Lower volatility means calmer seas, but can the boat still sink? Revenue strategies for option traders during low volatility – Taking advantage of the CBOE VIX
Lower volatility for options contract generally translates into lower vega, and lower premiums. The lack of price variation in the underlying assets, is a volatility best represented by the CBOE VIX, volatility index of the S&P 500. This index found comfort at higher levels since mid summer, when stock prices varied extremely, often times by more than 10% within the week. This volatility was due to better than expected results in earnings release, in most cases, and a horrible economic performance from Europe and the United States.
Since mid-November, volatility levels have come down from their 50% peak, and are resting, around 30%. The higher volatility earlier in this quarter implied more chances for options buyers, to make significant profits. Most of their out of themoney contracts would end in the money. As well, it was a different situation for option writers, who maybe had a better premium, would eventually fall out of the money on their side.
The time has come for sellers to strike back, as now option selling strategies can allow option writers to reap a profit. Although the current economic forecast is not clear, and we are still bombarded with good and bad news, with the holidays around the corner, I would expect the same sort of “Calm before the storm” situation in the market as it happened this summer, it is therefore just a short period of time for sellers to get back on their horses, and collect their dues, before it’s time to get on riding a higher volatility again.
Europe still has not fixed it’s debt issues, and day after day more and more large institutions and banks are defaulting, companies in the USA might still be bringing forth many good news on their performance, but they are part of an economic system that is unfortunately intertwined and thereby codependant.
As such, I would strongly advise traders to watch the news carefully, but not to be too optimistic over the long run (1-2 months) for a steady recovery yet.
Forex options trading, take advantage of politics and world wide economy in your trading strategy. Options are not limited to assets listed in the stock market, you can use options with forex trading.
In this economy, where the only direction Europe is headed is down, and despite it’s previous experience with a similar situation, America is stubbornly following, we can expect fluctuations as both race for small dips. We can see this battle of the giants by the ebb and flow of world wide market indexes, and a volatility VIX index that has found stability at higher levels.
Forex trading is highly dependent on politics, if you believe your government’s not doing the right thing in regards to the economy of your country, options is a great way to Hedge your cash. Indeed, forex options have limited downside risk, that is limited to the premium of the contract, and unlimited profit, it’s a great way to safeguard you from a national recession.
Forex options offer the classic put and call options, as well as SPOT, which are extremely flexible options. SPOT, or single payment options trading, allows you to spell out a scenario, such as “EUR/USD will be at 1.30 in 12 days”, for which you’ll obtain a premium, and get paid out if the scenario takes place.
Many options traders enjoy the flexibility offered by SPOT trading, for bullish traders these days; in this bouncy downhill track of a recession we’re going down, it’s a safety net for when America will decide to cut loose from the European wagon’s decent.
Be careful as in SPOT comports the same time risks as options, even if you get to decide on the expiry dates yourself. Premiums for SPOT options are also higher than the typical options, it’s a considerable trade off.
A put is a contract that gives the holder the right to sell the underlying stock at a predetermined strike price, by a fixed expiration date, for a premium whose value varies depending stock price, and greeks.
The buyer of the contract is called the Holder, and has a long position, the seller is called the Writer, and has a short position.
It is important to note the difference between writing and holding a call:
- Holding a put position has limited profit: if the stock goes to zero the profit is maximum. However the risk is limited to the premium paid for the contract.
- Writing a limited reward, and writing naked puts has unlimited risk, and covered calls have a very high risk (if a stock rises).
- Writing a put
- Holding a put
Selling, or writing a call creates the obligation to sell a stock at a predetermined strike price. This contract is sold for a premium, and if the stock does not reach the strike price by expiration, the contract will expire worthless, therefore the writer will keep the premium as a profit. However, if the stock does rise beyond the strike price, the writer will be obligated to sell the stock at that strike.
If the call writer does not have the underlying stock on hand, a short position on the stock will be created, this is called a naked call. If the writer does own the underlying stock, the position is called a covered call, and that stock must be sold at the strike price.
Shorting a call is profitable in a bearish market.
This is a preview of “Sell call ( Short call )“
Why buy a call when you can own the underlying, one may ask. This depends on the intentions and predictions of the holder.
Buying a call is a limited risk, unlimited reward scenario. However one needs to be careful when choosing the expiration date for the contract. You might end up out of the money, and lose everything.
Long calls are profitable in a bullish market.
This is a preview of “Buy a call ( long call )“
A call is a contract that gives the holder the right to buy the underlying stock at a predetermined strike price, by a fixed expiration date, for a premium whose value varies depending stock price, and greeks.
It is important to note the difference between writing and holding a call:
- Holding a call position has limited risk with unlimited reward
- Writing a limited reward, and writing naked calls has unlimited risk, and covered calls have a very high risk (for a stock that tends to 0).
