OPTIONS
Explore Your Options 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. E-mail your questions for Gentile to Editor@Traders.com, with the subject line directed to "Tom Gentile Question."
OPTIONS INFO
I am new to options, although I have been trading stocks for several years. Does the technical analysis I use for stocks also apply to options? Is there anything (such as the parameters of MACD, RSI, and DMI) I need to change in order to adapt to the options market? Do you know of any websites that provide charts of options? Thanks. - Richard Wilson
First, you can use any analysis you want, because the option is a surrogate for the stock. I suggest changing time frames to reflect a longer period of analysis. Trading options longer-term (30 days or longer) seems to work better than daytrading them, mainly because of liquidity and slippage issues.
No site I know of charts options prices. To chart options prices, a company would have to collect data for every option every day, and that would get to be a big file. Our company, Optionetics.com, collects options data every day, but we don't look at charts on options. They basically run the same way that stocks do, give or take the options delta, and whether you trade calls or puts. We use the data to determine options strategies, but only after we have determined direction, just as a stock or futures trader would.
LEVERAGED TRADING
Trading the S&P 500 takes a few forms. You can trade the index-tracking stock SPY, you can trade the S&P futures, or you can trade options on the S&P futures. What are the advantages and disadvantages to trading futures or options futures versus trading the underlying commodity? Do people trade futures just because they are more leveraged, and futures options to be even more leveraged? - Michael McClellan
You hit it right on the head. In some cases, trading options on index futures gives more leverage than the underlying or even the index options. Depending on the underlying futures contract size, some trade as high as $500 per point move, and so the options do too. The only problem with these is the slippage concerns (the difference between the bid and offer). It's best to consider these factors carefully before you choose your trades.
COMMODITIES OPTIONS
I have an interview for a commodities options trader position, and I know nothing about the commodities market! Do commodities options work the same way as equity options? Are there only futures contracts in the commodities market? Any info you can provide would be greatly appreciated. - Niki Gibbs
That's a lot to answer in this forum! Yes, options are always options, which means they confer the right to buy or sell the underlying (for the purchaser of an option), or for options sellers, the obligation to deliver. When it comes to stocks and commodities, there are differences, especially for traders who like to spread options with different months, because each options contract for futures may or may not pertain to a certain delivery date. I suggest you get as much information as possible beforehand; there are good books available on the subject in bookstores or online.
STOCK OPTIONS AND STOCK SPLITS
I was wondering what happens to stock options when the underlying stock splits. Does the call's strike price go down? An example would really help me out. - James Kramer
When a stock declares a split, the options will remain the same until the date the split is to take place. On that date, your option in most cases will split too, just like the stock, so rest assured you won't be losing anything. There are some instances where the option prices will remain normal, but that's rare. You should consult with your broker on specific cases. In addition, note that the option symbols will more than likely change as well.
BUY-WRITE STRATEGY
I came across the buy-write strategy on the CBOE website. Is this a feasible strategy for individual options traders? - Name withheld
A buy-write is also called a covered call, in which you buy the stock and write call options against it. This strategy is best implemented in a bullish to neutral market, where a slow rise in the market price of the underlying stock is anticipated. This technique allows traders to handle moderate price declines, because the call premium reduces the position's breakeven. Since you are counting on the time decay of the short option to render the short call worthless, you don't want to sell a call more than 45 days out. However, since the profit on a covered call is limited to the premium received, the premium needs to be high enough to balance out the trade's risk.
Got a question about options? E-mail your questions for Gentile to Editor@Traders.com, with the subject line directed to "Tom Gentile Question."
Originally published in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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