Thursday, November 30, 2006

Monday, November 27, 2006

Bond options

This was originally posted in the advancedoptionstrategies group, by Stall Horn.

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James Bond, that is...!

Greetings friends,

Did you know that the hugely successful James Bond cinematic franchise, as
we know it today, all started with a call option? Read More....

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Additional info can be found Here and Here.

Here is yet another example of a bond film with options mixed in.

Saturday, November 25, 2006

Quick tip on options pricing estimation

Q: I bot some GOOG March 600/620 bull call spreads debit 2.6 each, anticipating the stock moving higher. Goog is currently at 505. How do I know what that spread will be worth if the stock moved quickly to 530 within a week's time?

A: There are several ways to do this. I'll use a single option as an example as its easier to visualize for newer folks. Same steps for spreads pricing. (please also see the valuable comment posted by Ben Evans, at the bottom of this post)

If I bot the jan07 550c for 7.7 and I wanted to know roughly what that option is worth (not counting effect of IV) if GOOG moved up by 20 pts quickly (say within a day or two) there are several ways to do this:

1. Use an options calculator found at many websites and tools. Here is the one I use http://www.ivolatility.com/calc/ or
2. use a risk graphing tool such as the one built in on thinkorswim or hoadley.net or 888options.com. The graphing method is nothing but a giant, sophisticated options calculator, plotting all the results.
or
(click on pic to see larger version)
3. look at the strike thats 20pts lower on the jan 07 chain, specifically in this case the jan07 530c (12.9ish as of this writing).
That is what the 550c will be worth if goog moved up 20pts quickly.

The same is true if u wanted to know if goog moved down 20pts, just look at the strike 20pts higher, in this case the 570c and that will give u a rough guesstimate.

Thursday, November 23, 2006

check out Options Trader mag


Absolutely free monthly online publication if u have not checked it out already.

In the current Nov issue I particularly enjoyed:
  • Trading Tips from an options market maker
  • CME, CBOT join forces
  • Nasdaq enters croweded options field
Registration is free HERE.

Where its also free, is my new Forum along with my stock buddy cmatt. Please come by with your questions and comments.

Tuesday, November 21, 2006

IWM choices

Q:
I entered 3 Mar IWM 78 puts today at a cost of 2.85 per option. I have a stop at 2.45 which correlates with a new high for IWM based on OX
option pricer. I have contemplated selling OTM puts (either Dec or Mar - maybe 74s) on IWM and making a spread out of the trade. What action would be recommended on this trade? Leave it and move the stop down if gains are made or convert to a spread trade?



Here is the risk profile if selling 3 dec quarterly 74p for merely .30 each.
Click on image to enlarge.










Risk profile if turning it into march vertical spreads by selling Mar 74puts. The problem with this long dated vertical spread is the delta implications.

See my video on ANF vertical spread answered for explaination.

All risk graphs created with thinkorswim.

Sunday, November 19, 2006

How to protect my stock with long put?

Q: I have SBUX stock that has appreciated significantly since I bought it three years ago. I read McMillan book and it recommends that buying very long term (like two-yrs LEAPS) put option is the best strategy to protect a long stock position from loss, but it didn't go into much details about how out-of-money should such a put be. Do you guys have any experience of doing this? Thanks!

A: leap put in your situation would be like buying insurance for say your car. How much value do you want to protect against loss and for how long, and what kind of deductible are u willing to take on, those are the 3 main deciding elements (not considering implied volatility).

For example, if u bot 1 jan09 35 strike put (800 days) u have the right to sell 100 shares of sbux at 35, no matter how low sbux went. So u are saying u have protection from 35 on down, with a $2.33 per share deductible (current closing price minus 35, assume stock at 37.33) , for 800 days.

But wait, that insurance contract will cost you $400, so 35 less 4pts is 31. Your real protection at jan 09 expiration is really 31 on down. So refer to the options chain and pick the choice that best suit your needs, based on the simple rules I have outlined above.

Click on image to see original size and details. Risk Graph created with Thinkorswim.

OT: not the same o same o breakfast

Tired of the same o same o breakfast? Try the following:

Shrimp Sandwich (right) - Served open faced on rye bread topped with hard boiled egg, cold water shrimp and mayonnaise.

Complete breakfast, includes coffee (top).

Fresh cinnamon roll (left).

Holiday cold plate (bottom) - A sampling of Swedish items. Featuring meatballs, ham, gravad lax (salmon), egg and shrimp. As always, click on picture to enlarge.

