the markets have two important traits:
1. The options volatility of the month sold is higher than the month
bought. This is referred to as volatility skew. Since volatility is the
mean reverting, these usually come back together.
2. Rising volatility is also good for a calendar spread, since your
profit comes from the value left in the option that was purchased. I have
seen stocks that have broken up or down and the calendar spread was still
profitable because of the perception of the future built into the long
options.
BLACK-SCHOLES MODEL
How is the Black-Scholes model used differently for futures options
and stock options? - Minkacha Mosha
Without getting too technical, there are differences when trading futures
as opposed to stocks, and the dividend comes into play with some stock
options.
Since the dividend payout directly reflects the stock price, that in
turn will relate more or less (delta) to the options price. So the Black-Scholes
option pricing model has a dividend adjustment field to incorporate this.
The Black model does not include dividends, and is the model most used
by futures traders.
MONEY MANAGEMENT OF OPTION SPREADS
What are some money management tips for credit and debit spreads?
Specifically, when should I get out when a spread goes against me? - Bob
Maclaurin
First, a spread is already in place as a way of managing risk. I use
a time stop in place of a price stop for two reasons. First, since most
of my spreads cost around 2.50 or less, I'm happy with taking the price
risk, although I rarely take a 100% loss.
The second reason I use the time stop is that if I expect a certain
stock to rise or fall within a set time frame, I always go out a month
or more past that time frame. That way, if the stock doesn't move by my
allotted time, I can exit my spread with at least 30 days to expiration.
In most cases I still have premium in the spread.
GETTING INVOLVED WITH OPTIONS
What is the best way for a beginner to get involved with trading
options? I have the capital and feel comfortable with the risks involved,
so it's mostly a matter of building up my confidence in my trading ability.
I would like to trade options as a complement to my other investments,
such as mutual funds, stocks, and so on. - DD
The first thing to do is maybe pick up a good book on options trading,
or you can scan Yahoo! for options-related material. There is also plenty
of good information on our site at Optionetics.com.
Another thing you need to do is take a good look at your current trading
and identify exactly how options might be an alternative or a complement
to your style. I am a systems trader, so before trading a stock system
with options I try to determine if I am going to get a decent enough reward-to-risk
ratio (versus the original system with stocks). For example, it's tough
for a daytrader to use options as a replacement for stocks because of liquidity,
the spread, and the commissions. On the other hand, most position traders
can find a use for options.
[Optionsites.com is another good source of information, and includes
a list of books on options. See our review in this issue on page 117. -
Ed.]
EXPRIRATION MONTHS
What is the rationale underlying the confusing options expiration
months cycles? What would be wrong with having one only? Thank you kindly
- Fiorenzo Primavori, Genoa, Italy
You have no idea how many times I ask that same question myself. The
answer, I am told, has to do with symbols: If every optionable stock had
options for every month, the symbol process would be increased at least
by a factor of four, which could cause problems. The cycles were created
to reduce the number of option symbols in place at one time.
Return to October 2002 Contents
Originally published in the October 2002 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2002, Technical Analysis, Inc.