Options can be intimidating at first, especially for someone who first sees an options chain and all the tables and mathematics associated with options. In reality, options trading requires constant attention, and very careful monitoring, but once the basics are understood, and you know where to get the right tools to do the math for you, they can become a gold mine. Options can be used in various strategies, including strategies that incorporate buying the actual stock (a strategy with several positions is called multi-legged).
Stick around to learn options trading secrets.
Tricks and secrets of options trading have the potential to make you a fortune within a day. While minimizing the amount of money you could loose. The options trading market is one of contracts made on an underlying asset, and these contracts are not issued by the company or entity representing that asset. In essence, it’s like an insurance contract, you can use it to protect you from getting wounded, but you might not use it at all even though you did pay the premium. However if you use it the insurance covers you for several times more what you paid as a premium. That’s where it gets interesting.
Whether you’re already a stock trader and want to add options in the soup for protection, or if you’re a neophyte curious about options, I’ll go through the ins and outs of succeeding in this options world.
If you already understand the basics and how options work you can skip to the strategies section where we discuss several mathematical tools and secrets useful to options trading, and tricks to maximize the profit, while minimizing the risk.
This is a preview of “Basics of options trading“
Jobs, Bernanke, and Buffett’s move: more volatility as summer ends? It’s still an options trading territory!
This week offered a several day long recovery of the $DJIA, $SPY and other major averages, as investors awaited Bernanke’s speech. Hopeful of some words of hope from the Fed chairman, investors recovered slightly from earlier weeks’ dip, some were expecting quantitative easing, others more skeptical. In the end, Bernanke did not offer much of a solution for immediate recovery, but did leave the door open for further examining of the US economy next month.
Giving investors hope for some sort of action in the mid-long term; allows for rumors of potential aid from the Fed next time, food for the bulls. This is essentially the opposite of any subpar news, similar to what we’ve had in early august. This in fact did lead to a short rally after Bernanke’s speech, with the S&P 500 up 17.53 points and DJIA up 134.72 points. I have no doubt this will be re-digested by media to push for more bullish moves in the coming weeks. However, given the global economic situation, including European bank debt problems, and with an exceptionally high VIX, above 30% since the first week of August, reaching 40% at least three times, we can’t say we’re out of a bear market.
The financial sectors partial recovery was also assisted by Buffett’s decision to invest $5 billion in $BAC preferred stock, a move in the style of most of Buffett’s investment decisions, that promises slow growth in his profits. This Buffett style investment is reminiscent of his $GS investments in 2008, which paid off over 128%. His new position entitles him to a juicy 6% dividend, as well as 700,000 $7.14 warrant options. This insurance of long term dividend driven profit, for a cheaply priced stock that will probably not be left to crash by the American government. Could this be Buffett’s tell that BAC bottomed? or is it a precautionary move to weather down the recession ahead.
From an option trader’s point of view this offers greater volatility to juice long strategies, long straddles will likely payoff greatly on $BAC and other financials as this summer approaches its end and investors get back from vacation. There is also the weekend news about RBC missing estimates by 4 cents, at $1.04 versus the concensus of $1.08. Buying 3 to 4 months calls on the dips, and puts on the dips in BAC is likely to pay off well, given all that is stated above.
Hidden by all this turmoil, Steve Jobs, took the classiest way out, resigning at the top. Jobs resignation was a question of when, for a while now, and the timing was wisely chosen. After $AAPL became the most valuable company. So valuable it was able to withstand an apocalyptic crash following his decision. With September traditionally promising to be a major month for sales (and the iPhone 5 coming out in october), $AAPL will be strong against any market downtrend. As well the philosophy of the company has finally been able to go beyond his youthful image, cool techy image.
These news together in the last couple of days warranted a market uprising. It cannot be neglected that the European situation is still grim. Any negative news, or hint of fear over the week to come could have devastating effects, such as another dip, and a plunge is not out of the picture.
I will be buying protective puts on most of my positions, including techs and financials in the next weeks on the high days, and calls on the low days.
In what regulators believe is a strategy to restore confidence through this jittery market, four contries’ financial stocks’ will have a ban on short selling. Backing this hypothesis is that short selling will help reduce the impact of rumors on panic selling, bringing down stocks, and profiting short sellers.
Thursday night, the European Securities Market Authority said Belgium, France, Italy and Spain would bring forth this ban,
However, some of us still want to profit from the ebb and flow of this market, even as it plunges. Options can help you either way the market goes, and you don’t need to be shorting.
Buying puts is a buyer’s way to profit from an asset’s bearish move; Deep in the money puts carry less risk than shorting the stock, as you only pay for the contract, which is often times a fraction of the cost.