All for 10 bucks at my local IKEA cafe, easily fed 2 adults and 2 youngsters, right inside the IKEA store. I cant find any info on their website at all regarding their onsite cafe but I would highly recommend a visit if u are kinda tired of the same o same o.....

Click here for a store near you.

Friday, November 17, 2006

Nymex IPO

My own dear brother wants to play the NMX IPO and we had the following actual discussion. I will make and post a short video clip illustrating the ideas this weekend.

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----- Original Message ----
From: junky
To: bro
Sent: Tuesday, November 14, 2006 7:50:21 PM
Subject: Re: Can we buy some Nymex?

whats the press release say they expect to open at?

---- Original Message ----
From: bro
To: junky
Sent: Wednesday, November 15, 2006 12:06:43 AM
Subject: Re: Can we buy some Nymex?



Question:

Is there a way to put a buy order in to accomplish the following logic? I want to buy 150 shares, but I don't want to pay more than $72/share. If I put in a limit order at $72, then it won't buy until it hits that point. But if I put in a market order, then who knows, it might finally execute at $102/share with some trader screwing me because market order = blank check?

These choices seem clumsy and very limited. Is there a better way?

---- Original Message ----
From: junky
To: bro
Sent: Wednesday, November 15, 2006 12:34:01 PM
Subject: Re: Can we buy some Nymex?

ok depends on what NMX opens at on Friday, limit orders guarantee min. buy price but not execution.
Market order guarantee execution but not price.

For your 72$ example, if there are options for NMX, which I doubt for an IPO, what u can do is sell puts. Say u are bullish on the stock and u dont mind owning shares at a lower price, u can sell a 30 day 70 strike put and collect $200 per contract (pulled number out of the hat).

What u are saying is u are willing to buy 100 shares of stock at 70 less the $200 u collected. so in the end of the contract period if stock was anywhere below 70, u agree to buy 100 shares at 70, subtract the 200 u got for the put, effectively buy it at 68. If stock was anywhere above 70, no stock is to be purchased and u keep the $200.

The other thing good about this put contract (selling cash secured put, or selling naked put) is that time decay is on your side. U don’t need to wait 30 days to profit from this. Time is ticking away in your favor on that put that u sold. Even if stock say at 72, didn’t move for 2 weeks, that put would have decayed some, and maybe u can terminate that contract by buying that put back for say 150, ending your obligation to buy stock, and pocketing $50.

We can even discuss selling put spreads, which IMO is much more risk averse than selling puts alone, and ties up alot less cash.

Wednesday, November 15, 2006

three choice comparisons

MO covered call +100 shares at 85.15 and
sell 1 Dec 85c credit 1.85

See video in the learning section on how to read a risk graph, if u are not familiar with the tool.
Click on graph to enlarge.




sell 1 MO dec 85 put credit 1.5. Notice this is the synthetic equivalent of the covered call above.


Long 1 MO jan09 85call debit 9.0
Sell 1 MO dec06 85call credit 1.85
This is a calendar spread. Note the difference in risk profile compared to the above two choices.

Risk graphs generated within Thinkorswim.

KOSP Tender Offer by Abbott

CBOE research circular dated 11/22/06. This explains the best I think.
KQW is the current options series

All current SEC filings for KOSP

Monday, November 13, 2006

Yet another way to trade!!!!

My trades by Michael Catolico - excerpts from a message response to
others in compoundstockearnings yahoo groups.
The thread is titled "bunch of stuff" posted on 11/12/2006.
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i don't approach the markets the way i've been challenged here. i don't
enter a position by finding "a good stock" then tossing on a few options
to enhance that investment. i trade reactively to the markets in a
dynamic, provisional way. i do everything i can to NOT have an opinion
on what a stock or the market will do. with every trade i essentially
enter it randomly, completely neutral and assuming the trade will fail.
then i try to extricate myself from the mess i've gotten myself into and
somehow make money with it. i've been an active participant in many
discussion groups and have worked through and discussed many actual
trades - winners and losers - i've made. but mostly the point has been
to illustrate some principle or other that i've learned and not to show
someone "how to trade like me." i'm not going to toss a trade out there
just to show how good or bad i am. what's the point of that when i
consider that success lies with the individual trader and has nothing at
all to do with the strategy or advice behind it. if i say buy abcde
stock someone could follow that or take the opposite position. either
way, it's not the original opinion that makes the money. it's what's
done with the trade that counts. both traders could win or both could
lose following or going contrary to my "advice." unless they follow in
lockstep with each of my moves, the winnings or losses experienced would
have nothing to do with me.

folks on this list give a lot of their research and work effort. some
might find some poster's theory about a stock's technical momentum or
fundamental value of some use. what i offer is a sober look at risk. if
people don't find that perspective of any value it's easy enough to
simply hit the DEL key on any of my messages.

