Tag Archives | non-standard options

There is no substitute for an education

I recently received an email message from a true options beginner.  He made a trade, did not understand the trade and wrote to ask about it.

This is simply the wrong sequence of events.  It's mandatory to ask the questions first, and if and only if, you understand the answer, then it's okay to make the trade.

This gentleman owns 300 shares of a given stock and wrote three call options at an unbelievably high premium.  The stock is trading near 6 and he wrote three Jan 7.5 2011 calls.  These are nicely out of the money, but he collected a premium of $6.40.

As I am sure most readers are aware, these must be non-standard options.  My correspondent also knew these were non-standard options, but did not know what that means.

Non-standard call options require delivery of something other than 100 shares of stock when the writer is assigned an exercise notice.  Due to a special dividend, the deliverable is 100 shares of stock plus $217 cash.

[ADDENDUM: The truth is that there is another non-standard option with the same strike and expiration.  He may have sold that one – and it requires delivery of $425 plus 20 shares of a different stock, in addition to 100 shares of the underlying.  It can be treacherous out there.]

The sad news is that he sold these calls under parity – for less than their intrinsic value.  There's nothing to be done except to learn a lesson.  He thought he had made a great trade, but decided to ask my advice.  Sadly the advice came too late.

This situation truly saddens me. 

Please learn first, trade later.

740


EM_Button Contrib Ed

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Non-Standard Options

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I have a question about an option that I really don't understand.

I own
stock in Enterprise Products Partners (EPD) so I looked up their calls
to see if there would be a good premium available for selling a covered
call. In my brokerage account I found that the April 35 call has a
bid/ask of $3 / $3.80.

This seems to good to be true and I noticed
under the strike is (AJ1) this appears to be an adjusted strike price
but I'm not sure what this means.

I looked at my virtual trading
account at CBOE.com and I cannot get any options quoted in April for
EPD.

Can you explain?

Bill

***

As it turns out, I can explain.

When trading options, always verify the symbol of the option you are trading is identical to the symbol of the other options.  In this case, there is a difference. 

Your instincts were correct and the CBOE is the place to go for the information you seek.  This document describes a merger that occurred last October.

Notice that the symbol for all April options is 'TTX,' and not 'EPD.'  that tells you something is different.  And you knew that to be true.

Epd

Looking at the document (link above), you see that each TTX call option gives it's owner the right to buy 124 shares of EPD by paying the exercise price of $3,000.

Thus, to sell the covered call, you would have to deliver 124 shares, not 100 shares.  That's the reason the option is priced higher than your expectation.

Merger


So what does an 'adjusted' option mean.  It tells you that the terms of the option have been adjusted.  That's an immediate warning that the deliverable [what the call owner gets – or the put owner sells – by exercising the option and paying (receiving) 100 x the strike price] is NOT 100 shares of stock.

If you Google 'EPD TTX options' you will find the information.  Keep that in mind the next time you find an adjusted option.

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