options

How do you place a value on options positions within a portfolio? Actually, because of the nature of options it is extremely difficult – if not impossible – to accurately balance an asset allocation target that includes derivatives.    For example, a portfolio of $1 million specified the...

  The federal tax rules concerning options are among the most complex sections of the tax code. This has led to many misunderstandings. For example, many traders have heard that some covered calls are “unqualified.” What does this mean? It means that in some situations, a trader who has...

Among the “Greeks” the most valuable for options trading (and specifically for timing of trades) is the delta. This indicator compares likely change in option value relative to change in the value of the underlying. The higher the delta level, the more likely the premium will move pre than...

The great dilemma for options traders is well known: Options close to expiration cost less but expire soon. Options with more time to develop profitably cost more. How do you balance these conflicting attributes? Trading options very close to expiration and containing little or no time value...

The problem for anyone in the market is the threat of loss. Owning stock means you risk a decline in the price, and this is where some specific options-based protective strategies are exceptionally valuable. One such strategy is the collar. The collar has three parts: 100 shares of stock, a...

The curiously-named "iron butterfly" is a complex strategy offering limited losses and limited profits. It is an expanded version of the basic butterfly (two separate spreads offsetting one another). The "iron" version is a combined straddle consisting of four options instead of the butterfly's...

One way to cover a short position is to own 100 shares of the underlying stock. Another, more creative way is to sell a shorter-term expiration position and buy a longer-term position. This works not only with calls, but also with puts. This calendar spread is a popular strategy; it can be...

A strangle is not as violent as it sounds, nor as deadly. It simply is a variation on the straddle, and it presents some interesting possibilities in terms of profit potential and risk. When two strangles are combined with one another, it forms a popular strategy known as the iron condor. A...

Is the backspread always a bear strategy? Most traders think of the put ratio backspread in this way. Why? Because it involves puts. But in fact, it is not a bear strategy, but a volatility strategy. That means its’ designed to turn profitable due to fast point movement in the underlying. The...

In a previous blog, I discussed synthetic short stock, an options position that duplicates price movement of the underlying. It consists of a long put and a short call. Now think about the opposite, synthetic long stick -- another position with low cost, low risk, and great leverage. This...