Options Bootcamp #34: Mail Call

Published on: Nov 20 2013 by John Critchley

Question from Benjammin – I am currently a law student and have always been interested in options. I have read about options and am now listening to all of the Options Bootcamp podcasts, which is a great show, to prepare to start trading options! SCENARIO: Assume I sell a naked put option and collected $500 in prem. 1 week prior to expiration the value of the underlying has increased and it looks like the option will expire worthless and I will get to keep the $500. Is there anything I can do other than waiting to expiration to lock in my profits by sacrificing a portion of that collected premium?

Question from Richard D – Mark and the Team,

The shows are consistently great! Thank you! You may remember me from “the mega question” early in the month. I will be a LITTLE more succinct in these posts. Also thank you for that bootcamp episode on vol and skew!

I think expiration and settlement could be a good topic for a future Bootcamp show.

Could you discuss a little on how American style options stop trading on Fridays but actually expire on Saturday (at least the monthlies do)? Is anyone allowed, like for example brokers or large institutions, allowed to trade these options after they stop trading for the retail investor?

I understand there are ways a trader can get hurt by this because if you hold a short option at the Friday close, even if it’s a covered option like a bear call, and the stop gaps up after 4 PM Friday, you will get exercised and then be short or long that lot of stock come Monday morning. Could your team discuss what happens if I’m holding a long position and hold it past 4 PM on a Friday? If it’s even a penny in the money it gets exercised, however how does the timing on that work. Here is a hypothetical example:

I own a Nov 18 ’13 100 call on stock XYZ. Stock XYZ closes on Fri, Nov 18 at 99.99 but then by 8 PM it goes up in after hours to 100.15. Is my contract automatically exercised?

Alternatively, stock XYZ closes on Fri, Nov 18 at 101 but then by 8 PM that evening drops to 99.99. Again what happens?

Question from Lil Rich – Can you explain the origins of volatility skew? Is it true that skew didn’t exist pre-1987?

Question from Eric Thamos – I love the Boot Camp show. It is a great resource for newcomers to options like me. I am listening to the skew episode on the train home right now. I am still puzzled about the actual fundamental underpinnings of skew. What is the bigger determining factor – the actual order-flow or the psychological factors?  Also, is it possible to impact the skew myself? For example, if I see a stock where the skew is inflated, could I sell it and deflate it – locking in a profit in the process? Thank again for this insightful program.

Question from Tim Santiago, Albany, NY – I am catching up on options basics including the Greeks (great book Dan). Most of them make sense but I’m kind of hung up on two – rho and delta. Why do we need rho? Is it me or is it really a superfluous variable? Have you ever encountered a circumstance where your knowledge of RHO came in handy and saved the day? As for delta – it seems like the super variable. It’s a hedge ratio, a measure of price change AND the probability of expiring in the money all wrapped up into one shiny package. Is it me or is that just too tidy? Do you find this to be the case in real life or is this another example of mathematicians trying to extrapolate their findings to areas that don’t really apply?

 

You also can download the podcast via:

Itunes http://itunes.apple.com/us/podcast/options-boot-camp/id514144367

Stitcher: http://stitcher.com/listen.php?sid=971812

 

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