fbpx Feature Articles | Option Strategist

Feature Articles

What’s Up With the A-D Line? (10:16)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 10, No. 16 on August 23, 2001. 

Almost every day, some technician is quoted as saying that market breadth is strong – and, by inference, that there is an underlying positive tone to this market. The indicator that is often used to demonstrate this is the advance-decline (A-D) line – the daily difference between advancing and declining NYSE issues. Of course, we see the same figures. There have been more advances than declines on quite a few days in the last year or so – especially the last eight months. Yet the market continues to struggle. So where is all this supposedly positive action?

A Volatility-Based Approach to The Iron Condor Strategy (14:07)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 7 on April 15, 2005. 

An “iron condor” (also sometimes simply called a “condor”) is the name applied to a rather basic strategy that has many adherents. In this article, we’ll define the strategy and give examples, but we also want to look at a possible way to improve upon the strategy by using a new product – $VIX options – which should begin trading soon.

The iron condor strategy is a fairly simple one – the sale of credit spreads both above and below the current (index) market price. Risk and reward are both limited, but rewards are more probable than the risks, assuming that all options are out of the money initially. Specifically, four striking prices are generally used, and thus the spread requires the payment of four commissions – making the strategy viable only for accounts with low commission costs.

Misconceptions About Volatility (08:07)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 7 on April 8, 1999. 

Statistics are used to estimate stock price movement (and futures and indices as well) in many areas of financial analysis. For example, we have written extensively about the use of probabilities to aid us in choosing viable option strategies. Stock mutual fund managers often use volatility estimates to help them determine how risky their portfolio is. The uses are myriad. Unfortunately, almost all of these applications are wrong! Okay, maybe wrong is too strong of a word, but almost all estimates of stock price movement are overly conservative. This can be very dangerous if one is using such estimates for the purposes of, say, writing naked options or engaging in some other such strategy in which stock price movement is undesirable.

Large Differences Between Historical and Implied Volatility (18:12)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 18, No. 12 on June 25, 2009.

Recently, the CBOE’s Volatility Index ($VIX) has been trading at substantially higher levels than the 20-day historical volatility of the S&P 500 Index ($SPX). While it’s somewhat normal for $VIX to trade higher than historical volatility, the recent differential (over 10 points on some days) has been large enough to raise eyebrows among those who follow these things – e.g., us! In this article, we’ll examine the relationship between $VIX (implied volatility of $SPX options) and historical volatility of the $SPX Index itself.

Presidential Election Years (21:20)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 21, No. 20 on October 26, 2012. 

I’m always a bit dubious of analyses of how a particular indicator or market behaves in an election year. First of all, you have to throw out 75% of your results, which automatically reduces the reliability of the data. However, there are some patterns that seem to be significant, so let’s look at some of these.

The Real Reason Why $VIX Futures and Options Don’t Keep Pace With $VIX (15:10)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 15, No. 10 on May 25, 2006. 

As the market has declined, $VIX has risen dramatically. As owners of $VIX futures – now joined by owners of $VIX calls – have come to expect, though, the futures and options have not followed $VIX higher. This has generated a torrent of frustrated and sometimes nasty email to us. Owners of these products are incredulous as to how this can continue to be. We have explained the process at length, but we agree that something does not seem right here. So we decided to take a much closer look. Doing so involves getting into the very arcane formula for $VIX (if you care, it is published in a “white paper” on the CBOE web site).

Reverse Calendar Spreads (09:12)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 12 on June 22, 2000. 

The reverse calendar spread strategy is not one that is employed too often, probably because the margin requirements for stock and index option traders are rather onerous. However, it does have a place in an option trader’s arsenal, and can be an especially useful strategy with regard to futures options. The strategy has been discussed before in The Option Strategist, and it is apropos again because it can be applied to the expensive options in the oil and natural gas sectors currently.

Protective Collars – LEAPS & $VIX (17:11)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 11 on June 12, 2008. 

In this article, we’re going to examine a popular strategy – the “collar.” We feel it’s apropos, since it appears that stocks may have now embarked on the next leg of the bear market. Moreover, we’ll give you our take on how to best utilize the strategy, and we’ll also take a look at a new application with $VIX options that should be of great interest.

Does It Pay To Diagonalize? (16:21)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 16, No. 21 on November 8, 2007. 

In the past couple of weeks, I’ve read articles and heard options traders talking about a strategy that is apparently becoming more widespread: the use of long-term options in a position as the preferred hedge when selling near-term premium. These types of strategies generally fall into the category of “diagonal spreads.” While this isn’t exactly revolutionary thinking, it is a new era in the popularity of diagonals. As with any strategy, there are nuances that may not always be obvious to those inexperienced with using it. So, we thought we’d go over some of the benefits and drawbacks of using these strategies.

Q&A: Delta Neutral Positions (08:16)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 16 on August 26, 1999. 

Questions & Answers

Q: I would like to ask you about delta neutral trading which I have heard and read about. Could you give me a brief description, it's merits and drawbacks, and in what situations it is best used. K.T. 6/17/99

Pages

Option Strategist
Blog Search

Recent Blog Posts

Trading or investing whether on margin or otherwise carries a high level of risk, and may not be suitable for all persons. Leverage can work against you as well as for you. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. The possibility exists that you could sustain a loss of some or all of your initial investment or even more than your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and investing, and seek advice from an independent financial advisor if you have any doubts. Past performance is not necessarily indicative of future results.
Visit the Disclosure & Policies page for full website disclosures.

-->