Options Boot Camp

Basic Training: Lessons from the Trading Floor

• Paper flow rules all - Go with the flow! Being obstinate and refusing to adjust to changing market conditions will only cost you money.
• Don't step in front of the train!
• When in doubt, palms out!!
• There is such a thing as an upside crash.
• Calls are puts and puts are calls.

Mail Call: Schooling traders, one question at a time.

• Question from George: Why were puts so expensive when TWTR options launched?
• Question from Niles F., Montgomery, AL - I saw an article recently touting a "synthetic covered call strategy" that essentially involved buying an ITM call and selling an OTM call against it. It was really just a vertical call spread. What am I missing? How is this a synthetic covered call?
• Question from Mr. Gif - Great show on volatility skew. What do you guys think of this piece? Should I, as an investor, avoid these volatility ETFs?
• Question from Buckeye - A question from John - Can I buy a stock on margin then write covered calls against it? Or does a broker like SogoTrade remove the 50% margin and make you pay the full price for the stock when you sell the calls?

Basic Training: Lessons from the Trading Floor

• Paper flow rules all - Go with the flow! Being obstinate and refusing to adjust to changing market conditions will only cost you money.
• Don't step in front of the train!
• When in doubt, palms out!!
• There is such a thing as an upside crash.
• Calls are puts and puts are calls.

Mail Call: Schooling traders, one question at a time.

• Question from George: Why were puts so expensive when TWTR options launched?
• Question from Niles F., Montgomery, AL - I saw an article recently touting a "synthetic covered call strategy" that essentially involved buying an ITM call and selling an OTM call against it. It was really just a vertical call spread. What am I missing? How is this a synthetic covered call?
• Question from Mr. Gif - Great show on volatility skew. What do you guys think of this piece? Should I, as an investor, avoid these volatility ETFs?
• Question from Buckeye - A question from John - Can I buy a stock on margin then write covered calls against it? Or does a broker like SogoTrade remove the 50% margin and make you pay the full price for the stock when you sell the calls?

Mail Call: All Mail. All day long.

Question from Benjammin - I am currently a law student and have always been interested in options. I have read about options and am now listening to all of the Options Bootcamp podcasts, which is a great show, to prepare to start trading options! SCENARIO: Assume I sell a naked put option and collected $500 in prem. 1 week prior to expiration the value of the underlying has increased and it looks like the option will expire worthless and I will get to keep the $500. Is there anything I can do other than waiting to expiration to lock in my profits by sacrificing a portion of that collected premium?

Question from Richard D - Mark and the Team,

The shows are consistently great! Thank you! You may remember me from "the mega question" early in the month. I will be a LITTLE more succinct in these posts. Also thank you for that bootcamp episode on vol and skew!

I think expiration and settlement could be a good topic for a future Bootcamp show.

Could you discuss a little on how American style options stop trading on Fridays but actually expire on Saturday (at least the monthlies do)? Is anyone allowed, like for example brokers or large institutions, allowed to trade these options after they stop trading for the retail investor?

I understand there are ways a trader can get hurt by this because if you hold a short option at the Friday close, even if it's a covered option like a bear call, and the stop gaps up after 4 PM Friday, you will get exercised and then be short or long that lot of stock come Monday morning. Could your team discuss what happens if I'm holding a long position and hold it past 4 PM on a Friday? If it's even a penny in the money it gets exercised, however how does the timing on that work. Here is a hypothetical example:

I own a Nov 18 '13 100 call on stock XYZ. Stock XYZ closes on Fri, Nov 18 at 99.99 but then by 8 PM it goes up in after hours to 100.15. Is my contract automatically exercised?

Alternatively, stock XYZ closes on Fri, Nov 18 at 101 but then by 8 PM that evening drops to 99.99. Again what happens?

Question from Lil Rich - Can you explain the origins of volatility skew? Is it true that skew didn't exist pre-1987?

Question from Eric Thamos - I love the Boot Camp show. It is a great resource for newcomers to options like me. I am listening to the skew episode on the train home right now. I am still puzzled about the actual fundamental underpinnings of skew. What is the bigger determining factor - the actual order-flow or the psychological factors? Also, is it possible to impact the skew myself? For example, if I see a stock where the skew is inflated, could I sell it and deflate it - locking in a profit in the process? Thank again for this insightful program.

