Who Do You Trust?

Who Do You Trust, starring Johnny Carson, was an old TV show (1957-1963). 

Johnnycarson

The question is appropriate today.  Numerous people write/talk about options and my observation is that too many of them simply get things wrong.  Not intentionally.  Not maliciously.  But, wrong just the same.

Most bloggers are dedicated to dispensing truth and are passionate about the material they blog about.  I've mentioned several in this blog who do an outstanding job.  I am not familiar with all option related blogs, but some of the ones I read regularly are written by Adam, Bill, Dr Brett, Charles, Don, Jared, Jeff, and Michael.

Some other bloggers do the best they can, but if they are newcomers to the options world, their efforts are not as helpful as they could be.

Then there are professional writers.  Some produce books, some are reporters.  Some write columns while others write opinion pieces.  I've mentioned previously that these professionals have an obligation to their readers and that the obligation is to do sufficient research to get the facts straight and then report those facts accurately.  It's even better when the financial journalist can add a knowledgeable opinion to the piece.

Books

I can understand when someone writes about topics that are not well understood by that author.  Many e-books were written in an attempt to make money for the author, not to educate the reader.  I've read option books targeted to beginners, and although I have not read all the beginner's books, I know of at least two that are so filled with mistakes and misleading statements as to make them far less useful to the reader than they should be.  One of the reasons I wrote The Rookies Guide to Options is to provide a high quality primer.

Journalists

(Bloomberg editors, are you reading this?) The link is to yet another Bloomberg article containing badly drawn conclusions.  It's difficult to know if the people interviewed gave bad information (doubtful), or if the writer was unable to put together an accurate, finished article. It's a shame, but the truth is that some writers are asked to cover areas in which they lack sufficient knowledge.  But readers should not be damaged. I don't know the solution, but please don't take everything you read as gospel.

These writers are widely read, and bad information is spread.  Thus, the question (in correct English) – whom do you trust? – must be asked.

If you find information that seems doubtful, please try to verify it before making trading decisions based on that advice or information.  As I wrote once before: it's a dangerous world out there. 

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6 Responses to Who Do You Trust?

  1. piazzi 01/14/2009 at 5:16 AM #

    Hi Mark,
    I have noticed that sometimes during an expiration week, markets (or some individual issues) are not very volatile. Some other times they are extremely volatile.
    I have heard peole talking about volatilty decreasing when market makers are net long, which produces more gamma needing to be hedged on small moves, causing volatilty to decrease
    and also, market makers being net short,trading negative gamma, causing volatilty to increase.
    1st of all, is there any substance in this argument?
    2ndly, can you explain it in a simpler way, the whole thing is a bit vague to me?
    3rdly, is there a way to know what market makers positions are?
    Best Regards

  2. Mark Wolfinger 01/14/2009 at 9:36 AM #

    1) Yes
    3) No
    2) More details tomorrow morning via blog post.

  3. Michael S. 01/14/2009 at 8:04 PM #

    Hi Mark, a quick question:
    If I sell a naked put and the strike price drops below the strike price that I had sold before the expiration date — do I have to assign the stock?
    Thanks…from a beginner.

  4. Mark Wolfinger 01/14/2009 at 8:19 PM #

    Michael
    1) I assume you mean that the STOCK price drops below the strike price.
    2) You sold the put. You have no rights. You cannot ‘assign’ the stock.
    In fact you cannot do anything – except to buy back the option you sold. You can do that anytime you want to do so. I don’t want to confuse you: You do not have to buy it back, it’s just a choice.
    In fact, ‘assign the stock’ is not a meaningful phrase, but let me try to reply:
    a) You cannot exercise the put option because you sold the put.
    b) If you want to be assigned an exercise notice – and I believe this is what you mean to say – then no. You have no rights. None.
    Only the owner of the put has the right to exercise and he/she will do that if and when they choose. You have nothing to say in the matter. There is no method for you to request that the option be assigned. You just sit and wait.
    c) If you are asking: Must you accept the assignment if and when you receive it, yes you must. If assigned, it is irrevocable and you are forced to buy stock at the strike price.
    If none of these replies is appropriate to your intended question, please try again.
    Mark

  5. Michael S. 01/15/2009 at 9:13 AM #

    Thanks, Mark, for your answer but I would like to know: do I have to assign the put before the expiration date? Like if I sell the naked put strike price 50.00 Jan 2010 on April 2009 the stock drops to 45.00.
    Does the put owner have the right to ask me to assign the put on April? Or does the put owner have to wait until Jan 2010?
    The reason is when I sell the naked put I plan to buy the stock cheaper but I want to know — do I have to be ready with all that money right away or I can wait to have the money in January?

  6. Mark Wolfinger 01/15/2009 at 9:33 AM #

    Michael,
    Yes, the put owner has the right to exercise the put, forcing you to buy the shares at the strike price. That can be done at any time before the option expires. He DOES NOT have to wait until Jan 2010.
    But let’s use proper terminology because it makes it easier to communicate. He does not ‘ask you to do anything.’ He forces you to do something.
    What you mean to ask is: ‘Can he force me to accept assignment on the put.’ Yes he can.
    Thus, you should be ready with ‘all that money.’ But that’s for your protection. You are not required to have the cash ready.
    Here’s the big problem: You do not want to be forced to buy the shares and find that you get a margin call from your broker. You don’t necessarily need CASH. You can borrow cash from your broker – that’s called ‘margin.’ If you own other stocks in the account, you can use those stocks as collateral for the margin loan.
    If this put sale is your only position, then it is a good idea to have the money ready – but only if the stock drops significantly below the strike price. In your example, if the stock is 45 in April, there is almost zero chance that you will be assigned an exercise notice. I think the stock would have to be below 35 – and even then it’s unlikely that you would be forced to buy the shares as early as April.
    People who own put options seldom exercise prior to expiration, unless the stock is far below the strike price But it is possible.