I want to set a stop-loss order on my option position. Should I use the stock
price or the option price as the "trigger" to set the stop-loss order?
It is a matter of personal preference. Most exchanges allow stop-loss orders
in options; however, most brokerage firms do not allow them for various
reasons. Stop-loss orders are a way of attempting to limit your losses on an
investment once that investment goes a certain amount in the "wrong"
direction. Generally, most people who set stop-loss orders use the actual
price of the investment (in this case the option price) for the "trigger"
which decides when to liquidate a losing position. On the other hand, some
people use options to execute a strategy based on technical analysis of the
underlying stock. For example, an investor might feel that a certain chart
pattern in a stock makes him believe that the stock is due for a rally. To
"monetize" that opinion, the investor buys calls. He may then believe that if
the stock instead drops to a certain price, that bullish opinion is no longer
warranted, and he would not want to be "long" anymore. In this case, the
investor might prefer to use the stock price as the trigger for the stop-loss
order. As always, check with your broker to see if he accepts these types of
orders. Once "triggered," the stop order can be of two different types: a
market order or a limit order. This is another decision for you. Again,
personal preferences would rule; there is no better or worse choice.
Is it true that when executing buy-write
order(s), there needs to be two orders and that both are executed at the ASK
price?
The short answer is an unequivocal "maybe". It's possible that with a
multi-part order (such as a buy-write) that the options part of the trade
MIGHT occur at the ask price, but there is no guarantee. When traders enter
buy-writes, they are usually entered on a single ticket, for a "Net Debit". In
this case, the prices received for the call, and paid for the stock matter
only in the sense that the net dollars spent should not exceed the (debit)
limit. For further information regarding buy-writes, review our new on-line
Covered Call class.
Who sets the width between the bid-ask
on the options exchanges?
Basically, anyone who trades does! However, there are rules on each exchange
regarding the maximum width that those quotes may be. Generally speaking, the
maximum bid/ask differentials are the same at the exchanges that trade
options. Please be aware that there are occasions and market situations on the
various trading floors that may necessitate the maximum bid ask differentials
can be modified or waived.
The 5 US options exchanges that list options have rules that specify the
maximum bid ask differentials in option contracts. The members of these
exchanges are obligated, under normal circumstances, to honor their displayed
quote for a minimum number of contracts. The number of contracts can vary,
depending on the stock or index in question, but it is usually at least 10
contracts, and in many circumstances could be 20, 50 or even 250 contracts!
For example, if a stock offered 8 different strikes per month, you could say
that there are 64 different contracts available (8 calls, 8 puts and four
expiration months)!
You quickly realize the amount of capital these ladies and gentleman are
willing to risk at any time. Then, multiply this number of strikes by 10 (most
of these specialists/market makers work between 10-15 different stocks) and
you can see the daunting task these traders have.
How does open interest affect
my order? Should there be a certain amount of open interest to execute the
trade? If not, what is open interest telling us? I have 8,500 shares of XYZ.
If I were to write 85 contracts, do I get filled at the bid or ask?
It's doubtful that open interest will have any affect on the execution of your
order. Open interest is simply the number of outstanding contracts; it expands
and contracts as investors and traders open and close positions. If you enter
a market sell order, you will be filled at the best available bid price -- if
the quantity at that bid price is less than your order size, then you'll sell
the number of contracts on that bid and the balance of your order at the
next-best bid price, and so on and so forth.
The impact of selling 85 call contracts will probably have a similar effect to
that of selling 8,500 shares, so if you feel the market would have problems
digesting that many shares then it might be appropriate to spread that
quantity out over the course of the trading day. In any case, if you're
worried about the price you would receive upon entering a market order, you
might consider the use of a limit order, where the limit is the lowest price
you would be willing to accept.
What does the term
"triple witching hour" mean?
Triple witching is the third Friday of March, June, September and December,
when options, index futures, and options on index futures expire concurrently.
Massive trades in options and underlying stocks by hedge strategists and
arbitrageurs can cause above average volume and added market volatility.
Derivative contracts based on stock indices do not generally involve the
actual exchange of any underlying security, but rather are cash-settled based
on some fair market value at a specified time. Many arbitrage strategies
involve simultaneous, offsetting transactions in a basket of stocks
representing an index and a derivatives contract on the index. When the
derivatives contract reaches expiration, the usual practice is to buy or sell
the basket of stocks at the exact price used for cash-settling the derivatives
contract.
In the early 1980's when organized futures and options exchanges began trading
standardized contracts based on stock indices, that final value of those
indices for cash-settlement purposes was usually the close of trading on the
third Friday of the month. Every month there is an expiration on options and
options on the futures. But expiration of the futures, where a large
proportion of the arbitrage activity takes place, only occurs once a quarter.
So on the third Friday of the last month of each quarter, stock exchanges
would be deluged with orders to buy or sell huge quantities of stock at
exactly the closing price used for cash-settling the derivatives contracts.
This combined expiration of options, futures and options on futures came to be
known as the Triple Witching Hour.
Because these arbitrage strategies were market-neutral, simply taking
advantage of price discrepancies between the index and derivatives on the
index, they didn't represent any real opinion on the market's direction. But
unwinding only one side of the strategy with a market order and letting the
other side cash-settle sometimes caused huge gyrations in the markets during
the final hour of trading on the third Friday of that month.
Eventually, many of these expiring contracts switched from using Friday's
closing price to using the opening price or trading range for each of the
component stocks in determining their settlement values. This lessened the
pressure for immediate execution at any price, and allowed the possibility of
delayed openings for order imbalances at exchanges that have such procedures
in place. So while the triple expiration of options, futures and options on
futures can still have an impact on how the market opens on that day, the
kinds of gyrations that routinely occurred in those early days is rarely
observed today.
View
a complete list of optionable indices and the related product
specification links.
This book describes just about every
fundamental strategy you could try with options. It covers the total return
concept of covered call writing, the pros and cons of option buying, examines
various types of spreads (vertical, calendar, and diagonal) and the various
delta (price) neutral strategies. If you have to have only one book on options,
this will be it.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
