Australian (ASX) Stock Market Forum

Option Traps and Gotchas

Jump to new
Ageo said:
Well Wayne basically i wanted a better alternative to investing in shares (i.e not having to outlay huge sums of cash etc....) im talking about buying direct call (and puts if opportunity arises) options in the view of a big move (but trying to guess in short term is kinda hard thats why i choose longer term options).

For instance we all know the market will bounce (when will it happen who knows), and some stocks will probably rocket in the next few yrs, so id rather outlay a couple of thousand in premium and know thats my maximum loss (instead of buying the share outright and increasing my risk and profit potential).
Click to expand...


My thourghts exactly, cheap way to go long on a stock you like, surely?
 
Smallprofits said:
My thourghts exactly, cheap way to go long on a stock you like, surely?
Click to expand...

It's cheap at the right price. If you pay high volatilities, it's very expensive.

You can go deep ITM and tame some of the theta and vega, but then you are paying up more for intrinsic value. More expensive, but cheaper.
 
Hi all
Have two questions to ask before I take the plunge into index options over xjo

Firstly have heard mention that when you sell a index call you can be liable to pay dividends........please explain

another is a forum contributor who spoke of receiving a huge bill as the company announced a buyback I recall it may have been sold call over RIO.......please explain

with thanks
gary
 
jackson8 said:
Hi all
Have two questions to ask before I take the plunge into index options over xjo

Firstly have heard mention that when you sell a index call you can be liable to pay dividends........please explain

another is a forum contributor who spoke of receiving a huge bill as the company announced a buyback I recall it may have been sold call over RIO.......please explain

with thanks
gary
Click to expand...
There are no dividends payable or liable when you own or write options. However, when a dividend is paid by a company, the option price will adjust acordingly.

See my blog post here: http://sigmaoptions.blogspot.com/2008/05/effect-of-dividends-payable.html

The fifth input into the Option Pricing Model is dividends. If the underlying pays no dividend, then there is no effect on option prices. However if the stock does have an upcoming cash dividend payable, it will have an effect on option prices. It is very important to be aware of this, as many a neophyte option trader has been caught out by thinking an arbitrage opportunity existed with mis-priced options, when in fact the pricing anomaly was due to an upcoming dividend; hence not an anomaly at all.

The reason for this is that option holders are not entitled to participate in cash dividends, so option prices must compensate.

It is a general rule of thumb that the underlying stock will drop by the dividend amount when the stock goes ex-dividend, all things being equal. As far as the stockholder is concerned, he/she ends up squits; what is lost on the stock, is gained in cash.

Option Pricing Formulae account for this by considering the move in the underlying due to going ex-dividend.

When the stock is cum-dividend, call option prices will be cheaper than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of shielding the call option holder from an unwarranted loss due to the drop in the underlying.

The reverse is true for put options. When the stock is cum-dividend, put prices will be more expensive than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of ensuring that the put holder doesn’t receive an unwarranted windfall profit.
In a Nutshell

When a dividend is payable:

* Call option prices will be cheaper.
* Put option prices will be more expensive.
Click to expand...

Indexes don't pay dividends so it is not a factor at all.
 
Hi Guy’s,

A gotcha to add to the list,

I’ve just been assigned on a short put via my comsec account, this isn’t a big deal, but what i’ve just discovered with comsec is I can’t offload today because it’s not registered against my account yet,:eek: even though I received the contract note this morning.

This is the first time I’ve been assigned on a short put and it really got me.
 
cutz said:
Hi Guy’s,

A gotcha to add to the list,

I’ve just been assigned on a short put via my comsec account, this isn’t a big deal, but what i’ve just discovered with comsec is I can’t offload today because it’s not registered against my account yet,:eek: even though I received the contract note this morning.

This is the first time I’ve been assigned on a short put and it really got me.
Click to expand...

Every time I've been assigned, always been able to close out the same day - and that's been with different brokers. IB insist on it in the first 10 mins of the trading day, so I have no idea what Commsec are up to. :confused:

EDIT: Did you manage to hedge the stock position, Cutz?
 
I suspect they will show up tommorrow as being available, it will be a nervous wait.
 
cutz said:
I suspect they will show up tommorrow as being available, it will be a nervous wait.
Click to expand...

I can imagine :(... Although, if you were assigned, it would appear that there was practically no time value on the short put so the delta would have been getting pretty close to 1 anyway.

If the market is favourable, you will probably gain faster on the shares than on your short put. If it's not, it is possible that you are not much worse off than if you hadn't been assigned. All guesswork here...

If you can't get out tomorrow, maybe have a look at buying a cheap put to hedge for a day or so. Jan puts are getting pretty cheap with expiry next week and you could do that in IB for cheaper brokerage. Even a wider put spread might give you some peace of mind for a day or two.

