These are a few of the questions raised and answered on the CBOE web site. If one holds a call option on a stock will he receive a dividend paid for the stock? The answer is no. You need to own the stock in order to receive the dividend. In other words you need to exercise the call option on or before the In-dividend date in order to receive the dividend. The price of an option will typically fall after the In-dividend date as the holder of the option will not be able to exercise the option and receive the dividend. Back to the original question and regarding dividends what happens to a call option if a company splits up before the In-dividend date? The more important date here may well be the Declaration date. This is when the company board of directors declares a dividend. If a company is in trouble and about to be split up it may forego declaring a dividend, which will reduce the value of the call option. Succeeding in options trading requires that an options trader keep track of such events as they affect the stocks on which he is trading options.

In regard to exercising the option and the value of the option what happens to a call option if a company splits up? This falls under contract adjustment. To quote the CBOE, “Whenever the terms of an equity option contract have been changed to terms different from its original standardized terms, such as the contract’s deliverable (unit of trade) after an underlying stock split, or corporate action such as a take-over, merger or special stock or cash distribution, those terms will be adjusted to account for this.” For the options trader knowing when and how a contract’s terms have been adjusted is basic to how to buy stock options. The first hint of a contract adjust will typically be a seemingly mispriced option. In other words the option price will not seem to fit the underlying stock price and the strike price of the option. This will especially be true if all put and call prices are far different that when one might expect. The trader can check the contract adjustments area of the CBOE web site for bulletins regarding adjustments made due to special distributions, mergers, stock splits, or more damaging news such as a company splitting up.

A contract adjustment is what happens to a call option if a company splits up. To quote the CBOE site again regarding “other types of corporate action” than stock splits, “such as mergers, take-overs, spin-offs, and special distributions of cash and/or stock, adjustments fit the circumstances and terms of each action, and these vary from situation to situation. If you have, or are contemplating an option position in any class of options that is undergoing contract adjustments, be on the alert. Make yourself fully aware of what the adjustments are and how they may affect you financially.” In short, what happens to a call option if a company splits up can have a dramatic effect on call option price and needs to be attended to promptly to avoid significant loss. How to trade options in these cases is to be aware and check out discrepancies promptly.

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How to write a covered call most profitably has to do with picking the strike price of the option. A very high strike price, compared to the current price of the stock, will sell for less but the contract will be less likely to be executed. Thus the owner of the stock and writer of the option will be able to recurrently sell options on his stock. This is a little bit like eating your cake and having it too. However, if the options writer chooses to sell an option with a lower strike price, compared to the current stock price, he runs the risk of having to sell his stock at the strike price and forego the profit he would have made on the stock when it rose in price. How to write a covered call most profitably is to have a clear idea about just where the stock is likely to go in price and only sell options when you believe the price will not go up. This strategy applies to how to trade stock options, in general.

How to write a covered call includes choosing a time frame. The longer the time until the call option expires the larger the time value of the option. That is to say there is more time for the stock, commodity, futures contract, or Forex contract to rise in value so that the buyer will execute it. The ideal situation in writing an options contract is for the owner of the equity to receive the premium, keep the equity, and repeat the process numerous times. An options trader will sell to open. He receives the premium immediately and assumes the obligation to sell should the buyer choose to exercise the option contract. This is often an occasional options trading strategy for those owning stock and wishing to add to their cash flow. Writing covered calls successfully can be like receiving an extra dividend check every so often.

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The Chicago Board Options Exchange (CBOE) offers interest rate option trading. CBOE describes interest rate options as “European-style, cash-settled options on the yield of U.S. Treasury securities.” This is one of the kinds of options trading that deals solely in projected interest rates. These options trade in U.S. Treasury bills with short, medium, and long term rates. Options trading terms are the same in trading interest rates as in other options trading.

Interest rate option trading is referred to as trading in yield based options. In trading interest rates on U.S. Treasury bills the individual who buys a call option expects the prevailing interest rate to go up. The individual who buys a put expects the rate to go down. For the buyer of a call option to profit, the underlying interest rate must rise above the strike price by more than the premium paid. For the buyer of a put option to profit, the interest rate must drop below the strike price by at least the price of the premium. In addition, taxes and commissions will figure into the cost analysis for interest rate option trading. For using risk management in options trading the same types of combinations of puts and calls, buys and sells apply as throughout options trading.

Interest rate option trading products offered by CBOE include the thirteen week Treasury bill which trades under the symbol IRX, the five and ten year notes as FVX and TNX, and the thirty year bond as TYX. Strike prices and spot prices in options trading work the same on interest rates as in other options. The buyer profits when the spot price rises or falls from the strike price, depending upon whether he or she purchased a call or a put. The seller is betting that the spot price will not move significantly away from the strike price so that he or she will gain the premium paid for the option and will not lose on a large adverse movement in the interest rate of the  product involved.

Options expiration dates for interest rate option trading at CBOE are the Saturday following the third Friday of the expiration month. The option value of interest rate options is ten times the yield of the underlying security. For example an interest rate of 3% on a 5 year bond makes the option worth $30. Interest rate options trading contracts are settled in cash. There is no need to buy or sell the actual bills, notes, or bonds. Contracts are multiples of 100. In the matter of United States versus other options trading interest rate option trading is done in European style. Thus all contracts are settled on expiration, never before. While the multiplier for contract is 100 the strike price intervals are quoted at every two and a half points as opposed to every five points on a standard strike table. A one point interval is 10 basis points. Premiums are quoted as one point for every $100 and are in decimals.

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Let’s look at what our options are in trading call options. There are call options and put options each of which you can buy or sell. You will buy or sell call options depending upon whether you believe a stock is about to go up or down.

An options trader who thinks a stock’s price will go up can purchase the stock or, for a much lesser amount, purchase a call option on stock at or near the current price. This means the options trader has the right to purchase the stock at any time up until the expiration date of the call option, at the set price called the strike price or the exercise price regardless of what the market price, the spot price, is. If the stock does not go up the trader is under no obligation to buy. If the stock goes up the trader has the right to buy.

The price of a call option is based on what traders think is the value of the option and upon the difference between the set price for buying the stock and current stock price. If the consensus of options traders is that the stock is very likely to go up the price of the call option will reflect that fact and be more expensive. If options traders believe that the stock price will go down or stay the same then the price of the option will be low.

The risk in buying a call option is that the stock will not go up enough (or not at all) to warrant exercising the option and buying the stock. The risk of selling a call option is that the stock will go up spectacularly and you will miss out.

In selling call options you are betting that the stock you own will not rise sufficiently and that at the end of the term of the option you will still hold the stock and be richer by the price of the stock option you sold. In general only owners of stock will sell options because, if the price goes up spectacularly, they will not need to go into the market and buy at a high price in order to sell the stock at the previous low price.

Options traders who buy call options typically are not interested in long term stock ownership. The idea is to use a smaller amount of capital to purchase options on stocks that are about to go up. When that happens the purchases exercises the option, buys the stock and promptly sells at the higher price. The gain for the successful buyer of a call option is the higher price minus commissions and minus the price of the option.

Both buying and selling call options have their place depending upon whether or not you already own the stock and whether you believe the stock’s price will go up or down. Investors typically sell call options and traders typically buy call options.