CallWriter's Money Newsletter

As you know by now, the former (OPRA) option symbols are being replaced this week by the new option symbols developed by the Options Symbology Initiative (the OSI symbols). Everyone must use the OSI symbols beginning on Friday, February 12th. However, many brokers already are using the new symbols, as are Yahoo! and similar financial portals. Full consolidation of symbols will not happen until May, but for our purposes, the new symbols are here.

The graphic below compares the old OPRA symbol to the new OSI symbol for the same month and strike call option:

The new symbols are something only a mother could love, assuming the mother was a computer. Note that CallWriter's data feed will not provide us the new OSI symbols for our lists until Friday, February 12th. I would like to get them now, but that's the way it is.

We have revamped our software to deal with the new 21-character OSI symbols and do not expect any problem with the data changeover on February 12th.

Our calculator updates through Yahoo! and must request data in the Yahoo! format. Since Yahoo! will not recognize the old symbols, it is necessary to enter the new symbols (according to Yahoo!) into the calculator.

Once we have the new symbols on the Real-Time Lists™, it will be possible to copy the symbol from the list and enter it into the calculator. If necessary, the calculator will translate the symbol into Yahoo-ese.

But that will be an option only when we start getting the new symbols onto the lists. Until then, the option symbols must either be manually entered, OR copied from Yahoo! option chains and pasted into the calculator.

It is easy, by the way, to copy an option symbol that is also a hyperlink. If you just put your cursor on the symbol and right-click, you copy the embedded link. That's no good! To copy the text of the symbol itself, simply follow these two steps:

The same little trick also will work to copy symbols from the Real-Time Lists™.

Yahoo! features some option symbols that do not seem "right" - some February options on DOW, for example, have a root of NZA instead of the ticker symbol, which is of course DOW. I don't know why. However, for the calculator to update prices, you have to enter the Yahoo! symbol.

The market has of course been selling off since January 20th, and all the major indices have been affected, large-cap and small-cap alike. The DJ Industrials have lost about 1,000 points. The VIX, a sentiment indicator, began moving up strongly on January 20th, from under 18 to about 26, though it almost hit 30 on Friday.

When markets make a (relatively) uninterrupted rise, they tend to retrace at some point. The market of course traded in a rising range after the July low, which itself was the end of a retracement after the runup from March 9th. The market then stalled out in November by going into a flattish range. This market correction is in my estimation a good thing. A retracement of the autumn market rise was due at some point, and many traders were waiting for it.

You see, when a market has risen too long without a meaningful correction (or put differently, when market players large and small sense the market is overbought), a retracement of some of that uncorrected rise becomes almost a self-fulfilling prophecy. Players pull money out of the market to lock in profits and shorts get more aggressive, as do put buyers.

A true retracement will often pull the market back either 38%, 50% or 62% - and I am rounding slightly here - of the uncorrected rise. Think of these levels as 3/8, 1/2 and 5/8 and you're pretty much on the money. Yes, these are the famous Fibonacci levels. According to my reckoning, the 38% level is 9,720 for the Dow Jones Industrials Average (INDU or DJIA), which also happens to be the a support level fromthe November low. The 38% level is 1,043 for the S&P 500 (SPX). The SPX hit 1,044 on Friday the 5th, a cat whisker away from the 38% level. The same day, the INDU pulled back to 9,935.

Note that the market has broken through the 100-day average after clustering there for a couple of weeks and may sell off all the way to the 50% Fibonacci level, which coincidentally is right about the 200-day average and the October low. I'm guessing the sell-off still has legs for a few more weeks. We'll see. The turnaround will come on a cluster of days at a support level on climax volume.

There has been the usual hand-wringing on CNBC about the market collapse and the new "bear market". How do we know whether this is a (healthy) retracement or the beginning of an awful bear market? There is no way to know for sure. But we do know that retracements are a fact of life. The timing of the sell-off is auspicious, in my view.

But so what? Once we see the market is really selling off, particularly when it seemed a bit overbought, the only course is to get out of covered call positions. Why? So we can buy the stock cheaper, closer to the retracement's bottom! Doing this lowers our cost basis. Why hold a stock, except for portfolio stocks with the 1-year capital gains holding period accrued, when its value is falling? This logic applies with the same force to covered call writers! In fact, the second and rather large red candle on January 21st was a good time to dump a stock.

The logic goes like this: if the market simply is retracing, then dumping the stock early allows you to buy it back much cheaper when the shooting stops to lower cost basis. And if the sell-off is not a retracement but the feared return of the bear, then you are already out. Make sense?

SuperPut writers (covered call + a long-dated protective put) have lots of options, excuse the pun. You can dump the stock and then buy back the stock at a lower price (lowering your cost basis below the put strike) and exercise the put for a profit. Or roll the put down, which "puts" a few bucks in your pocket and replaces the original put with a lower-strike one more relevant to the current (fallen) stock price.

What else can be done in a correction? During a market retracement or any down-trending market, consider writing the inverse ETFs that move roughly opposite to the market. In fact, CallWriter offers lists of regular and leveraged ETFs that are rich with inverse ETFs.

Question: What should I do if I put on a buy-write covered call and I am not assigned at expiration?

Answer: You don't say whether the stock was up or down, or the whether the call was written ITM, NTM or OTM. When not assigned after a profitable call write, you have had a successful trade and lowered cost basis in the amount of the net profit on the write. Assuming the stock price is above your cost basis, you can sell the stock for a profit or write another call on it, known as rewriting.

Whether you rewrite the same stock again after assignment will depend on 1) premium available, 2) your assessment of the market at the time, and 3) your assessment of the stock and industry at the time (which is simple and fast using our Research Page).

For example, if earnings will be announced before expiration in the next month, do you want to write across earnings? If the company has preannounced earnings and given guidance for future quarters, maybe so. Also, if the market or industry appears to be turning down, it may make more sense to sell and find another trade.

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