From where I sit, Commsec don't appear to have much idea about Iress or options (see the other thread on Commsec Iress :eek:)
 
sails said:
EDIT: Did you manage to hedge the stock position, Cutz?
Click to expand...

No, not this one, if i was able to sell today i still would have made a small profit, it the stock gaps down tommorrow, not so good.:eek:

This was the last off my unhedged puts which I had put on the backburner with the intent of doing a diagonal roll next week.

It took me by surprise as I didn't expect the contracts to be trading below intrinsic, (spreads weren’t showing this week and late last week)

BTW all comments welcome, stock is WBC if anyone is interested.
 
cutz said:
No, not this one, if i was able to sell today i still would have made a small profit, it the stock gaps down tommorrow, not so good.:eek:

This was the last off my unhedged puts which I had put on the backburner with the intent of doing a diagonal roll next week.

It took me by surprise as I didn't expect the contracts to be trading below intrinsic, (spreads weren’t showing this week and late last week)

BTW all comments welcome, stock is WBC if anyone is interested.
Click to expand...

I think the US markets are closed again tonight, so hopefully there won't be too much movement...
 
sails said:
From where I sit, Commsec don't appear to have much idea about Iress or options (see the other thread on Commsec Iress :eek:)
Click to expand...

Yep,

You're right about that, the only options i'll end up trading via comsec will be the XJO index contacts, only because IB don't offer them yet.

Also thanks for your thoughts regarding the puts Sails.:)
 
cutz said:
Yep,

You're right about that, the only options i'll end up trading via comsec will be the XJO index contacts, only because IB don't offer them yet.

Also thanks for your thoughts regarding the puts Sails.:)
Click to expand...

Good luck with it today, Cutz. Hope Commsec lets you close out. I've got to go out for a while so will check in when I get back - will be interested to see how it pans out for you today...

I'm not sure that a broker is allowed to stop you closing an assigned position - might be worth a call to the ASX and ask for their options dept. (hopefully their CS is better than Commsec!)

PS - there was a really helpful guy in ASX options - if you're not getting the right help I will look through old emails to try and find his name and see if he is still there.
 
sails said:
Good luck with it today, Cutz. Hope Commsec lets you close out. I've got to go out for a while so will check in when I get back - will be interested to see how it pans out for you today...

I'm not sure that a broker is allowed to stop you closing an assigned position - might be worth a call to the ASX and ask for their options dept. (hopefully their CS is better than Commsec!)

PS - there was a really helpful guy in ASX options - if you're not getting the right help I will look through old emails to try and find his name and see if he is still there.
Click to expand...

I only just managed to just check it out, yep they are now available but of course i am now a proud owner of WBC stock :eek:, it's a shame about yesterday not being able to unload, even though the date on the contract note is 19/01/09 + as of 20/01/09.

Thanks Sails but I think I will sit on this one and sell next week if the banking panic subsides, I never would have guessed it took overnight with comsec, I always assumed if I had the contract note it should have been available for sale.
 
Can anybody explain why MQG Jan 30.26 call is selling at such a high volatility (415 %), I’ve got a call credit spread out on this (30.26/32.74), everything checks out so I’m wondering what I’m overlooking.

After the WBC fiasco i’m waiting for another gotcha :D, but this spread is set up with IB so I should be right.
 
cutz said:
Can anybody explain why MQG Jan 30.26 call is selling at such a high volatility (415 %), I’ve got a call credit spread out on this (30.26/32.74), everything checks out so I’m wondering what I’m overlooking.

After the WBC fiasco i’m waiting for another gotcha :D, but this spread is set up with IB so I should be right.
Click to expand...

Cutz, if you have a look in Iress depth for that option, it's only a one lot asking 500 ($5). You can see a one lot TM at 503.5 was cancelled - so it may be something to do with that. It's obviously ridiculously above any sort of fair value, so I wouldn't let it worry you too much. Most likely will be gone by the morning as any prices left after the options market closes at 4.20pm are uncancelled orders.
 
With a little over two hours to go to expiry, below is a snap shot of BHP's call options. The slightly OTM $35 calls are highlighted showing a fair amount of time value. There must be a few retail sellers at that strike. It's not much fun trying to buy to close a sold option this close to the money on expiry day.
 

Attachments

  • BHP May09 expiry.JPG
    BHP May09 expiry.JPG
    62.6 KB · Views: 130
Yeah Dutchie - I am a day out :eek:

Not trading options this month so not in touch as much as I would normally be. And have a heap of other things happening plus had to look after a grandkid all weekend, so it feels like the end of the week already - at least that's my excuse!

Even so, that's still a fair bit of premium with only a day to go. Will see what it's like tomorrow...
 
Top