Steve:

I loved your "Options Tell the Truth" article. I'm just getting back into trading. Can you recommend any software or services that track option volatility, open interest, etc., that an individual can keep track of daily?

Best regards,

--D.F.

As readers and option traders know, nearly any discussion of options trading and strategies, including the above-referenced article on the predictive nature of options activity , will necessarily include a reference to implied volatility that generates requests for the best places to find such information. In the past I've referred people to such sites as iVolatility and Optionetics , which both provide free data, including lists of stocks displaying high and low implied volatilities relative to their historical averages.

Some sites such as Schaeffer Research and Quote.com's LiveCharts will provide intraday lists of most actives and unusual activity (issues with option volume at least two times the daily average). However, these are typically compiled once a day and released at midday, so you won't find out about events of the last three hours of the trading day. Many online brokerage firms such as OptionsXpress, Ameritrade and most recently Fidelity offer analytic tools for scanning data and testing various strategies.

To identify singular events occurring in a short time period, such as a chunk of calls purchased near the close, you'll need to get more advanced and costly software packages. One of the most popular trading platforms, and the one used by Larry McMillan's firm, is Realtick . McMillan's firm uses Realtick to perform intraday scans, and it also executes trades through its system. Another useful system is esignal.com , which enables you to set up customized scans to flag unusual activity. These services can cost several hundred dollars a month.

But there's still no easy way to avoid good old-fashioned hard work and elbow grease. This means a commitment of time and energy of tracking and crunching a group of stocks. Even with a staff of researchers and access to state-of-the-art software, McMillan still downloads raw data at the end of each day to sift through with his own proprietary methods and screens. It's because of this hard work that he's able to charge thousands of dollars a year for his newsletter and various services, which, for the most part, have provided a great return on investment.

Steve:

I have noticed that there is not any volume for some in-the-money and all deep in-the-money options. Does that mean people are stuck with these positions until they expire worthless because there are not any buyers?

-- M

Fret not my friend -- by definition, an in-the-money option has an intrinsic value equal and is therefore not worthless, even if it's not actively traded. For example, if I own January XYZ calls with a $50 strike and shares of XYZ are currently trading at $60, my calls have $10 of intrinsic value. This means at the minimum I can sell them for $10 per contract, or exercise the calls and own the stock at a cost basis equal to the strike plus the premium paid.

The fact that deep in-the-money options tend to trade less frequently has nothing to do with their value; it's due mainly to the fact that the options' delta has approached 1.0 (meaning they are equivalent to owning the underlying shares, and therefore offer little of the leverage often sought by option traders).

This segues nicely to another much more subtle and difficult question regarding vertical spreads that have moved deep into the money:

Often when this happens before expiration, the spread value can be a dollar less than the theoretical maximum value (the difference between the two strike prices). Can you suggest rules of thumb for closing out the spread?"

-- RHR

It's true that the full value of an in-the-money spread typically becomes realized as you move closer to expiration. This is due mostly to that above-mentioned lack of liquidity for many deep in-the-money options. As far as guidelines for pulling out of the position, you have to consider several things. For example, is the dollar discount of the current quote on a $5 spread or a $15 spread? Obviously, if you receive less than "fair value" on the former, this is far less acceptable than leaving some money on the table with the latter.

You also must consider the time remaining and balance the risk/reward ratio over that time frame. One tactic might be to sell out the long call while buying stock in the cash market to offset the short call, turning the spread into a covered position. This should help you capture some of the time premium still remaining short the call.

Matthew Kelmon, president of Kelmoore Investment Co. , a mutual fund company that makes extensive use of covered calls and other option-hedging strategies, operates under the theory "that it's usually not worth it to hold a position until the bitter end and to try to squeeze out the last few pennies."

If a position has moved deep into the money, Kelmon figures he has realized the bulk of the gains and feels that "profits should be taken applied to other opportunities that present a better risk/reward with the same remaining time frame." However, Kelmon is adamant about not legging out of a position "because you can end up giving away a lot of your profit in the execution due to wide bid/ask spreads and your attempt at market-timing."

Because of the leverage advantages of options, the maxim of not being pennywise and pound-foolish is perfectly applicable.

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 May 1989 to August 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.