Options Symbol An option symbol is a code by which options are
identified on a futures exchange. Ex. XDLQ2 Although the letters
may appear random, there is actually an organized structure to each
symbol. It is a backup to ensure you enter the correct option
order. This is one of the three most common mistakes for both
retailers and brokers. Incorrect symbol, Wrong quantity, Wrong
Action
Slide 3
Incorrect Symbols Are Costly You have to pay an extra
commission to correct it (remove and replace) You can incur a Loss
You may miss out favorable movements
Slide 4
Symbol Structure XXXMS XXX the root symbol M Month S Strike
Price
Slide 5
The Root symbol Is a code that identifies the underlying code
and can be any length form one to three letters. Stocks listed on
an exchange will have the same root symbol as the ticker symbol,
although it may be different from splits, mergers, acquisitions and
special dividends. Ex. IBM, GE For the NASDAQ trade stocks (with 4
letters ticker) will be reduced to three letters, including an
ending Q to designate NASDAQ. Ex. Dell DLQ MSFT MSQ
Slide 6
The Month Symbol The month symbol depends on the type of the
option, a call or put. For call options: the first twelve letters
of the alphabet represent the 12 months For puts: Letters M to X
(letters 14 to 23 of the alphabet) are use to represents the
months. JanFebMarAprMayJunJulAugSeptOctNovDec Call s ABCDEFGHIJKL
PutsMNOPQRSTUVWX
Slide 7
Options Strike Price Symbol Each letter from A to T represents
$5 strike intervals. Because there is a wide range of potential
strike prices and a limited number of letters, each letter
represents more than one strike price. Once $100 is reached (letter
T) a new root symbol is created and we are required to start back
at A. In addition letters U trough Z are reserved for $2.50 strike
intervals.
Slide 8
Options Strike Price Symbol
Slide 9
Other Considerations If any option you are holding goes through
a symbol change, it will automatically change in your account. You
must always check the symbol before trading, nothing ensures that
the root will remains the same. There are companies that use
different roots based on the range in which is the strike price The
MS of the symbol tells three important things: The month, the
strike price and the option type
Slide 10
Option Expiration Cycles Because option strategies require
making modifications during the life of a trade, you need to know
in what months the options will expire. Originally all options
stocks were randomly assigned to one of three cycles: 1 st Cycle:
January; 2 nd Cycle: February and 3 rd Cycle March Once a stock is
assigned to a particular cycle, it does not change.
Slide 11
The Cycles Options under Cycle 1 would have expirations
matching the first month of each quarter. The Cycle 2 Stocks only
have options expiration to the middle month of each quarter. And
the Cycle 3 have expiration for the end month of each quarter.
JanFebMarAprMayJunJulAugSep t OctNovDec
Slide 12
Slide 13
New Rules To ensure that there would always be short-term
options, the CEOB decide to change the rules. Under the new rules,
there would still be four option expiration months listed: The
first two months of the quarter are always the two near months (the
current and the following month, also called the serial months),
but for the two farther-out months, the rules use the original
cycles.
Slide 14
Lets see how it works Let's say it is the beginning of January,
and we are looking at a stock assigned to the January cycle. Under
the newer rules, there is always the current month plus the
following month available, so January and February will be
available. Because four months must trade, the next two months from
the original cycle would be April and July. So, the stock will have
options available in January, February, April and July.
JanFebMarAprMayJunJulAugSep t OctNovDec
Slide 15
February is already trading, so that simply becomes the
near-month contract. Because the first two months must trade
options, March will begin to trade on the first trading day after
the January expiration date. So the four months now available are
February, March, April and July. Lets see how it works (Cont.) What
happens when January expires? JanFebMarAprMayJunJulAugSep t
OctNovDec
Slide 16
Lets see how it works (Cont.) What happens when February
expires? Once the February options expire, March becomes the
current contract. The following month, April, is already trading.
