38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 519
|
||
Assuming the strategist did not anticipate assignment and therefore did not
|
||
exercise his long calls, he has several choices after receiving an assignment notice the
|
||
next morning. First, he could do nothing. This would be an overly aggressive bullish
|
||
stance for someone who was previously in a hedged position, but it is sometimes
|
||
done. The strategist who takes this aggressive tack is banking on the fact that the sell
|
||
ing after the assignment will be temporary, and the market will rebound thereafter,
|
||
giving him the opportunity to close out his remaining longs at favorable prices. This
|
||
is an overly aggressive strategy and is not recommended.
|
||
The most prudent approach to take when one receives an early assignment on
|
||
a cash-based option is to immediately try to do something to hedge the remaining
|
||
position. The simplest thing to do is to buy or sell futures, depending on whether the
|
||
assignment was on a put or call. If one was assigned on a put, a portion of the bull
|
||
ishness (short puts are bullish) of one's position has been removed. Therefore, one
|
||
might buy futures to quickly add some bullishness to the remaining position.
|
||
Generally, if one were assigned early on calls, part of the bearishness of his position
|
||
would have been removed - short calls being bearish - and he might therefore sell
|
||
futures to add bearishness to his remaining position. Once hedged, the position can
|
||
be removed during that trading day, if desired; by trading out of the hedge estab
|
||
lished that morning.
|
||
One should receive this assignment notice early in the morning, so he can
|
||
immediately hedge his position in the overnight markets. If he waits until the day ses
|
||
sion opens, he might use futures or options to hedge. One should be particularly
|
||
careful about placing market orders in an opening option rotation, especially on index
|
||
options after a severe downside move has occurred the previous day. Market makers
|
||
are very nervous and are not willing to sell puts as protection to the public in that sit
|
||
uation. Consequently, puts are notoriously overpriced after a large down day in the
|
||
stock market. One should refrain from buying put options in the opening rotation in
|
||
such a case. In the future, it is possible that comparable situations may exist on the
|
||
upside. To date, however, all gaps and severe mispricing anomalies have been on the
|
||
bearish side of the market, the downside.
|
||
CONCLUSION
|
||
The introduction of index products has opened some new areas for option strategists.
|
||
The ideas presented in this chapter form a foundation for exploring this new realm
|
||
of option strategies. Many traders are reluctant to trade futures options because
|
||
futures seem too foreign. Such should not be the case. By trading in futures options,
|
||
one can avail himself of the same strategies available in stock option. Moreover, he
|
||
may be able to take advantage of certain features of futures and futures options that |