Question from Tim Santiago, Albany, NY - I am catching up on options basics including the Greeks (great book Dan). Most of them make sense but I'm kind of hung up on two - rho and delta. Why do we need rho? Is it me or is it really a superfluous variable? Have you ever encountered a circumstance where your knowledge of RHO came in handy and saved the day? As for delta - it seems like the super variable. It's a hedge ratio, a measure of price change AND the probability of expiring in the money all wrapped up into one shiny package. Is it me or is that just too tidy? Do you find this to be the case in real life or is this another example of mathematicians trying to extrapolate their findings to areas that don't really apply?

Mail Call: All Mail. All day long.

Question from Benjammin - I am currently a law student and have always been interested in options. I have read about options and am now listening to all of the Options Bootcamp podcasts, which is a great show, to prepare to start trading options! SCENARIO: Assume I sell a naked put option and collected $500 in prem. 1 week prior to expiration the value of the underlying has increased and it looks like the option will expire worthless and I will get to keep the $500. Is there anything I can do other than waiting to expiration to lock in my profits by sacrificing a portion of that collected premium?

Question from Richard D - Mark and the Team,

The shows are consistently great! Thank you! You may remember me from "the mega question" early in the month. I will be a LITTLE more succinct in these posts. Also thank you for that bootcamp episode on vol and skew!

I think expiration and settlement could be a good topic for a future Bootcamp show.

Could you discuss a little on how American style options stop trading on Fridays but actually expire on Saturday (at least the monthlies do)? Is anyone allowed, like for example brokers or large institutions, allowed to trade these options after they stop trading for the retail investor?

I understand there are ways a trader can get hurt by this because if you hold a short option at the Friday close, even if it’s a covered option like a bear call, and the stop gaps up after 4 PM Friday, you will get exercised and then be short or long that lot of stock come Monday morning. Could your team discuss what happens if I'm holding a long position and hold it past 4 PM on a Friday? If it’s even a penny in the money it gets exercised, however how does the timing on that work. Here is a hypothetical example:

I own a Nov 18 '13 100 call on stock XYZ. Stock XYZ closes on Fri, Nov 18 at 99.99 but then by 8 PM it goes up in after hours to 100.15. Is my contract automatically exercised?

Alternatively, stock XYZ closes on Fri, Nov 18 at 101 but then by 8 PM that evening drops to 99.99. Again what happens?

Question from Lil Rich - Can you explain the origins of volatility skew? Is it true that skew didn't exist pre-1987?

Question from Eric Thamos - I love the Boot Camp show. It is a great resource for newcomers to options like me. I am listening to the skew episode on the train home right now. I am still puzzled about the actual fundamental underpinnings of skew. What is the bigger determining factor - the actual order-flow or the psychological factors? Also, is it possible to impact the skew myself? For example, if I see a stock where the skew is inflated, could I sell it and deflate it - locking in a profit in the process? Thank again for this insightful program.

Question from Tim Santiago, Albany, NY - I am catching up on options basics including the Greeks (great book Dan). Most of them make sense but I'm kind of hung up on two - rho and delta. Why do we need rho? Is it me or is it really a superfluous variable? Have you ever encountered a circumstance where your knowledge of RHO came in handy and saved the day? As for delta - it seems like the super variable. It's a hedge ratio, a measure of price change AND the probability of expiring in the money all wrapped up into one shiny package. Is it me or is that just too tidy? Do you find this to be the case in real life or is this another example of mathematicians trying to extrapolate their findings to areas that don't really apply?

Basic Training: Trading VIX and Volatility Products

• What is the VIX? How is the VIX calculated?
• How are VIX options priced?
• How do the Greeks work with VIX options?
• What is the difference between VIX cash and VIX futures?
• The VIX is NOT a perfect hedge that offers pure inverse correlation of the S&P?
• VIX can be used as a kicker for extreme events.
• Beware of VIX settlement process.
• Remember to understand the context with which the VIX is being represented.

Mail Call: How may we be of assistance?

• Question from Bicycle My - So how do you become a better trader? I have been trading for a few years now and although I am profitable, I have not seen phenomenal returns.
• Question from Hawkeye6: Can you explain what Maker-Taker is? What is different about it from the traditional methods? Advantages? Disadvantages? Thanks.

