Effect of Window Dressing on Option Trading

Options Trading Topic: Seasonality of Trading

Dear Options Trading FAQ:

Trading options on the OEX is my life. I saw on TV today stuff about the rally being due to the "strong" part of the month effect. Whatzzat? How does it impact my option trading strategy?

Trading Options from TV Land

Dear Whozzat Option Trader?

The definitive source for studies on seasonality effects is Yale Hirsh. In addition to his market letter, he publishes the yearly Stock Trader's Almanac. It has exhaustive studies of historical performance tallied with regard to time of day, day of week, days of the month, periods of the year etc. Fascinating stuff. You should be aware of the trends and the potential impact on your option trading. If only because it has a strong following among stock traders.

Anyway his work shows that the strongest part of the month is the last two trading days and the first four of the new month. This is the "end of the month" or "window dressing" effect. Everyone knows about it (supposedly) but many forget to check their calenders before putting on a bearish position. Yale Hirsch's organization can be reached at 201 767 4100. Sometimes they can be persuaded to sell old copies (last year or this year) of the almanac for little money. A must read for traders.

Check out these Stock Trader's Almanac sample pages

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Strategy, Options Trading Seasonality

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Trade Options.

Option Assignment of Worthless Put Options

Today's option trading topic: Assignment of "worthless" put options

Dear Options Trading FAQ:

I'm sure there is a lesson to be learned from one of my recent options trades, but I figured I'd ask an expert rather than rely on my sometimes logical, but totally false reasoning.

I couldn't resist the put option premiums in Caldor, and had to "scalp" the 7/16 by shorting the Sept 5s, with 4 days to expiration. On Friday when I called my broker at 12:55 PDT, the last trade was 5 1/4 with a bid of 5 1/8 and 5 3/8, so I figured I'd risk the last 5 minutes of trading and not close out the position. The stock closed at 5 1/8, with the bid now at 5 and the ask at 5 3/8, so I figured the options would expire worthless. I received my exercise notice on Monday, but was fortunate enough to unload on wednesday at a slight profit. The timing of the notice seemed to surprize even the broker, a grizzled options trading veteran.

Is it common for at-the-money or even out-of-the money options to be assigned (excluding any dividend capture strategy)? Could be someone got wind of the Chapter 11 filing and decided to bet on the outcome. Also, my understanding is that option exercises have to be made Saturday, altho' it could still take a while to notify the assignee.

Any insight you can provide would be much appreciated. Up till now, I've been under the (probably mistaken) notion that one was home free if the put wasn't in the money on expiration date.

I also imagine it was ominous that the put last traded at 1/8, as reported by Barrons.

Thanks, Assigned for No Stinking Reason

Dear Stinky:

Thank you for your great question. This matter comes up now and again and is most interesting to look at.

Do you remember the Gerber takeover? We had a situation where one client was short Gerber call options coming into the expiration friday. The stock closed the day at a price where the client felt it safe to not take any action to close out his position. In fact, any reasonable look at the circumstances would have also recommended that no offsetting trade be made. Well, of course, the outcome was historic. The Gerber takeover was announced and our client was assigned all of his short calls. Needless to say, the resulting short stock position turned out to be a disaster. There was a Barrons column dedicated to the topic of how these exercises meant that players had advance information on the timing of the announcement.

The moral is to remember that short option positions can be assigned to you without regard to logic. There are cases in the past where options out-of-the-money by a full 1/2 point or so were assigned for no apparent reason.

This just goes to show that nothing is a secret on Wall Street. In the Gerber situation, someone had the "scoop" and so was willing to pay the extra to grab the shares from the short option .

In your particular case, I don't feel that this was the case (inside scoop). The stock closed 5 1/8 (bid at 5) which is close enough to your short strike that an assignment is not totally bizarre. In general, any expiration where the stock lands "on-the-money", do not be surprised at any assignments. Even with "worthless" options, there are reasons why yu might get assigned (dividends, as you mentioned). With the Caldor out-of-the-money, a long put holder wanted to play out his hand over the weekend.

By the way, the Caldor situation was interesting in terms of option premium. I noted that the movement ot the option premiums seemed to presage rather well the stock moves, both the decline and in particular the snap-back.
I've rambled on enough - maybe the others can relate their tales of wacky assignments.

Hope that helps.

P.S. I'm glad the Caldor worked out for you. I guess this time the "wise-guy" exercising the option outsmarted himself!

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Expiration, Options Assignment

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Trade options.

What do OEX Index Options Prices Really Track?

