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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe -- Ignore unavailable to you. Want to Upgrade?

To: jt101 who wrote (709)	12/7/2002 5:24:56 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 1064

Ah yes, the old 50 times multiplier. I forgot about that. So one ES call priced at $20 is $1000 and that compares favorably with the OEX call prices. ES might even be a bit better for comparable strikes. As for the position, adding a long ES call would make sense if you are fortunate enough to catch a dip in ES. If ES gets down near 870 your concern is of course going to be loss on the short puts in excess of your gains on the ES short, but your breakeven is almost down to 850 and you can perhaps add ES shorts on the way down to get to a 1:1 ratio before it gets below 870. Of course you can always play with the ES itself to protect against the runaway to the upside, but unless you are up all night a call at the right price can be cheap insurance. At this point a call does not look attractive since it would cost all of the premiums you collected for a nearby strike. A nice dip below 900 next week might change that picture considerably. If you find yourself in that territory, an ES call at 910 or 920 could be down below $200. At that point it might be worth it to pay for the ES call rather than plan to roll up puts if ES takes off on you. The question of whether to close out or expire often depends on what your expectations are as expiration approaches. If you think ES is going to run higher you might do better rolling out to a later month before the later month puts lose value. Of course you can sell higher strike puts after expiration, but that increases the risk of losing on a downturn. Unless you are planning to roll out immediately there should be no reason cover puts that are sure to expire worthless. How are the ES options settled? If they are settled by contract delivery, IB may require you to close them. If they settle in cash you can do what you want with contracts that expire ITM. I think they settle in cash only on the months the options contracts expire. The other months you might have to close them out. You should check with IB to be sure.