# "Wings Insurance"



## Seneca60BC (14 November 2008)

Hi All

What is meant by the term "wings insurance" - Just say a trader takes out a short call on an underlying stock.  How does "wings insurance" help to protect the trader?

E.g. trader has written a short call on XYZ Strike $25, with XYZ trading at $20, where will the wing insurance options be bought (what strike(s)) and will they be long calls or puts? (trader is bearish on XYZ).

thanks!


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## cutz (14 November 2008)

Are you referring to a collar which is a long put and a short call to pay for it. Haven’t heard of a "wings insurance" but I’m sure an experienced options trader will help you out.


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## mazzatelli1000 (14 November 2008)

Seneca60BC said:


> Hi All
> 
> What is meant by the term "wings insurance" - Just say a trader takes out a short call on an underlying stock.  How does "wings insurance" help to protect the trader?
> 
> ...




Just another term for a hedge - these "wings" will generally limit losses and define maximum risk.

It usually applies to positions that have potential unlimited losses upside or downside e.g. short strangles and straddes, short calls and puts

The short call has unlimited upside risk, which one can limit buy purchasing a higher strike call - e.g. XYZ $30 call. This will cap your maximum loss to ($30 - $25 = $5). This is like insurance against a massive rally in XYZ past your short strike. Since the long call is further OTM, it will cost less than your short call resulting in a net credit position. This credit amount will reduce your maximum loss and reduce collateral requirements compared to the naked position. This is the bear call spread.

The same can be achieved by purchasing a lower strike put for naked puts - aka bull put spread.

For straddles and strangles - it is just a combination of the above 2 spreads which results in your iron condor and butterfly.


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## mazzatelli1000 (14 November 2008)

cutz said:


> Are you referring to a collar which is a long put and a short call to pay for it. Haven’t heard of a "wings insurance" but I’m sure an experienced options trader will help you out.




Cutz - the long put can be considered the "wing insurance" as it limits your loss. It really is just the synthetic bull spread.

You already know it....just fancy terminology or Seneca is drinking Red Bull (terrible joke.......but I've been up all night)


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## Seneca60BC (14 November 2008)

No, what I meant in the original question was a naked put or call which Maz has covered - have to reread his answer again when I get back from work 

Cheers


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## Grinder (14 November 2008)

Seneca60BC said:


> Hi All
> 
> What is meant by the term "wings insurance" - Just say a trader takes out a short call on an underlying stock.  How does "wings insurance" help to protect the trader?
> 
> ...




The wings come into play when your short call is at risk, it provides a hedge on your upside.

Depending on your comfort zone, level of risk and some greek analysis will dictate where you place your wings. For what you described above they would be long calls to protect against a bullish move.


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## cutz (14 November 2008)

Seneca60BC said:


> No, what I meant in the original question was a naked put or call which Maz has covered - have to reread his answer again when I get back from work
> 
> Cheers




Sorry, I thought you were looking at taking out a short call on underlying stock which I assumed you owned. Its good that mazza is always on the ball.


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## Seneca60BC (15 November 2008)

Actually I am naked a short call and the expiry date is this friday - the short call is on a strike of $105 and the underlying stock closed at $69.81 - so will taking out insurance for this worthwhile with 5 days to go?

The trend is down for this stock.

cheers!


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## chops_a_must (15 November 2008)

Seneca60BC said:


> Actually I am naked a short call and the expiry date is this friday - the short call is on a strike of $105 and the underlying stock closed at $69.81 - so will taking out insurance for this worthwhile with 5 days to go?
> 
> The trend is down for this stock.
> 
> cheers!



GS I assume?

Personally, I never initiate spreads without defined risk beforehand. But what would be the difference between buying a higher call and the remaining time value in the call you've written? It might prove to be more effective to just close out the trade.


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## jackson8 (15 November 2008)

seneca just out of interest do you know what the iv was at the time that you sold that 105 call or the annual return 
am interested to see the variation between aussie iv's and usa


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## Seneca60BC (15 November 2008)

Hi 

The IV was about 114% - yes i know the risk is substantial - although the probability is very small it will sky rocket - especially in this business atmosphere - yes i think i will close the trade come monday.

Cheers!


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## chops_a_must (15 November 2008)

Seneca60BC said:


> Hi
> 
> The IV was about 114% - yes i know the risk is substantial - although the probability is very small it will sky rocket - especially in this business atmosphere - yes i think i will close the trade come monday.
> 
> Cheers!




