HOT TRADING STRATEGIES FOR A COLD MARKET
Daily Stock Market Equity and Options Trading Commentary

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Friday, October 30, 2009

Most Active Stock Options October 30, 2009 & Trading Activity

As of today the top ten stock options traded were:
  1. S&P 500 SPDR (NYSE:SPY) November 105 Put Options
  2. S&P 500 SPDR March 91 Put Options
  3. S&P 500 SPDR March 92 Put Options
  4. S&P 500 SPDR November 104 Put Options
  5. PowerShares QQQ (NASDAQ:QQQQ) December 40 Put Options
  6. S&P 500 SPDR November 103 Put Options
  7. S&P 500 SPDR November 106 Call Options
  8. PowerShares QQQ November 41 Put Options
  9. S&P 500 SPDR November 106 Put Options
  10. S&P 500 SPDR November 102 Put Options
As you can see there is mainly bearish betting going on in the options market. I believe we could see this market trade down to 900 on the S&P before we can move higher. It would be nice to see the market pair some of its losses next week, but in anticipation for Friday's unemployment report, I believe we could see continued weakness in the early part of next week. I actually opened a put spread on the Dow Diamonds ETF (NYSE:DIA) for the November 95/90. I opened this position on slight volatility collapse before the weekend at roughly 3:45 PM. I also closed my put position on the Direxion Financial 3X Bull (NYSE:FAS) as it neared $1050 per option contract. I will look to reopen it if we can get some strength Monday. As stated Wednesday, there was some bullish option betting going on as we approached a 5% replacement from the highs on the S&P, and it looks as if it was the right play if closed yesterday. However today I did not see any similar bullish activity as the market dropped below that same 5% level, therefore I cannot say we should get any strength in the coming week. One thing I noticed on Citigroup (NYSE:C) as it traded within pennies of its Wednesday low was that some buying came into it pushing it back up to as high as 4.15. I am using weakness to get into stocks and ETF's that I feel I have missed out on, but I am selling put options on them. I feel this is the best way to take advantage of getting the stock lower, and taking advantage of the rising volatility we are seeing in the market. Have a good weekend - happy trading! Sphere: Related Content

Wednesday, October 28, 2009

Most Active Stock Options October 28, 2009 & Trading Activity

The top ten most active stock option contracts traded today were:
  1. PowerShares DB US Dollar Index Bullish (NYSE:UUP) March 24 Call Options
  2. S&P 500 SPDR (NYSE:SPY) November 105 Put Options
  3. S&P 500 SPDR November 110 Call Options
  4. S&P 500 SPDR December 2010 50 Put Options
  5. PowerShares QQQ (NASDAQ:QQQQ) December 40 Put Options
  6. PowerShares QQQ November 41 Put Options
  7. S&P 500 SPDR November 107 Call Options
  8. Citigroup (NYSE:C) November 4 Put Options
  9. SunMicrosystems (NASDAQ:JAVA) November 9 Call Options
  10. PowerShares QQQ November 42 Put Options
As you may have noticed the activity on the SPY seemed to be a bit more bullish than the past few days. This may be because we are down 5% from the recent high, and some traders may be thinking we could rally higher. The GDP number is ideal tomorrow, and I believe if it the least bit bullish we could see a nice rally. The dollar got stronger today making it 5 days in a row, and as you can see the most active option on my screen today was the UUP for March. I will hopefully have time this weekend to write a post about how to profit from a stronger dollar. I took profits in my put position on the FAS today as the NYSE Financial Index broke below the recent lows of 4647. I closed my position in the November FAS 85 puts and purchased November 65 Puts which will accelerate much faster than the 85 if the financials continue to sell off. I closed my Visa 72.50 puts this morning for $70 per contract and half of my 67.5 strike puts for $10 per option contract and the other half for $15 (I hate when that happens). I do still hold the 70 strike put options which were down, but make for a cheap hedge in case MasterCard reports poor numbers and Visa sells off with it. I watched Palm (PALM) approach a key support level today at 12.50 and as it traded off of 12.50 per share I sold 12.50 strike put options for $90 per option contract. I believe Palm will stabilize soon, as the cheaper they get the more attractive they become to a "bigger fish". One name which I have noticed extremely strange activity on is YRC Worldwide Inc (YRCW), I have noticed unusual stock and option volume over the last 3 days. I believe it is due for a big move one way or the other so a straddle may be key. I will not be posting Thursday as I am traveling and will not have access to the Internet. Happy trading! Sphere: Related Content

