Tag Archives | Weeklys

Can you believe this?

What some brokers do

I recently read a trader’s lament in an online form. It turns out that his broker forbids him from buying options on an unspecified day during of expiration week. Why? Because if he still owns the calls at the close of trading on Friday, he would not have enough cash in his account to meet his margin requirements if the options were exercised.

I’ve heard that at least one other broker enforces the same rule, but at least they allow their customers to buy options from Monday through Thursday of expiration week.

This practice is nothing short of stupidity in action. There is no rational reason why customers should be prohibited from trading.

This firm willingly granted him clearance at the appropriate permission level to buy and sell calls and puts. It now seems that the permission is strictly limited and only available to certain customers on certain dates. If their customers do not have enough cash to exercise the options, this firm does not trust the customer to exit the trade in a timely manner.

It now seems that ‘permission to buy options’ now depends on how much time remains before the options expire and how much borrowing power is available to the customer.

Isn’t this why many investors trade options? They don’t have the cash required to trade the shares, so they own options instead. It’s called leverage and reduced risk. This firm does not allow a customer who had $50,000 in his account to buy a 10-lot of calls for a quick trade. That’s all this customer wanted to do: Hold the position for a very short time. However, because buying 1,000 shares would cost more than this customer can borrow on margin, the call purchase was forbidden.

It is beyond belief that any customer would accept this. To his credit, this trader accepted the denial of trade and the lament was his way of asking whether anyone else had seen that happen.

As a disinterested reader of the forum post, I was horrified. I recognize that the brokerage firm must protect itself against customer losses that cannot be recovered, but this specific ruling startled me.

Weeklys

Weeklys options have become a star attraction, as many traders love the idea of playing with short-term options. I don’t know if this firm blocks everyone who lacks sufficient buying power from trading Weeklys, or whether this individual was singled out for a specific reason. It would not be a wise business decision to forbid a significant portion of your customers from trading in Weeklys.

Protecting the broker

The brokerage firm has other methods to protect itself from the possibility that this, or any, trader would incur a margin call that he cannot meet. For example:

  • If trader the calls one hour prior to the market close on Friday, liquidated the position
  • Trader must submit ‘Do Not Exercise’ form no later than (pick a time) on Friday, or else options are sold
  • If trader fails to sell calls, firm locates broker-dealer and sells short 100 shares per call.
    • If the fill is not at a good price, I’m certain that the firm could not care less

To me, these are three viable alternatives to prevent the firm from incurring risk. At this point it seems fair to ask, just what is that risk? How bad can it be for the firm would to take such drastic measures to protect itself?

For the firm to suffer a substantial loss, these items must occur:

  • The trader must forget to to close the ITM option position
  • The stock must undergo a large price gap (in the wrong direction) on Monday morning
  • The gap must be large enough to place the customer account into deficit
  • The customer must be unable to re-pay that debt
  • The customer must have so little remaining assets that the firm cannot recover via lawsuit

I don’t believe there is a person on this planet who deems this to be an event with any reasonable chance of occurring. I agree that the firm wants to avoid even this much risk, but it has better ways to accomplish that task than by preventing a customer from making a trade.

Brokers have dissed their customers for decades. I never thought it would reach this level.

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Quiz

It’s been almost one year since I last published an options quiz.  Time for another. 

Your participation is appreciated becasue it helps me gauge which material is most appropriate for readers of Options for Rookies

 

1)

 

2)

 

 

 

3) You decide to trade some Weeklys and open an iron condor position by selling an out of the money SPX put spread (1100/1110) and an out of the money SPX call spread (1220/1230).  All options expire in one week.  SPX is trading at 1160. [Corrected to 1160]

By Tuesday of expiration week, ONE of the following events occurred:

To reply, choose ‘other’ and enter (for example) a,b,c,d

 

4) Let’s assume you have been bullish and earned a significant profit on your investment portfolio since May 2010. You are concerned with protecting your profits. 

Please consider cost, how much protection is gained, and the possibility of earning a lot more money if the market undergoes another major rally


 

 

5)  Poll: This question is directed to you as a trader/investor.  I am not looking for a theoretical reply, but am asking which of the following worked for you. 

 

 

Thanks for participating

806

“Your book is well written, comprehensible, coherent and detailed.  I was especially pleased with the absence of useless chatter.”  VT 

 


 

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Weeklys: There are now 52 Expirations per Year, up from 12

Thanks to the CBOE, weekly expiration has arrived for a small (~20) number of stocks, ETFs, and indexes.  Information is available at the CBOE site.

New Weeklys are listed each Thursday and expire the following
Friday
, but no Weeklys are
listed when they would expire during expiration week for standard options  (3rd Friday).

The are now 52 option expiration every year.  This is good for the CBOE because trading volume is going to increase.



Option Description

Most of these options are 'regular' American style options and settle in shares.

Thus, if assigned an exercise notice on
any of the individual stocks or ETFs, you are obligated to sell shares
(if assigned on a call option) at the strike price or buy shares (if assigned
on a put) at the strike.

However, just to keep things interesting (and in my opinion, giving novice traders more chances to make a significant error), SPX and DJX options are European style and settle Friday mornings.

XEO is European style, but settles at Friday's close [corrected]

OEX is American style and settle in cash. 

One interesting idea used by the CBOE is
to change the list of stocks on a regular basis.  There is no major
revision each week, but stocks can be added or removed from the list.  The current list can be downloaded by clicking here.


Blogosphere

These options have been gathering much attention among bloggers and it's time  to join the discussion.  This product has been accepted by the public and there is every reason to believe it will continue to increase in popularity, as measured by trading volume.  


The Dancing Greeks

For anyone who loves to trade expiration and its characteristic BIG theta along with EXPLOSIVE 
Explosives gamma, this is your chance.  My fear is that the small trader, first getting started with options, will not understand just how volatile these options can be as the stock rips through the strike price in one direction or the other. 

This is truly the ideal tool for the big risk taker and makes it ever more difficult to try to classify options as a risk-reducing investment tool.

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"I thoroughly enjoyed your book “The Rookies
Guide to Options”.  The book has paid for itself many times
over.  Thank you."  VR


"I am finishing your book The Rookie’s Guide to Options
and I agree with the other reviewers on Amazon."   DE

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