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Answers to Options Quiz

80 Year Anniversary

1929 crash

ADDENDUM:  I've been told that the links to the poll results (they were below, but have been removed) are not functional.   Please go to the quiz and click on 'view results' at the bottom of each poll question.  Sorry for the inconvenience.

If you missed it, the quiz was posted yesterday.

1) What can you do to collect those dividends?

I'm pleased to see that the vast majority of readers answered this correctly.  There is nothing you can do to get the dividends.  Your broker cannot reverse the assignment – because assignments are final.

If you buy new shares, it's too late to collect the dividend.

2) That put spread you sold – is it a winner or loser?  The stock declined 5 points and there's plenty of time remaining before expiration.  This spread is clearly a loser.

Many of you thought much more information is needed to determine the answer.  While it is true that if the implied volatility dropped all the way to zero, the spread would be a winner.  But that is never going to happen and you have all the information needed to believe that the spread seller is currently losing cash on the position.

3) What happens to the options? The calls expired out of the money and thus, expire worthless.

But, the option owner is allowed to exercise.  That might occur if the option owner was short shares and unable to cover that short at his/her bid price.  Exercising the calls and paying $30 per share eliminates all risk.

Thus, the correct answer is e): 'both b) and c) are correct'

4) This is an opinion question, and thus, no 'correct' reply.  But some choices are far better than others.  Which adjustment trade would you prefer an iron condor:

a) Sell five put spreads.  Collect some cash.

This is a poor choice and few chose it.  There are two major problems.  First it does not provide enough cash to do much good if the market rallies farther. Second, if the market reverses, you can quickly get in trouble with the new put spread.  This is a high risk/small reward play.

b) Buy 3 Nov 720 calls. 

These are too far OTM to help.  Yes, they are great if the market quickly undergoes a huge rally, but that is unlikely and as time passes, these calls provide less and less protection.

c) Cover 20% of the short spread position.

This is a good idea.  It reduces risk and keeps you in the game.  The only time this is not a good choice is when you hate the position and want to cover the entire short position.

d) Buy one Nov 680 call. 

I like this idea.  Owning one or more extra long options provides excellent protection against a large move.  It's not cheap, but provides extra chances to earn a profit.  Unlike OTM calls, it's always valuable if and when your short strike is threatened.

e) Convert to double diagonal. 

Too expensive for me.  There would be a profit on the adjustment if the stock rallies, but those profits are limited and are not nearly enough to offset losses from the original iron condor.

If you fail to sell the calendar spread when it's near the strike price, then a further rally results in losses on both the IC and the calendar.  In other words, this doesn't help on a good-sized rally – and that's your biggest risk right now.

In addition, the double diagonal is vega rich and a rally will probably result in a continued IV decrease – further hurting the calendar spread.

My preferred answer:

Either c) or d) works for me. 

I don't like the other choices, but b), e), and last is a).


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