Most Active Stock Options October 27, 2009 & Trading Activity

The top ten most active stock option contracts traded today were:
  1. Bank of America (NYSE:BAC) November 17.5 Call Options
  2. Bank of America November 16 Call Options
  3. S&P 500 Index Options (SPX) December 2010 500 Put Options
  4. ConocoPhillips (NYSE:COP) January 40 Call Options
  5. S&P 500 SPDR (NYSE:SPY) November 107 Put Options
  6. Chesapeake (NYSE:CHK) January 2011 30 Call Options
  7. Citigroup (NYSE:C) November 5 Call Options
  8. ConocoPhillips November 45 Call Options
  9. S&P 500 SPDR November 106 Put Options
  10. S&P 500 Index Options December 2010 600 Put Options
It seems as if traders became bullish on Bank of America, and I noticed this as the stock moved off of its lows of 15.02 to finish the day higher. I believe this could have been a key reversal day for Bank of America, and think we could see it shoot back up to 17 per share range in no time with the help of the overall market. It looks as if there is some extremely bearish betting going on for the S&P 500 Index options, however this could be considered as a very cheap form of protection and nothing more. Almost exactly 2 500 strike put index options sold for every 1 600 strike put option. This is most likely a 2:1 ratio put spread, and ran for roughly $90 per spread (at last prices). A very cheap form of protection considering the break even is roughly 300 on the S&P 500 index, and would return a maximum gain of $10,000 per $90 spent if the S&P closed at 400 on December 2010 expiration. The ConocoPhillips (COP) and Chesapeake (CHK) calls traded today were among the most active because they are both spinning dividends out tomorrow morning. Today, I sold put options for the 72.50 on Visa, and went long the December 85 Call options with the premium received. I also opened a ratio put spread on Visa by purchasing one 70 strike put option for every three 67.50 strike put options sold. I did end up selling both the 40 and 35 strike put options on Buffalo Wild Wings and purchased the December 50 strike call options with the premium received. It looks as if BWLD is weaker after they came out with earnings, but it is a very lightly traded stock so it is hard to get a good read after hours. I also sold several put options for the Norfolk Southern (NSC) November 42 strike. Will look to buy back my puts on strength in the underlying names tomorrow. Happy trading! Sphere: Related Content

Monday, October 26, 2009

Most Active Stock Options October 26, 2009 & Trading Activity

As of today the top ten most active stock option contracts traded were:
  1. S&P 500 SPDR (NYSE:SPY) November 107 Put Options
  2. Bank of America (NYSE:BAC) November 15 Put Options
  3. Bank of America November 16 Call Options
  4. S&P 500 SPDR November 108 Put Options
  5. Citigroup (NYSE:C) November 5 Call Options
  6. PowerShares QQQ (NASDAQ:QQQQ) November 43 Put Options
  7. S&P 500 SPDR November 109 Call Options
  8. S&P 500 SPDR November 106 Put Options
  9. Bank of America November 17.50 Call Options
  10. PowerShares DB US Dollar Index Bullish (NYSE:UUP) December 23 Call Options
The top contracts traded today seemed to be a bit more bullish than the past few days. The UUP is very rare to see among the most active. Could this be signaling a stronger dollar ahead? I am a bit skeptical going long if the dollar gains strength as I think it will put pressure on the market. I am anxiously awaiting the Case-Shiller and the consumer confidence reports which come out tomorrow at 9 and 10 AM respectively. I did not trade too much today, but will certainly look at taking a long position in the UUP if dollar strength continues tomorrow. I will look to sell puts on Buffalo Wild Wings (BWLD) and Visa (V) for sure tomorrow before their earnings releases. Revenue seems to be the key driver in all earnings reports so far! Sphere: Related Content

