Learning About the Markets While Social Distancing

Posted On March 27, 2020 12:53 pm
By: Steve Smith

Many people’s lives have been turned upside down by staying at home or sheltering in place — they are looking for diversions.

And while it might be tough to watch the daily gyrations of the stock market, this could be a good opportunity to step back and use the extra free time to bone up on their financial education. Especially in the area of options so when things return to normal you’ll have more investment tools at your disposal or when the next crisis emerges you’ll be better prepared.

Operation Manual

As with any tool, before using options, make sure you are familiar with the basic rules and guidelines that govern their behavior.

For starters, make sure you know the contract specifications of the product you are trading. Items such as margin requirements (pay special attention to leverage), the exercise and settlement procedures, and what strikes and expirations are currently listed for trading are important to know.

For example, you should be aware that index options, such as for those on the S&P 500 or SPX, can only be exercised on expiration day and are cash-settled; also note that SPX options actually cease trading on the third Thursday of the month, a day earlier than equity options, though they officially expire on the third Saturday. By contrast, equity options, including those on the Spyder Trust (SPY), can be exercised at any time during the life of the contract. This is especially important when trading options on stocks that pay dividends.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.