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Another week, another round of interesting questions. This week, we help one of our readers understand how a change in volatility made him a loser on some



puts he bought before earnings. And, we come to the aid of another who must realize that expiration Friday does indeed mean Friday, no matter when he gets a confirm from his broker.

Next week, we'll likely be talking more about volatility and ways to profit from big moves in either direction. Keep your questions coming to

Options Forum and be sure to include your full name.

Volatility Pinch

I recently bought 60 puts on Nordstrom for $1 before its quarterly earnings. There were 450 bought before me that day and none of them went for anything above 5/8. Result, the company reports poor earnings, drops 11% and my puts are worthless. Is there something I can do? Chris Grange


What can you do? As they say in Chicago: Go to the exchange and visit your money.

Just kidding. Don't feel too bad. An experience like this could send the average guy running to an index mutual fund. But actually, traders are often right about a direction and wrong about the volatility. Unfortunately, when that happens you end up with a worthless option.

One of our buddies in Chicago took a look back at the numbers on your trade for us, and it is apparent what went wrong. You bought options at the most expensive possible moment.

With nine days until expiration, on the day before earnings were announced, the stock was at about 35. The implied volatility reading on the May 30 options was about 148%. That makes the implied volatility a disproportionate amount of the option's price because the market was expecting something dramatic.

If you had bought the May 30 puts, you wouldn't have hit a break-even point until the stock fell to 29. That's about a 17% fall.

So, Nordstrom falls 11%, as you say, and those puts are still pretty far out of the money. The difference between Friday and the day you bought the option is that the implied volatility is now just 51% with eight days left until expiration. That takes a major chunk out of the option's premium and leaves your put at 1/16 -- essentially worthless.

This time around you had a good play, you just bought the wrong option. Next time, buy an at-the-money or in-the-money put. It'll cost you more, but you'll have some value left when the volatility gets sucked out of the premium.

Monday, Monday? Not Quite

I have been trading listed stock options for a month. I have yet to let an option expire. My online broker (E*Trade) supposedly allows me until the Monday after expiration to exercise any options which are at least 75 cents in the money when they expired. But what if I would rather sell (to close) the options than exercise them? Can I still wait until Monday to do that? Peter Harris

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The options that are at least 75 cents in the money are auto-exercised on Friday; you get the ticket on Monday.

More importantly, what you also get on Friday is the joy of weekend risk in the stock. If your XYZ May 40 calls are in the money on Friday and exercised, and the company announces Sunday that it is bankrupt, you get the ride all the way down.

You have to be able to pay for exercised equity options via margin or cash in your account. If you are playing index options, you simply get the cash difference between the strike and the underlying.

As far as selling to close, that's a similar no-go. While options technically expire on Saturday, they cease trading at the close Friday (Saturday is simply for errors). There is no market for them on Monday, so you would be unable to find the other side to your trade.

Rotation Equation

I have a question regarding rotation. I placed an order to close an existing naked put position on CNet (CNET) . The stock was halted due to the NBC-Xoom.comundefined merger. When trading began, and 30 minutes after the option market maker began moving his bids/asks, I entered a closing transaction above the current ask using a limit order. The order was never filled. When I contacted Brown & Co., they said the market maker was going through rotation and that they were not required to fill the order. My question is, if the market maker isn't prepared to fill an order, why bother moving the bid/ask? It seems as though they are hiding behind this when they are caught with their shorts down. The spread on the option was 1 1/2 points, so it's not like they don't have sufficient time to hedge their position. Dennis Beck


Great question. We're hearing from many readers about confusing interactions with their brokers or with exchange floors.

We contacted a veteran of the floor wars to get a handle on what could have happened to you. Assuming you have the sequence of events right, this is what our anonymous pro thinks happened.

There is an "indication" of what an opening price (or quote) will be for an option. This indication is adjusted for the underlying stock price (because the stock could be moving while opening rotation is not yet complete)


the supply and demand in its individual options.

Just because a quote goes up on the board doesn't mean someone is entitled to a fill. A specialist may post a high bid to attract a seller or vice versa. If it trades through a limit order, then you're entitled to a fill.

To the floor trader we spoke with, it seems like you have no standing because there was no trade through the limit order and because they (the specialist and market makers) were trying to figure out where to open that particular option.

Look at it as if it were a stock. If a stock had an indication of say, 50 to 55 (it closed at 48 the day before), then the indication changes to 53 to 57 and eventually opens at 56. If someone had an order to buy shares at 55 to cover a short (even prior to the second indication), they get nothing. The stock opens at 56 and that's that. That's why people pay the big bucks for seats (or big bucks to lease them).

Seeing things like this happen, or more importantly, reacting to these changes on the spot, is the biggest advantage and one of the most important skills of floor trading.

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.