Basic Training: Trading VIX and Volatility Products

• What is the VIX? How is the VIX calculated?
• How are VIX options priced?
• How do the Greeks work with VIX options?
• What is the difference between VIX cash and VIX futures?
• The VIX is NOT a perfect hedge that offers pure inverse correlation of the S&P?
• VIX can be used as a kicker for extreme events.
• Beware of VIX settlement process.
• Remember to understand the context with which the VIX is being represented.

Mail Call: How may we be of assistance?

• Question from Bicycle My - So how do you become a better trader? I have been trading for a few years now and although I am profitable, I have not seen phenomenal returns.
• Question from Hawkeye6: Can you explain what Maker-Taker is? What is different about it from the traditional methods? Advantages? Disadvantages? Thanks.

Basic Training: Let's talk fundamentals

• What is Implied Volatility and how it is derived? Why is understanding implied volatility is so important?
• Historical volatility versus implied volatility.
• What is skew? Why does skew exist?
• What is the put wing? What is the call wing?
• What is investment skew? What are other types of skew?
• #1 Options question from newcomers - I bought a call option then the stock rallied and my call lost value. Why?
• How do you evaluate skew? How is skew measured?
• What is reverse skew? What does reverse skew sometimes indicate?
• What is term structure?

Mail Call: You have questions. We have answers.

• Question from Nick D. - I am a covered call seller. I have some people recommend that I should sell in-the-money covered calls instead of my usual 5%-10% out-of-the-money calls because of volatility. But why would I want to sell a call that is going to inevitably be called away? What is your thought on this strategy?
• Question from Charles Midler, Santa Fe, NM - I am thinking about hedging my short stock positions with short put positions. How do the drill instructors view this strategy? Am I on the right track? Can John discuss the margin requirements of such a strategy?
• Question from Nomad 6 - What are flex options?

Basic Training: Let's talk fundamentals

• What is Implied Volatility and how it is derived? Why is understanding implied volatility is so important?
• Historical volatility versus implied volatility.
• What is skew? Why does skew exist?
• What is the put wing? What is the call wing?
• What is investment skew? What are other types of skew?
• #1 Options question from newcomers - I bought a call option then the stock rallied and my call lost value. Why?
• How do you evaluate skew? How is skew measured?
• What is reverse skew? What does reverse skew sometimes indicate?
• What is term structure?

Mail Call: You have questions. We have answers.

• Question from Nick D. - I am a covered call seller. I have some people recommend that I should sell in-the-money covered calls instead of my usual 5%-10% out-of-the-money calls because of volatility. But why would I want to sell a call that is going to inevitably be called away? What is your thought on this strategy?
• Question from Charles Midler, Santa Fe, NM - I am thinking about hedging my short stock positions with short put positions. How do the drill instructors view this strategy? Am I on the right track? Can John discuss the margin requirements of such a strategy?
• Question from Nomad 6 - What are flex options?

Basic Training: Stock Repair Strategy Review

• Have a downturn in your account? Options can help make that money back.
• When do you use this?
• How does this differ from just holding the stock outright?
• Is there a better alternative to doubling down?

Mail Call: Tell us what you want to know.

• Question from Nick - Can you explain the difference between a front spread and a back spread? Thank for the program. It has a regular spot on my podcast playlist.
• Question from Avalon 360 - I have heard a lot of talk about covered calls. They are in interesting income trade, but they seem to be leaving money on the table - namely the put. Why does no one talk about covered straddles? After all, if you are comfortable selling the vol or premium on one strike you should be comfortable selling both and collecting twice the income?

Basic Training: Stock Repair Strategy Review

• Have a downturn in your account? Options can help make that money back.
• When do you use this?
• How does this differ from just holding the stock outright?
• Is there a better alternative to doubling down?

Mail Call: Tell us what you want to know.

• Question from Nick - Can you explain the difference between a front spread and a back spread? Thank for the program. It has a regular spot on my podcast playlist.
• Question from Avalon 360 - I have heard a lot of talk about covered calls. They are in interesting income trade, but they seem to be leaving money on the table - namely the put. Why does no one talk about covered straddles? After all, if you are comfortable selling the vol or premium on one strike you should be comfortable selling both and collecting twice the income?