Michael Thomsett

Michael Thomsett

Michael Thomsett is a prolific author and blogger. He has written eight options bookws including the best-selling Getting Started in Options (Wiley, over 250,000 copies sold, 9th ed. released March 4, 2013). He also recently published Options for Risk-Free Portfolios (Palgrave-Macmillan). He operates the educational website ThomsettOptions.com and teaches five classes at the New York Institute of Finance (NYIF). He lives in Nashville and writes and teaches fulltime.

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Trading Close to Expiration – a Strategy with Advantages

Everyone familiar with options trading is aware of the big dilemma: Options close to expiration cost less but expire soon. Options with more time to develop profitably cost more. How do you balance these conflicting attributes? Trading options very close to expiration and containing little or no time value might be the most powerful form […]

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How to Improve Your Odds with Put Ratio Backspreads

Traders tend to view the Put Ratio Backspread as a bear strategy, because it employs puts. However, it is actually a volatility strategy. So entering the position when implied volatility is high and waiting for the inevitable adjustment is a smart approach, regardless of the direction of price movement. Based on volatility and time decay, […]

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Black-Scholes – a Critical Examination and Suggestions for Alternative Methods

The big question, of course, is: How can we rely on a formula with a series of variables that are provably inaccurate and based on a flawed assumptions, exponentially inaccurate variables, and outdated models about the nature of options? The pricing model under the Black-Scholes (B-S) formula is premised on several assumptions. Today, in spite […]

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When Volatility Becomes Unreliable – then What?

Truth be told, volatility analysis is a great idea, but only until the last month before expiration. In that last month, volatility simply doesn’t work reliably enough to be used. Why? Because extrinsic value (IV) is not logical and most or all of time value has evaporated. What can you do at this point? These […]

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New Options Educational Site Launched

(Editors note: we are happy to pass along info about Michael Thomsett’s new blog site. He is a well known option expert and a friend of the CBOE. Good luck Michael). After years of writing books, articles, blogs, and opinion pieces within the options market, I recently teamed up with a partner, Michael Stoppa, an […]

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Pitfalls (and Possible Solution) of the Ratio Write

The attraction of the ratio write is the potential for higher premium income. Traders too often convince themselves that exercise is unlikely, and that time decay is “likely” to outpace intrinsic value as the stock goes higher, even if the calls go in the money. Here’s the thinking: You own shares of an underlying security. […]

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More thoughts on the Black-Scholes Quandary

I appreciated the comment from Sebastien Bossuposted to a May 1 blog I did for the CBOE community about Black-Scholes. Here are my responses: My primary issue concerning the assumed “risk-free” interest rate is not which rate to use, but my observation that no such thing exists. At the time B-S was published (and ever […]

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Best Ways Using Options to Manage Portfolio Risk

We all know about speculating with options, the market risks on the long and short side, and exercise possibilities. But putting all of that aside for the moment, do options serve a more valuable and even a more conservative purpose? How about managing portfolio risks with options? Every long position in your portfolio is exposed […]

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Swing Trading with Options – a Lot of Ways to Go

Anyone who has heard of swing trading knows what’s involved: open positions on exaggerated price swings, wait for the correction and then close. A swing trader generally expects to see the round trip within three to five sessions. The signals are well-known, too: narrow-range days (NRDs) often signal the end of momentum. A reversal day, […]

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Options for Portfolio Management

The reputation of options as high-risk speculative side bets persists even as the market expands and its utility becomes more mainstream. But in fact, options can be speculative and high-risk or very conservative and used to manage risk in a long position portfolio. The idea of options as risk management tools should not be surprising; […]

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Looking for an Alternative to Black-Scholes

The drawbacks of Black-Scholes are well-known and, while used in a limited way by some, the majority of trades find no value in the pricing model. But there are other ways to calculate and model price. First of all, what is the reason for pricing models? You want to know what, in theory, the option […]

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The Deceptive Nature of Option Risk

Everyonehas heard about the "sure thing" of low-risk or no-risk options strategies. But in reality, some risks may be lurking in the background, just out of sight butready to pounce. What this means is that some traders, whether new to options or experienced, mayconvince themselves that they have found the sure thing and that all risks […]

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The Dividend Collar: A High-Yield and Low-Risk Strategy

Is it possible with well-selected and timed options positions, to combine high-yield and low-risk? Yes, but it takes work to locate the right proximity and value. The dividend collar is so-called because timing involves ex-dividend date. The idea is to move into a long stock position right before ex-dividend date, protect that position with options, […]

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Do You Really Understand the Meaning of Low Risk?

I have recently been introduced to some new ways of thinking about investment risk. This has completely changed my point of view about trading, especially conservative trading. But “conservative” can mean different things to different people; so I offer a definition of this concept. Any low-risk investment with above-market average return is a Conservative Investment. […]

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Is Black-Scholes Worth the Trouble?

How many traders use Black-Scholes? I find myself questioning whether it is worth any more than an academic theory about option pricing. Let’s not forget when this paper was first published, 1973. Back then there were hardly any calls available, and for public trading, no puts at all. There has been a lot published since 1973 […]

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The Synthetic Advantage

When you set up synthetic long or short stock, you get some incredible advantages. These are easily overlooked. Consider, though: The risk to a synthetic position is no greater than going long or short on stock. But the synthetic position cost is close to zero, and possibly even a net credit. The short stock risk […]

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The “Installment Collar” – A New Twist

The "Installment Collar"  The collar can be expanded to create a truly creative variety. The traditional collar (own 100 shares, sell 1 covered call, and buy 1 put) can be turned into a long-term protective version:   buy 100 shares sell one very short-term covered call, maximizing annualized income as the result of time decay […]

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Uncertainty – What Else is New?

February 10, 2011, 11 a.m. EST: Today’s market opened weak and is now trending lower. But what does that really mean? Options traders don’t enjoy the luxury of certainty in the market every day. On those days when strong movements do take place, we can all feel safe following the trend. But when markets move […]

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The Risk of Doing Nothing – Michael C. Thomsett

Are options “risky?” Of course, like all products, options trading presents risks. But the actual range of risks is far broader than for virtually any other investment alternative. The perception of options as always high-risk, exotic, or mathematically incomprehensible, is based largely on the industry’s jargon and on some well-known but high-risk strategies like the […]