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Options, Dividends and Volatility


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Options, Dividends and Volatility

There is an excellent discussion of specific options trades in the current online issue of Forbes (www.forbes. com /sites /stockoptionschannel/2013/11/11/interesting-april-2014-stock-options-for-cisco-systems/). The article discusses put and call options for April 2014 for Cisco (CSCO). At issue are the price of the put option or call option, the dividend paid by Cisco, and potential market volatility. This is an article for investors who may wish to sell puts or call on the stock and want to do the arithmetic on how much they will gain or lose using various scenarios. It is an excellent example of the fundamental analysis of options in cases in which picking options is just matter of arithmetic. Our take on options, dividends, and volatility follows.

Options Price and Anticipation of Price Changes

As a rule, options writers make more money than those who purchase options. Selling puts can lead to devastating losses if a stock falls markedly and leads to lost opportunity if the stock soars in value. The options trader will want to account for premiums on options, dividends, and volatility. For example, when an investor sells calls and puts on a basically stable stock such as CSCO he limits his risk. When selling puts and calls on a large cap stable stock it is often simply a matter of doing the math. For a refresher on how this is done read the Forbes article. If you are thinking of selling calls and puts in a volatile market on volatile stocks you had better have deep pockets because of the risk of an occasion very large loss. In online options trading remember the triad of options, dividends, and volatility.

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