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Current Events and a Common Question
I'm writing this article from my beautiful hotel room across the street from the Ontario Convention Center, just outside of Los Angeles, where I'm attending the International Traders Expo. Several Online Trading Academy instructors are speaking and showing their expertise on various topics of interest to options, equity, Forex, and futures traders.
There's a lot happening in the options field that I have to tell you about so let's get started.
REMINDER: Hopefully, we are all aware that tomorrow is expiration Friday. As I have previously mentioned, beginning with tomorrow's expiration, options that are in the money by only one penny (.01) will be automatically exercised. If, near the close of trading, you are long an option that is hovering around the strike price and you don't want to exercise that option, either sell it prior to the close of trading, or give instructions to your broker not to exercise. Two things you should know before tomorrow; find out up until what time your broker will accept exercise or contrary instructions, and determine if your broker will accept contingent type instructions such as, "exercise my option only if it's .10 or more ITM."
If you're short the option and don't want to take a chance of being assigned, buy the option back. That is the only way to guarantee that you won't be assigned.
NEWS ALERT: As I noted in my article about Expiration Cycles on April 17th of this year, the 2011 LEAPS were supposed to start trading on the 2nd Monday after the May, June and July expirations for stocks on the January, February and March cycles, respectively. Well, if you're waiting to trade these options, you'll have to wait just a little bit longer. The Options Clearing Corporation (OCC), after reviewing the volume of contracts that normally trade after the introduction of LEAPS, has determined that not enough contracts trade in the first 4 months after introduction. Therefore, they decided to delay the introduction of the 2011 LEAPS by 4 months. So the January, February and March cycles will begin trading the 2011 LEAPS in September, October, and November of 2008, respectively. The OCC announced that they will continue on this schedule in following years as well.
SOMETHING NEW: On June 2nd, the CBOE announced plans to begin trading binary options on the S&P 500 Index (SPX) and on the CBOE Volatility Index (VIX). The trading symbols assigned are BSZ for the SPX options and BVZ for the VIX options. Trading is scheduled to begin on July 1, 2008. Initially, they will be trading in the first 3 consecutive near term months and will have expiration dates that coincide with those of the SPX and VIX. The strike price intervals will be a minimum of 1 point for BVZ and a minimum interval of 5 points for BSZ.
Speaking of binary options should remind you of the binary options that were introduced by the American Stock Exchange (AMEX) in May. When the AMEX introduced their product, instead of calling them "binary options" they chose to call them Fixed Return Options (FROs). In addition, they defined Finish High and Finish Low FROs, as opposed to just using Call and Put FROs. So for now only the AMEX can trade FROs. Also, but for other reasons, only the CBOE can trade the BVZ and BSZ. Could this be the beginning of a feud between the Exchanges?
QUESTION: Every week I receive questions from my readers regarding either current or past articles. One question that seems to come up over and over in various forms is; "What is the best options trading strategy?" Unfortunately, as is often the case, this simple question does not have a simple answer.
The problem is, at least from my perspective, that there is no answer to the question because there is no "best strategy." As you have seen over the past 6 or 7 months there are lots of ways to make money trading options. Some traders like to sell premium, some like to buy premium, some like to trade based on directional predictions and some like to trade based on volatility. There's short term versus long term trades. Some like to trade options on a particular group of stocks or indexes, while others will trade whatever is currently "hot." Some like to do event based trading, while others steer clear from events. Some trade delta neutral, others like gamma neutral, or volatility neutral, and I've actually met at least 2 traders who trade based on astrological signs (I'm not kidding.) And then there's always the fundamental versus technical analysis debate. I actually could keep on going but I think you get the idea.
Anyway, and for what it's worth, this is what I think. If you are of the mindset that there is only one or two ways to trade options, you have what I call a "trade orientation." Trade orientations are Bad, note the capital B! There are times when it makes sense to trade in particular fashion and there are times when it makes sense to trade differently. For example, in the current environment of relatively high volatility, it generally would make more sense to be a volatility seller, rather than a buyer. But I've received lots of email from traders who are buying premium (mostly puts, at least.) There is no strategy or trading method that works under all market conditions. The bottom line is that you should let the market conditions dictate the trade. I know that's not profound, but I also know it is not commonly practiced.
By the way, that is the reason why it is so important to continue your options trading education. Trading options is not an easy way to make money, but by being flexible and knowing what market conditions require what types of trades, will help you to make consistent profits with a minimum amount of risk.
As always, if you have any questions about my articles, have suggestions for future topics, or want more information about our options mentoring program, feel free to email me at: sfreifeld@tradingacademy.com or call me at: (888) OTA-2580 ext. 2010.
11. Know Thy Options!
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Stan Freifeld comes to us from the Floor of the American Stock Exchange where he traded options for his own account from 1994-2001. He was a Market Maker for the options on several popular equities including Dupont, Schering Plough, Walgreen's, CBS, U.S. Surgical and Biovail.When he is not trading or thinking about trading, Stan relieves his stress by playing competitive squash, competing in local road rallies with his Ferrari Cabriolet and tutoring local high school students for the SAT's. The bottom line is that Stan, a long time MENSA member, is an engaging teacher with an extraordinary background in options trading and risk management. He is helpful and patient by nature and equally at ease with all levels of traders, from complete novices to advanced pros and academics. He'll be happy to teach you to trade!