Options Trading Topic: OEX Index Option Valuation

Dear Options Trading FAQ:

I am an avid index option trader and I watch the OEX index and the OEX options very closely in live time on my computer. I notice that on some days, the options don't seem to track the underlying index very well - that is, sometimes the OEX will be up only a little yet the options are up a lot, and vice versa. Any thoughts?
Puzzled Option Strategist

Dear Puzzler:

Here's a Wall Street fact of life that a surprising number of people don't know:

Derivatives on various indexes are often skewed by things other than the underlying index in question. For example, the OEX options are usually NOT priced off the OEX index. The working pricing mechanism is, in fact, the S&P 500 futures as that is a better indicator of future expectations.

That is why on some days the options will show increases or decreases in value not in line with the OEX index. One should always be aware of where the S&P futures are - most of Wall Street watches it in a trend following fashion. The CNBC ticker shows it all the time, or you can just ask your broker when you call for quotes. The current contract to follow is the S&P 500 December futures contract. That's quite a mouthful so just ask how the December "Spooze" are doing. Keep track of it and you'll see a more true correlation to the index premiums that you watch.

Note: The current month options do strongly track their own underlying index on expiration day.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Index Options, Option Pricing

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Think about your options.

Booking an Options Order

Options Trading Topic: Options Order Book

Dear Options Trading FAQ:

I got one for ya. Two identical option trades with two different brokers (same option and price limit, but different amounts - 10 contracts and 5 contracts). No restrictions on either. 10 lot order given to broker #1 at 10am; 5 lot entered to Broker #2 at 10:45 am. Now, only one order gets filled: the one for 5 contracts, placed with Broker #2. How is this possible?

Love,
Switching all funds to Options Broker #2

Dear Switcher:

Great question. I'm going to feature it on the usenet post today if you don't mind. I've seen this happen in the past and this is what I've been told by the floor: The answer has to do with a lot of things, one of which is whether or not the order was "booked".

Here's what may have happened if it was an OEX order on the CBOE: The first broker does not book the order - instead he holds the order in the crowd (We'll discuss why later). The second broker enters his 5 lot onto the public order book. A sell order comes along at your limit. On this floor, that order must be filled off the book first, so the 5 lot sell order placed by broker #2 is executed while the first broker is still representing your 10 lot buy in the crowd. In this case, Broker #2 got the job done due to his use of the "book".

So why aren't all orders put on the book? Simple, the executing floor broker (his firm) makes more $ on orders that he executes directly. It costs him to leave orders on the book so he prefers to keep most orders in his own "deck". This is not the only reason, but a prominent one.

What should the public customer do? You can ask your limit orders to be "booked" when you place your order. Some firms may give you an attitude but it may mean the difference in an execution (as in your case).

Any downside to booking an order? Yes. If you need to change your limit (to a market order, or example), it will take longer to execute because the broker will have to find and cancel the book order first. The process mayl take longer than changing an order kept in the floor broker's pocket. In the meantime, the market on the option may have changed significantly.

Note: This scenario was for the OEX options only. Other floors have their own rules regarding public order priority. Call the option exchanges for floor procedures.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Broker, Options Order

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use.

SPX Index Option Expiration and Settlement

Options Trading Topic: Option Expiration

Dear Options Trading FAQ:

I just went through my first SPX option expiration and am utterly confused. How did it settle? The figures don't match my opening print of the SPX on expiration friday. Did the batteries on my calculator run out?

Bewildered Options Trader

Dear Expired Option Trader:

Your calculator is just fine, but the user needs adjustment. What you want to look at is the SET or settlement price that comes out around noon time on expiration day. It represents the theoretical opening of the S&P 500 index. It will differ from the SPX opening print because that figure does not wait for all 500 components to open. Again, I refer you to the CBOE website which I mentioned in the previous letter.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Index Options, SPX Options, Options Settlement

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Think about your options.

Standing of Option Orders with All or None AON Qualification

Today's Options Trading Subjects include: All or None (AON) option orders and the Chicago Board of Options Exchange (CBOE) hotline and website.

Dear Options Trading FAQ:

I placed an order to buy 20 calls of xyz at 2 9/16 all or none with the bid-ask at 2 1/2 to 2 5/8. Not only did I get nothing done, but they are not reflecting my 2 9/16 bid. Huh?

Frustrated Buyer of Options

Dear Frustrated Option Trader:

I see that you don't realize that AON orders (and any other "restriction" orders like IOC or FOK) don't have any standing versus the published bid-ask. They can't show your bid due to the size restriction. You may see some option trades go off at your price but you'll not be entitled to that transaction price. This is true of not only options orders, but of other securities as well.

Further info can received from the exchanges, which brings us to the next question:

Dear Options Trading FAQ:

I think I need more help than even you can give me. I want to start back at square one.

Former Big Shot

Dear Little Shot:

Call the CBOE (Chicago Board of Options Exchange) for free literature. They have a full array of educational materials to help you out. Reach them at (800) OPTIONS. Their snazzy web site is good too: http://www.cboe.com

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Broker, Options Order

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Think about your options.