This article was originally published in The Option Strategist Newsletter Volume 16, No. 3 on February 16, 2007.
Last month, we saw the standard put-call ratio experience some very herky-jerky movements on its chart. As we pointed out at the time, those distortions were due to heavy dividend arbitrage in Altria (MO), JP Morgan (JPM), and AT&T (T). Since dividend arbitrage has become much more prevalent in recent quarters, we feel it’s time to examine this issue to see if there is something that needs to be done to “cleanse” the data of this extraneous, but extremely heavy, call option volume.
This article was originally published in The Option Strategist Newsletter Volume 19, No. 24 on December 24, 2010.
The “January defect” is the first seasonal trade of the year. The “system” states that the NASDAQ-100 usually falls from about the 8th trading day of January to the 18th trading day. The system’s results are shown in Table 1, in the next column.
This article was originally published in The Option Strategist Newsletter Volume 6, No. 6 on March 27, 1997.
I was tempted not to label this article as a "basics" article, because the concept we're going to discuss is one that is probably not all that familiar to most option traders. It concerns the rate of decay of in- or at-the-money options versus that of out-of-themoney options. It's a concept that I realized I understood subconsciously, but not one that I had thought about specifically until I recently read Len Yates' article in The Option Vue Informer. Len is the owner and founder of Option Vue, creator of the software package of the same name and is one of the best option "thinkers" in the business (we are going to have a review of Option Vue when their new version is released).
This article was originally published in The Option Strategist Newsletter Volume 13, No. 2 on January 22, 2004.
Question: You have repeatedly mentioned dividend arbitrage. Could you briefly tell me what it is? – J.Z., 1/17/2004
Answer: Dividend arbitrage has been around since listed call options first traded. It has become quite popular lately, though, as heavy call volume is noticeable in nearly every stock with decent open interest in its options that is paying a quarterly dividend of 20 cents or more.
The stock market continues to put on a tremendous display of bullishness. There was some brief but heavy selling in relation to the military action in Iraq, but most of the selling came in the overnight sessions and was largely reversed by the time the NYSE opened the next day.
With most of the major averages making new all-time highs, their charts remain bullish. There is support at 3190-3210. There is further support at 3150 and 3070.
There was wild overnight action during the night session on Tuesday January 7th. S&P futures dropped 54 points immediately after news that Iran had fired missiles at U.S. installations in Iraq. Obviously, prices have recovered since then, but perhaps we can get a glimpse into what might happen should a “real” decline of that magnitude take place.
This article was originally published in The Option Strategist Newsletter Volume 9, No. 8 on April 27, 2000.
In the past year or two, there have been many references in this newsletter to the fact that stock prices don’t conform to the lognormal distribution, which is the distribution used in many mathematical models that are intended to describe the behavior of stock and option prices. This isn’t new information to mathematicians – papers dating back to the mid-1960's have pointed out that the lognormal distribution is flawed. However, it isn’t a really terrible description of the way that stock prices behave, so many applications have continued to use the lognormal distribution.