But with March, April and July contracts trading, that's only three
expiration months, and we need four. So, we go back to the original
cycle and add October because it is the next month in the January
cycle after July. So the March, April, July and October options
will now be available. JanFebMarAprMayJunJulAugSep t OctNovDec
Slide 17
Some Highlights This pattern continues regardless of which
cycle were on. The serial months (current and following) must
always be made available. No matter the cycle of stock, it will
have the serial months available. The remaining two months will be
from the corresponding quarterly cycle.
Slide 18
Slide 19
LEAPS LEAPS are long-term options When options first started
trading, there were available up to nine months, but with LEAPS we
can find options nearly three years forward. There will be more
than four contracts listed at any given time. LEAPS usually trade
with a January expiration date. If a stock does have LEAPS, then
new LEAPS are issued in May, June or July depending on the cycle to
which the stock is assigned. The premiums for LEAPs are higher than
for standard options in the same stock because the increased
expiration date gives the underlying asset more time to make a
substantial move and for the investor to make a healthy
profit.
Slide 20
How do Options Cycle works with the addition of LEAPS? If a
stock trades LEAPS, the new LEAPS will be issued sometime between
May and July. Lets explain it with an example Its currently July 05
and Intel has the following months trading: July, August, October,
January06, January07, and January08 At this point Jan07 and Jan08
are LEAPS contracts. The Jan06 are considered a quarterly contract.
When July expires, September will be added We will then have
August, September, October, and January06 providing four months of
regular contracts. When August expires,, we will have only three
months providing regular contracts, therefore the next January
Cycle month will be added, which is April.
Slide 21
How do Options Cycle works with the addition of LEAPS? (Cont.)
This process continues and eventually the date become May06. The
January06 options will have been expired, and are no longer listed.
When May options expire, there will be only three contracts months
(June, July, and October). This is where we have to add another
January contract since it is the next January cycle month. It is at
this point where the January09 contract will be rolled out. At the
same time the January07 contract will lose their LEAPS designation
because they have les than nine months to expiration. The root
symbol to show that it is no longer a LEAPS option, this will
happens in May, June or July. This process is called melding (when
LEAPS options become regular options).
Slide 22
Slide 23
Which Cycle is My Stock On? Before you can find out when a
particular month will be added to the list you will need to: Know
in which cycle your stock is trade How? If we have the months that
the option has being traded, we know that the first two months are
the serial months, so we must look at the third or fourth month
(when the 3 rd month is January, because all stocks that have LEAPS
options will have them listed in January). Then we have to see to
which cycle the months belong.
Slide 24
Double, Triple and Quadruple Witching These are days when
multiple derivative products expire on the same day. If a stock
futures, stock index options, and stock options, all expire the
same day, thats a Triple Witching day. Typically stocks futures
expire on the last month of each quarter (Mar, Jun, Sept, Dec), so
triple witching occur only on these months. Double Witching occur
when any two of the three assets expire the same day. Quadruple
Witching occurs when single-stock future expire on the same day as
well.
Slide 25
Contract Size (The Multiplier) Contract Size: First start
trading options is generally 100-share lots. Referred as The
Multiplier since is the amount we need to multiply the option
premium by to find the total cost of the contract. Ex.: if a call
option is asking $3, you pay $3*100= $300 (plus Commisions). Its
also the amount we must multiply to find the total cost of the
contract: Ex: if you exercise a $30 call, you pay $30*100= $3,000
& receive 100 shares of stock.
Slide 26
Contract Size (The Multiplier) Changes in Contract Size: Most
common event are stock splits. They generally occur when the price
of a stock is perceived to be too high, and the company splits the
stock to bring the price down. Its considered a dividend paid in
shares rather than cash. Three types of stock splits Whole Number
Split Fractional Split Reverse Split
Slide 27
Contract Size (The Multiplier) Whole Number Split: You always
end up with multiple 100-share lots after the split. The most
popular is 2:1. Ex.: ABC stock is trading for $180 per share. The
company thinks is too expensive and announces 2:1 Stock split. If
you own 100 shares of ABC prior to the split: You will own 200
shares (100 shares * {2/1} = 200 shares). Price of the stock will
fall to $90 ($180 per shares/2 = $90 per share). You will be in the
same position, $18,000 worth of ABC stock.
