|» What's the difference between the Option Advisor newsletter and your "Alert Services?"|
|Answer: The Option Advisor is a monthly publication with weekly Hotline updates. The Specialized Service recommendations we provide in our "Alert Services" may be sent whenever the indicators are ripe for a trade. [Back to Main Help Page]|
|» What are "Alert Services?"|
|Answer: These services employ various strategies in real-time and are delivered to you by fax or email as soon as the opportunity presents itself. [Back to Main Help Page]|
|» How are Alert Services different from online services?|
|Answer: There is little difference, because we immediately notify you of web updates for your subscription. Alert services are each different from one another, and you should contact an Account Representative for details*. [Back to Main Help Page]|
|» How long do I have to enter trades?|
In the Option Advisor, you typically have
seven (7) days to enter the trade. [Back to Main Help Page]
|» What happens when the window of opportunity has passed?|
Don't chase positions. Wait for the next
trade. [Back to Main Help Page]
|» When will I be automatically billed for auto-charged services?|
|Answer: You will be billed on your service's expiration date to ensure its continuity. [Back to Main Help Page]|
|» What happens when my subscription expires?|
|Answer: You will receive no further updates of any kind including follow-ups on open positions. You are entirely responsible for any interaction with your broker. [Back to Main Help Page]|
|» Why did I receive a closeout for a trade that I didn't receive?|
|Answer: As a new subscriber, you have immediate access to all the updates and follow ups, even for trades opened prior to membership. [Back to Main Help Page]|
|» When I subscribe to a new Alert Service, will my broker know to trade this for me? |
|Answer: No. You must contact your broker and inform him of this addition. [Back to Main Help Page]|
|» What is your opinion on stock XYZ? If I buy ABC, will you tell me when to sell?|
|Answer: As publishers, we are not permitted to give individual advice on your personal investments. However, we do have Product Catalog available on our website. [Back to Main Help Page]|
|» Where can I find stock symbols?|
|Answer: From any page on SchaeffersResearch.com, click on the Quotes & Tools Tab. Under the "Summary" section, there is a listing of choices where you'll find Symbol Lookup - click on this. Enter the company name in the indicated box and click on the button to initiate a search. [Back to Main Help Page]|
|» Where do I get a stock or option quote?|
|Answer: From any page on SchaeffersResearch.com, click on the Quotes & Tools Tab. Under the "Options" section, there is a listing of choices where you'll find an Option Quotes link - click on this. Option quotes are available on a 20-minute delay. [Back to Main Help Page]|
|» What is the time delay for quotes on your options montage page?|
|Answer: There is a 20-minute delay on our options montage. [Back to Main Help Page]|
|» What is open interest?|
|Answer: Open interest is the number of outstanding contracts on a particular option class or series. Open interest increases when an investor initiates a new position. For example, if a trader buys a new call, open interest on that particular call will increase by the number of contracts the trader purchased. Similarly, if an investor writes a new put position, open interest on the option will increase as well. Open interest declines when investors liquidate open positions. That is, when the put seller buys to close his position, open interest on the put will decline. Open interest will also decrease when a trader sells to close a previously purchased put or call. [Back to Main Help Page]|
|» What are put/call open interest ratios and how can they be used to reflect investor sentiment?|
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. [Back to Main Help Page]
|» How do you use contrarian thinking in options trading?|
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® [Back to Main Help Page]
|» What will happen to an option if the company spins off one of its divisions?|
|Answer: A spin-off's impact on an option will depend on the terms of the spin-off. After a spin-off, an option will likely represent some combination of the two companies - for example, 50 shares of the parent and 50 shares of the spin-off, or 70 shares of the parent and 30 shares of the spin-off. Another example would be company A that spins off subsidiary B by distributing 1.5 shares of B for each share of A. Outstanding A options could then be adjusted to deliver 100 A shares and 150 B shares. In any event, it's best to check with the exchange listing your option to see how the options will be adjusted. [Back to Main Help Page]|
|» What will happen to an option if the underlying company is acquired?|
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. [Back to Main Help Page]
|» What happens to the options when a stock splits?|
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. [Back to Main Help Page]
|» One day an option will move as if almost mirroring the stock, but another day it may not. Does this have something to do with volatility?|
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. [Back to Main Help Page]
|» If my options have increased in value and I decide to sell them to lock in a profit, will liquidity be a problem?|
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. [Back to Main Help Page]
|» I currently trade equity options and almost always use the current expiration month in which to trade. Why do you choose to trade months that are so far out, with such increased time premiums?|
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. [Back to Main Help Page]
|» I've noticed that you often mention that heavy out-of-the-money call open interest can act as resistance, while significant out-of-the-money put open interest can act as support. Why is this the case?|
There are three reasons that out-of-the-money call strikes with large open interest can act as resistance:
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.
- 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.
- 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:
[Back to Main Help Page]
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.
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.
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.
|» I am having difficulty understanding the terms buy and sell to open and close. Are these actually terms for writing an option and creating an open position?|
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. [Back to Main Help Page]
|» Why are there no out-of-the-money call options trading for a specific stock?|
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. [Back to Main Help Page]
|» How are exercised options settled?|
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. [Back to Main Help Page]
|» If I exercise an option, do I have to buy the stock or can I exercise it like a cash settlement option?|
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. [Back to Main Help Page]
|» Can you tell me how to find all of a company's option symbols?|
|Answer: We would encourage you to check out our Option Montage section to find both option symbols and current option price information. [Back to Main Help Page]|
|» Where can I find free delta values for options?|
|Answer: You can find all the Greeks for a particular option via the Quotes & Tools tab at the top of this page. Once in the this area, simply click on "Greeks". [Back to Main Help Page]|
|» Is there somewhere I can get a listing of all the different sectors and how they are performing and also be able to tell what sector a certain stock falls under if I know the stock name or symbol?|
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/. [Back to Main Help Page]
|» Where can I learn more about Options Trading?|
|Answer: To learn more about options trading, visit our "Schaeffer's Education" section. [Back to Main Help Page]|
|» Where can I learn more about Bernie Schaeffer and his expertise?|
|Answer: Learn more about Bernie Schaeffer and our methodology in our "Schaeffer's Edge" section. [Back to Main Help Page]|