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The Volatility of Volatility (09:18)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 18 on September 28, 2000. 

While the title may look like a typo, it’s what we want to talk about. In order to discuss the implied volatility of a particular entity – stock, index, or futures contract – we generally refer to the implied volatility of individual options or perhaps the composite implied volatility of the entire option series.

Time Value Premium is a Misnomer (08:22)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 8, No. 22 on November 24, 1999. 

At a recent seminar or conference (don’t ask which one – there have been too many to distinguish one from another!), the subject was raised regarding the effect of time decay on an option. As the discussion progressed, it dawned on me that many (perhaps novice) option traders seem to think of time as the main antagonist to an option buyer. However, when one really thinks about it, he should realize that the portion of an option that is not intrinsic value is really much more related to stock price movement and/or volatility than anything else – at least in the short term.

The Basics: Review and Explanation of Concepts Debit Spreads (04:20)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 20 on October 26, 1995. 

Any spread that creates a debit in one's account, when it is established, is technically a debit spread. However, when the term "debit spread" is used, it generally connotes either a bull spread with calls or a bear spread with puts. These are types of vertical spreads, since all the options have the same expiration date but have different striking prices (credit spreads are vertical spreads also).

Hard To Borrow Stocks (Preview)

By Lawrence G. McMillan

In the past, we have occasionally talked about hard to borrow stocks, and how that affects option prices.  When market makers and others cannot borrow stock, then the “normal” option arbitrage relation falls apart.  Normally, the following equation holds true (modulo dividends and carrying charges):

Stock price = Strike Price + Call Price – Put Price (where put and call have the same terms)

Dispersion Strategy (10:23)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 10, No. 23 on December 13, 2001. 

This strategy was mentioned in the “Striking Price” column in Barron’s last Sunday, and we have received several questions from subscribers asking about the strategy. The strategy has been around for a long time – since the inception of index options, actually – but it is something of a professional strategy, so it’s not widely know. However, it is gaining more popularity lately, so it is the subject of this week’s feature article.

The Put-Call Ratio (02:10)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 2, No. 10 on May 27, 1993. 

We often refer to the put-call ratio in our Sentiment Indicators section. However, judging by questions we have received from subscribers, it might be beneficial to expand on the concept. We will cover the subject both generally and then specifically, in regard to the way we prefer to interpret the ratio. The put-call ratio is simply the number of puts traded, divided by the number of calls traded. It can be computed daily, weekly, or over any other time period. It can be computed for stock options, index options, or futures options.

Protection for Stock Owners (09:13)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 13 on July 13, 2000. 

Most option traders – even fairly novice ones – understand that options can be used to protect a stock holding against loss. However, when one delves into the specifics of establishing such protection, he usually forsakes the protection, often due to apparently high costs. In this article, we’re going to re-visit a subject that we’ve discussed before (protection), but try to bring some facts to light that might not be understood by many stock owners. The reason that we think this might be an apropos topic now is that it’s July, and July has marked a peak for the market in each of the last two years. There is some evidence (page 5) that a similar scenario might be unfolding again this year.

Are Options Better Than Stocks? (05:04)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 5, No. 4 on February 22, 1996. 

An understanding of equivalent positions is mandatory knowledge for option traders. Two positions or strategies are equivalent if their profit graphs have the same shape. For example, we have repeatedly stressed that covered call writing and naked put writing are equivalent. This can be quickly verified by looking at the profit graph on the right. Both strategies have limited profit potential, large downside risk, and can make money if the underlying remains relatively unchanged in price until expiration.

Portfolio Margin (16:10)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 16, No. 10 on June 1, 2007. 

On April 2, 2007, the final phase of the Portfolio Margin requirements for listed stock and index options went into effect. Any account approved for naked option trading is eligible to be granted these reduced margin requirements. Assuming that one’s broker has a real-time margining system, the minimum account size to be eligible for these requirements is $100,000; otherwise, it’s $150,000, with certain exceptions. Your broker can elect not to grant you these requirements (much as the broker doesn’t have to grant one exchange minimum margin requirements). However, for competitive reasons, we suspect most brokers will grant the requirements to eligible accounts.

Time For Collars? (23:22)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 23, No. 22 on December 1, 2014. 

With the stock market at all-time highs, and many stock holders sitting on large gains, thoughts often turn to options as a hedging technique. For stock owners, there are two ways to provide protection to a portfolio: 1) macro protection, which involves the use of index options to hedge an entire portfolio’s risk, or 2) micro protection, which involves the use of individual options on each stock in the portfolio. In either case, the use of a collar is often attractive to the owner of the portfolio, because it is often established for zero debit.

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