Feature Articles

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 1, No. 22 on November 12, 1992. 

In the last issue, we looked at some of the rewards and pitfalls of calendar spreads using index or equity options. This week, we'll take a look at the calendar spread using futures options.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 20 on October 28, 1999. 

There are various trading strategies – some short-term, some long-term (even buy and hold). If one decides to use an option to implement a trading strategy, the time horizon of the strategy itself often dictates the general category of option which should be bought – in-the-money vs. out-of-the-money, near-term vs. LEAPS, etc. This statement is true whether one is referring to stock, index, or futures options.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 13 on July 8, 1999. 

After having spoken at many conventions and seminars, I would say the most common general question that I am asked is “Should I be a speculator or should I trade hedged positions?” There is no pat answer to that question, for part of the answer depends on the individual’s penchant for what he feels comfortable doing. That aside, it might be enlightening to look at the track records of The Option Strategist hedged portfolio and speculative portfolio as a means of determining at least some of the factors that one would use in making the determination as to whether to be a hedger or a speculator.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 2, No. 7 on April 8, 1993. 

Many strategists like to position themselves so that they can make money when the underlying security swings wildly, rather than having to scramble as naked option sellers must during such wild price swings. One strategy that allows the strategist to do this is the "backspread". In general a backspread consists of selling an in-the-money option and then buying a larger quantity of out-of-the-money options, all on the same underlying instrument. Some traders even use a broader definition, preferring to use the term "backspread" to refer to any strategy in which one can make money on large price moves; by this alternate definition, straddle purchases and combination purchases would qualify as backspreads as well. For the purposes of this article, we will stick with the first, more restrictive definition.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 12 on June 21, 1995. 

With the market being so high, many individual investors and institutional money managers as well are wondering what to do with these profits. Completely exiting the market is not a viable alternative for many, and is prohibited by charter for some institutions. However, there is a way in which one can reduce his downside exposure while still retaining upside profit potential — he can sell his stock and replace it with LEAPS call options.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 13 on July 13, 1995. 

Most option traders quickly realize that time is a very heavy factor weighing on the price of an option. This lesson often is driven home after buying an option and losing money.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 20, No. 3 on February 10, 2011. 

Most traders are familiar with the concept of averaging down. It is almost a mantra as far as long-term investment strategies go; buyand- hold funds and investors often feel they are getting a bargain when they get a chance to average down. However, the strategy can be a disaster in certain circumstances.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 22 on November 23, 2005. 

As we enter the holiday season, the media will mix and match terms referring to the various Holiday-related trends of the stock market. They rarely get it straight, and as a result, they wind up confusing a lot of people. Here are the major ones:

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 15 on August 15, 2008. 

Trading or investing involves several facets of operation: trade analysis, money management (including trade execution and position size), and follow-up action (including exiting the trade). Most successful and experienced traders agree that trade analysis is the least important – contrary to what a novice would expect. In fact, I have seen a successful system trader state that he could turn any reasonable system into a profit through proper money management (i.e., through proper position sizing and follow-up action).

If one is too conservative, he can ruin a successful system (by stopping himself out at the tiniest hint of a loss, for example). On the other hand, if one is too aggressive – say, leveraging position size up too aggressively when profits exist, he will also fail because one small downturn will eventually be a disastrous loss.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 17 on September 9, 1999. 

As most of our subscribers know, we often use option premium levels as an aid in predicting what might happen to the underlying instrument – whether it be an index, a futures contract, or stock. The way that we normally speak about option premium levels is to refer to the implied volatility of the options. Implied volatility is really an attempt to determine how volatile the underlying will be during the life of the option. As implied volatility increases, so does time value premium – and hence the option price. So that an option with a very high implied volatility will be a very costly option, and it will have a great deal of time value premium.