Feature Articles

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 10, No. 5 on March 8, 2001. 

We receive a lot of questions here at McMillan Analysis Corporation – most of them come in from the Q&A section on our web site. The more generic (and interesting) questions and answers get posted on the site. Those that are specific get a personal email answer. One way or the other, they all receive an answer – although we do not comment on specific stocks or specific positions in your trading account. We also hear a number of questions at seminars (so far this year, we’ve attended four seminars), and that is where we got the idea for this article. One topic that people seem to want to discuss is that of “covered writing against LEAPS.” Many people think this strategy has little or no risk, based on some sort of historical studies.

This article was originally published in The Option Strategist Newsletter Volume 13, No. 3 on February 12, 2004. 

Also known as the incremental return concept of covered call writing, this form of selling options against stock that is owned has several benefits that most investors don't realize. The goal of this strategy is to allow stock appreciation for a block of common stock between the current price and a selected target sale price, while also earning an incremental amount of income from selling options. The target sale price can be substantially above the current stock price. The typical investors positioned for this strategy are those with large stock holdings, interested in increasing current income, and wanting to refrain from selling the stock near current levels.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994. 

We have written a few articles about collars this year, but another one is appropriate because it is a strategy that can give one peace of mind in a market like this.

To review, a collar consists of long stock, a long out-ofthe- money put, and a short out-of-the-money call. The resulting position has limited risk, because of the ownership of the put. It also has limited profit potential, because of the presence of the short call. In general, investors don’t like to pay a lot of cash out of pocket for the put/call combo that sits on top of the stock. In fact, a “no-cost collar” is one in which the price of the call is equal to or greater than the price of the put when the position is established.

By Lawrence G. McMillan

We have previously seen that $VIX has a slightly different pattern in election years than in most years. We wrote about this in the September 4th issue, so please refer to that article for more detail on this. The graph of $VIX in election years is reprinted on the right. The wild market action of 2020 caused point “A” to be much higher than it previously was (maybe we should be using the median here, too). The low point of $VIX after that occurs just about exactly on the first of September, and 2020 matches up with that pretty well. From there, $VIX rises sharply into October, holding onto its high levels until the election takes place and then begins to back off. It remains to be seen if that scenario will play out this year.

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?

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.

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.

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.

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.

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).