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Daily Stock Market Equity and Options Trading Commentary

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Tuesday, September 15, 2009

Most Active Stock Options September 15, 2009

As of today September 15, 2009 the top ten option contracts traded were:
  1. Citigroup (NYSE:C) September 4 Put Options
  2. Citigroup October 5 Call Options
  3. Citigroup October 4 Put Options
  4. General Electric (NYSE:GE) September 15 Call Options
  5. S&P 500 SPDR ETF (NYSE:SPY) September 105 Put Options
  6. Citigroup September 4 Call Options
  7. Citigroup September 5 Call Options
  8. S&P 500 SPDR ETF September 100 Put Options
  9. General Electric December 20 Call Options
  10. S&P 500 SPDR ETF September 105 Call Options
Just three different stocks among the top ten contracts today. Looks as if people are quite bullish on General Electric both short and mid-term. I am surprised to see the Citigroup September 5 Call options being among the most actives considering it would need to shoot up by nearly 20%. There seems to be share dilution speculation which could drive the share price much lower, so use caution! Sphere: Related Content

50 Four Day Buy/Write Option Ideas: September Expiration

With the September options expiration approaching us in just 4 days, I thought I would outline some trade ideas on stocks I wouldn't mind going long (with the exception of AIG), that would return good percentages in just 4 days. When using the buy/write option strategy, it is important that you are willing to hold the security in case it is below the strike price at options expiration. I have put together a list of stocks/ETF's which will return a nice percentage gain if they are above the strike price as of September options expiration, but will also protect (lower cost basis) to the downside in case the stock/ETF sells off slightly and expires below the strike price. The list below is a very tall one, and for your convenience I have ranked the securities in order from the largest % return to the least. To learn more about the buy/write option strategy, risks, pricing, calculations, other strategies, and options in general, click here.

Note that higher beta securities return higher percentages due to their levels of implied volatility, and because they are riskier.

To understand the table, I will give a detailed example of Bank of America (BAC) below.

Sell the Bank of America September 17 strike call option. The premium received from the call option would give a downside protection of 1.82%. If the stock is assigned at options expiration on September 19, 2009 the total return from this position would be 1.88% in 4 trading days.

Company Ticker Strike Potential Return % Protection %





Citigroup Inc. C 5 11.50 0.88
Dendreon Corporation DNDN 28 5.72 3.65
MBIA Inc. MBI 7 5.64 4.34
American Intl. Group AIG 41 5.18 5.45
MGM MIRAGE MGM 12.5 5.11 3.65
SXC Health Solutions SXCI 45 4.30 0.80
Palm, Inc. PALM 14 4.04 6.61
Direxion Daily Financial Bull 3X ETF FAS 80 3.87 3.33
Allied Irish Banks, plc AIB 7.5 3.81 5.26
AMR Corporation AMR 7 3.75 2.88
Hartford Financial Services HIG 26 3.69 2.72
Coventry Health Care, Inc. CVH 25 3.55 2.82
Teck Resources Limited TCK 27 3.50 1.88
Yahoo! Inc. YHOO 16 3.47 0.71
Wynn Resorts, Limited WYNN 70 3.46 2.24
First Solar, Inc. FSLR 135 3.28 1.84
Discover Financial Services DFS 15 3.13 3.33
Agnico-Eagle Mines Limited AEM 70 3.01 2.16
Allegheny Technologies Incorporated ATI 34 2.91 2.08
Eastman Kodak Company EK 6 2.69 7.90
Human Genome Sciences HGSI 20 2.64 4.89
SL Green Realty Corp. SLG 40 2.47 2.62
Barclays PLC BCS 25 2.46 1.81
Las Vegas Sands Corp. LVS 17.5 2.44 5.54
KB Home KBH 19 2.42 2.37
BB&T Corporation BBT 27.5 2.41 1.83
Kinross Gold Corporation KGC 22 2.36 2.50
Kinross Gold Corporation KGC 22 2.36 2.50
Amazon.com, Inc. AMZN 85 2.30 0.94
Genworth Financial, Inc. GNW 11 2.28 5.71
Goldcorp Inc. GG 41 2.25 1.84
CME Group Inc. CME 280 2.17 1.44
Cliffs Natural Resources Inc CLF 30 2.14 3.45
Chesapeake Energy Corporation CHK 27 2.07 2.40
Capital One Financial Corp. COF 38 2.04 2.87
Baidu, Inc. BIDU 380 2.00 1.87
Goldman Sachs Group, Inc. GS 180 1.99 0.70
Textron Inc. TXT 19 1.97 3.37
CSX Corporation CSX 47 1.95 2.12
Caterpillar Inc. CAT 49 1.95 1.48
ArcelorMittal MT 40 1.94 2.61
U.S. Bancorp USB 22 1.91 1.82
Gold Fields Limited GFI 14 1.90 3.17
Wells Fargo & Company WFC 28 1.90 1.61
Bank of America Corporation BAC 17 1.88 1.82
JPMorgan Chase & Co. JPM 44 1.85 1.28
Google Inc. GOOG 480 1.60 0.57
Apple Inc. AAPL 175 1.58 0.84
Wells Fargo & Company WFC 28 1.54 1.25
Deere & Company DE 43 1.36 1.96