Well, we'll go through it how I would think it through...

You probably want to buy the 110 strike.

I would imagine neither would be fetching much. Perhaps 3-4 dollars each...

So if the 105 strike is now at say 5 dollars, and the 110 at 3, what you are inherently saying is that the remaining 5 dollars of time value, is worth 500 dollars of risk. I'd think not.


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## jackson8 (15 November 2008)

Seneca60BC said:


> Actually I am naked a short call and the expiry date is this friday - the short call is on a strike of $105 and the underlying stock closed at $69.81 - so will taking out insurance for this worthwhile with 5 days to go?
> 
> The trend is down for this stock.
> 
> cheers!




is there any reason that you would expect a 50% rise with this stock over the next 5 day period


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## cutz (15 November 2008)

Seneca60BC said:


> Hi
> 
> The IV was about 114% - yes i know the risk is substantial - although the probability is very small it will sky rocket - especially in this business atmosphere - yes i think i will close the trade come monday.
> 
> Cheers!




Hi, 

If your short call has moved deep OTM i reckon there’s no point hanging on thinking it will expire worthless, chances are it will, but there always is that small chance it won’t wiping out your profit, one example that springs to mind is MQG, on the 18sep it looked buried the next day it leaped back into life closing up about 10bucks with a few days remaining till ex day.


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## Seneca60BC (15 November 2008)

Hi

No I do not expect a rally in the next 5 days to above $105 from $69 - but you know - the black swan - that's always there - lets see what happens monday - if NY tanks, well i think I will hold off till tuesday - so Ill take it day by day.

Cheers!


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## Seneca60BC (15 November 2008)

chops_a_must said:


> Well, we'll go through it how I would think it through...
> 
> You probably want to buy the 110 strike.
> 
> ...




Hi chops

Sorry missed your reply

The option value is currently $0.15c which I bought at $0.50cent - hey dont laugh im learning options  so im starting small - anyway the probability of this finishing in the money is very small

cheers!


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## cutz (15 November 2008)

Yeah, that's fair enough, BTW MQG rallied from $26.05 to $39.25 in the preceding 5 trading days leading up to expiry thursday.

I know your case may be different but i was making the point that these things have been known to happen.


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## jackson8 (15 November 2008)

Seneca60BC said:


> Hi
> 
> No I do not expect a rally in the next 5 days to above $105 from $69 - but you know - the black swan - that's always there - lets see what happens monday - if NY tanks, well i think I will hold off till tuesday - so Ill take it day by day.
> 
> Cheers!




so as not to cause  as much stress in the future it might be worth takeing insurance out with the original sale .  may stop those sleepless nights worrying about what could happen in the worst case scenario

because of the unlimited risk associated with selling naked calls if you want to stay in the game it may be wise to cover yourself .


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## Seneca60BC (15 November 2008)

yes I totally agree - thats what I will be doing in the future.  Thats why I asked about wings insurance


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## Seneca60BC (15 November 2008)

cutz said:


> Yeah, that's fair enough, BTW MQG rallied from $26.05 to $39.25 in the preceding 5 trading days leading up to expiry thursday.
> 
> I know your case may be different but i was making the point that these things have been known to happen.




Hi Cutz, yea i totally agree with you - better to have some insurance.


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## chops_a_must (15 November 2008)

Seneca60BC said:


> Hi chops
> 
> Sorry missed your reply
> 
> ...




Hey, I'm not laughing at all. 

Like I've said elsewhere, I'm only one step ahead of you. 

You still have a third of your potential profit on the table, so it maybe worth looking at some protection, and play it like you would if you had multiple contracts.

Someone can correct me on this, but time decay seems to accelerate faster the closer you get to expiry on deep OTM options. So if Monday opens down, you may be able to get cheap protection.

But yeah, I have never, and especially in this market, wouldn't ever write naked options. You just never know when a takeover gets announced etc.


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## cutz (15 November 2008)

chops_a_must said:


> Someone can correct me on this, but time decay seems to accelerate faster the closer you get to expiry on deep OTM options. So if Monday opens down, you may be able to get cheap protection.




Yeah time decay accelerates toward expiry but only on ATM or close to the money, deep ITM or OTM hardly have any time premium left therefore time decay would be minimal.


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## mazzatelli1000 (16 November 2008)

The point of option writing is to capture as much theta as possible. With 5 days left to go, and as cutz and chops have pointed out there is hardly any time premium left in that option. You might as well close it now instead of capping it. 