Slide 28
Contract Size (The Multiplier) Fractional Split: Any stock
split were the second number is greater than 1 creates a fractional
split, such as 3:2. Ex.: Recall the last example and now assume the
stock split is 3:2. The split ratio is 3/2= 1.5. If you had 100
shares prior to the split: Youd have 150 shares (100 shares * {3/2
= 1.5} = 150 shares). The price of the stock would fall too $120
($180 per share/ {3/2 = 1.5} = $120 per share). You will still be
in the same position, $18,000 worth of stock.
Slide 29
Contract Size (The Multiplier) Reverse Split: In this case, a
company with a very low stock price may vote for a reverse split to
lift the price of the stock in hopes of being recognized as a
viable investment. In certain cases, this is done to meet listing
requirements so that the stock be traded on a nationally recognized
exchange. Ex.: Recall the last example and now assume the split is
1:3. The split ratio is 1/3 =.33. If you had 100 shares prior to
the split: Youd have 33 shares (100 shares * 0.33 = 33 shares). The
price would rise too $545.45 ($180 per share/0.33 = $545.45) Youd
still be in the same position, $18,000 worth of ABC stock.
Slide 30
Contract Size (The Multiplier) Effect on you're option
contracts: Ex.: Assume you own 20 XYZ $10 calls trading for $1 and
the company announces 1:5 reverse split. The split ratio is 1/5
=.20. The number of contracts you own is 4 (20 contracts*0.2 = 4
contracts). Strike price increased too $50 ($10 per share/0.20 =
$50 per share). Price of the option rises to $5 ($1/0.2 = $5).
Slide 31
Contract Size (The Multiplier) Effect on youre option contracts
(cont.): Original position: Contract price is $2,000 = $1*20
contracts*100 shares per contract. Exercise value is $20,000 =
$10*20contracts*100 shares per contract. After Split Position:
Contract Price is $2,000 = $5*4 contracts*100 shares per contract.
Exercise value is $20,000 = $50*4 contracts*100 shares per
contract. Theres no change in position, only the distribution of
the investment.
Slide 32
Contract Adjustments for Special Dividends Many stocks pay
dividends on a quarterly basis. Ex.: If a stock pays $0.80 dividend
and you own 100 shares, youll receive $8 per year in youre
brokerage account. Stock price is always reduced by the amount of
the dividend on the date the dividend is paid, which is known as
the ex-date. Regular paid dividends do not affect options. Special
paid dividends reduce all call and put strikes by the same amount.
Ex.: If Microsoft announces a $3 dividend and you own a $30 call or
put, the strike price will be reduced to $27.
Slide 33
Contract Adjustments for Special Dividends The Intrinsic value
of the stock doesn't change. Ex.: Recall the last example and
assume that the stock trades for $35. Intrinsic value of the option
is $5 ($35-$30). After $3 dividend is paid: Stock price is $32
($35-$3). Strike price is $27 ($30-$3). Intrinsic value still
remains $5 ($32-$27).
Slide 34
Open Interest Options Clearing Corporation (OCC) must account
for the total number of outstanding contracts. The reason is
because an option is created between two traders on opposite ends
of an agreement. OCC need to know if a trader is entering a
contract or exiting. Enter or increase position (buy to open/sell
to open) Vs. Exiting or reducing position (sell to close/buy to
close).
Slide 35
Open Interest Open interest keeps track of how many open
contracts there are for a specific option. You must count either
all long positions or all short positions to get the number of
outstanding contracts. Whenever both traders are entering opening
transactions, then the open interest will increase. Whenever both
traders are exiting closing transactions, then the open interest
will decrease. If one trader is entering and the other closing,
then open interest remains unchanged.
