Forget Dow 10,000 and tricky ways to tap dance into complicated options strategies, at least for now.

This week, it's back to basics in the Options Forum. Many of this week's questions address themselves to newbie options concerns, such as how to read volume and open interest, what to do with a call that's about to expire, and just how firms decide where to route orders.

Next week, we'll tackle more complicated topics, but keep any questions -- easy or hard -- coming to

Down and Out-of-the-Money

I purchased 600 Dell March 47 1/2 calls at 3 1/4 before the announcement of earnings. They are now at 1/8. At this point, what is the best recourse? Should I exercise the stock or just let the option expire and lose out? What kind of strategy, if any, should I implement to protect myself? -- Raymond Li


Tough play, but the march to Dow 10,000 may help out some.

The first thing you don't want to do is exercise the option. By doing that you'll pay 47 1/2 per share for Dell stock that is currently trading near 41.

Rod Jamieson, options strategist for

Everen Securities

, suggests rolling the options over into an in-the-money strike, like the April 40 calls.

That's a strategy you should keep in mind when you're using options as a proxy investment for the stock: Always buy in-the-money options. (These might have been in-the-money when you bought them.) It will cost you more, but you'll be getting some intrinsic value to work with.

As for the March 47 1/2 options you hold, Jamieson says any strategy to wring some value from them may only cost you more money and further heartache. "I'd write them off," he says. "Let 'em expire."

Your best-case scenario: The volatility of a big triple-witch could move those options in-the-money.

Open Interest Interest

Sometimes I am watching options activity on certain stocks (usually most-actives) together with time and sales data. There are number of things I cannot explain. I'd appreciate comments on the following real-life example: Stock CBS (CBS) - Get Report. Option: CBSDH (Apr 40 call). March 9, 1999, at 12:44, a single block of 2,000 contracts was traded. Total daily volume showed 2,104 contracts and open interest was 5,624. By the end of the next day, volume and open interest were 35 and 5,555, respectively. It seems to me that this 2,000 contracts block somehow did not get reflected in open interest. I presume open interest next day should be either around 7,500 or around 3,500. What happened to the 2,000 contracts block? -- Gleb Esman


What likely happened is that volume was someone buying and selling a block of about 1,000 contracts. Had they opened and closed the contract on the same day, the volume would be recorded but it would never count as open interest.

The "open" in open interest means just that -- the number of contracts that remain open, whether they were bought or sold. To avoid this kind of confusion in the future, remember the wisdom of Larry McMillan, who writes in

Options as a Strategic Investment

: "Each opening transaction adds to the open interest and each closing transaction decreases the open interest."

So, if someone opened 1,052 calls -- it doesn't matter whether they were buying or selling them to open -- and then closed out the position the same day, the open interest doesn't change. If that investor would have sold the options to open and was planning to let them expire worthless, you would've seen the change in the open interest the same as if he was a buyer to open.

A QQQ-uestion

I have attempted to contact CBOE and Nasdaq regarding the settlement of QQQ options. Do they settle in cash, as index options do, or in 100 shares of QQQ?


Reese Reed


According to the

American Stock Exchange

Web site, a

Nasdaq 100

(QQQ) - Get Report

share "works like an index fund, but trades like a stock." The Nasdaq 100 shares are an index-tracking stock, allowing investors to buy with one share a portfolio of the companies in the Nasdaq 100 index.

As to your question of settlement, that may be done for either stock or cash. "A block of 50,000 Nasdaq 100 shares (or multiples of 50,000) can be redeemed in return for a portfolio of stocks approximating the Nasdaq 100 Index and, sometimes, a specified amount of cash," according to the site.

The site also points out that creating and redeeming the QQQ requires dealing with a brokerage that is either a member of the Continuous Net Settlement system of the

National Securities Clearing Corp.

or a

Depository Trust Co.

participant. They would probably have the answers to a specific situation that may arise with settling the option.

New Listings

Every day, week or month new stocks (having been around for a year) get their options listed for trading. How can I find out when an underlying stock's options are available for trading? -- Jeff Davidson


Keep an eye on the major options exchanges -- the CBOE, the Amex, the Philly and the Pacific. They usually announce via press release which options will start trading on their respective exchanges and when. You can always check daily press releases on the

PR Newswire

, which you can find on



However, if you want to trade options on an initial public offering, you'll have to wait a bit. According to a

Chicago Board Options Exchange

representative, the exchange lists several requirements for what options it will trade. The key measure is that the underlying stock must have traded at a price at or above 7 1/2 for three consecutive months.

Quote Conflict

My online broker showed an option quote of 1/2 bid 5/8 ask. This option traded at three exchanges, and I knew this to be the quote from Chicago. I placed a market order to sell 10 contracts. I got a fill at 3/16 (which was the bid on the Amex). For the next 10 minutes after my fill, the online broker screen still showed the quote at 1/2 by 5/8. I called customer service and they got the Amex to honor the CBOE price of 1/2. But they told me in the future, if I want to specify a certain exchange, I need to talk to a live broker (at a higher fee). Is it difficult to program the options order screens to add a selection specifying which exchange you want the order routed to? And do you think the Amex market maker just sent my order to Chicago for the fill, or did he cough up the difference? --Tom Ski


It's typical for a brokerage firm to set an order-routing default in its "front-end" system. Firms have their speed-dials set to automatically route orders for multiple-listed options to a specific floor. They decide which exchange on the basis of cost (if a firm has a floor operation on a specific market, it can internalize the order and save floor brokerage fees) or on some other parameter (historic market share or some other measure of relative liquidity).

The front-end system


allow a registered representative to circumvent the default and route the order to a specific floor with additional key strokes. But, as far as we know, no online order entry system allows a customer to do this, yet.

TSC Options Forum aims to provide general securities information. Under no circumstances does the information in this column represent a recommendation to buy or sell securities.