AAPL example




Trader buys ITM AAPL 75c debit 9.45.












Stock moves up to 85, sell 81 shares of aapl to make it delta neutral and limit risk at expiration.

Sunday, November 12, 2006

Does this really benefit online options trading??

This is a follow up to Major options announcement from a few days ago.

More details on the SEC margin ease proposal

and

what it really means to the small retail traders.
Its buried in section 3. SEC Moves to Abolish Margin Calls.
Also read the Broker-Dealer "Friendly Reminder Call" transcript, just below it.


Official NYSE memo.

Saturday, November 11, 2006

No man is an island

Frequently this type of question comes up from the newer folks:

When I trade the QQQQ the bid/ask spread is typically .05, but when I look at SPX/NDX/RUT the bid/ask spread is quoted in whole dollar, why would anyone trade the larger indices?

"A 3pt move in the NDX or MNX is quite a different story as a 3pt move in the QQQQ" an experienced trader once related to me. "You have to compare apples to apples, in relative terms". Lets see how.

The table values were constructed using after hour quotes as of the close on Friday 11/10/06. Basically comparing apples to apples in % terms.

Also consider transaction costs. If u had a set amount of say $5000 blocks to deploy in the Nasdaq index, how many commissions would you have to pay using the Qs? How many commissions would you have to pay using the MNX or NDX?

Amen for ISE challenging CBOE for their proprietary products to be multi-listed. See full article here.

I remember the week NDX went from trading on CBOE only to trading on multiple exchanges and the spread dropped by 2/3.

When is someone gonna sue PHLX for XAU to be opened up ;-)

Just as No man is an island, entire of itself; every man is a piece of the continent, a part of the main, no options exchange can be on its own for every long ;-)

Thursday, November 09, 2006

Scratch pad





How to enable Theo feature in Thinkorswim.
Click on the image to enlarge.

Wednesday, November 08, 2006

OT: Chained to the ......

I was out sick today from work so I watched a bit of day time TV. I channel surfed and ran into The Rachel Ray Show . I turned around and typed in one of the chat rooms that Rachel Ray is on CBS and she is cute. One of the chatters inquired if I was still married. "I am married but not dead", I typed. My buddy jp promptly announced to the room:

Just because you are chained to the dog house does not mean you cant bark at the cars going by!!

Priceless jp, priceless.

Major options announcement (from Sept)

no affiliation with options university, informational only:

Click to view short video.

Additional info on Nasdaq options market.

Sunday, November 05, 2006

EXPE skew case study


EXPE low historical vol vs. high front month IV. 17% skew between nov/dec.

EXPE will do their numbers 11/9.




Sample nov/dec itm 15call calendar debit .25.
The expectations is that the front month will revert back to the mean (-17%) while
the back month contracts a mere 3% vol.







Here is the spread after the -17% and -3% simulated.



Risk graphs created with Thinkorswim.




This is what happens after a vol crush post news. This risk profile is taken 1 hour b4 Friday's (11/10) close. Quite different than the hypothetical posted a few days ago eh?

Front month vol 39.53
Dec vol 29.76 both on the itm 15calls

Saturday, November 04, 2006

NVDA collar


Someone from InvestorVillage posted a NVDA collar trade:



long 100 shares of stock - $33.95
Sold Nov 32.5 Call - $ 2.65
Bought Dec 30 Put - $ 1.05


Margin required: $3000+





The covered call portion (long stock-nov call) is a synthetic equivalent to a short naked put. Thus the whole collar is the same as a nov/dec diagonal spread:

-nov 32.5p
+dec 30p

Margin required: $225

NVDA will announce their numbers, Nov 9th.

Friday, November 03, 2006

Love is grand, but divorce is.......

Guy across the street, moved in about a year ago with wife and 2 little ones. Recently we don’t see the wife and 2 little ones anymore. My girl found out from neighborhood gossip they are in divorce proceedings. We then deduced to the following scenario (complete speculation):

Just b4 they moved in, the guy's Dad died of old age in that house and son inherits the place. Wife prolly served the paper at that opportune time shortly there after.

Love is grand, but divorce is 100 grand (depending on what part of country u live).

Along that line of thought, this is one of the most entertaining Radio Show, IMO.