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Daily Stock Market Equity and Options Trading Commentary

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Saturday, June 6, 2009

Over 250 Option E-Books Sold

As of 10:31 PM Tuesday June 2, 2009 I sold my 250th option trading E-Book. Helping educate people about options is something I love and hope to continue doing for a very long time. Although demand for my E-Book seems to be high I have decided to keep it under $5 a copy. Thanks for reading and supporting my blog, it is truly appreciated! Buy my latest version below!







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My Palm Pre Disappointment

After waiting in the Best Buy parking lot (as blogged about below) from about 4:30 AM to 10 AM I came up empty handed. So the story goes...

It was a very nice night and my friend and I decided that we'd stay in the Best Buy parking lot to get this new Palm device... Well we were the first people in the parking lot, so if Best Buy (BB) was going to get the new Palm (PALM) Pre I would sure to be getting one, correct? Incorrect! At about 5 AM cars starting showing up and a car dropped a guy off right in front of the door which forced me to get out and wait in line behind him... So here I am thinking I have a good chance of getting this phone, as I assumed they'd get at least 3 and I was second in line. So 7 AM rolls around and the Best Buy employees start coming into work. We kept asking them: “how many Palm Pre's do you guys have?”, and they simply answered: we can't tell you... So we wait some more and finally at about 9:30 a Best Buy Mobile guy comes out and takes the first 3 people in lines info to verify they are eligible for the Pre. So I was one of them, and very excited, as I've been waiting for this phone since January. Well after 10 minutes of taking our numbers and info, he says: "due to inventory constraints, we only got one Pre in". I was pretty upset at first, but then the guy starts going on about how long the activation process will take and all these other "bad" things about the Pre, as if he wanted the guy first in line to leave. He was saying it would take more than a month to learn all the gestures; it was definitely for a business person (the guy in front of me couldn't stop talking about the facebook syncing deal... I told him I trade stocks off my HTC Touch Pro every day, and manage my online website GoldenAgeCheese.com (my family business for over 25 years). Well the mobile guy got to bashing the Pre and the guy in front of me seemed pretty scared (I didn't care, as Palm stock has paid for this phone 100 times over for me), he kept asking when they'd get more in, he didn't want to wait but he didn't want to be upset, etc... So I am saying I want it no matter what, I don't care I won't be returning it anyway, and the Best Buy mobile guy wanted me to take it (as I told him what I'd be doing with it versus line stander #1 and I could tell he was pulling for me ;-) ).

So the guy in front of me definitely had every right to the Pre as he was first in line, but he was kind enough to offer me a coin flip. Sure enough I had my lucky "pocket analyst" which has a bear on one side of the coin and a bull on the other, I told him to call bull or bear, he chose bear and sure enough it was a..... BEAR! Fair is fair and the guy deserved it. However I feel Palm, Sprint, and Best Buy all blew this wonderful opportunity to sell many more phones today.

I did get the guy to reserve the next one they get for 24 hours though since it was such a close call. In a way I am kind of happy I didn't get it, this way I can check out more opinions online.

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Market Stabilizing or More Volatility Ahead? 3 Strategies to Hedge against Volatility

With the VIX closing below 30 (historically high level) as of Friday June 5, 2009, it looks as if the market is starting to settle down. The VIX shot above 30 on September 15, 2008 and has stayed above it (closing value) ever since. The VIX closed below 30 three times in May; on the 19th, 20th, and last trading day the 29th. As for June the VIX closed below 30 on the 2nd, but broke back above 30 on June 3rd before finishing the week below 30.

This seems to be a similar trend, and by the looks of it the VIX does not want to stay below 30. I think if we can stay below 30 and eventually move lower, it will attribute to the overall confidence in the market, and push the market higher. Looking at the chart below, we can see that the last time the VIX closed below 30 was on September 12, where it closed at 25.66, this correlates to the S&P 500 at 1251.70. (click image to enlarge)


I am not saying that the next time the VIX is at 25.66, the S&P 500 will magically be at 1270. However I am stating that it should attribute to a market rally. The chart above shows the VIX (red and white) and the S&P index (green), and as you can see is almost perfectly negatively correlated. As the VIX gets higher the market sells off, and as the VIX drops the market rallies (this should make sense).

Historically entering the summer months the market does not perform as well as the other months, however if the VIX could stay below 30 and get lower, it may help to keep the rally going into fall.

