Learning about Options. How Much Detail is Too Much Detail?

I received an interesting e-mail message from a reader that inspired today's blog post.  I'll get to his comment later, but first some:


Background

One of the facts of life is that some people are very good listeners (I admit to being not so good at this) or readers, and understand the points being made by the speaker/writer.  Nothing is misunderstood.

On the other hand, some people are lazy listeners and 'hear what they want to hear.'  They ignore details, and that often results in bewilderment, as the speaker finds him/herself thinking:  'How can you possibly think I said that?  I said almost exactly the opposite.'

The same can
be said for the speakers/writers.  Some supply all necessary details, while others speak in such broad terms that the
detail-oriented listener/reader yearns for clarification.

I frequently find myself in uncomfortable situations due to my need for detail.  I have one specific friend with whom conversations are often painful.  I'm expected to understand what he means when his words are ambiguous.  But it's even worse when I speak.  I explain in detail, but those details are lost because they are unimportant to him.  It's as if we are speaking different languages.

I don't know if this is a character flaw on my part, but it's the world I live in.  Which brings me to today's comment.  I believe I provide careful, detailed explanations
of the concepts of options: how they work, and how you can use them to reduce risk when
investing in the stock market. 
But is that true?  Are many readers confused by my writing style?  I'm not looking for an ego boost here, nor am I asking anyone to reply.  It's a rhetorical question – but I'm wondering what went wrong in this example.  or perhaps I'm overly concerned about something unimportant.

The Comment

His opening comment, referring to data received from his broker, was: "I often see Delta, Theta and Vega
expressed in both positive and negative and I don't know how that
is
affecting my spreads.
"

The bottom line is that none of the Greeks are 'affecting' his spreads.  They are merely measurements of specific risks associated with the positions.  If any of those risks are unwanted – in an attempt to earn a profit – the beauty of trading options is that risk can be reduced or eliminated.

It's the word 'affected' that throws me.  My interpretation of this comment is that he is missing something.  But it may just be my problem – reading too much into a single word.  I Take his words to mean that the Greeks affect his positions, but he is not sure just how that works.  On the other hand, it may simply be a less detailed way of saying that he's a bit uncertain just how to use the Greeks.

The latter I can understand.  We learn what the Greeks are and what they represent.  How we should go about using them to our advantage may not be immediately obvious.  It takes analyzing some positions, and thus, trading experience, to grasp the concepts.   I know the Greeks are easier to understand with a clear explanation, but perhaps I failed to provide that.  Or perhaps my 'too many details; approach may have made it more difficult for him to grasp the meaning of my words.  This is a big problem because my goal – my job – is to explain things so that readers understand as quickly as possible.  The idea is to prevent the unnecessary loss of money.

I believe in details; I live for the details.  I don't know how else to accomplish my goals of helping the average individual investor learn to use options to mitigate market risk. 

386

8 Responses to Learning about Options. How Much Detail is Too Much Detail?

  1. Sigma Options 07/13/2009 at 9:18 AM #

    “I believe I provide careful, detailed explanations of the concepts of options: how they work, and how you can use them to reduce risk when investing in the stock market. But is that true? Are many readers confused by my writing style?”
    Mark,
    I think you’re doing a jolly good job. But the bottom line is that options are complicated and non-linear, unlike stocks. It’s like trying to squash a balloon in your hands.
    Very few grasp what any of us are trying to say right off the bat… that is if we are trying to explain greeks etc. It’s complicated by those who teach that it’s not necessary to learn.
    All you can do is know that you are doing the responsible thing. It’s up to the people to study, grasp and use.
    FWIW, the more pedantic about details, the less “chance” of misunderstanding.
    Cheers
    Wayne

  2. Mark Wolfinger 07/13/2009 at 9:22 AM #

    Thanks for sharing
    Cheers!

  3. Eye Doc 07/13/2009 at 12:05 PM #

    Mark,
    You explain things very clearly, and your blog is a pleasure to read. I believe your reader is wondering how changes in the Greeks effect his existing spreads, but I can’t know for sure. Anyway, keep up the good work.

  4. Mark Wolfinger 07/13/2009 at 12:07 PM #

    Thanks.

