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.
MATH ASSIGNMENT
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- Parent Category: Q & A
- Category: Explore Your Options
- Written by Tom Gentile
With assignment of a short call prior to expiration a possibility on equity options, when should I expect this type of risk?
Equity options fall under the category of being American style, wherein and as stated there is the risk of assignment for those holding short contracts, either a call or a put. With regards to the call, the good news is that an early assignment is typically very clear as to when it might occur.
A BROKEN BUTTERFLY?
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- Category: Explore Your Options
- Written by Tom Gentile
Being relatively new to options, I’m paper trading various strategies until I thoroughly understand them and commit real capital. One position that’s stumped me is a long butterfly using two contracts (2 x (4) x 2) purchased for $1.00. The stock proceeded to dive shortly thereafter and much to my surprise, instead of a maximum loss I thought was contained to $200, the position was down more than $1,200! Can you help explain this to a slightly disconcerted newbie?
LEAPS OF FAITH
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- Category: Explore Your Options
- Written by Tom Gentile
Following Netflix’s late October 2011 earnings disappointment, shares cemented the stock’s out-of-favor position with growth traders. But with NFLX’s rapid drop in excess of 70% from its highs and the company still the dominant player in the to-your-doorstep or streaming video market, what are your thoughts on buying a LEAPS call as a way to position for some upside?
It’s not my place to give recommendations on a particular stock. What I can say is that despite your prognosis of shares, a long call strategy with a long-term contract needs to assess liquidity and implied volatility.
PUTTING IT TO BETTER USE
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- Category: Explore Your Options
- Written by Tom Gentile
If I want to accumulate a stock over time and am willing to buy on weakness, is hedging shares with protective puts the best means to do this? Or would a short put strategy be a better approach?
That’s a wonderful question. In the first scenario, by buying or “marrying” a put in conjunction with shares, you as a trader have guaranteed yourself limited losses and guard the stock against a bearish downside catastrophe.
GIVEN THE SLIP
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- Category: Explore Your Options
- Written by Tom Gentile
How can I best ensure against slippage on an option order?
If you’ve been trading long enough, you probably have learned about slippage the hard way. Two good ways to guard against this enemy of profits is to deal in options with strong liquidity characteristics and stay clear of market orders whenever possible.
As for a stock’s options providing strong liquidity: Average daily contract volume, large open interest, and tight quoted call and put markets are the three components that we can use as measures against unjust slippage. Having one of these characteristics in place is no guarantee of the other two. Without all three in place, without a contract month that’s new to the board, there’s a strong chance that what looks to be worth trading today, all else being equal, might not be so at a later date.