Why? You incur commissions for both actions, but closing it takes all risk of the table, whereas insurance leaves you with a possible maximum loss if there is an adverse move (sounds unlikely in your case).

The risk as at now far outweighs the reward.

It would be better to close out and start initiating other positions to capture more theta.  
Also it will release any cash/stock that is collateral for other trades. This way you are utilising your capital more efficiently.

I highly agree with the others to pursue limited risk short strategies - it is very painful financially and psychologically when just one big move will wipe out months of profit. 
Writing naked calls on equities is very risky!!! If you want to pursue it, do it on indices.


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## Seneca60BC (16 November 2008)

ok thanks guys - I will close this position immediately.


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## sails (16 November 2008)

Sounds like a good move, Seneca.  All things being equal, this sold call is relatively "safe" with only five days to go, however, one of the worst nightmares to upset that equilibrium would have to be a take-over bid close to expiry. 

A few years ago, WMC/WMR (can't remember which code it was trading under at the time) had a take-over bid on expiry morning   I know of someone who had taken in approx. $40 per contract of short call premium and no protective wing.  The take-over bid price was well above that short call strike - leaving them with losses of around $1,000 per contract.  The day before expiry, that same short call was looking relatively "safe"...

Agree with Mazz - naked call selling is a bit safer on the indicies, however if things do go wrong, it can still put an unacceptably large hole in the trading account.  I believe that money/risk management are paramount in options trading.  IMO,  a good working knowledge of the greeks is also a must-have in order to understand where the risks have been shifted, but all the options knowledge under the sun won't help without a solid money/risk management plan.

I have listened to quite a few of the Wednesday chat archives on TOS - and they strongly support the idea of closing out call credit spreads well before expiration, and then opening up a new position in next month early.There are often some fat premiums on the incoming month and it is possible of actually gain more than holding on for that last $15 as in the case of this call.

Here is the link to TOS archives.  The sessions before US expiration are the most likely to have hints on how to manage expiring positions - and lots of other interesting stuff


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## mazzatelli1000 (16 November 2008)

The TOS folk are great!!!

I remember Don Kauffman on one of his chats saying that retail traders are usually excellent at finding trades, but absolutely terrible when managing the trades, whereas market makers and pit traders like him and the sos arent great at finding trades, but know how to manage risk well.

The sos and Preston dont sound like they use minimal fundamental or technical analysis to trade, but are real good at getting in and out


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## Seneca60BC (16 November 2008)

sails said:


> Sounds like a good move, Seneca.  All things being equal, this sold call is relatively "safe" with only five days to go, however, one of the worst nightmares to upset that equilibrium would have to be a take-over bid close to expiry.
> 
> A few years ago, WMC/WMR (can't remember which code it was trading under at the time) had a take-over bid on expiry morning   I know of someone who had taken in approx. $40 per contract of short call premium and no protective wing.  The take-over bid price was well above that short call strike - leaving them with losses of around $1,000 per contract.  The day before expiry, that same short call was looking relatively "safe"...
> 
> ...





Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.

Cheers!


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## mazzatelli1000 (16 November 2008)

Seneca60BC said:


> Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.
> 
> Cheers!




www.thinkorswim.com
Go to Support - option school - chat archives


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## Grinder (17 November 2008)

back to wings insurance.. otm wings protection can be substituted for smaller number of cons atm. Eg: Had a 10 con spread on otm with 2 atm con picked up at the same time, my short strike was under threat and would have to close for a small loss. However, my 2 atm cons came into play & turned a losing position into a nice little earner.


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## sails (17 November 2008)

Seneca60BC said:


> Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.
> 
> Cheers!




sorry Seneca - didn't check the link before posting.  Mazz has pointed you in the right direction.  Actually heaps of options educational material on the TOS site.


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## cutz (27 November 2008)

Hi Guys,

Today towards the close I went about putting on a call credit spread and made an error in the process, first I shorted the lower strike calls, then went about buying the wings but I was rushing around a little and I sold to open instead buying to open , as the ask was 71 with no bids I entered what I thought was buy to open as a sell to open at 45, the order went through at 60, then I had to reverse that position which was a bit of a hassle but I got out with a partial hedge. 

My question is why did I get 60 for the wings sold in error when I punched in 45, i’m not complaining but I am a little curious on how the order gets to the market, this is the second time this has happened to me, the first time I promised myself to be a bit more careful but I got bitten again today.