  5. JB 07/13/2009 at 11:30 PM #

    Hi Mark,
    Your explanations are clear and include enough detail. Many of us need to read several times and then work several examples. I know you include a Quiz at the end of each chapter in the Rookies Guide … Even with this, the real market moves so fast that it is easy to just wait one more day and see what happens and then another day and another etc. I find I can set a good-till-cancel order on the winning side of spread but when the move is against me is when I have trouble.
    By the way, I was under the belief that it was almost always better for the option owner to sell the option rather than to put the stock to put seller (me). I seem get stock put to me when make the wrong play. Any comments on when or why put owners put the stock instead of sell the put?
    FWIW – There is no such thing as too much detail or clarity.
    All the best.
    JB

  6. Mark Wolfinger 07/14/2009 at 8:15 AM #

    I’m just guessing, but I believe you have more trouble deciding when to pull the trigger on a losing trade for psychological reasons. No one who owns a position with negative gamma likes to take the loss or make an adjustment at ‘the top’ or at ‘the bottom.’
    I don’t like the idea of using ‘iron clad’ rules, but if you must set specific points where you force yourself to exit a trade, that may help.
    I much prefer to see a trader make the key decision at the time it’s needed. That provides a bit of flexibility. The ‘set in stone’ adjustment order may not be a good idea because the situation changes daily when using options. A stop loss order for a stock works well – but option prices are dependent on many factors and it seems wrong to me to exit a trade just because an option price reached a certain level. I’d be more comfortable using ‘set in stone’ option orders if you were to change your order (based delta or whatever parameter you use) on a daily basis.
    Regarding the put assignment.
    a) When someone owns puts plus stock, sometimes the put moves so far into the money that there is essentially no chance it will move OTM prior to expiration. At that time, the put owner often exercises the put to get rid of the position. Why do that? Just to save a small amount of interest – the cost of owning (carrying) the position through expiration. Freeing up cash earns some interest. Obviously when interest rates are higher, this occurs more often.
    Even more subtle: When the corresponding call option can be purchased for less than the cost of carry, it’s a decent idea to unload the stock plus put and buy the call. You have the equivalent position and you freed up some cash to earn interest.
    Thus, if cost to carry stock plus put is $32 and you can buy the call for $0.25, it’s intelligent to exercise the put and buy the call. You won’t see this often, but it happens when IV is low.
    b) If you own a put that is five points ITM and the bid for the option is only 4.80 or 4.90, rather than sell the put for less that it’s intrinsic value (5.00), it’s better to exercise the put and buy stock. Sure it’s an extra commission, but well worth it for most traders (obviously depends on individual’s commission structure).
    What are you telling me about the quizzes?

  7. JB 07/15/2009 at 2:42 PM #

    Hi Mark,
    In regards to the quizzes, some would find it helpful to have a companion workbook with several/(many??) problems for each chapter, especially the Greeks. The original email for this posting to you was in the scope of the greeks.
    For a working stiff, limited time to watch the market, and familiar with owning stocks, it sounds like the collar is recommended. A question comes to mind — how far out should the insurance side (long put) be? I know there is no RIGHT answer, but your thoughts would be appreciated. To add a little context, assume the investor would like to hold the stock for several years. Buy puts when they’re cheap—vix is low?

  8. Mark Wolfinger 07/15/2009 at 3:13 PM #

    Hi JB,
    Am doing a piece tomorrow morning (July 16) that may answer that question.
    The truth is I don’t know – it really depends on which is most important to you. Insurance, or the chance to earn a bigger profit. It’s a very personal decision.
    I would want to buy a put with as high a strike price as feasible. That’s costly. If I can find a call to sell that pays for the put (or almost pays for it), and if I were willing to accept the maximum possible profit that the trade offers – that’s what I would choose.
    This is what I recommend for you. Assuming you know that being short a put spread is equivalent to owning a collar – look at the put spread instead. It’s two legs instead of three, easier to trade and requires fewer commissions.
    I believe you will see things differently from that perspective. Choose the put spread that suits your needs: how far OTM, how much cash credit, how much can possibly be lost, would you want to close early each month (or however long the option lifetime is) – and if so – to earn how much? How difficult is it to achieve those profit expectations. Etc.
    You may even want to consider owning longer-term puts and selling a new call option every month. The variations are endless.