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Well Wayne basically i wanted a better alternative to investing in shares (i.e not having to outlay huge sums of cash etc....) im talking about buying direct call (and puts if opportunity arises) options in the view of a big move (but trying to guess in short term is kinda hard thats why i choose longer term options).
For instance we all know the market will bounce (when will it happen who knows), and some stocks will probably rocket in the next few yrs, so id rather outlay a couple of thousand in premium and know thats my maximum loss (instead of buying the share outright and increasing my risk and profit potential).
My thourghts exactly, cheap way to go long on a stock you like, surely?
There are no dividends payable or liable when you own or write options. However, when a dividend is paid by a company, the option price will adjust acordingly.Hi all
Have two questions to ask before I take the plunge into index options over xjo
Firstly have heard mention that when you sell a index call you can be liable to pay dividends........please explain
another is a forum contributor who spoke of receiving a huge bill as the company announced a buyback I recall it may have been sold call over RIO.......please explain
with thanks
gary
The fifth input into the Option Pricing Model is dividends. If the underlying pays no dividend, then there is no effect on option prices. However if the stock does have an upcoming cash dividend payable, it will have an effect on option prices. It is very important to be aware of this, as many a neophyte option trader has been caught out by thinking an arbitrage opportunity existed with mis-priced options, when in fact the pricing anomaly was due to an upcoming dividend; hence not an anomaly at all.
The reason for this is that option holders are not entitled to participate in cash dividends, so option prices must compensate.
It is a general rule of thumb that the underlying stock will drop by the dividend amount when the stock goes ex-dividend, all things being equal. As far as the stockholder is concerned, he/she ends up squits; what is lost on the stock, is gained in cash.
Option Pricing Formulae account for this by considering the move in the underlying due to going ex-dividend.
When the stock is cum-dividend, call option prices will be cheaper than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of shielding the call option holder from an unwarranted loss due to the drop in the underlying.
The reverse is true for put options. When the stock is cum-dividend, put prices will be more expensive than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of ensuring that the put holder doesn’t receive an unwarranted windfall profit.
In a Nutshell
When a dividend is payable:
* Call option prices will be cheaper.
* Put option prices will be more expensive.
There are no dividends payable or liable when you own or write options. However, when a dividend is paid by a company, the option price will adjust acordingly.
See my blog post here: http://sigmaoptions.blogspot.com/2008/05/effect-of-dividends-payable.html
Indexes don't pay dividends so it is not a factor at all.
Hi Guy’s,
A gotcha to add to the list,
I’ve just been assigned on a short put via my comsec account, this isn’t a big deal, but what i’ve just discovered with comsec is I can’t offload today because it’s not registered against my account yet,even though I received the contract note this morning.
This is the first time I’ve been assigned on a short put and it really got me.
I suspect they will show up tommorrow as being available, it will be a nervous wait.
EDIT: Did you manage to hedge the stock position, Cutz?
No, not this one, if i was able to sell today i still would have made a small profit, it the stock gaps down tommorrow, not so good.
This was the last off my unhedged puts which I had put on the backburner with the intent of doing a diagonal roll next week.
It took me by surprise as I didn't expect the contracts to be trading below intrinsic, (spreads weren’t showing this week and late last week)
BTW all comments welcome, stock is WBC if anyone is interested.
I think the US markets are closed again tonight, so hopefully there won't be too much movement...
From where I sit, Commsec don't appear to have much idea about Iress or options (see the other thread on Commsec Iress)
Yep,
You're right about that, the only options i'll end up trading via comsec will be the XJO index contacts, only because IB don't offer them yet.
Also thanks for your thoughts regarding the puts Sails.
Good luck with it today, Cutz. Hope Commsec lets you close out. I've got to go out for a while so will check in when I get back - will be interested to see how it pans out for you today...
I'm not sure that a broker is allowed to stop you closing an assigned position - might be worth a call to the ASX and ask for their options dept. (hopefully their CS is better than Commsec!)
PS - there was a really helpful guy in ASX options - if you're not getting the right help I will look through old emails to try and find his name and see if he is still there.
Can anybody explain why MQG Jan 30.26 call is selling at such a high volatility (415 %), I’ve got a call credit spread out on this (30.26/32.74), everything checks out so I’m wondering what I’m overlooking.
After the WBC fiasco i’m waiting for another gotcha, but this spread is set up with IB so I should be right.
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