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## jackson8 (27 November 2008)

cutz said:


> Hi Guys,
> 
> Today towards the close I went about putting on a call credit spread and made an error in the process, first I shorted the lower strike calls, then went about buying the wings but I was rushing around a little and I sold to open instead buying to open , as the ask was 71 with no bids I entered what I thought was buy to open as a sell to open at 45, the order went through at 60, then I had to reverse that position which was a bit of a hassle but I got out with a partial hedge.
> 
> My question is why did I get 60 for the wings sold in error when I punched in 45, i’m not complaining but I am a little curious on how the order gets to the market, this is the second time this has happened to me, the first time I promised myself to be a bit more careful but I got bitten again today.




i cant answer your question but have noticed the same sort of thing myself,  when i place a limit order i always seem to get it filled at a little bit more than the limit that i placed ........yet the price i have received is never allocated on the seats screen

so when i sell a call or put i receive bit extra than what i thought and when i buy to open seem to pay a bit less.  

not complaining just would like to understand how this works.


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## cutz (27 November 2008)

Hi jackson8,

If what you're describing is happening regularly something is not right, in my case I put the sell order through at way below market price and there were no market makers on the scene just a small odd number on the ask, the market makers came on and bought above what I offered but this was a mistake on my part, i’m not sure how this happens.

Normally the way I do it if there are no bid/offers on I check the theoretical price and put the order in way above/below theoretical price as required, wait for the market makers then adjust the order slowly as required till it gets filled and the price is always what I punched in.

If you don’t have a live platform and because the market maker spreads move around the price you see when you check the quotes may not be the same price the time you punch your trade through, so you may get a slightly unexpected result, perhaps someone else could comment on this.


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## sails (28 November 2008)

Hi Cutz,

I'm not sure either how this happens.  Would need to hear from a broker or MM to find out.  Has only happened to me on very rare occasions and certainly not recently - would be a pleasant surprise though!

Perhaps there are combo orders where the MM is not displaying that particular leg in the market depth screen - and your order hits it.  I quite often find the MM only displays one leg of my combos and on rare occasions nothing is displayed at all.  However, that order is still there - just invisible.

Anyway, that's only a guess at it!

If it's not a highly liquid stock for options, then the idea of a combo order is probably unlikely.  And the MM is not likely to give away free money - so there would have to be a reason.

Anyone else know ? Any brokers or MMs lurking - care to explain?


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## elbee (28 November 2008)

When submitting an order you can elect for it to be not visible.

This option is not available in many of the retail trading platforms but is available through IB.


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## Grinder (28 November 2008)

Never happened to me, doh.. 

Here's a theory though, maybe theres a big order in the pipe or just on 1 side of the trade & the MM wants to stretch the spread to catch bigger fish. So to do that, the MM might just fill your smaller order to get you outta the way.

Would also like to hear from a MM.


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## Grinder (28 November 2008)

didnt know that elbee, nice to know.


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## cutz (28 November 2008)

elbee said:


> When submitting an order you can elect for it to be not visible.
> 
> This option is not available in many of the retail trading platforms but is available through IB.





Hi elbee

With the invisible order, can i assume that only the market makers see it and not retail traders like myself, so if i'm looking at the series with no spreads showing, there could actually be something there, but i just can't see it.


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## jackson8 (6 December 2008)

cutz said:


> Hi jackson8,
> 
> If what you're describing is happening regularly something is not right, in my case I put the sell order through at way below market price and there were no market makers on the scene just a small odd number on the ask, the market makers came on and bought above what I offered but this was a mistake on my part, i’m not sure how this happens.
> 
> Normally the way I do it if there are no bid/offers on I check the theoretical price and put the order in way above/below theoretical price as required, wait for the market makers then adjust the order slowly as required till it gets filled and the price is always what I punched in.




further comment to this
whenever i place a bid to buy at market price i always seem to get couple cents cheaper and also on flip side when sell a premium seem to get couple cents more than the market quote..............talking options in 40c-50c spreads and no underlying sp movement. so i always know that spread is little bit closer than shows on screen............ am using basic commsec platform i don't do enough to warrant webiress fees  or qualify for free access

have read in American article that mm's could place buy and sell prices as ghosts which do not show up on trading screen to what effect i don't quite understand

also bit weird, placed a limit order on otm buy side in a series where there were no other bid or asks ..........within seconds there were prices on offer both side and with 2 or 3 depth as soon as i adjusted my price to market and order went thru they all disappeared 
there were orders either side 15 20 contracts mine was only for 2 so thought it was bit of overkill

anyone with a similar experiences or is it one of those things you just don't question


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## cutz (6 December 2008)

Hi jackson8,

I’m not sure exactly how the process works but when you put an order through a request for a spread is initiated so the market makers shows a spread (normally), I have no idea how it works whether its the broker manually requesting or maybe its an automatic process, I suspect it may be a broker request as once I had to put a phone order through and the broker was able to get a spread to appear then he put my order on.