However something very different happened on Monday June 1, 2009. With the market rallying near 2.6% on Monday, we’d expect the VIX to sell off correct? Incorrect, the VIX also rallied 3.9%. This is a major disconnect from the way these two have been correlating in the previous 6 months. We can see from the 10 day chart below. (click image to enlarge)



This sends a signal to me that the market is factoring in more volatility ahead. Some ways to hedge against volatility are outlines below.

Strategy 1: Purchase the iPath S&P VIX Short-Term Futures ETN (VXX)

Strategy 2: Purchase the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

Both of these are ETN’s and will help hedge your overall portfolio against volatility. As you can see from the chart below both ETN’s track the VIX quite well (VXX in green, and VXZ in blue). (click image to enlarge)


However I prefer using a bit riskier strategy with options. This captures the actual move of the volatility or “fear index”.

Strategy 3:

One way I hedge against volatility is to purchase call contracts on the VIX. Friday I used the weakness in the VIX to open a 35/40 option spread (learn more about options here) for the August expiration. It was $160 per contract to open this position, and I am protecting my portfolio against the VIX spiking. This may seem like a stupid idea, but let’s not forget those days back in October where the market sold off tremendously and the VIX spiked. Currently the options market is factoring in a 29.1% chance the VIX is at or above 40 come August expiration.

Using options to predict the probability the VIX is below 30:

As posted on my blog about VIX options, we can see that the options market is factoring in a 51.7% probability the VIX closes at or above 30 by June expiration (all data as of close Friday June 5, 2009). If we go out to July the options market is factoring in a 56.8% chance the VIX will be at or above 30 at July expiration.
Disclosure: Long VIX July 35/37.50 call spread, VIX August 35/40 call spread

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The Wait Has Begun for the Palm Pre...

I am currently waiting in the Best Buy parking lot to get a Palm Pre. With 5 hours to wait people have already started showing up... I am hoping this is the last blog post off my HTC Touch Pro... Sphere: Related Content

Friday, June 5, 2009

Mid-Day Options Watch

I am currently trying to sell some call options on the FAZ (3X financial bear) for the June $4. I purchased these shares this morning at $4.20 per share and am trying to return 12.5% in 2 weeks (assuming the option gets called out). The option has a greater than 70% probability it will expire in the money. The contract has a high of 70 cents today. I will keep you posted on this trade. Sphere: Related Content

60 ETF Option Strategies Spreadsheet Download

As posted previously in my blog, ETFs are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETFs is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately (gives you some downside protection), however if the stock takes off you cap your upside.

The buy/write option strategy seems ideal when purchasing diversified ETFs. This is because diversified ETFs are less volatile than purchasing specific stocks (however leveraged ETFs are extremely volatile and click here to see why I don't believe they are investment vehicles).

Below is a list of 60 ETFs and their % probability (risk-neutral) of expiring above the indicated strike, as well as the % return if they expire above the indicated strike. The list below is sorted alphabetically, and all options are for the July expiration (July 18, 2009). Every strike price is near the money unless indicated in the money (denoted by IN $).

(All option data priced as of pre-market Friday June 5, 2009).

