This article was originally published in The Option Strategist Newsletter Volume 3, No. 21 on November 17, 1994.
Volatility is merely the term that we use to describe how fast a stock, future, or index changes in price. When we speak of volatility in connection with options, there are two types of volatility that are important: historical volatility, which is a number that can be calculated mathematically by seeing how fast the stock has been changing in price over the past 10 days, 20 days, or any other time period that we want to examine. The other type of volatility that is important for option traders is implied volatility. Implied volatility is what the options are "saying" about future volatility: if it is high, then the options are predicting that the underlying instrument is going to become more volatile in the (near) future; if it is low, then the options are predicting that the volatility of the underlying will decrease. Thus there may be a difference between the historical and implied volatility. If the difference is large enough, then one can use options strategies to create a position with an "edge" — the "edge" being the differential between these two types of volatility.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 15 on August 8, 1996
Most stock options and a few index options are American style, meaning that they can be exercised at any time during their life. Most index options are not American style, but are European style, meaning they can only be exercised on the day they expire. Large institutions — many of whom sell index and sector options to hedge portions of their portfolios — prefer European style exercise because they then know they can't be called out of short positions prematurely. However, OEX options have always been American style. This makes them more interesting, but it means that one has to be on his toes when he is trading spreads in OEX — either debit spreads or credit spreads — if short options in the spread become deeply in-the-money.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 20 on October 26, 1995.
Any spread that creates a debit in one's account, when it is established, is technically a debit spread. However, when the term "debit spread" is used, it generally connotes either a bull spread with calls or a bear spread with puts. These are types of vertical spreads, since all the options have the same expiration date but have different striking prices (credit spreads are vertical spreads also).
This article was originally published in The Option Strategist Newsletter Volume 4, No. 7 on April 13, 1995.
Credit spreads using options are a popular strategy. In this article, we'll define them, see how they work, and attempt to assess their true profitability. They have been growing in popularity recently, partially for the wrong reasons, as we will see later in the article.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 13 on July 13, 1995.
Most option traders quickly realize that time is a very heavy factor weighing on the price of an option. This lesson often is driven home after buying an option and losing money.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 1 on January 12, 1995.
Buying options is often regarded as one of the most speculative activities. However, as we have shown time and time again, there are often differing ways in which one can establish a strategy. These different ways may change the speculative to the conservative, or at least moderate things somewhat. Buying options is no exception.
This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994.
Traders sometimes use bull spreads instead of actually buying calls when they want to hedge their bets somewhat. In this article, we'll take a look at how the bull spread works, and perhaps shed some light on the somewhat unusual characteristics of its profit potential as time passes.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 8 on April 27, 1995.
Since we are currently recommending a "backspread" strategy in OEX options (and have been for a while), we though it might be beneficial to define and review the strategy for subscribers who are not familiar with the term.
The recording of Stan Freifeld 's recent "Early Exercise: Strengthen Your Position" webinar is now available for viewing below.