This week I profited from buying puts on $RIM, $BAC, and $SPY. I made up to 200% profit per position for moves as little as 10% on the assets price, there again. These were not Deep in the money puts, but to minimize risk for a short seller not used to options, deep in the money puts are the safest way to start.
Alternatively, if you believe the stock will have a bullish movement, deep in the money calls is a safe way to bet on them.
Following yesterday’s plunge of stock markets world wide, the $DJIA, and $SPY are rallying today, as investors await the Fed. Monday morning I hedged my long assets to avoid being affected by the downgrade, I did this by buying puts. The volatility was out of this world and those longing options, such as myself, made significant gains. My hedging paid off 200%, since the fear and doubt aura began in this market, and especially yesterday. I cautiously sold my puts by days end yesterday, and bought much longer expiring puts on the $SPY. We’re not out of this mad market, but I prefer to take less risk.
The $VIX was down a bit today, and this is giving us another opportunity to pack up on puts, and maybe get out of the long assets that may be more vulnerable of the crisis to come. If not, it’s always safer to go through the tough times ahead by hedging these positions.
$GLD maybe a good indicator of a crisis, if we look at 2008, following rising prices for gold for the past years, there was a sell off around October, as the recession began. Right now, gold is still strong but oil is letting go of its grip on high prices, I believe that when gold starts dropping too, this will be one sign of a big dip to come.
Once again I will hedge my investments for the days to come, at least until the end of August.
My opinion is that the day to day trading will be affected greatly by the news, especially by how much it will add to the uncertainty of the market the following session.
Also, I believe that just like European markets will affect markets world wide.
The S&P downgrade, the timing of which could not have been better to match the plethora of debt problems in Europe, are going to be a gold rush for options traders.
The VIX indicates major volatility in the S&P 500 options in the past week, and the news is only going to keep increasing it. Volatility will increase the price of option contracts; with ambiguous news coming from every source and I will buy December or 2012 deep out of the money Puts on SPY, and some US stocks. It’s also a good idea to buy protective puts on long positions you have, at least for the short term. As panic ensues in the confusion, I strongly believe these put contracts are the only safe haven.
A recession might be right around the corner, several indicators, including a head and shoulders pattern on the S&P 500 and DJI indicate that. However promises are being made by the Feds, or Banks in Europe that all hell will not break loose.
As of this time open markets in Asia and Europe are plunging, US markets will no doubt follow this same faith.
I will hold long, deep out of the money puts on spyder, for december as well as buying several protective puts on my investment tomorrow.
There’s been a lot of good news from $SBUX, including about it’s presence world wide, china, making for a larger demand, and with cheaper coffee prices, stock growth in June as well.
But amidst debt concerns, and no clear idea of what is going to happen next week, I’m still hesitant to position myself in this stock before earnings.
There will clearly be movement in this stock, and I am betting it will be positive. We can take a look at $GMCR’s movement today following it’s report.
So I will probably buy some calls for the short term, and sell them off before any bad news comes from Congress.
Then probably jump back in the train when it’s in the trough
For those willing to juice the volatility, look in the strategy section to see what options trading secrets could help you maximize your gains in the following week!
Just before closing i bought 4 calls on visa at 95$, at what i consider a good price, with a down trend all day. I expect the stock will turn around later this week, to next week.
Although I’m optimistic, news about the US Debt decision, normally due next week, will definitely affect this stock.
Tomorrow I will be watching $MSI, $XOM, $SBUX and try to make an end of day bet.
I’ve been hearing talk about $SBUX, and will read on about it, hoping to take a bullish position on it.
$MSI I am more bearish on, and $XOM, I will probably just watch.
The advantage of buying options just before earnings is that you get the same resulting percentage increase, without risking a lot more money. You also have a limited amount of losses in case the stock crashes.
The expiration is also more pressure on you to cash in your gains, in such a volatile environment these days.
Today I made a last minute bet on $AMZN today, bought some calls at a very cheap end of day price right before closing, and had a nice rally post closing, following a satisfying earnings report.
AMZN’s rally follows $BIDU’s earlier this week, and $GOOG earlier this month. It’s why i’m willing to bet $SINA’s and MOBI’s in the coming days and week will be no different.
Option’s is a great way to make bets before big announcements like this, where there will obviously be a much greater volatility, it’s much cheaper than buying the underlying asset. You can hedge your losses and still make a lot of money on the difference in premiums you’ve paid. You can try simple long straddle strategies if you have no idea what will be the outcome of the earnings report.
But personally, i have a positive outlook for both $MOBI and $SINA, my targets being 11$ and 130$ for the end of August. $YOKU is another chinese tech making some noise, but i have not looked into it enough to give my outlook. Face-value for a Chinese tech like that would make me bet it’s going up at earnings (August 8), but it’s barely a guess.
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