Tuesday, January 18, 2011

Checklist for Applying Option Strategies | Options Like a DPM Webinars #8: Ratio Spreads

Checklist for Applying Option Strategies | Options Like a DPM Webinars #8: Ratio SpreadsSocialTwist Tell-a-Friend
The Admiral, a former CBOE designated primary market maker, runs through a checklist to both master various option strategies and expertly analyze the market to determine which option strategy is the best for a particular stock at a particular time. Having gone through 8 Options Education Sessions in this "Trade Options Like a DPM" series, students should have enough tools in their toolbox to take advantage of any stock move and the possible scenarios.

This a Q&A excerpt from "Trade Options like a DPM Webinar #8: Ratio Spreads" - http://hamzeianalytics.com/pow_register.asp




"RATIO SPREADS" OPTIONS WEBINAR CLASS DESCRIPTION (December 13, 2010, 1800 CT)

An options strategy in which an investor simultaneously holds an unequal number of long and short positions. A commonly used ratio is two short options for every option purchased. A ratio spread would be achieved by purchasing one call option with a strike price of $45 and writing two call options with a strike price of $50. This would allow the investor to capture a gain on a small upward move in the underlying stock's price. However, any move past the higher strike price ($50) of the written options will cause this position to lose value. Theoretically, an extremely large increase in the underlying stock's price can cause an unlimited loss to the investor due to the extra short call.

ABOUT "THE ADMIRAL"

The featured speaker, whom we affectionately call "The Admiral," was a Designated Primary Market Maker (DPM) on the floor of the CBOE for five years. Although we're not using his real name (so don't ask!) suffice it to say that we consider him to be one of the most knowledgeable option traders on the planet. As a floor trader in the '80s and '90s he did the opening options rotation for 5-25 stocks the old-fashioned open outcry way—meaning he opened each option strike price for each of these stocks within the first 30 minutes of trading, both calls and puts.

That meant he had to price more than 500 option strikes, plus as a market maker he traded and kept the markets current. As a DPM, technology brought forth auto-quoting of option series, but pricing of those quotes remained his responsibility. Trading 1 million shares of stocks and 50,000 options contracts was a normal day for him. In 27 years at CBOE, he has traded through the crash of '87, the smaller crash of '90 and the tech bubble in 2000. He has traded three-digit volatility and seen every possible market environment imaginable. So, if you're going to learn options, it might as well be from the very best.

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