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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.


The volatility index went down a notch in november, from high 40s to 30s

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.

 

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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.

 

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Use options to circumvent the short selling ban in Europe! Deep in the money puts!

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.

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One more chance to pack up on options $SPY $GLD $DJIA

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.

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S&P Downgrade, European debt confusion. How options can help.

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.

 

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$SBUX – what will happen

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!

 

 

 

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$V good earnings all around from VISA

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.

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Who to watch on earnings in the coming weeks

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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This weeks outlook

Here are some notes i took down, concerning positions i have or wish to look into:

------------------------HSOL-------------------------
Problem:
80% loss on HSOL, with 70 positions, current price 5.217

Strategy to recover HSOL:
-write 5 puts of HSOL for DEC 17 @ .75 (375$), if it is exercised, $2500 of HSOL will be bought, average price of owned HSOL in portfolio will become: 5.02 

-puts might not be bought, might need to write puts for earlier deadline, to ensure that they will be held, but for less premium, however still bringing the price down.

------------------------BIDU------------------------
Outlook: earnings next week and US declaring debt report in 2 weeks, extremely volatile. 

But the outlook for BIDU is nonetheless pretty good, might be a good time to buy some calls @150, and write some puts at/around 140$ (not to keep, these puts must be bought to close if stock goes below 145, currently @ 152.)

Sought put write price: 4.00 (x100) for BIDU 200811 140 P
	Call price:	4.00 (x100) for BIDU 200811 155 C
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My picks for this week

I’ve been holding MOBI for a while now, waiting for it to recover and it’s almost there.

This rally is going to break several resistance levels i think, it’s around 11.10 right now, with extremely high volume, so something is probably  cooking in the kitchen. When news gets out i expect the volatility to raise even higher.

It’s a prime time to negotiate options with MOBI, two days in a row i saw 10$ and 12.50 calls each rise over 500-1000%, with minimal losses on the puts, so good time for hedging these stocks.

Definitely keep an eye on MOBI and one hand in your pocket.

 

Another one i’ve been watching recently is V, VISA, with a huge rally last week. It looks to be profiting from confusion in world wide economy. I’m not sure what to do with it yet. But definitely keep an eye on it, it looks volatile too.

 

SINA is settling at a resistance level around 114. My target for this stock is 140 by the end of summer, it will probably fluctuate before then, we’ll see what it gives.

 

RIMM, is probably a volatile one too, especially in the next week.

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Rumors of a RIM takeover, why RIM-AMZN is bi-winning.

RIM shares dropped to half their 2010 values in a year, and after dismal quarterly results, it decided to lay off an unspecified number of it’s employees world wide. We all want to know what RIM has up their sleeves at the moment, because if it does not pull some magical new technology soon, the outlook will remain grim

The Blackberry and Playbook are having a hard time catching up to the iPad 2, iPhone, and Google products in the competing mobile tech sector. RIM’s competition is constantly upgrading it’s features, and gearing itself towards new technologies such as iCloud for AAPL products.

Cloud computing is the future of software technology, and AMZN with one of the biggest web properties in existence, has become the first large scale and biggest cloud provider in existence.

If RIM was to tap into this cloud for its next gen devices, it would have a major advantage over it’s primary competitors.

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Observations, week of June

Last week i decided to take a step in my journey into options by buying Puts and Calls for SINA, a stock that has been going down since i initially bought some assets of it around $135.

In particular the last two weeks were really horrible as right after a small rebound, it went up to 125, then crashed in a couple of days to 90$ then 80$.

Effectively the “Sellers were in control” at that time. This was clear with options too, where there was an extremely high volume, that brought the average up by more than 3 milllion in a couple of weeks, from 7M to 10M.

In this kind of market where sellers are in control, i realize that it was not a good idea to buy option puts or calls, as neither really went in the money long enough. Sellers were keeping the spikes small until the expiry of my option.

The current market, the week after the expiry of options for june, is one that is marked by a big spike in tech stocks including RIMM and SINA, where sina gains 16% in a single day, RIMM over 6%.

So clearly these are fairly predictable markets and should have been noted.

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RIMM Long straddle for July 16

Following the mixed success of my long straddle, 1 week ahead of time with SINA, i decided i should try it tis time 1 month ahead of time with RIMM.

I placed orders for 100 July 16 calls at $1.1 and 100 Puts at $1.1 too, the volatility of these tech stocks this year allows me to believe both will go through.

Although i have greater confidence this assets value will go down, for the sake of testing the long straddle strategy with a second time i decided to try this again.

I also believe that either way it goes, it will rapidly cover the cost of the opposite contract.

 

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First day

6/8/2011 2:16 PM Option: Sell to Close at Limit SINA1118R105 (SINA 105.00 – Jun 2011) 13 $8.00 $8.10 $52.74 $10,477.26 $101,647.26
6/8/2011 11:09 AM Option: Buy to Open at Market SINA1118R105 (SINA 105.00 – Jun 2011) 13 $6.80 $42.74 $8,882.74 $100,000.00

You can see here i bought a put at 6.80 when SINA was going down. I based myself on gut feeling that panik would continue to push people to sell below the 100 mark, allowing my contract to rise to $8.

There is no strategy or options trading secret here!  This is an example of how much options can amplify your gains.

You can see that i made a total of 13*100*1.3. That is The difference in contract prices, times the amount of contracts (13) times the amount of assets the contracts represent (100).

So in a matter of 3 hours i made 1647.26, after commissions are removed.

 

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Options Basics

Tricks and secrets of options trading have the potential to make you rich, within a day. While minimizing the amount of money you could loose.

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.

If not, here’s an example that that helped me first make sense of options:

Suppose a local sports team has a game in one month against a city with no supporters (so locals are the only ones who’d buy tickets), and tickets are on sale now for 100$. Lets say you believe ticket prices will soar in one month because the team will perform well, but that you don’t want to pay the full ticket price right now, so your ticket reseller tells you you can put a down payment of 10$ to promise you’ll pay 100$ before the game.

In the time you wait before the game, your local team plays against other teams, and depending on the outcome of each of those games, the prices rise and fall, changing the value of the ticket for the big game. Lets say for example that your team beats the best team in the league! The prices for the final game will soar to 200$, however you still only have to pay the 90$ difference you promised to pay up to your dealer. When you do you can just sell back your ticket to any one who wants to watch the game, for 200$ and still get 100$ profit!

On the other hand, if in the mean time your team performs bad, the price for the ticket will drop, lets say it goes down to 50$, but you promised to pay 90$ to complete the original price of your ticket. You are at loss in this situation, of course you could just let go of the 10$ and not pay up the 90$, that way you’d only lose 10$. That is what i find really wonderful about options.

 

What you should remember from the example above is that buying options comes down to buying a contract. There are several types of options contracts, and we will see each of them in the Learn section.

 

 

 

So what you can win comes down to the actual volatility (variation) of the asset ( stock or commodity). Where as you can only lose as much as it cost you to buy the contract, often times that is much less than the actual strike price, however keep in mind that a contract is leverage of 100 stocks.

An other important aspect of options, is that Selling or buying the asset aforementioned in the contract is Not obligated, you can do it at any time too. And often times contract’s prices fluctuate greatly.

So if you’re still with me here, you’ll understand that this means volatility on top of volatility, and potential for gain once more (loss as well).

Of course, the potential for loss is compounded by the time-value of your option, which is the value it often loses as the deadline to sell your contract approaches. However if by that time there is no real proft to be made by going ahead with the sale of your asset, you can just let it lose it’s value completely (the time value will match the so called intrinsic value, and the premium, the actual value of the options contract, sum of these two, will now be 0)

 

 

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