Stock Ticker Strike % Probability % Return
Consumer Discret Select Sector SPDR XLY 24 54.2 3.9 IN $
Consumer Staples Select Sector SPDR XLP 24 42 2.7
DIAMONDS Trust, Series 1 DIA 88 47.8 3.5
Direxion Daily 10 Yr Trsy Bull 3X Shares TYD 50 68 2.6
Direxion Daily 30 Yr Trsy Bull 3X Shares TMF 40 42.3 16.9
Direxion Daily Devlpd Mrkts Bull 3X Shrs DZK 55 59.1 9.7 IN $
Direxion Daily Energy Bull 3X Shares ERX 40 48 16.4
Direxion Daily Financial Bear 3X Shares FAZ 5 49.1 27.7
Direxion Daily Financial Bull 3X Shares FAS 10 62.8 12.9
Direxion Daily Large Cap Bear 3X Shares BGZ 35 49.3 13.9
Direxion Daily Large Cap Bull 3X Shares BGU 35 62.4 8.6 IN $
Direxion Daily Small Cap Bear 3X Shares TZA 22.5 46.9 20.3
Direxion Daily Small Cap Bull 3X Shares TNA 32 56.6 12.8
Direxion Daily Technology Bull 3X Shares TYH 85 61.4 8.2 IN $
Energy Select Sector SPDR XLE 53 48.8 5
Financial Select Sector SPDR XLF 12 61 4.7 IN $
Industrial Select Sector SPDR XLI 23 59.2 3.3 IN $
iShares Dow Jones US Energy IYE 30 65.7 2.4 IN $
iShares Dow Jones US Real Estate IYR 35 54.9 5.5 IN $
iShares MSCI EAFE Index EFA 48 50.2 3.5
iShares Russell 2000 Growth Index IWO 59 48.7 4.6
iShares Russell Midcap Growth Index IWP 35 73.1 0.85 IN $
iShares Russell Midcap Index IWR 65 65.7 2.1 IN $
iShares S&P 100 Index OEF 44 50.3 3.2
iShares S&P 500 Index IVV 95 49.9 3.4
iShares Silver Trust SLV 15 64.5 3.8 IN $
Materials Select Sector SPDR XLB 28 50 4.7
MidCap SPDRs MDY 110 47.5 4.6
PowerShares QQQ QQQQ 37 49.1 4.2
Retail HOLDRs RTH 80 54.4 3.8 IN $
Short Dow30 ProShares DOG 66 43.7 5.2
Short Financials ProShares SEF 59 40.8 10.8
Short QQQ ProShares PSQ 55 60.2 3 IN $
Short Russell2000 ProShares RWM 55 51.7 5.3
Short S&P500 ProShares SH 66 42 5.2
SPDR Gold Shares GLD 97 49.2 4.2
SPDR S&P 500 SPY 95 48.9 3.7
SPDR S&P Metals & Mining XME 40 53.4 8
SPDR S&P Retail XRT 30 38.6 8.1
Technology Select Sector SPDR XLK 18 56 3.3 IN $
Ultra Basic Materials ProShares UYM 21 55.2 9.4 IN $
Ultra DJ-AIG Crude Oil ProShares UCO 12.5 61.7 8.4 IN $
Ultra Dow30 ProShares DDM 31 51.8 6.2
Ultra Financials ProShares UYG 4 64.2 8.2 IN $
Ultra Gold ProShares UGL 37 55.5 6.6 IN $
Ultra Industrials ProShares UXI 22.5 72.5 8.5
Ultra Oil & Gas ProShares DIG 31 54.8 8.2 IN $
Ultra QQQ ProShares QLD 40 47.6 8.6
Ultra Real Estate ProShares URE 4 61.7 9.7 IN $
Ultra Russell2000 ProShares UWM 21 54.5 8.7 IN $
Ultra S&P500 ProShares SSO 28 48.6 7.8
Ultra Semiconductor ProShares USD 20 52 9.7
Ultra Technology ProShares ROM 30 65.7 5.2 IN $
UltraShort Financials ProShares SKF 42 48.2 15.1
UltraShort Oil & Gas ProShares DUG 18 39.2 15.6
UltraShort QQQ ProShares QID 34 41.4 12.9
UltraShort S&P500 ProShares SDS 55 47.5 9.4
United States Natural Gas UNG 15 50.4 11.4
United States Oil USO 38 51.1 6.3
Utilities Select Sector SPDR XLV 26 44.5 3.1

The table above allows you to see which ETFs (out of my list of 60 chosen) have the best chances at the highest possible returns ("best bang for your buck"). I use this method to choose which ETFs I'll be buying to write out immediately. As a high risk investor, from this table I am most interested in the following ETFs: SPDR S&P Metals & Mining (XME), Direxion Daily Technology Bull 3X Shares (TYH), and the Direxion Daily Small Cap Bull 3X Shares (TNA). This is because all three of these ETFs (two of the three leveraged) have higher than average returns, and probabilities (of the 60 ETFs analyzed).

When writing in the money calls for expirations greater than 30 days, I usually use ETFs. This is because they are less volatile (on average) than individual stocks. As you can see from the table above, some ETFs written in the money will return a decent profit, while others return very high profit (considering the options expiration is 43 days away).

I like using this strategy especially with ETFs, because even if I'm not called out on the ETF (at expiration), I'll still have it to write out again at my desired strike price and date again for another premium. Check out my blog for more strategies like the ones mentioned above, options pricing, probabilities, and more.

Using this strategy during the months of September, October (2008) allowed me to protect my portfolio greatly, and I actually returned a profit in November (2008).

For your convenience I have ranked these 60 ETFs by return % and % probability. To download these spreadsheets for the July expiration click here (Excel 2007 and Mozilla Firefox recommended).

