S&C Magazine Current Contents Q & A Explore Your Options
Explore Your Options
with Tom Gentile
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.
WHERE'S MY HEDGE?
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
If I put on a bull vertical spread, what can I do to hedge the position?
By either purchasing a bull call vertical or selling a bull put spread, you are starting out with a hedged position. Compared to an outright long call using the same strike for the purchased vertical or selling the same strike put, the trader is dramatically cutting down vega (volatility) and theta (time decay) risk. At the same time, desired directional risk is reduced but remains the crux of the spread’s ability to turn a profit.
OPEN AND INTERESTED
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
How does open interest as a trading statistic compare in its usefulness versus contract volume of an option?
Option open interest can be useful in a couple of ways as a subordinate tool in reaching a trade decision that may not be gleaned from volume alone. One improvement for traders who pay attention to open interest versus those who do not is having a better read on general liquidity provision in a product.
DOUBLE DOWN OR UP?
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
If a trader is long stock that goes against him and he’s unwilling to sell, are there any option strategies to recoup those paper losses without laying out more capital?
Hypothetically, anything is possible. But it’s also true when a trader opens up his portfolio to options, there are more opportunities to produce a larger profit or reclaim open losses faster. For a longer-term investor intent on holding shares despite an existing loss, one such strategy is called a double long position.
WHAT VOLATILITY?
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
When determining the fair price for an option, how important is historical stock volatility compared to the current implied pricing set by the crowd if the two are deviating widely?
That’s a good question but one without a set answer, as far as profits handed out by the market is concerned. What we can say emphatically is historic or statistical stock volatility is important, particularly for longer-term contracts. A large discrepancy between the pricing of the option and underlying volatility won’t go unpunished, if the two types of volatility continue with that relationship.
BUY MORE FOR LESS?
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
I recently bought calls that proceeded to go up in price despite implied volatility dropping fairly hard from the levels associated with my initial purchase. Not wanting to look a gift horse in the mouth, yet wanting to maintain some directional exposure but also unwilling to sell call premium that appeared too cheap to me, I sold two-thirds of my position and let the balance ride. Do you think this was the right adjustment to make?