To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here. As a shareholder of Bank of America, Citigroup, and Goldman Sachs shares, I've written them out for a variety of strikes for the September options expiration, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

This is an ideal strategy to open long positions when the market has rallied as much as it has. This strategy will give protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long BAC, C, CAT, GS, PALM, Short BAC September 20 Call Options, C September 5 Call Options, PALM September 16 Call Options

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Monday, September 14, 2009

Most Active Stock Options September 14, 2009

As of today September 14, 2009 the top ten most active stock option contracts traded were:
  1. Citigroup (NYSE:C) March 5 Call Options
  2. General Electric (NYSE:GE) September 15 Call Options
  3. Citigroup September 5 Call Options
  4. Citigroup October 5 Call Options
  5. Citigroup October 4 Put Options
  6. S&P 500 SPDR ETF (NYSE:SPY) September 104 Put Options
  7. S&P 500 SPDR ETF September 105 Call Options
  8. S&P 500 SPDR ETF December 105 Put Options
  9. Financial Select Sector SPDR (NYSE:XLF) September 14 Put Options
  10. CBOE Market Volatility Index (VIX) September 25 Put Options
Note that the volatility Index options expire on Wednesday of this week. As the stock market continues to move higher there seems to be continued bearish bets, however today the bearish bets were lower than usual making up for only 40% of the top ten contracts. In my opinion a pull back is necessary, but since everyone is and has been expecting one, I think it will contribute to the market going even higher, perhaps the S&P 500 to 1075 and then 1100. I have been making money the last few weeks using the buy/write option strategy on several higher beta names but have the Volatility Index October options in place for a hedge. I am extremely bearish on AIG after the move it made to the upside today. Let's face it, the stock is worthless and in my opinion it is only a matter of time until it sells off significantly. Citigroup option contracts are back trading among the most actives, after a few days last week trading only one or two contracts in the top ten. General Electric broke to the upside today and it looks as if the September 15 call options followed it. For the third day in a row the Financial Select Sector SPDR (XLF) September 14 put options traded among the most actives. Other than that, there was nothing really too exciting in the options market today. Sphere: Related Content

25 Breakout Stocks to Watch: Week of September 14, 2009

In this post is a fresh list of 25 bullish stocks to watch for the week of September 14, 2009. I will be keeping my eye on all of these stocks this week, but chose only one to write a detailed option trade about this week. All of these stocks demonstrated tremendous strength during Friday's trade breaking out to the upside on huge volume. The table below shows the company, ticker, Friday's per share % increase, and Friday's volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price % Change Volume % Change
Tri Valley Corp TIV 164.96% 11291.34%
Neurometrix Inc NURO 30.04% 3365.85%
Altair Nanotechnologies ALTI 29.83% 2773.34%
Ambassadors Intl Inc AMIE 75.31% 1705.57%
Discovery Labs Inc DSCO 78.96% 1356.74%
Pinnacle Gas Resources PINN 13.51% 1116.25%
Fibertower Corp FTWR 36.84% 853.97%
Warren Resources Inc WRES 29.84% 725.83%
Innodata Isogen Inc INOD 5.69% 676.12%
Entegris Inc ENTG 7.32% 661.58%
Eagle Rock Energy Ptnrs EROC 9.32% 356.02%
Exterran Holdings Inc EXH 11.48% 355.00%
Informatica Corp INFA 6.73% 288.06%
Sealy Corp ZZ 13.38% 274.78%
Fedex Corp FDX 6.41% 252.02%
Select Comfort Corp SCSS 12.11% 217.41%
United Parcel Svc Cl B UPS 4.44% 204.66%
Powerwave Tech Inc PWAV 9.27% 193.93%
Commercial Vehicle Group CVGI 15.82% 190.16%
Motorola Inc MOT 8.91% 152.54%
B J Services Co BJS 2.63% 123.09%
Cirrus Logic Inc CRUS 4.48% 117.66%
Take-Two Interactv Sftwr TTWO 3.86% 95.38%
Amer Axle & Mfg Holdings AXL 16.14% 90.88%
Alliance One Intl Inc AOI 7.78% 30.62%