The first sheet has the ETF's ranked by return %. The second sheet has the ETF's ranked by probabilities they'll expire in the money.

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Thursday, June 4, 2009

Why 4 is My Lucky Number

4 has always been a lucky number for me, and as of today my portfolio of both cash and stocks is up 444% year to date.

It has been a very profitable 5 months.

My Top 5 Biggest % Gainers:

  1. Palm 5 July Calls
  2. BGZ 60 Puts
  3. SDS 100 Puts
  4. Goldman Sachs 90 Leap 11 Calls
  5. American Express July 15 Calls
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Playing More Conservative: 80 ETF Buy-Write Option Strategies & Ranked Spreadsheets

As posted previously in my blog, ETF's are some of the safest securities to purchase when planning on investing. An even more conservative way to buy ETF's is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately and gives you some downside protection, however if the stock really takes off you cap your upside.

The buy/write option strategy seems ideal when purchasing diversified ETF's. This is because diversified ETF's are less volatile than purchasing specific stocks (however leveraged ETF's are extremely volatile and as I state here I don't believe are investment vehicles).

I have put together a list of 80 ETF's (yes 80!) and calculated each of their % probability of expiring above the indicated strike, as well as the % return if they expire above the indicated strike. The list below is sorted alphabetically, and all options are for the July expiration (July 18, 2009). All strike prices are near the money unless indicated they are in the money (IN $).

Below is a list of the 80 Exchange Traded Funds. (All data priced as of pre-market Thursday June 4, 2009).