Slide 36
Open Interest Open interest is used as a liquidity guide. Ex.:
NDX is trading around 1,550 contracts for the $1550 call trading
for $108. The open interest is 1,578. 1,578*$108 per share*100
shares = $17,000,000 represented in this option.
Slide 37
Call Options Early Exercise: American Style option can be
exercised at any time prior to expiration. For many traders, the
exercise restrictions on European options are considered as
negative features. It is never advantageous to exercise a call
option early, with the exception of the investors that want to
collect upcoming dividends on stock.
Slide 38
Call Options Early Exercise on a Non- Dividend Paying Stock:
Ex.: Investor#1 buys a stock for $50, and Invetor#2 buys a $50 call
for $2. If the stock is trading for $60 at expiration: Invetor#1
gains $10 ($60-$50) Investor#2 gains $8 ($60-$52) If the stock
rises price, both profit dollar for dollar from the stock. If the
stock price drops, the option holder only loses $2 while the stock
holder loses dollar for dollar for the drop.
Slide 39
Call Options Exercising a Call to Collect a Dividend: Designed
to offset a loss and not for a financial gain. Ex.: Assume that a
stock is trading for $50 and pays $1 dividend. You own a $40 call
that is trading at parity for $10. The day the dividend is paid,
the stock value decreases by $1. If you exercise the call: $10 of
unrealized gain, while lose $1 of stock price. You get dividend of
$1. Therefore you now have $9 of unrealized gain and $1 of realized
gain.
Slide 40
Put Options With put options, if the stock is sufficiently in
the money, it doesnt make sense to exercise early. The difference
with the call option, with a put option you're trying to get rid of
a risky asset and receiving cash. If you delay the exercise of the
put, you only lose the interest you could have earned on the
cash.
Slide 41
Mechanics of Exercising a Call to Collect Dividends If an
investor wishes to collect the dividend on a stock, he must
exercise the call to gain control of it. He must be a stockholder
before the record date to be eligible to receive the dividend.
Investor must focus to exercise the call option before the ex-date
to assure to buy the stock with the dividend. If an investor buy on
or after the ex-date, he buys the stock without the dividend.
Slide 42
Why Is There So Much Confusion In Practice? For investors, to
figure out who gets the dividend is not as easy as it seems. Many
times they get confused and are unable to find the appropriate date
the stock must be buy in order to receive the dividend payment. The
reason for this confusion is due to three dates associated with the
dividend announcement: Record date Payable date Ex-date
Slide 43
Why Is There So Much Confusion In Practice? (cont) Corporations
usually only publicize the record date and payable date. The record
date is the only date that matters to the company. Before making
the dividend payment, the company looks at a list of names of the
stock owners as of the record date and pay the dividends to them.
The payable date is when the payment is actually made, which may be
a week or more after the record date.
Slide 44
Why Is There So Much Confusion In Practice? (cont) In order to
be the owner of record, the stock transaction must be settled by
the record date. There is currently a three- business-day
settlement period (trade date plus three business day). For
example, if you buy a stock on Monday it will be settle on
Thursday. Suppose that the record date is on March 10, if you want
to own the stock by that date, you need to make your purchase on
March 7 or before. If you buy the stock on March 8 or later you
will not be the owner as of the record date (you will not receive
the dividend payment).
Slide 45
Why Is There So Much Confusion In Practice? (cont) All the
confusion has to do with the timing of the settlement period. Many
investors think they just need to buy the stocks on or before the
record date in order to collect the dividend. The truth is they
have to make the purchase three business days before the record
date. The ex-date is an artificial creation of brokerage firms to
mathematically figure out the purchase date that makes you owner by
the record date. If the company announces a March 10 record date,
the ex-date would be March 8. If you buy the stock on March 8 or
later, you will not be the owner of the stock by the record date (
wont receive the next dividend payment)
Slide 46
Why Is There So Much Confusion In Practice? (cont) After
understanding the stock settlement process, adding call options to
the figure is not complicated. If you own a call option and wish to
exercise it in order to collect the dividend, you must exercise the
call the day before the ex-date.
