To Assign or Not to Assign - that is the worrying question !

How can you figure out if you are going to be assigned on your short options positions, particularly if their is a dividend due?

The main reason that this situation occurs is that a market maker would typically be on the other side of your short position. Thus this long call would then be hedged with short stock. Synthetically the short stock and the long call equate to a long put. So if the market maker needs to maintain this risk position, they can assign your short call which closes out their short stock and if they then buy a long put to reinstate their original risk position at a cost that is less than the dividend amount, they will make a profit by assigning you.

Assignment only effects short calls because these are where your obligation to buy rests. Thus in order to work out if you will be assigned on your short calls, (A), simply look at the equivalent Put price (B), and if it is less than the expected dividend, (C), then there is a high probability that you will be assigned.

In our DIA example, the dividend, (C) is$0.0942 cents whilst the Put value,(B),  is $3.20 so the cost far outweighs the benefit derived by assigning your short calls and claiming the dividend.

In addition your trade will need to be close to expiration as well - trades that have multiple months to run will usually have such high remaining extrinsic or time value that assignment will not make sense.

Cheers

Is Existentialism on the rise ?

Like “rationalism” and “empiricism,” is “existentialism” a term that belongs to intellectual history ?

If like me, you grew up in the 1960's and 1970's you were almost certainly exposed to Albert Camus and Jean Paul Satre at school, drank lots of coffee in small clubs with close friends, wore black and were constantly wondering why "... man was free but everywhere in chains ..".

I could not say that I was a staunch existentialist back then, but I did wonder about how much freedom we all had; in art, in literature, in the ways we sought relaxation and escape from a drab reality and most of all in our daily toil, whether at school or at a job.

It was a subject that hooked me in and made me wonder. After I read Camus's "Outsider" and "On the Road" by Jack Kerouac, I saw references to the conundrum of perceived freedom everywhere, particularly in music. Not so much jazz, but for me, more in the nuances of inference in the music of the Beatles and Van Morrison.

So here we are some 50 years after the bulk of existentialist works were written, and I am still reflecting on whether we have more or less freedom, am I better off now than back then, and is the world a better place?

Cheers

Schadenfreude

Schadenfreude is a German word.

Translated, it loosely means, "... the pleasure taken from someone else's misfortune ..."
So now I think I understand the rise and popularity in reality shows on TV.

Nope, maybe not.

Schadenfreude !

Why there is no weekend Theta advantage

Many traders think that if they sell a credit spread, Iron Condor, or Butterfly on a Friday, they will get the advantage of making free Theta over the weekend without any risk. Then by buying back the trade in the following week they have scooped up two days of free money due to Theta decay - They are wrong, and lets see why this rather logical reasoning is flawed.

It all stems from the fact that market makers are also very logical and are not in the business of giving away free Theta to the retail trader. In essence, the market makers begin to move their computer system clocks gradually forward from around the end of business on Thursday. This has the effect of pricing the Friday open by the close of business on Thursday, by midday on Thursday they are reflecting the close of markets on Friday and by close of business on Friday they are reflecting the opening of the markets on Monday morning.

Let's have a look at the numbers to prove the theory. Using and Iron Condor on the SPX as at Thursday July 2nd 2009, we have the following option chain prices:

(Click on the image to enlarge).

Lets now see how the pricing of the Iron Condor has changed by the open of the markets on the Monday morning, the 6th July 2009 :

 On Monday we see that the price has moved down by $5.70 (A), Using the short 1000 call leg as an example, we note that the Delta has moved from 7 down to 4.4 and that the option price has moved from $2.35 down to $2.05, a price change of $0.30.

So we see that the short option has dropped -$0.30 over the weekend, but what was the cause of this move - was it Theta related?

Step 1 - Calculating the average Delta : Thursday Delta @ 7 + Monday Delta @ 4.4 / 2 = 5.7.

Step 2 - Calculating the price effect of the Delta move : Price change -$5.70 * Average Delta move 5.7 / 100 = $0.32.

Thus almost 100% of the change in the option value over the weekend was due to price effect and Delta and not Theta.

Cheers

Memorizing the Greeks

Have you ever been in a trade and the market has begun to move quickly and you are not quite sure of what the combinations of impacts from Delta, Theta, Gamma or Vega will do to your trades profitability and eventual return ?

Well, here is an interesting note on memorising the Greeks by Jay Baily, a mentor at Sheridan Options Mentoring.

Click on the following link.

Memorizing the Greeks

Regards

Market Direction : Time to take a rest

Over the past week the S&P 500 & the DOW have been on a roller coaster ride. Both indexes began last week with very strong rises only to have a significant drop off going into the weekend. Whilst last night - 6th Oct, the market rose strongly for the second day in a row.

The danger with this market is the focus on "not so bad news" and how the market makers seem determined to push the market up despite the constant feel that the market needs a rest or pull back.

In the S&P chart above, the price has just finished a major wave 5 sequence and seems primed for a retracement. If we assume the wave count is correct, then the first target is for the next wave 3 at around the 827 - in fact the market could retrace into the zone between the previous wave 4 at 880 and the Fibonacci wave 3 target at 827 mark.

Once this target is hit, a new wave 4 would see the S&P retracing back up into the vicinity of 955 with the final and rather significant drop in the S&P down toward the potential wave 5 low in the vacinity of 670 mark.

Scary targets indeed if Fibonacci can be believed.