options in their heads and make money on price anomalies of 1/16, or, as
they call it, a “teenie.” For perspective, the reader may contemplate a
conversation the editor had with one of the most important options traders
in the world who remarked casually that his fortune was built on teenies.
The reader may imagine at some length what would be necessary for the
general investor to make a profit on anomalies of 1/16. (EN10: The advent
of digital pricing has given market makers and specialists even more
flexibility to beat the investor by shaving spreads, theoretically, to $0.01.)
This does not mean the general investor should never touch options; it just
means he should be thoroughly prepared before he goes down to play that
game. In options trading, traders speak of bull spreads, bear spreads, and
alligator spreads. The alligator spread is an options strategy that eats the
customer's capital in toto.
Among these strategies is covered call writing. This strategy is touted as
being an income producer on a stock portfolio. There is no purpose in
writing a call on a stock in which the investor is long—unless that stock is
stuck in a clear congestion phase that is not due to expire before the option
expires. Besides, if the stock is in a downtrend, it should be liquidated, but
to write a call on a stock in a clear uptrend is to make oneself beloved of the
broker, whose good humor improves markedly with account activity and
commission income. The outcome of a covered call on an ascending stock
is that the writer (you, dear reader) has the stock called at the exercise price,
losing his position and future appreciation, not to mention costs. The
income is actually small consolation, a sort of booby prize—a way of
cutting your profits while increasing your costs. Nevertheless, covered
writes are justified and profitable in some cases.
Quantitative analysis
The investor should be aware of another area of computer and investment
technology that has yielded much more dramatic and profitable results, but
that is in a model-driven market—namely, the options markets. Quantitative
analysts, those who investigate and trade the options markets, are a breed
apart from technical analysts. In an interesting irony, behavioral markets,
the stock markets, are used as the basis for derivatives, or options whose