Slide 47
Does It Really Matters If The Stock Holders Get The Dividend?
Mathematically, there is no difference if stockholders get the
dividend or not. The reason there is not mathematical difference is
that the stock price is reduced by the amount of the dividend on
the ex-date. For instance, if an investor buy one share of stock
for $100 before the ex-date and collect a dividend payment of $2,
on the ex-date the stock will decline to $98 and the total value of
his account will remain the same: $98 + $ 2= $100.
Slide 48
Rules Violation: Selling Dividends Many brokers take advantage
of investors by touting an immediate return on your money by
purchasing stock just before the ex-date. A broker may call saying
if you purchase a stock for $100, you will receive a 2% return on
your money the very next day. By now you should know this is not
true. For tax reasons, buying the stock just to get the dividend is
not a good idea. When an investor buys on share of stock for $100,
he is paying with after-tax dollars, he doesnt owe tax on the $100.
However, if you buy the stock before the ex-date you will owe taxes
on the dividend payment.
Slide 49
Rules Violation: Selling Dividends (cont.) For these reasons
the NASD (National Association Of Security Dealers) prohibits
brokers of selling you stocks exclusively for the reason of
collecting the dividend.
Slide 50
Types of Options Orders To understand the many terms associated
with placing orders is crucial, particularly in todays market when
most people make trades online and there is no interaction with a
broker. Making the Trade There are five basics pieces of
information you must specify when you are buying or selling
options: Action (buy or sell) Quantity (number of contracts) Symbol
Price Time
Slide 51
Types of Options Orders The action, quantity and Symbol are all
basic and dont need explanation. But price and time fields are the
ones that create the most questions and unexpected surprises. Price
When placing an order to buy or sell, you must provide some
information about the price at which you are willing to make the
deal. There are two ways to provide price information: Market Order
Limit Order
Slide 52
Types of Options Orders Market Order A market order guarantees
that your order will be filled but does not guarantee the price at
which the transaction will be made. If you place an order to buy
option calls At market you know for sure that you have purchased
the calls, but in order that is transaction to be guaranteed, it
means that you must be flexible on the price. A market order
guaranteed the execution but not the price.
Slide 53
Types of Options Orders Multiple Fills If you place an order,
it is possible that the order comes back filled at multiple prices.
This means the traders were only able to get a certain number of
contracts at one price and had to fill the balance at one or more
prices. Limit Orders A limit order is one where the price is
specified. When buying options, the order cannot be filled at a
price higher than your limit price. When selling options, the order
cannot be filled at a price lower than your limit price. Limit
orders guarantee the price but not the execution
Slide 54
Types of Options Orders Tick Size The tick size are the minimum
amounts that the price can change when submitting option orders.
There is a five-cent ticked size for the option orders at the
current price and below and a ten-cent ticked size for option
orders above the current price. Why is not possible to guaranteed
the execution and price? If both, execution and price could be
guaranteed, investors could buy an expensive option for a very low
price an then sell it at a higher price, which is simply not
possible.
Slide 55
Types of Options Orders Or-Better Orders An or-better order
qualifier is a type of limit order where your buy price is stated
above the current market price and your sell limit is placed below
the current market price. This type of order reduces the risks of
the market and limit orders. All-or-None (AON) When an investor do
not wish to get a partial fill, he could place all-or-none
restriction in his order. This just tells the market makers to not
fill your order until they can fill the entire number of contracts
you requested.
Slide 56
Types of Options Orders Time Limits In addition to setting a
price when entering your order, you must also specify the time
limit for which the order is good. This is true for any bid to buy
or offer to sale. There are to basic choices for time limits: Day
Order Good til Cancelled (GTC)
Slide 57
Types of Options Orders Day Orders This type of order is only
good for the trading day. When placing an order after the market
close, then it will be good only for the following business day.
