Steve:

If an investor was long Microsoft calls, what would a huge, one-time cash dividend do to the call option? Thank you.-- G.M.

A recent spate of special dividends, or one-time payments, issued by companies such as

Metro-Goldwyn-Mayer

(MGM) - Get Report

and

Blockbuster

(BBI) - Get Report

has prompted similar questions. Typically, the options are adjusted by decreasing the strike price by the amount of the cash dividend. The multiplier remains at 100 in terms of both shares controlled (one call contract equals 100 shares), and in price (a $1 option equates to a $100 value).

You can look at

this story regarding MGM's recent $8-a-share special dividend for a recent example of what happens. For further information on other individual issues, go to

this page on the Chicago Board of Options Exchange Web site and simply type in the company's name or ticker symbol.

Note that the adjustments made for a special payout are different than what typically occurs in a

stock split. In splits, the option's aggregate exercise value always remains the same. So, if XYZ Corp. is trading at $60 and announces a 2-for-1 split, the owner of one 60 strike (or put) -- regardless of the month -- gets two 30 strike calls (or puts). In the case of a fractional split, such as a 3-for-2, the 60 strike becomes a 40 strike on 150 shares, but each strike still represents a $6,000 aggregate value of the underlying shares.

Steve: I am getting hung up on the difference between two iShares vehicles, IWN vs. IWM. I have looked around but have not found a good explanation. Do you have a source or could you tell me? Thanks. -- B.B.

The IWM is an exchange-traded fund that tracks the

Russell 2000 index, while the IWN is based on the

Russell 2000 Value Index. (Although the annual reconstitution of the Russell indices takes place June 25, the official list won't be released until July 6, so these links do not yet reflect the changes.)

The Value Index, according to Russell, "seeks investment results that correspond to the performance of publicly traded U.S. small-cap value stocks with the lowest price-to-book ratios and forecast growth within the Russell 2000 Index." Those criteria and objectives are evident when comparing some of the simple ratios: The Value Index sports a P/E of 17.15, a price-to-book of 2.84 and a beta of 1.23, while the overall Russell 2000 has a P/E of 20.59, a price-to-book of 3.78 and a beta of 1.35.

For a description of the ETFs based on the above indices, I would suggest going to the source,

Barclay's Web site, since it created and manages the iShare ETFs. To get details regarding members, weightings, structure, cost and all the details of the basic

Russell 2000 iShares

(IWM) - Get Report

,

click here. To get the lowdown on the value of the

iShares Russell 2000 Value Index

(IWN) - Get Report

,click here.

To get a prospectus and pertinent filings on these or any other iShare ETFs,

you can go to this page.

Steve: It seems like highly capitalized people could have profited this past month using a short strangle strategy on index options. In a market that tends not to move overly fast, what would be the associated risks with this strategy? It's especially important because there are many times when markets are moving nowhere (like now). You will profit each day that goes by when the index doesn't move. Then, once you start to move toward the outside of the range, where the trade is heading back toward zero, you simply close the contracts that are near-the-money and let more time value wear off on the open contracts, until it's expiration time or your technical analysis says it's time to get out. What am I missing? -- R.

It's been well-documented that volatility levels of the overall market have been contracting to their lowest levels in more than eight years. This is reflected not only in the VIX, which is a measure of the near-term implied volatility of options on

S&P 500 Index

as well as in the options of individual issues.

So, although selling premium has indeed worked over the last 14 months, the risk/reward of being short straddles or strangles is becoming unattractive. Remember: A naked short option position carries the risk of an unlimited loss while offering maximum profit limited to the amount of premium sold. If the market's trading range expands or there is a big move resulting from an extraneous event, there will likely be an associated increase in implied volatility. This could create huge losses.

There is nothing wrong with selling premium on a selective basis if you think implied volatility is being pumped up ahead of an event (an earnings release, a

Fed

meeting, etc.) disproportionate to what will be the resulting response. But look at this as a volatility-based trade; I wouldn't suggest being short strangles and straddles -- no matter what the implied volatility level is -- as an ongoing strategy. It may work for an extended period, but all it takes is one misadventure to ruin your extended stay.

As for pulling off one leg at a time, if you are going to do it at all, it probably makes sense to buy back the side that has moved out of the money and has little value left to gain from remaining short.

If you buy back the side that has moved into the money (most likely at a loss) and leave the "worthless" one open on the assumption that it will expire worthless, you're leaving yourself open to incur more losses should the market reverse course. Positions should always be viewed on a risk/reward basis; don't trade the clock and try squeezing out one last dime. As Rambo said, "Nothing's over 'til it's over." Cover your short positions even if they appear worthless, lest they blow up in your face.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from 1989 to 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

steve.smith@thestreet.com.