Earnings Season Option Plays for Tuesday & Wednesday

In my latest two blog posts Monday and Wednesday, I listed some stocks which I would be willing to go long by selling the puts right before the stock reported earnings. Keep in mind these are companies which I believed would have a positive reaction to the earnings, however if the stock moved sideways on the number this strategy would still likely return a gain the following day. This is because I am taking advantage of the increased levels of implied volatility factored into the option premium before earnings. If you missed them, be sure to check out Monday's blog post here, and Wednesday's here. So far this earnings season the overall results have been very positive, even on Ebay (EBAY), which sold off nearly 10% after earnings; I was able to purchase back the puts options (closed the position) for a $4 per contract gain the following day. The best results are of course when has a very positive reaction to the report and pops. My best trades so far this earnings season include the trades indicated in the two previous blog posts on the following companies:
  • Google (GOOG)
  • Apple (AAPL)
  • Caterpillar (CAT)
  • Texas Instruments (TXN)
  • SanDisk (SNDK)
  • Walter Energy (WLT)
  • Yahoo! (YHOO)
  • Amazon (AMZN) By far the best with over a 1900% gain the following day
  • Microsoft (MSFT)
The put options sold on the stocks above were quickly closed within 2 hours after market open following the earnings report (some for as low as $1 per option contract). In most of the cases, the call options purchased were also sold the following day, but I continue to hold both the Google and Apple call options. In this post, I will lay out some trades for Tuesday and Wednesday (October: 27 and 28).

To reiterate my previous blog post:

In this post, I will outline an option strategy that I use particularly during earnings season. This will put money in my pocket up front, give me a chance to purchase the stock for less than it's trading for now, and also give me gains if the stock moves even higher. I must note that this strategy could lose money if the stock moves much lower after results and you get the stock PUT to you at expiration (or in the rare case of an early exercise). This post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows some of the stocks I'm willing to go long (for reasons not discussed in this post), which will be reporting earnings in the two days mentioned above. To understand the table below read the example used with Visa (V).

With Visa reporting after the bell Tuesday, it may be a great day to sell put options as implied volatility will likely soar before the earnings release.

For example, let's say I'm willing to purchase Visa's stock at 7% less than its current share price. I would look to sell the November 70 strike Put options, and with the money received would look to purchase November 80 strike call options. Opening this position would put $40 in my portfolio. If Visa expires between 70 and 80 a share at November expiration, this position would return $40 (*NOTE* I always close my positions ASAP and do not wait for expiration). However, if Visa can get and close above 80 at November options expiration, this position has the potential to return even more. The break-even for this position is Visa at 69.60 a share at expiration; anything less would result in an unrealized loss on 100 shares of Visa stock. I would also look to purchase call options on the December 85 (instead of the November 80), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums.

Company Ticker Put Call Net
TUESDAY



AK Steel Holding Corp. AKS 17 22 $15
BP BP 50 60 $15
Buffalo Wild Wings BWLD 35 50 $40
Norfolk Southern NSC 45 50 $60
Patriot Coal PCX 11 14 $40
Sociedad Quimica y Minera SQM 35 45 $30
Textron Inc. TXT 17 22 $15
Under Armour, Inc. UA 30 35 $70
United States Steel Corp. X 38 44 $40
Visa Inc. V 70 80 $40
WEDNESDAY


$0
ConocoPhillips COP 49 55 $26
Express Scripts, Inc. ESRX 75 90 $60
First Solar, Inc. FSLR 140 170 $160
Southern Copper Corp. ... PCU 35 40 $115

This is a bullish strategy and should not be considered if you think the stock will sell off after earnings. However if you feel you've missed the stock and think it could move sideways or up after the report, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

The list above are stocks which I wouldn't mind holding in my portfolio if they get PUT to me at expiration. 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.

I use this strategy to open long positions when the market has rallied as much as it has. This strategy will allow me to purchase stocks for less, as well as provide a return without the stock if the market continues to rally. 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 AAPL December 200 Call Options, AAPL LEAP 100 Call Options, GOOG LEAP 300 Call Options, V November 60 Call Options, Short AAPL November 220 Call Options

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