Any market order can only be entered as day order for the fact that
markets orders are guaranteed to fill. Good til Cancelled Orders
Good til cancelled orders may only be used for limit orders. GTC
orders can be a useful tool that keeps you from having to retype
orders that do not fill.
Slide 58
Stop limit order Stop orders are conditional orders to buy or
sell at market. Your stop price is simply a price at which point
the trade is triggered (technically elected), which makes it a live
market order, in which the execution is guaranteed but not the
price. Your order will be triggered if the stock trades at or below
your stock price. A stop limit order is an extension of a stop
order. The difference is that stop limit orders convert to a limit
order, which means your shares will be sold only if the limit price
or higher can be and guarantee a price. But as with any limit
order, if you guarantee the price, you cannot guarantee the fill.
In order to place a stop limit order, you must specify two prices.
The first price is the stop price. Once you specify the stop price
you must then specify a stop limit price (which must be less than
or equal to your stop price).
Slide 59
Which should you use? If your stock opens below your stop price
do you want to sell the shares at any price? Is your goal to simply
get rid of the shares regardless of price? If the answer is yes,
then use a stop order. However, if there is a price at which youd
rather hold onto the shares rather than sell then use a stop limit
order.
Slide 60
Option Stop Order: difference Options stop orders and stop
limits are not based on the last trade. The reason is that it is
possible to not have any trades on the option even if the stock
price is falling. However the bid price and asking prices on the
options will definitely change in response to the falling stock
price.
Slide 61
Understanding the Quote system Assume the market is not open
yet and the maker has no orders on the books. When orders are
placed through the various brokerage firms, the market maker will
accumulate them in a specific manner. Assume that the first order
is an order to buy 5 contracts at a limit of $1.90. Because this is
an order to buy, the market maker will list it under the bid
column. Assume that the next order is an order to buy 10 contracts
at a limit of $2.00. Because this is another buy order the market
make will place it under the bid column as well. However, this
trader is considering a stronger buyer since his buy price is
higher than the person at $1.90 the markets are only concerned with
the highest bidder and lowest offer. Notice how the orders are
being stacked. The bids are being stacked in descending order from
strongest to weakest; that is, from highest to lowest. The sellers
are stacked in ascending order from strongest to weakest, that is,
from lowest to highest.
Slide 62
Understanding the Quote system (Cont.) The process continues
until all the orders are on the books. Of course, the final list
will be quite long, but the entire system is automated so it
happens very quickly. The difference between the bid and ask is
called the bid asked spread or, more simply, the spread. The market
makers must be ready to keep a liquid and orderly market when one
is not available. If the market is quite liquid and competitive, it
is possible that the inside quote is strictly due to retail
traders. While the market makers usually have some presence at the
bid and ask, it is possible that it is represented by only retail
traders at certain times. Higher bids and lower offers will reduce
the spread between the bids and ask. Higher bids attract sellers
and lower offers attract buyers, both create more contracts traded
in the marketplace.
Slide 63
Limit order display rule In order to ensure that higher bids
and lower offers would be shown; the exchanges created the Limit
Order Display Rule, which we can use to our advantage once you
understand how it works. The limit order display rule, sometimes
called the Show or Fill Rule is not a rule that the market makers
make very well known for obvious reasons, as we shall soon see.
However, knowing this rule can make a big difference in your option
profits. It works: lets assume you wish to place an order to buy 2
contracts. You dont wish to pay the current asking price of $2.25
so you put in an order for something between the bid and ask, say
$2.15. When the market maker receives the order, he now has one of
two choices: He can either fill the order or show the order. If he
chooses to not fill the order, he must show it by allowing you to
jump in front of the line. The narrower the spread, the more
efficient the market. The limit order display rule was created for
that very reason. Before the rule, market makers could hide your
order from the public and just leave the quote at bid 2.00 and ask
2.25.
