US stock options

slackjaw

Junior member
10 0
Can anyone tell me if options on US stocks are the type that can only be exercised on expiry or can be exercised any time up to expiry?

Cheers,
 

RogerM

Established member
752 6
slackjaw - the overwhelming majority of US stock options are "American Style" which can be exercised at any time. I say "overwhelming majority" rather than "all" in case there are some I've not thought of that offer European style settlement, but I can't think of any!

This is particularly relevant if you are selling puts. A large proportion of puts are bought as portfolio insurance, and therefore if the put goes into the money (ITM) the owner of the put has very little reason not to require you to take the shares from him at the higher strike price. Your chances of being assigned are quite high.

Calls however are more often held as a speculative investment and if they go ITM the holder might just as well take the profit from the increased value of the option rather than taking the stock. Also many calls are written against stock already held and so are covered. The main reason for exercising a call option that has gone into the money will be to capture a dividend.

Some US index options are European style settlement - notably SPX, DJX and XEO.

HTH
 
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slackjaw

Junior member
10 0
Hello Roger,

Thanks for that. I'm attempting to teach myself the nuts and bolts of calendar spreads; and I was just trying to work out the best and worst case scenarios. I'm thinking along the lines of finding a stock that's progressing slowly in an even fashion either upwards or downwards; and then either selling a short dated call a few points above the current price and buying the same strike price at the next date out in the case of the rising stock, or selling a short dated put and buying the same priced longer dated one a few points below the declining stock.

I think that's it, anyway!

The idea is not necessarily to hold on till expiry of the sold option but to exit if the debit it cost me to set up widens sufficiently.

It's early days; and I keep getting waylaid by all the other spread strategies people talk about. I'm trying to concentrate on just one.

Understanding even the relatively simple sounding horizontal spreads does my head in!

Nick
 

RogerM

Established member
752 6
Nick - there are a number of things to be wary of with calendar spreads.

Ideally you want there to be an implied volatility (IV) skew between the written leg (in the near month) and the long leg (in a far month), so that you are selling an option with high IV (expensive) and buying an option with lower IV (cheaper).

Remember that the profit from a calendar spread comes from the value left in the long option after the short option has expired - ideally worthless. If you pay too much for the long leg (i.e. if IV is too high and it subsequently falls) then it can have a dramatic effect on the profitability of the position.

I mention this because if you find a position that looks attractive with very high IV in the near month, and lower (but still high in nominal terms) IV in the far month, you need to ask yourself why this is. Very often IV will rise before results and collapse immediately afterwards. It doesn't matter if the price doesn't move very much, the collapse in IV (known as a "volatility crush") will take much, if not all, the potential profit out of the position. Back months invariably have their IV hit after earnings - there will be loads of put buyers going into earnings as an insurance against bad numbers, and once the nos are out the way the IV will come off as the demand for puts dries up.

I think for calendar spreads to work well, IV of the long position should be REALLY low, so that it has nowhere to go. Just because it is low to where it has been is not enough if it is high in nominal terms. Also just because there is a big skew between front and back months doesn't make it a low risk trade. It's the crush on the far month IV that does the damage, and a crush on the near month as well makes little difference. The profit comes from the value left in the far month longs.

HTH
 

osho67

Well-known member
407 3
Roger

Thanks for your comments. I have tried but cant find IV figures for the positions I want to sell. Where can I get IV - free if possible but paid otherwise. Thanks so much
 

RogerM

Established member
752 6
Osho - I don't know anywhere that will provide a chart of IV for free for all stocks. I know that http://www.ivolatility.com/ provide it for $19:95 per month, and it's also part of the package for http://www.optionetics.com/ in their platinum service, but this is not cheap at $80 per 4 weeks or $799 per annum.

However, Optionetics does provide a useful rough screening service which is free. if you go to their homepage http://www.optionetics.com/ and look halfway down on the right, you will see a box headed "Options Volatility Rankings", with 5 selections (expensive, cheap, explosive, quiet and more). Clicking on one of these will give you a ranked list showing IV high, low, current and change. If you then click on the stock name you will get a chart of the stock for the last 6 months plus a chart of IV for various periods over the same timeframe. I think this is the best you'll find without putting your hand in your pocket! :)

You can of course calculate spot IV using an on-line calculator or using the Hoadley model, which as you know I value very highly. But this won't show you where IV is in relation to where it has been on a chart.
 

belinea03

Junior member
28 0
OptionsXpress provides IV figures for all strikes in a particular series. The service is free on their website (www.optionsxpress.com). Check it out.

Roger, I too think Hoadley's software is very good but would be more helpful if one could enter trades having more than 5 legs. This feature is very important if one needs to adjust position over time or develop complex combination trades.
 

osho67

Well-known member
407 3
belinea03

optionsxpress provide free service for their customers only. Does it mean opening an account.Commissions are high compares to IB.
 

belinea03

Junior member
28 0
Osho67,

The data I mentioned is free to the public, i.e., there is no need to open an account. Go to their web page, click on Quotes\Chain and in the drop down menu choose Implied Volatility (the default is "Calls and Puts".

OX allows you to open an account without funding it. You then have access to all the site including their paper trading account. Their commission structure is best when placing 10 contract or more for a given strike. If trading smaller quantities IB or ThinkorSwim are better.
 

osho67

Well-known member
407 3
Thanks so much belinea03. I got the IV figures and I will open an account as well without funding.
 

osho67

Well-known member
407 3
Thanks RogerM
I had a look at optionetics.com and 5 selections could be quite useful as well. Thanks.
 
 
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