options (15)

The naked call is probably the highest-risk option strategy of all, right?

Not necessarily.

Most options traders associate risk with specific strategies. But you might want to question this assumption, based on a different definition of risks in trading: risk is not only determined by the attributes of a strategy, but more so by when and where the position is opened.

Even the notorious uncovered call may be less risky than most traders believe, based on a few important observations. These include:


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In the 1940s the average holding period for stocks was as high as 10 years. This is unheard of today. Now the average is down below one year and many active traders (day traders, swing traders) are looking at being in open positions for a matter of days, not even weeks or months.

With this new "normal" (created in part by access through the Internet, low trading costs, and markets characterized by high volatility), do options play a role?

In fact, they can. Options are flexible, much cheaper than

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Options: Forward Roll Pitfalls

Traders, especially covered call writers, love the forward roll. It helps avoid or defer exercise, creates additional income, and helps keep ownership of stock that is on an uptrend.

But there are potential problems. Among these are the following four every covered call writer needs to remember:

1. Rolling keeps you exposed longer, tying up capital. As advantageous as it might look to roll forward, does it really make sense? When you roll, you buy to close the original position and replace it with

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Options: Pitfalls In The Ratio Write

The attraction of the ratio write is the potential for higher premium income. Traders too often convince themselves that exercise is unlikely, and that time decay is likely to outpace intrinsic value as the stock goes higher, even if the calls go in the money.

Here's the thinking: You own shares of an underlying security. You sell to open ATM, OTM or slightly ITM (At, Out of or In The-Money) call positions with one to two months until expiration. A ratio write is defined as a strategy in which yo

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Options - Alternative To Black-Scholes - by Michael C. Thomsett

Using the Black-Scholes pricing model for pricing options is not the best system for trade timing. Given the numerous flawed assumptions in Black-Scholes, traders may consider an alternative for selecting options and timing trades - for two reasons.

First, many systems are based on using options expiring in the very near future. However, if the selection is based on implied volatility analysis, this is an unreliable method. Volatility

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Further thoughts on the shortcomings of the Black-Scholes pricing model:

Three possible causes (separately or together) for differences between value and price related to volatility are: (1) the value is correct but the option price is not; (2) the incorrect outputs are derived from the Black-Scholes model; and (3) the Black-Scholes model might be inaccurate.

The primary cause of inaccuracy is due to the underlying assumption that volatility is a constant. This means that volatility of the underly

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The original Black-Scholes formula often is cited as the authoritative source for options pricing. However, with a large number of variables built into option formulae, it is surprising that they occasionally are close to approximating or matching market value.

The Black-Scholes formula as originally published was full of unrealistic assumptions. These include:

1. Volatility is fixed and never changes.

2. The short-term interest rate never changes.

3. Anyone can lend or borrow as much as he wants as

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So many traders start out with a sensible plan, only to abandon it because of the way the markets move. This abandonment of a smart plan invariably leads to potentially small added gains but large added losses.

In entering a trade, it is sensible to set two goals: the point where profits will be taken, and the bail-out point where losses will be cut. If you buy a long option, you should know going in that 75% of options expire worthless, so setting goals to sell and close make sense.

This does not

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Options: The Iron Butterfly Strategy

The curiously-named "iron butterfly" is a complex strategy offering limited losses and limited profits. It is an expanded version of the basic butterfly (two separate spreads offsetting one another). The "iron" version is a combined straddle consisting of four options instead of the butterfly's three.

An iron butterfly can be either long or short. The long version consists of a long call and long put at the same strike; and a lower-strike short put plus higher-strike short call. For example, a co

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When you write covered calls, greater profits will be earned by writing several two-month positions per year, than from writing one covered call with the longest time to expiration. Time decay for further-out options is quite small, so writing options more than a few months away is equal to lost time. Based solely on option premium profits, focusing on short-term ATM or OTM contracts produces impressive annualized returns.

An example of the covered call and how to identify profit, loss and breake

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The dilemma of the long stock position is unending downside risk. This is where options serve their best purpose: as tools for portfolio management. Rather than use only as speculative and high-risk market plays, strategies like the synthetic short stock position protect against downside loss and, unlike the better-known covered call, offer a practical alternative to selling and taking profits. This position combines a long put and a short call. In a pure synthetic short, no stock would be held

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Benefits of the Covered Call


Benefits of the covered call include generation of income without added market risk. The comparison between the covered call and simply owning shares of stock demonstrates that added covered call income discounts the basis in stock, thus reducing market risk.

There are two criticisms of the covered call. First, if the underlying price declines below the discounted basis in stock (stock reduced by option premium), the overall position loses. However, if you own shares prior to opening the covered

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I am a former Stock Options Market Maker on the CBOE and the Pacific Stock Exchange. I and some others used a strategy of identifying mis-priced calls and puts. We sold the over-priced and bought the under-priced and then hedged to reduce risk.

After noticing that the millions of employees who have been granted equity compensation by their employer/company and their advisers have little understanding of the value that these employees have, the risks of losing that value and how to manage those po

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A recent debate on the ISO 31000 Linked in forum about time and risk poses the following question "Is delaying a risk considered a separate treatment method or is it just a sub-type of changing the likelihood?"

This is a very interesting statement and leads us to look at risk through time here in this blog.

Continue reading by following this link

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