Sorry, this is long overdue, but only recently approved by compliance.

SEC’s Bear Stearns Probe of Put Trades       

Today I would like to take a step off the educational path and talk about a real world application involving the Bear Stearns debacle.

Just to cover the basics, a buyer of a BSC (Bear Stearns symbol) put has the right to sell 100 shares of stock at the strike price for every contract they own. 

To summarize the situation, BSC was on the brink of bankruptcy when J.P. Morgan and the Federal Reserve stepped in with emergency funding. The day that BSC stock dropped to $50, there were some interesting put trades.  According to an article I read in the Wall Street Journal there were about 25,000 March $30 puts purchased and about 25,000 March $20 puts purchased.  This is someone betting that the stock will fall below $20 and $30 in approximately 9 days (until March expiration).*   Information on the purchase price of these options was not provided, but let’s take a guess.  Considering that BSC closed near $50, the puts could not have been offered at more than 5 or 10 cents. 

So let’s do the math:

25,000 (# of contracts) x $0.10 (price of one March $30 put)

 x 100 (# of shares per contract) = $250,000. 

For this amount of money, the buyer has the right to sell 2,500,000 shares of BSC at $30.

The next day the stock price fell to $2, and these puts went in-the-money by $28.

25,000 (# of contracts) x $28.00 (price of one March $30 put)

x 100 (# of shares per contract) = $70,000,000

A quarter million dollar gamble nets $70 million. 

Unbelievable.

Have a good one,

Brian

*Wall Street Journal Online, “SEC’s Bear Stearns Probe Zeroes In on ‘Put’ Trades”, by Kara Scannell, March 20, 2008

Limit orders on Options

I would like to address the message that was sent out to clients:

 What does that mean? Basically, if you place a market order you could get a much worse price than what you had intended. Limit orders reduce the risk to you, the client, and Scottrade.
Here is what could happen; customer looks at option quote after the market close to buy at the market. The Scottrade system figures the buying power of the last sale for that option, allowing the order. The next morning, and this happened almost everyday last week, a big move happens at the opening bell. The customer market order is still there and gets executed at a much worse price than expected, and the customer has to deposit more money.
Here is the latest link to the SEC rule: http://www.sec.gov/news/press/2008/2008-218.htm

Thanks,

Brian

Hello All,

It looks like I will finally have time to blog again and become a more active member of the community.

What do YOU want to hear about:

Stories from when I worked on the Chicago Board of Trade floor?

Stories from trading and being a market maker here at Scottrade?

My personal trades that taught me lessons?

Developing your own individual trading strategies?

Options fundamentals?

Option strategies?

Or more personal stuff like my favorites cities and music?

Thanks

Hello All,

Scottrade will be offering a new advanced options trading platform to existing customers hopefully within 3 months. The reason for this is overwhelming demand and the exponential growth on the options side of the business. As investors become more sophisticated, self-educated, and self-reliant, people are realizing that “options” may be used to enhance portfolio returns. In other words, options are not a bad word anymore.

Because this is a new product, it will not offer optimal functionality out of the gate. Due to many technical and compliance issues the platform will gain added functionality on a continual basis. We look forward to adding this exciting platform to our family.

The new platform will eventually offer the ability to trade spreads, write uncovered options, IRA accounts, advanced orders, greeks in the option chain, hot lists, charts, risk viewer, and strategy screeners.

As soon as I receive permission from the powers that be, I will release more info.

Thanks,

Brian

Hello again,

I just wanted to cover the basics before we move on to some of the more complicated aspects of options in the future.

Buying a Call or Put gives the owner the right to buy or sell an asset at a fixed price, the strike price, for a specific period of time. The person selling a Call or Put has the obligation to buy or sell an asset at a fixed price for a specific period of time. Let’s think about this for a minute.

If I buy a Ford June 08 $7.00 Call, what does this mean? I have the right to buy 100 shares of Ford stock at $7.00 per share before June expiration. But I can choose not to exercise my option, it is my right.

The difference between an option and a futures contract is that both the buyer and seller of a future have an obligation. A buyer of corn futures will have to take delivery if they are in the money at expiration. This is rare, but there are stories of people having to make arrangements for such occurrences.

I will try adding a little bit each day to the options puzzle.

Good bye for now,

Brian

Options involve risk and are not appropriate for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options. All option accounts require prior approval by Scottrade.

Hello Everybody

Today I would like to share some fantastic on-line resources for learning about options.

http://www.888options.com/default.jsp
The OIC, Options Industry Council, is a great place to start and has material for those just getting started all the way up to professional traders. The online classes, webcasts, audio & video podcasts, and live seminars are all great ways to learn for those who enjoy a more interactive educational experience. I would highly recommend taking some time to click all the links to fully understand all the free resources available to you.

http://www.cboe.com/tradtool/virtualtrade.aspx
The CBOE, Chicago Board Options Exchange also has great education resources, including this Virtual Trade Tool. This tool can be a big help in understanding different options strategies. Of course this is no guarantee of real market results, but hopefully it will help you build confidence and your knowledge base.

http://www.888optionsnet.com/investigator_2/disclaimer_frame.asp?goto=strategyExplorer
I love this website! I still use this website to quiz myself on options strategies regarding the outlook, summary, motivation, description, variations, max loss & gain, profit and loss, break even, volatility, time decay, assignment risk, expiration risk, and graphs.

There are many great books available, but I believe one of the best is “Option Volatility & Pricing” by Sheldon Natenberg. This book “reflects the developments and trends in option products and trading strategies. This work covers pricing models, volatility considerations, basic and advanced trading strategies, and risk management techniques. It also presents the foundations of option theory, and shows how this theory can be used to identify and exploit trading opportunities*.” *Google book search

Hopefully the hyperlink works, it was acting a little temperamental.

If you have any questions, please let me know!

Thanks, Brian.
Options involve risk and are not appropriate for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options. All option accounts require prior approval by Scottrade.

Hello All,

I am here to help the Scottrade Community understand the wonderful world of options.  Before we get into all that good stuff, a little about me.  I started in the financial industry as a runner/clerk at the Chicago Board of Trade.  I was there almost a year before I came to Scottrade.  For the next nine years I was a listed market maker and proprietary trader.  I have always dabbled in options, and became involved full time last year.  To me personally, options are much more challenging and learning all the intricacies has been very rewarding.  Now, that is not to say regular stock trading is un-challenging, because if that were the case, I would be retired on a ski slope somewhere right now. 

I want to use this blog to help others understand options and present the challenges I faced when first diving in.  I have made many mistakes and plan on sharing them all.  If I can not laugh at myself, then I have no right to laugh at others.  Please ask me questions and send me topics you really want more information about.  If I don't have the answers, I know where to find them. 

And everyone needs to remember, options are not for everybody, so please understand the risks involved before placing any trades.

 Tomorrow I will be sharing my educational resources and what I focused on while trying to catch up to all the option guru's in Chicago.

 Thanks, Brian