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In the Option Advisor, you typically have seven (7) days to enter the trade.

Don't chase positions. Wait for the next trade.

A put/call open interest ratio is simply the ratio of total put open interest to total call open interest. We compute Schaeffer's put/call open interest ratio (SOIR) based on open interest in the front three months only. These near-term options tend to attract a more speculative crowd, the sentiment of which is more useful for shorter-term trading.

If the SOIR is greater than 1.0, the put open interest on the front three months is greater than the corresponding call open interest. This generally means that investors have initiated more bearish positions than bullish ones. This could signal investor pessimism, but we find it more meaningful to compare the current SOIR reading to the daily readings taken over the past year. If, for example, the current reading is higher than 90 percent of all ratios recorded over the last 12 months, then this indicates that investors are more pessimistic now than they have been for most of the last year. On the other hand, relatively high levels of optimism would be inferred from a low-percentile reading of the SOIR.

As contrarians, we look for opportunities where the sentiment toward the stock contradicts the equity's price action. For example, if a security has maintained a solid uptrend in recent months, yet various sentiment indicators reflect that investors are pessimistic toward the equity, we would expect more bullish price action from the stock. In contrast, if a stock has been declining and faces significant moving-average and/or options-related resistance amid an optimistic sentiment environment, we would anticipate the equity's weakness to continue.

In short, investor pessimism suggests to us that there is potential sideline demand for an equity. As this pessimism unwinds and investors become more bullish toward the stock, this sideline money will pour in, sending the security even higher. On the flip side, investor optimism can signal a peak in a stock, as all these bullish investors are already fully invested in the shares.

Learn more about Expectational Analysis®

What happens to the options will depend upon the merger agreement. Each option will be adjusted based on that agreement.

For example, if you wrote a put on a company that is taken over in a cash settlement, the option will likely be settled immediately. If the put is out-of-the-money compared to the settlement value, it will expire worthless. For example, if the put strike is 50 and the terms of the acquisition are for each share of stock to be settled for $60 cash, then the put expires worthless. However, if the merger is a stock deal rather than a cash transaction, the value of the put will usually be adjusted based on the terms of the merger agreement. In this event, the value or assignment risk of the option sold will depend solely upon the price of XYZ Corp. As stated above, it's always wise to get the official word on the adjustment from the listing exchange.

Options are adjusted according to the terms of the split. When a stock splits, the effect on the option will usually mimic the effect on the stock. For a two-for-one stock split, a shareholder would receive twice as many shares at half the price. The same is true with options - you would hold twice as many contracts at half the strike price.

After the split, you will often notice two separate option roots for the same strike. For example, if a stock splits three for one, one root applies to options that were opened before the split and represents 100 shares per contract, while the second root may pertain to options after the split and represent 150 shares per contract.

An option's implied volatility (the assumption of the underlying stock's or index's volatility that helps determine the option's price) may be behind these price moves. We often see notable increases in implied volatilities prior to significant events followed by significant declines in implieds after the event. For example, when a company is scheduled to report earnings, we often see an increase in implieds prior to the report and then a sharp decline in implieds after the report.

In general, selling a few contracts at the bid is rarely a problem. If an option sells on several exchanges, liquidity is improved. However, if a particular option has low open interest, it could be a problem if you intend to sell a large block. If you intend to sell only a few contracts, you shouldn't have difficulty selling them later.

Time is the enemy of the options buyer. Unlike stocks, options are subject to time decay. That is, if all other factors remain constant, the value of an option will deteriorate as it approaches expiration due to time erosion. To be successful, an options trader has to be right about not only the stock's direction, but also about the stock's speed of movement. By recommending an option with an expiration that is farther out, we are, in essence, buying more time to allow the stock to move in the anticipated direction. Another factor to keep in mind is that time decay accelerates as an option approaches expiration. Therefore, the effects of time decay on options with several months of life remaining is not as severe.

There are three reasons that out-of-the-money call strikes with large open interest can act as resistance:

1. A large amount of call open interest can define a point of extreme market optimism, which usually coincides with the depletion of buying strength. When this strength has been depleted, it takes less selling activity to change market direction.
2. The individuals who sold these options to speculative investors may buy the underlying stock to balance their bearish position from selling the options. These long positions will ultimately be sold when the options expire or the call buyers unwind their positions.
3. Call sellers that do not hedge their position will try to pressure the market as it approaches the strike at which the calls were sold to protect themselves from losses.

Similarly, there are three reasons why heavy out-of-the-money put open interest can act as support:

1. A large amount of put open interest can define a point of extreme market pessimism, which usually coincides with the depletion of selling strength. When this strength has been depleted, it takes less buying activity to change market direction.
2. The individuals who sold these options to speculative investors may short the stock to balance their bullish position from selling the options. These short positions will ultimately be bought back when the options expire or the put buyers unwind their positions.
3. Put sellers that do not hedge their position will try to support the market as it approaches the strike that they sold to protect themselves from losses.

There are four basic categories of orders for both calls and puts, revolving around buy or sell orders, combined with open or close orders. They are:

• Buy To Open - The trader initiates a long premium position. Straight call or put purchases fall into this category.
• Sell To Open - The trader initiates a short premium position. Selling calls or puts is an example of this category.
• Sell To Close - The trader closes the long premium position initiated as a "buy to open" by selling an option.
• Buy To Close - The trader buys back the short premium position initiated as a "sell to open" order. Buying back a covered call is an example of this category.

Learn more about options trading basics.

This often occurs if a stock makes a sharp spike higher. Because of this rapid rise, the stock steps above all its options strikes for the time being, which is not uncommon for a quick-moving stock. The options exchanges will usually adjust quickly to the equity's rise, adding out-of-the-money options as appropriate.

The Option Clearing Corporation is the clearinghouse for all options transactions. They have published a booklet discussing how exercise and settlement are handled entitled Characteristics and Risks of Standardized Options. You can obtain this booklet free from your broker. For an online version of this booklet, go to http://www.optionsclearing.com/. You should also direct this specific question to your broker, as each broker may have different approaches to handling settlement.

If you exercise an equity call option on an equity, you are obligated to purchase the stock at the strike price of the option. You then can either hold the stock or sell it at the market price, thus generating two commissions. It's important to note that exercising a call option with considerable time value left in its premium may not be the most profitable move, as exercising captures only the option's intrinsic value. You might be better off selling the option to get both the time and intrinsic values.

Index options (like on the S&P 100 [OEX]) are cash settled. If you exercise an in-the-money index option, your account will be credited for the amount your option is in the money.

For a list of the different sector indices, go to this link on the CBOE website: http://www.cboe.com/. For a list of stocks that comprise certain sectors, go to the following link on the CBOE website: http://www.cboe.com/.