This is a mobile optimized page that loads fast, if you want to load the real page, click this text.

Option Traps and Gotchas

Jump to new
cutz said:
Double and triple checking the order pad before pushing the trade through, it got me a couple of times.
Click to expand...

Agree ... especially if the codes for the particular series have combinations of '1's, 'I's and 'L's.
 

Hi sails,

I'm new to relatively new to options

With regards to the credit spread, could you please explain what you mean by the the long position expiring worthless (wasnt the long position a hedge?)?


thanks
 
wakk said:
Hi sails,

I'm new to relatively new to options

With regards to the credit spread, could you please explain what you mean by the the long position expiring worthless (wasnt the long position a hedge?)?


thanks
Click to expand...

from my understanding the hedge which is the long option expires that afternoon at end of trading day whereas the short position if in the money is assigned the following morning so if there should be some adverse ann. or just a bad overnight on the dow there could be a gap down in sp which means the shares you have been assigned would have a lower value which would go against you if you wanted to sell them straight back into the market

hope that makes sense
please correct me if it isnt as i have never been assigned
 
just a quick question

does a takeover bid have any effect on already sold short positions
specifically in my situation sto as have sold a few otm puts expiring Feb and March

regards
Gary
 
wakk said:
Hi sails,

I'm new to relatively new to options

With regards to the credit spread, could you please explain what you mean by the the long position expiring worthless (wasnt the long position a hedge?)?


thanks
Click to expand...

Yes wakk, the long is the hedge. However in a credit spread, the long is further out of the money (or further away from the share price) than the short option. (Debit spreads are the reverse and could be where the confusion is.)

eg. XYZ stock at $10. Bull put spread (AKA put credit spread) with the short option at $7 strike and the long at $6.50. If the underlying share closes at $6.60 on expiry day, the short option would be 40c in the money (you would have to pay that to close it in this example) and the long at $6 is totally worthless and would expire as such.

Again, using the above example, if the short put is not bought back to close it out, then the possibility of being assisgned is extremely high. That means you could have 1000 shares of XYZ in your account the next day for every put option contract you were short. As the $6 long put expired worthless the day before, there is now no protection whatsoever on those shares. What was a limited risk trade is now wide open to whatever the market dishes up. If the market gaps down heavily the day after expiry, it could mean a much larger loss than you had bargained on. However, if it gaps up - it's your lucky day

It all comes down to how much risk you are prepared to take on...
 

Thanks for the quick replies guys

Just so that I understand this correctly, are you saying we wont know that we have been assigned until the next day. By that time, it is too late to exercise our long/hedge puts (which expired the day before).

So this is more of an issue on expiration day, and not so much of an issue if we are assigned before expiration day.

Have I understood that correctly?

So on expiration day, we need to make a decision on closing out short positions.
 


Yes Wakk - you've got the general idea

If assigned before expiry day when you are in a credit spread, it is a nuisance and can be costly on fees, however, the long is still there to protect either the short put or the long shares.
 
Hi

In my case i wouldn't find out until the wee hours of the day after expiry when i get my trading statement, normally it comes at night but on ex day it takes longer to arrive.
 
jackson8 said:
just a quick question

does a takeover bid have any effect on already sold short positions
specifically in my situation sto as have sold a few otm puts expiring Feb and March

regards
Gary
Click to expand...

Hi gary

If i had short puts on a company to be later subject to takeover i would expect the position to become extremely profitable.
 
I was going to raise that question here...

What happens if the stock is in a halt like this, do the options still exercise on the date?

If so, any short position no matter where, would probably be exercised would it not?
 
chops_a_must said:
I was going to raise that question here...

What happens if the stock is in a halt like this, do the options still exercise on the date?

If so, any short position no matter where, would probably be exercised would it not?
Click to expand...

Hey Chops - at lot has already been discussed in this thead: https://www.aussiestockforums.com/forums/showthread.php?t=13679

Looks like it's not an easy position to be in and perhaps we will all know more after expiry on Thursday. I have never experienced a situation like this myself, so I'm interested to see how it turns out for xtanda.
 