Stock Ticker Strike % Probability % Return
Consumer Discret Select Sector SPDR XLY 24 54.2 4.3 IN $
Consumer Staples Select Sector SPDR XLP 24 42.2 3
DIAMONDS Trust, Series 1 DIA 88 44.4 3.9
Direxion Daily 10 Yr Trsy Bear 3X Shares TYO 70 61.2 3.2 IN $
Direxion Daily 10 Yr Trsy Bull 3X Shares TYD 50 46.5 4.8
Direxion Daily 30 Yr Trsy Bear 3X Shares TMV 85 53.8 9.2
Direxion Daily 30 Yr Trsy Bull 3X Shares TMF 40 50 9.9
Direxion Daily Devlpd Mrkts Bear 3X Shrs DPK 30 61.1 9.7 IN $
Direxion Daily Devlpd Mrkts Bull 3X Shrs DZK 55 57.4 12 IN $
Direxion Daily Emrg Mrkts Bear 3X Shares EDZ 14 58.7 17.2
Direxion Daily Emrg Mrkts Bull 3X Shares EDC 90 53 17.7
Direxion Daily Energy Bear 3X Shares ERY 20 53.9 15
Direxion Daily Energy Bull 3X Shares ERX 35 58.1 12.7 IN $
Direxion Daily Financial Bear 3X Shares FAZ 5 56.3 20.7
Direxion Daily Financial Bull 3X Shares FAS 10 55 18
Direxion Daily Large Cap Bear 3X Shares BGZ 35 53.8 12.3
Direxion Daily Large Cap Bull 3X Shares BGU 35 58.4 9.5 IN $
Direxion Daily Mid Cap Bear 3X Shares MWN 30 51.4 12.4
Direxion Daily Mid Cap Bull 3X Shares MWJ 60 60.1 10.5 IN $
Direxion Daily Small Cap Bear 3X Shares TZA 22.5 53.2 18
Direxion Daily Small Cap Bull 3X Shares TNA 32 51.2 15.3
Direxion Daily Technology Bear 3X Shares TYP 22.5 58.1 10.8 IN $
Direxion Daily Technology Bull 3X Shares TYH 85 55.1 9.7 IN $
Energy Select Sector SPDR XLE 53 40.9 6.3
Financial Select Sector SPDR XLF 12 52.4 6.7 IN $
Industrial Select Sector SPDR XLI 23 53.2 4.3
iShares Dow Jones US Energy IYE 30 57.4 4.1 IN $
iShares Dow Jones US Real Estate IYR 35 48.5 7.4
iShares MSCI EAFE Index EFA 48 47.2 4
iShares Russell 2000 Growth Index IWO 59 42.7 5.7
iShares Russell Midcap Growth Index IWP 35 70.5 2.2 IN $
iShares Russell Midcap Index IWR 65 60 3 IN $
iShares S&P 100 Index OEF 44 46.6 3.4
iShares S&P 500 Index IVV 95 45.5 4
iShares Silver Trust SLV 15 55.9 4.9 IN $
Materials Select Sector SPDR XLB 28 43.3 2.6
MidCap SPDRs MDY 110 42.5 5.6
PowerShares QQQ QQQQ 37 44.8 4.9
Retail HOLDRs RTH 80 56.9 3.7 IN $
Short Dow30 ProShares DOG 66 46.9 4.8
Short Financials ProShares SEF 59 47.6 9
Short QQQ ProShares PSQ 55 63.5 2.8 IN $
Short Russell2000 ProShares RWM 55 56.8 4.8 IN $
Short S&P500 ProShares SH 66 46.1 4.8
SPDR Barclays Capital High Yield Bond JNK 34 54.5 1.4 IN $
SPDR DJ EURO STOXX 50 FEZ 36 44.3 4
SPDR Gold Shares GLD 96 45.4 4.7
SPDR S&P 500 SPY 95 44.5 4.3
SPDR S&P Metals & Mining XME 40 44.8 10.8
SPDR S&P Oil & Gas Equipment & Services XES 24 52.8 6
SPDR S&P Retail XRT 30 43.5 7.1
Technology Select Sector SPDR XLK 18 50.6 4.1 IN $
Ultra Basic Materials ProShares UYM 21 47.1 12.6
Ultra DJ-AIG Crude Oil ProShares UCO 12.5 49.7 12.1
Ultra Dow30 ProShares DDM 31 47.8 7
Ultra Financials ProShares UYG 4 56.5 10.9
Ultra Gold ProShares UGL 37 46.9 8.8
Ultra Industrials ProShares UXI 22.5 43.4 11.5
Ultra Oil & Gas ProShares DIG 31 48.2 10.6
Ultra QQQ ProShares QLD 40 43.1 9.7
Ultra Real Estate ProShares URE 4 56.1 13.5 IN $
Ultra Russell2000 ProShares UWM 21 49.3 10
Ultra S&P500 ProShares SSO 28 44.4 9.1
Ultra Semiconductor ProShares USD 20 46.8 11.1
Ultra Technology ProShares ROM 30 59.2 5.7 IN $
UltraShort Basic Materials ProShares SMN 17.5 54.8 11.5
UltraShort Dow30 ProShares DXD 46 53.8 7.1
UltraShort Financials ProShares SKF 44 50.7 14.7
UltraShort Industrials ProShares SIJ 40 56.1 7.8 IN $
UltraShort MidCap400 ProShares MZZ 38 50.2 10.4
UltraShort Oil & Gas ProShares DUG 18 45.9 12.7
UltraShort QQQ ProShares QID 34 45.3 11
UltraShort Real Estate ProShares SRS 20 50.5 21.5
UltraShort Russell2000 ProShares TWM 42 50.8 11.5
UltraShort S&P500 ProShares SDS 55 51.7 8.4
UltraShort Semiconductor ProShares SSG 40 44.6 15.1
UltraShort Technology ProShares REW 45 41 12.4
United States Natural Gas UNG 15 47.5 12.8
United States Oil USO 37 47.5 7
Utilities Select Sector SPDR XLV 26 52.2 2.6 IN $
Average

50.9725 8.75375


The July options expiration has 44 days left. Some people use the buy/write option strategy to write in the money covered calls and capture a 3% gain. If you write an in the money call every 2 months and happen to be called out every time, this would yield a return of 18% annually, not to mention dividends and capital gains distributions. The likelihood of continuously getting called out month after month is not too realistic, but not impossible either (and of course it depends on both the strike price and stocks volatility). For more information on options pricing, probabilities, check out my E-Book for under $4.99!

Among these ETF's are some which are very volatile such as the (TNA) and the (FAS), and some less volatile such as the (DIA) and the (SPY). As you'll see the greater the volatility of the underlying stock, the higher % return. You will also notice calls written in the money have a higher probability of expiring above the indicated strike (this should make sense).

Of these strategies I am most interested in the: (FAS), (IWJ), and (ERX). For one I am bullish on the underlying stocks (more reasons discussed on my blog), and their return % and probabilities of expiring above the indicated strike are both above the average for my analysis of these 80 ETF's.

Below is a spreadsheet I have created for 80 ETF's sorted by % return (click to enlarge).

Below is the same list but ranked in order by the current % probability they'll expire above the indicated strike price (click to enlarge).


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