The stocks which are most attractive to me from the list above are: Informatica Corp (INFA), Innodata Isogen Inc (INOD), Fibertower Corp (FTWR), and Select Comfort Corp (SCSS). However from the four listed, the only stock which has options available to trade is Informatica, so below is a detailed option trade involving Informatica. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

INFA Option Trade:
I am quite bullish on INFA longer term, therefore I will be looking at opening a diagonal call spread. To open this I would purchase in the money March 15 call options and sell October 22.50 Call options against them. As of Friday's close this position could be opened for roughly $600 per option spread, and If I happened to get called out (INFA above 22.50 at October options expiration), this position would yield 25% in just over 1 month. If I was not called out, I would look at selling a similar call option for the month of November. This is a bullish income generating strategy.

The ideas outlined above involve the use of stock options. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see option volume chart).

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

Disclosure: No Positions

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Futures Looking Weak September 14, 2009

As of now the stock market futures are down across the board. I expect a volatile week as quadruple witching is Friday. There isn't too much data scheduled to be released Monday that could move the market. I will be looking to trade out of my American International Group (AIG), Harley Davidson (HOG), Visa (V), and Bank of America (BAC) September put options on weakness Monday. I believe we will see buyers step into this market on extended weakness, which is why I will be looking to close September put positions. As of now the DOW futures are down 73 points, S&P futures are lower by 9.10 points, and the NASDAQ 100 futures are down 12.75 points. Sphere: Related Content

Sunday, September 13, 2009

What I Learned from Last Year's Market Massacre: Protect with VIX Call Options

As we are approaching the 1 year anniversary of the Lehman Brother's Bankruptcy, and Merrill Lynch-Bank of America Merger, I decided to write a quick post to share what I learned from it all.

The Night: I remember like it was only yesterday, I was trying to study for an Environmental Economics exam, but I was distracted by the nightly news. I was caught up in watching people pour in and out of the Lehman building with boxes of their belongings; thinking what will this mean for the future of the stock market? Lucky for me I was a shareholder in the bank that was saved that night, as Merrill Lynch was acquired by Bank of America (BAC).

The Only Green Call Option: The following morning, I remember watching many of my long call option positions losing huge percentages. However I had one call position that gained quite a few percentage points... The Volatility Index [VIX]. I had purchased October 30 strike call options for very little premiums in August. This single position (less than 1% of my portfolio at time of purchase) hedged my portfolio quite a bit during the market massacre to come in the following months. The Yahoo Finance chart below shows the S&P 500 (blue line) and the Volatility Index (red line) from August 20, 2008 until September 11, 2009.
(click to enlarge)

With increased levels of uncertainty coming into the market, the VIX spiked. This spike mixed with a huge increase in implied volatility on VIX option contracts caused call premiums to sky rocket. It is estimated that a $1,000 investment for a VIX call trading at $5 a contract just weeks before the VIX crossed 25, would have returned over $1 million dollars at one point by October VIX expiration.

The Trade: Prior to last year's market sell off, the CBOE Market Volatility Index at those levels was unheard of, so far out of the money call options barely fetched a premium, however things are much different this year causing out of the money calls on the VIX to go for higher premiums. However, levels of volatility hit a fresh 52 week low on Friday September 11, 2009, and I believe it is a good time to protect with VIX call options. I have been accumulating VIX call contracts for the October 30 strike for a couple weeks now; I have paid as much as $280 per contract and as little as $150 per contract. I am not anticipating a market sell off, like the one experienced last year anytime soon, however protection is at the cheapest level in a year, so now may be a good time to buy some VIX call options to protect. To learn more about trading VIX call options, risks, pricing, calculations, other strategies, and options in general, click here.

The Lesson: With huge levels of implied volatility on option contracts for the VIX, contract premiums can climb extremely fast. While I was losing money on my long positions last year, the money gained from my VIX call options helped offset it, and allowed me to reinvest the profits into beaten down stocks. If there is one lesson I learned from last year, it was to have good portfolio protection, and I believe the best way to do this is to purchase call options on the Volatility Index [VIX].

The ideas outlined above involve the use of stock options. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see option volume chart).

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you will want to adjust the strike price and expiration accordingly.

Disclosure: Long VIX September 30 Call Options

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