For anyone interested, here's a link to how ABS (ABC learning) options are being treated if ABS is still in voluntary adminstration on expiry day. http://www.asx.com.au/products/pdf/notices/2008/Clm23408.pdf

It appears that each time series will be cash settled at their expiry date with restrictions on exercise also. Cash settlement will be based on the share price being zero. Not good for Dec short puts

And as I have mentioned before, it would be pretty difficult for put calendars under these circumstances if one has to find the cash to finance the front month puts and have to wait a few weeks or months for expiry to be compensated on the long. It would be easier if they just cash settled the lot - I guess they have their reasons for dragging it out.
 
G'Day Everyone,

Thought I take a break from the Christmas Mayhem.

Lately I’ve been having a look around for an index fund that tracks the S&P 500, initially i looked at iShares IVV listed here on the ASX but i don't like the idea of having cash tied up in a non optionable product, next stop is SPY listed in the US, as i am not familiar with futures i would feel a little more comfortable using SPY as my first US index type options trade.
Eventually I may want to own some SPY so I’ve download the fact sheet and the prospectus for when I’ve got some spare time.

But in the mean time I was wondering if there are any big gochas on the US market, in particular SPY options and the underlying itself, the one that’s concerns me a little is currency risk if I eventually own the fund as the aussie dollar is looking a little unhealthy at the moment.

Any Thoughts?

Thanks in advance.
 
Hi cutz,

The only issue I find with SPY is that; because SPY is an actual share and you can be long the underlying, cost of carry and dividend is priced into the options, whereas it is not with SPX or ES options.

No biggy as long as you're aware of it. Otherwise, great liquidity and very tradeable.
 
Hi Guys,

I've just discovered STW (ASX200 SPDR) thanks to WayneL.
I was just wondering if anyone has traded these, i notice they are listed on the Australian Warrants Market, (according to iress).

I was also looking on feedback if anyone has traded the options on these, iress is showing 0 open interest on just about all of the series so i was wondering if the MM's come on board if a quote was requested.

When the time is right i may want to write short puts on these but if there is no liquidity another option is to buy STW and short some XJO calls,

Any gotchas?

Thanks in advance.
 
cutz said:
Double and triple checking the order pad before pushing the trade through, it got me a couple of times.




Not me personally, 1 month is the norm in my case. This gives me room to maneuver.
Click to expand...

What about a long call position, would you go longer term then? I have not yet but was today thinking of taking long position in RIO - only problem it is not cheap - even with excerise of $75+ anything 1 year or more out is not cheap....
 
Smallprofits said:
What about a long call position, would you go longer term then? I have not yet but was today thinking of taking long position in RIO - only problem it is not cheap - even with excerise of $75+ anything 1 year or more out is not cheap....
Click to expand...


G’Day Smallprofits,

Me personally I wouldn’t feel comfortable going long on a RIO call, firstly as you pointed out they’re pretty expensive at the moment due to high IV, and I wouldn’t feel 100% confident that it’s going to keep trending up sharply so I could still end up losing money even if the stock rallies slowly, so to answer your question and if I didn’t own any BHP shares I would rather be shorting RIO puts and I wouldn’t be going out further than one month.

Note, personal opinion only if i had to choose between going long on call or shorting put, not advice.
 



when you say not more than a month is this just due to uncertainity of RIO future?

or woudl you generally only go a month out?
 
Smallprofits said:
when you say not more than a month is this just due to uncertainity of RIO future?

or woudl you generally only go a month out?
Click to expand...


G’Day Smallprofits

I definitely haven’t got an opinion on RIO's future. It’s just that I only prefer to sell premium (if certain conditions are right) and I’m always a lot more comfortable going out one month because I may have a fair idea of where a particular stock or XJO is not going to go in that short amount of time. If I’m wrong defensive action is not as painful.

Having a short position on for longer periods is a lot risker, predicting stock price 3 or 4 months out is tricky if not impossible. If things go wrong with 2 months remaining on the contract, correcting that position could turn into a nightmare, especially in my case as I don’t use delta adjustment techniques, mainly due to brokerage costs but this is something I’m working on. (I’m also looking fwd to WayneL’s thread on this)

Please note these are only my views, there are obviously experienced traders around that put on long term contracts, but I’m still on training wheels so short term is for me.


BTW shorting RIO puts is a bullish position.
 
You must log in or register to reply here.

Similar threads

R
Forex options you can actually exercise?
Replies
3
Views
4K
James Martin
N
ES Futures Options Beginner Questions (IB)
Replies
0
Views
4K
NAsX
N
Menu
Log in
Register
Cookies are required to use this site. You must accept them to continue using the site. Learn more...