Tonight I went to a seminar at the Waldorf Astoria on 51st and Lexington, New York, NY. It was a pretty good review of concepts I had already studied. After listening to Freddie Rick’s Market Essentials there really wasn’t much that surprised me at this session. Our instructor went over the usual strategies:
- Bear Call Spread
- Bear Put Spread
- Bull Calll Spread
- Bull Put Spread
and their pros and cons without much fanfare. I was actually surprised at how fast he went through the strategies. I have a feeling that most of the people in attendance must have left being either curious for more or scared off. I think there were only a few people in the crowd that had any real experience with options trading. About 25% of the class raised their hands when he asked if anyone had traded options before.
He showed an example of the Iron Condor Strategy, which involves two credit spreads, from 1999. In that year it was possible to use the Iron Condor strategy to collect $1,100 per contract. Now the average is around $100 per contract. It appears that the Iron Condor strategy is in some dull days now. As our instructor said, “If the iron condor isn’t dead, it’s on life support.â€Â The strategy isn’t nearly as profitable as it used to be. This is primarily because the volatility we’re experiencing now is at a relative low point, roughly one third of the 1999 figures. Apparently volatility really increases the premium that can be collected by selling options and thus the value of spreads. From the other perspective, high volatility makes buying options expensive. Why? Because the stock underlying the option could go anywhere in volatile times!
Our instructor also spent some time explaining recent developments in the market as well as potential future changes. What I thought was really exciting is that options contracts may be quoted in penny increments after the new year. This is not a definite change yet, but if it happens for any options it would certainly happen for the QQQQ ETF. This is exciting because a smaller spread between the bid and asking price for an instrument means less draw-down when entering a position. If the spread is only a penny, the instrument only has to move 2 pennies your direction before you start making money (minus transaction fees of course. This is much better than having to wait for a 10 cent move in the contract.
Unfortunately he spent a lot of time on the exotic VIX and its associated options. These options are a little unusual in that the underlying instrument is actually a futures contract rather than the cash VIX index. This was surprising to learn but really not useful at all. I would maybe use volatility options if I was an institutional investor, but as your average retail customer, I think I’d be crazy to try them out. They are more volatile than the most volatile stock. I might use volatility in my trading decisions, but I don’t think I’ll be using it as a trading vehicle alone.
Another interesting development that he discussed with us was Weekly options. So far these are only offered on the SPX and OEX instruments. The strike prices are established each Friday for the following Friday. They are incredibly short term instruments. I don’t think I’ll ever buy these because of the extreme time decay that they are subject to, but perhaps I would sell them on the basis of technical analysis.
This seminar was good for a brush up on concepts I had already studied and used lightly. I also heard of a few new things to boot. It was offered free by the Chicago Board of Options Trade and OptionsXpress and I was glad to attend. I’d recommend a session like this to someone interested in learning about options. Perhaps even better, and more indepth, is Freddie Rick’s Market Essentials CD set.