Slide 64
Advantages Having the ability to compete with market makers and
their quotes is certainly an advantage, you can provide a stronger
incentive for someone to sell at the new higher price, and there is
a better chance that you will get filled. And theres an additional
advantage you can gain. There is an exchange policy that all quotes
must be good for at least 20 contracts. It is up to the market
makers to make sure that all quotes are good for at least 20
contracts, and we can use that to our advantage. Think of what a
difference that trading between the bid and ask can make on your
trades, especially when you consider that it works for the sell
side, too. Whether you are buying or selling a small number of
contracts, you have an advantage of submitting limit orders between
the bids and ask.
Slide 65
Rule when you are trading options If you are trading small
number of contracts, say up to seven, there is a very good chance
you can trade between the bid and ask and get filled for no other
reason than the market maker wanting to avoid the additional
liability of having to complete the 20- contract exchange
rule.
Slide 66
All-or-non- restrictions All-or-non- restrictions, especially
for less than 50 contracts; If you place an order will an
all-or-none restriction, youre telling the market maker that he can
only fill the order in its entirety, he cannot come back with a
partial fill. Because of this, many options traders believe that
they should mark all orders with an all-or-none restriction to
prevent partial fills. However there is the danger that the market
is not required to show your order if it is marked all-or- none. If
youre placing larger quantities of contracts its best to do one of
2 things. First, you can feed your contracts into the market in
smaller lots, perhaps placing four trades of five contracts each.
Many brokers though will charge 4 separate commissions to do this,
so it may not be advantageous. But if your broker aggregates all
orders by symbol and side (buy or sell) at the end of the day, this
may be a visible choice for you. The second thing you can do is
mark your order with a not held qualifier, which means you are not
holding the floor broker accountable to time and sales. If you do
not mark an order as not held, you can hold the broker
accountable.
Slide 67
Spread behavior Why do some option quotes have relatively small
spreads, say 5 cents, while other have much wider spreads such as
20 cents? Many traders believe this is the market maker playing
games or trying to squeeze out extra money from the more active
options. The spread is simply a reflection of the volume. Lower
volume options have higher spreads, while higher volume options
have narrow spreads. To show how the supply of an option is
created. If you want more supply, you (or the market maker) must
bid the contract higher. The higher the price, the more sellers
will step in and unload contracts. Traders often have difficulty
understanding how they can control the supply. Price is the
answer.
Slide 68
Market clearing price A market clearing price is the price
where all who want to buy and sell at that price can do so. In an
example, a price of $4 means that 50 contracts will be purchased
and sold. If the price were higher, wed get more sellers than
buyers. If the price were lower, wed get more buyers than sellers.
At a price of $4, there are an equal number of buyers and sellers
and the market clears
Slide 69
Option Price In the real world of options, we do not just have
a single price. Instead, we have a bid-ask spread, which tends to
reduce the value. However because of the two-price system, we can
find an equilibrium point and the market can clear. The wider the
spread, the lower the volume. Conversely, the lower the volume, the
wider the spread must be to balance supply and demand. So the
bid-ask spread is purely a function of the supply and demand for an
option.
Slide 70
Disclaimer DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO
BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY,
OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE.
WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM
RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE
OF RISK: THE RISK OF LOSS IN TRADING FUTURES, FOREX AND OPTIONS CAN
BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED.
FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL
INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR
FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS
SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN
A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE
MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY
TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT,
THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL
PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY
ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF
HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY
PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL
TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL
TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL
RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND
LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF
TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT
ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO
THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC
TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE
PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH
CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS. In our opinion, we
believe, it may be possible, that heavy smoking and drinking may be
hazardous to your health. If you choose to smoke and drink while
trading, The Delano Max Wealth Institute nor Dr. Scott Brown is
liable for any damage it may cause. If you slip and fall on the
ice, we're not liable for that either.