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## sails (6 December 2008)

cutz said:


> Hi jackson8,
> 
> I’m not sure exactly how the process works but when you put an order through a request for a spread is initiated so the market makers shows a spread (normally), I have no idea how it works whether its the broker manually requesting or maybe its an automatic process, I suspect it may be a broker request as once I had to put a phone order through and the broker was able to get a spread to appear then he put my order on.




You can usually ask the broker to get an option quote from the MMs for you.  It only appears for a few seconds before disappearing again, so you either need to have pen & paper handy to jot the quotes down or take a screen shot.

Alternatively with Iress and when the quotes are displaying in the Market depth window, you can click on the "detail" button which brings up a new little box which is not dynamically updated and so holds those quotes while you have time to work out mid price estimates, etc.

I guess the problem with the likes of Commsec is that by the time you get your phone call answered to ask for a quote, the opportunity you saw maybe gone...  

WebIress does have an "option quote request" function.  Right click on an option code and on the drop down list, there should be "Option Quote Request".  I'm not sure if all brokers have it enabled or if it is only handed out selectively as they don't like it being over-used. 

Even when asking for quote requests, I believe MMs are only obligated to respond to a certain percentage, so sometimes you knock on the door and and get no response   This is fairly typical for the first half hour or so in the mornings.

I have heard that the MMs have software controlling their quotes, so in most cases, those quotes are probably sitting there but, for whatever reason, they make them invisible until they receive a quote request.  In some cases, there are multiple option MMs per stock, so it probably explains why there are sometimes several quotes that pop out for those few seconds when requested.


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## cutz (6 December 2008)

sails said:


> Alternatively with Iress and when the quotes are displaying in the Market depth window, you can click on the "detail" button which brings up a new little box which is not dynamically updated and so holds those quotes while you have time to work out mid price estimates, etc.




Hi Sails,

Thanks for the tip


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## jackson8 (6 December 2008)

Mar	09	32.00		6.40	93
Mar	09	36.00		4.44	2
Mar	09	37.00		4.35	40
Mar	09	38.00		*12.23*	2
Mar	09	40.00		4.80	90
Mar	09	41.00		2.32	5
Mar	09	42.00		5.45	10
Mar	09	46.00		1.45	1
Mar	09	47.00		1.43	4
Mar	09	48.00		*0.00*	4
Mar	09	50.00		1.10	3
Mar	09	55.00		0.75	1
Mar	09	60.00		0.68	3


above are rio call sales for friday 5th

why would the $12.23 sale be so far away from the actual market 
and secondly $48 dollar contract shows 4 contracts sold but at $0.00

anyone know what gives here as the 38 call seems to be pretty good premium
and i dont understand how a sale can be 0
thanks
gary


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## cutz (7 December 2008)

Hi jackson8

Out of curiosity I checked out the course of sales last Fri on that 38 call and its showing 2 trades at 3.23, the 12.23 price was actually traded on the 28th of Nov, between the 28th of Nov and last Friday this series was traded for between about 5.8 and 3.23 with the condition code of Tailor Made Combination which I don’t know what it means but I noticed it doesn’t register against last sale price.

The 48 call was traded for 1.325 with the same code.


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## jackson8 (7 December 2008)

cutz said:


> Hi jackson8
> 
> Out of curiosity I checked out the course of sales last Fri on that 38 call and its showing 2 trades at 3.23, the 12.23 price was actually traded on the 28th of Nov, between the 28th of Nov and last Friday this series was traded for between about 5.8 and 3.23 with the condition code of Tailor Made Combination which I don’t know what it means but I noticed it doesn’t register against last sale price.
> 
> The 48 call was traded for 1.325 with the same code.




ok thanks for that , those figures came from commsec platform and from afr.com end of day share tables 
must be some discrepency in data between them all
i have noticed with commsec that their onscreen quotes seem to lag in time. have tried using professional trader but does not seem to have options trading platform on it
thanks for your help


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