Option Trading Resource FAQ
Get answers to your questions about option trading resource available on the internet.
Q: Can I trade options in my IRA?
A: Probably - depending on your brokerage firm’s policies and procedures regarding trading in Retirement Accounts. Some firms take a more open-minded view of what types of trading can or cannot be made in a Retirement Account. Another policy to look for is the ability to trade option spreads in an IRA account. Many firms that will allow purchasing options or covered calls will not allow you to trade option spreads in your IRA. You’ll want to find a firm that offers you the flexibility you desire. You may want to read the CBOE White Paper on Using Listed Options in Individual Retirement Accounts.
Q: Are option trades taxed the same as stock trades?
A: For more information on tax-related matters relative to trading options, refer to Taxes & Investing - A Guide for the Individual Investor from the OIC.
Q: What is a put/call ratio and how is it used?
A: The put-call ratio is simply the number of puts traded divided by the number of calls traded. It can be computed daily, weekly, or over any time period. It can be computed for stock options, index options, or future options. Some market technicians suspect that a high volume of puts relative to calls indicates investors are bearish, whereas a high ratio of calls to puts shows bullishness.
Many market technicians find the put-call ratio to be a good contrary indicator, meaning when the ratio is high, market bottom is near, and when the ratio is low, a market top is imminent. The more highly traded options contracts produce a more reliable put-call ratio. Traders and investors generally buy more calls than puts where stock options are concerned. Therefore, the equity put-call ratio is a number far less than 1.00. If call buying is heavy, the equity put-call ratio may dip into the .30 range on a daily basis. Very bearish days may occasionally produce numbers of 1.00 or higher. An average day will produce a ratio of around .50 - .70.
Here are some numbers that may be used for illustrative purposes:
Index P/C Ratio
* Bullish: 1.5 or higher * Bearish: .75 or lower * Neutral: .75-1.5
Equity P/C Ratio
* Bullish: .75-1 * Bearish: .4 or lower * Neutral: .4-.6
The Options Clearing Corporation website provides two types of put/call ratios:
Equity and Index Options Volume and Open Interest for the
overall market,
and Volume
and Open Interest for individual stocks.
If you have any more questions that we should add to our our option trading resource page, let us know, or post them on our option trading blog, and we will get you the answer.
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