Feature Articles

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 9 on May 11, 1995. 

We have written about the usefulness of the equity and index put-call ratios in attempting to predict the direction of the stock market. The ratios are useful in that we can see when "too many" puts or calls are being bought and interpret them in a contrarian manner. For example, if "too many" puts are being bought, then speculators are bearish and, by contrarian thinking, we should be bullish. The main problem with any contrary indicator is in determining what is actually making up the data.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 17 on September 9, 2005. 

In our last issue, we discussed the general concepts of leverage: trading stocks on margin, trading futures, and options – either long or naked. The most important point that was made is that leverage is neither inherently good nor bad, for it is within your control. If you want less of it, then boost your investment to reduce the leverage; if you want the maximum amount of it, fine – but be aware of the increased risk and reward percentages that accompany high leverage.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 9 on May 12, 2005. 

Occasionally, options on a particular entity (usually a stock or, less frequently, an index) will become so skewed that they are actually skewed in two directions – both horizontally and vertically. We saw dually skewed situations with some frequency in the fall of 2002, when traders felt that there was substantial risk of near-term volatility (hence, a horizontal skew arose), coupled with the possibility of further large declines in stock prices (so a reverse, or negative, skew arose as well).

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 15 on August 13, 2010. 

When one hedges risk in his portfolio – whether via broad-based index option strategies or via individual stock options – that doesn’t necessarily end the discussion. Later, especially if the underlying declines sharply in price, one has decisions to make. In this article, we’ll discuss those decisions as they apply to the somewhat popular strategy of “collaring” stock.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 20, No. 14 on July 29, 2011. 

There has been something of a “buzz” in volatility forums and in some media articles about a backspread strategy that is designed to take the loss out of using $VIX options for protection or speculation. As you know, we are running a “perpetual call buy” strategy for long $VIX calls (Position S610). Also, this week we recommended the purchase of $VIX calls as protection for stock portfolios, for those who were worried about what might happen in the event of a downgrade of U.S. debt or a failure to raise the debt ceiling. However, this backspread strategy purports to be better because it allows you to exit before much, if any, loss occurs. As all thinking traders know, however, there is no free lunch. If there’s really no risk, then something else has to give. You’ll see what we mean.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 22, No. 22 on November 29, 2013. 

There are a number of trading systems involving the days before and after Thanksgiving. Some are quite profitable, and some not so much. For some reason, there even seems to be a certain amount of misinformation about one of these systems, although that arises from financial television, which is incorrect, not surprisingly. In this article, we’re going to take a look at three such systems: one encompassing the three trading days prior to Thanksgiving, one looking only at the day after Thanksgiving, and a longer-term one involving a period several weeks after Thanksgiving. This latter one has a few interpretations, so we’ll expand our analysis of that one.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 10 on May 26, 2005. 

Statistically-based trading is normally applied to hedged positions. It could be pairs trades for stock traders, or option spreads for option traders, or intramarket spreads for futures traders. But generally, the position is one that is based on a relationship between the entities involved – whether that relationship be a price-based relationship or a volatilitybased relationship. The position can be evaluated using assumptions about price relationships or about volatility, and those assumptions are based in historic fact, upon which mathematical calculations can be made (expected return, for example, and then the Kelly Criterion).

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 2, No. 22 on November 26, 1993. 

When I was in Europe recently, one of the attendees at the Colloquium asked me what guidelines I generally followed in my option trading. This is actually a rather thought-provoking question, especially when it regards something you do almost every day. In our many feature articles, many useful general strategies have been given, but not assembled all in one place. After giving the matter some thought, it seemed like it might be beneficial to list some of the "rules" that we follow, either consciously or sub-consciously after all these years.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 12, No. 7 on April 10, 2003. 

A subscriber recently asked the question, “If the market is breaking down and options are expensive, would a call credit spread be the best low risk spreading strategy to use?” It’s a good question, and the answer gets into a dichotomy of sorts – in that a credit spread might not be the best strategy even when options are expensive.

It is sort of a “knee-jerk” assumption that a credit spread will do better than a debit spread if volatility collapses. In reality, that’s not true. If they both employ the same strikes, they will perform the same (otherwise, risk-free arbitrage would be available).

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 16, No. 7 on April 12, 2007. 

This article reflects some new research (or, more appropriately, backtesting) that we have done regarding credit spread strategies. These strategies are very popular at the current time with a large number of web sites and advisory services. However, it seems that most people don’t really understand the risk that they’re taking in this strategy. Many stories are now surfacing about condor spread accounts with losses of 50%, 60% and more. Most of these were caused by being heavily invested in a month when the underlying made a maximum move.

For completeness, let’s start at the beginning. A credit spread involves buying one option and (simultaneously) selling another option – where the two options expire in the same month, but have different strikes. If the option that is sold is trading at a higher price than the option that is bought, a credit is taken in when the spread is established. Hence it is a credit spread.