option education

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 16, No. 3 on February 16, 2007. 

Last month, we saw the standard put-call ratio experience some very herky-jerky movements on its chart. As we pointed out at the time, those distortions were due to heavy dividend arbitrage in Altria (MO), JP Morgan (JPM), and AT&T (T). Since dividend arbitrage has become much more prevalent in recent quarters, we feel it’s time to examine this issue to see if there is something that needs to be done to “cleanse” the data of this extraneous, but extremely heavy, call option volume.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 24 on December 24, 2010. 

The “January defect” is the first seasonal trade of the year. The “system” states that the NASDAQ-100 usually falls from about the 8th trading day of January to the 18th trading day. The system’s results are shown in Table 1, in the next column.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 6, No. 6 on March 27, 1997. 

I was tempted not to label this article as a "basics" article, because the concept we're going to discuss is one that is probably not all that familiar to most option traders. It concerns the rate of decay of in- or at-the-money options versus that of out-of-themoney options. It's a concept that I realized I understood subconsciously, but not one that I had thought about specifically until I recently read Len Yates' article in The Option Vue Informer. Len is the owner and founder of Option Vue, creator of the software package of the same name and is one of the best option "thinkers" in the business (we are going to have a review of Option Vue when their new version is released).

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 13, No. 2 on January 22, 2004. 

Question: You have repeatedly mentioned dividend arbitrage. Could you briefly tell me what it is? – J.Z., 1/17/2004

Answer: Dividend arbitrage has been around since listed call options first traded. It has become quite popular lately, though, as heavy call volume is noticeable in nearly every stock with decent open interest in its options that is paying a quarterly dividend of 20 cents or more.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 8 on April 27, 2000. 

In the past year or two, there have been many references in this newsletter to the fact that stock prices don’t conform to the lognormal distribution, which is the distribution used in many mathematical models that are intended to describe the behavior of stock and option prices. This isn’t new information to mathematicians – papers dating back to the mid-1960's have pointed out that the lognormal distribution is flawed. However, it isn’t a really terrible description of the way that stock prices behave, so many applications have continued to use the lognormal distribution.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 6 on March 27, 2008. 

Amongst our array of technical indicators is the put-call ratio. We use it extensively in analyzing the broad market (equity-only putcall ratios) as well as individual stocks and, especially, futures. It is less useful in the indices and ETF’s, but sometimes has validity there, as well. Furthermore, we use $VIX derivatives – particularly the futures – as predictors of short-term moves in the broad market as well. These $VIX derivatives have been very useful and accurate indicators, with two or three great “calls” again in the last week. So, the question becomes, should we be looking at put-call ratios on $VIX – trying to combine these two indicators which, separately, have proven to be quite useful in their own right? As you shall see, the answer is not completely clear, but there does seem to be some usefulness in $VIX put-call ratios.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 20, No. 23 on December 9, 2011. 

This is the time of year when even the media talks about seasonality. Of course, that doesn’t mean they understand what they’re talking about. Why would it be different on this subject than any other?

We have frequently mentioned the positive seasonality that takes place between Thanksgiving and Christmas. It’s unclear exactly why this happens, but it does. In fact, this particular seasonality doesn’t even have a cute name. But it certainly seems to work.

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).