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

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Friday, November 6, 2009

Most Active Stock Options November 6, 2009 & Trading Activity

As of today the top ten option contracts traded were:
  1. Volatility Index (VIX) January 22.50 Put Options
  2. Volatility Index November 22.50 Put Options
  3. Ford (NYSE:F) January 2011 5 Call Options
  4. Ford January 2011 5 Put Options
  5. S&P 500 SPDR (NYSE:SPY) November 105 Put Options
  6. S&P 500 SPDR November 107 Call Options
  7. PowerShares QQQ (NASDAQ:QQQQ) November 42 Put Options
  8. Qualcomm (NASDAQ:QCOM) April 50 Call Options
  9. S&P 500 SPDR November 107 Put Options
  10. CB Richard Ellis Group Inc (NYSE:CBG) June 10 Call Options
By looking at the activity in the Volatility Index I would say this is more bullish than bearish. The January puts were purchased mainly for the ask price of $75 per contract meaning one assumes the VIX to drop below 21.75 by January VIX option expiration. The puts for the December VIX option expiration were mostly traded for the bid price, meaning the same trader possibly sold the puts at the bid to help finance the January position. We can also assume the trader is expecting the VIX to stay abobe 22.50 short term, and fall by January VIX expiration. There were plenty of very rare option contracts traded today, like both of the Ford (F) contracts making a possible straddle around the 5 strike, this is certainly a bullish play on Ford as Ford is currently in the money by 2.75 points on the 5 call, and pretty much protecting against a bankrupt Ford by January. QUALCOMM's earnings report must have made someone extremely bullish on the future of the company as it is very rare to see this many call options trade on the tech monster. The CB Richard Ellis Group strikes me as extremely odd. This company is engaged in Real Estate operations, which would signal to me that one trader may be getting bullish on the sector and decided to speculate with this mid cap company. I thought for sure it would have been a special event or dividend play, but I could not find anything related to this company, not to mention the calls are for June.

I did as I said I would today selling November 9 strike put options on the United states Natural Gas Fund (UNG) and selling November 12.50 put options on Quicksilver Resources (KWK) fetching a nice premium of $70 per option contract. I also waited for a drop in the PowerShares DB US Dollar Index Bullish (NYSE:UUP) and purchased some December 23 call options for $30 per option contract. I will look to hold these as it is a hedge against my portfolio in case the dollar gets stronger. I could not get a bidder to fill my orders for Priceline.com (PCLN) and Perfect World (PWRD), but I did sell some November 17.50 put options on Rackspace (RAX) for $80 per option contract and will look to purchase 20 strike calls Monday if it does not open much higher. Have a nice weekend! Sphere: Related Content

4 Earnings Season Option Strategies for Monday November 9

In my latest three blog posts, 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 my October 19 blog post here, October 21 blog post here, and October 26 blog post 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 put options (closed the position) for a $4 per contract gain the following day. The best results are of course when the stock has a very positive reaction to the report and pops.

Below is a summary of my best trades so far this earnings season. These companies and trades were pulled from the three blog posts indicated above.

  • Google (Very nice gain, with the following day being expiration)
  • Apple (We all remember the very nice pop Apple experienced the following day, the puts were closed and the calls used as a base in a call spread position)
  • Caterpillar (Both closed at market open as CAT set a 52 week high)
  • Texas Instruments (Closed put side at market open for pennies a share)
  • SanDisk (Was not expecting that move, closed both sides at market open which was too early, but a gain never hurt anyone!)
  • Walter Energy (Stock didn't move too much after earnings, closed for moderate gain)
  • Yahoo! (Closed at market open for less than 5% of the premium received)
  • Amazon (My best trade so far this earnings season, puts were closed for $2 per contract, less than 2% of the premium received, and as we all know Amazon sky rocketed causing the call side to explode. I closed 80% of the call position the following day for more than a 1200% gain, and the remaining 20% the day after that for more than a 1900% gain.
  • Microsoft (Was really a risk free trade in my opinion considering Windows 7 was being released within days of this report)
  • Buffalo Wild Wings (Even on weakness in the underlying, the puts experienced tremendous volatility collapse which resulted in a net gain)
  • Visa (Did not close the position as I am very bullish still on this name)
  • Norfolk Southern (The stock didn't move too much in either direction, but both puts and calls collapsed by about 40% the following day. I would have held until expiration if it were not for Mr. Buffett sending shares higher when he purchased Burlington Northern (BNI)
Most of 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 several such as the Apple, Buffalo Wild Wings, Google, and Visa call options.

As the bulk of the earnings have been reported, this post will only contain four stocks to use this strategy on. I expect to use this strategy on all four of these stocks listed.

To reiterate my previous blog posts:

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 Monday. To understand the table below read the example used with Quicksilver Resources (KWK). All data as of market close Thursday November 5, 2009.

With Quicksilver reporting before the bell Monday, Friday may be a good 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 Quicksilver's stock at 8.1% less than its current share price. I would look to sell the November 12.50 strike Put options, and with the money received would look to purchase November 15 strike call options. Opening this position would put $25 in my portfolio. If Quicksilver expires between 12.50 and 15 a share at November expiration, this position would return $25 or 2% in two weeks taking into account the maintenance requirement for selling the put (*NOTE* I always close the put side of my positions ASAP and do not wait for expiration, depending on where I believe the stock could trade from there will determine if I close the call side as well). However, if Quicksilver can get and close above 15 at November options expiration, this position has the potential to return even more. The break-even for this position is Quicksilver at 12.25 a share at expiration; anything less would result in an unrealized loss on 100 shares of Quicksilver stock. I would also look to purchase call options on the December 16 (instead of the November 15), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums (they can be opened for roughly the same as the November 15 calls).


According to Google Finance Quicksilver is the only stock of these four that reports earnings before the bell. Therefore the only chance to open this position would be Friday, The theta value from this position will be in your favor as the put side theta is greater than the call side theta. This is the rate of decay for the option (holding everything else constant) - theta is your friend when you're the seller, and your enemy when you're the buyer. I usually like to open the calls and puts simultaneously, however in the case of the three stocks below which report earnings after the bell Monday, I would look to sell the puts Friday and purchase the calls Monday. If the stock does not spike on Monday before the call option(s) are purchased, this will likely result in opening the position for cheaper, therefore putting even a greater amount of money in your portfolio. Again, taking advantage of the option decaying slightly over the weekend.

Company Ticker Put Call Net
Quicksilver Resources KWK 12.5 15 $25
Perfect World PWRD 40 55 $40
Priceline.com PCLN 150 190 $100
Rackspace Holdings RAX 17.5 20 $45





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 Calls, BWLD December 50 Call Options, GOOG LEAP Call Options, V November 60 Call Options, V December 80 Call Options, Short: GOOG November 580 Call Options, V November 70 Put Options, V November 80 Call Options

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Thursday, November 5, 2009

Most Active Stock Options November 5, 2009 & Trading Activity

As of today, the top ten most active stock options were:
  1. PowerShares DB US Dollar Index Bullish (NYSE:UUP) November 23 Call Options
  2. S&P 500 SPDR (NYSE:SPY) November 105 Put Options
  3. Bank of America (NYSE:BAC) November 16 Call Options
  4. Bank of America November 17.5 Call Options
  5. PowerShares DB US Dollar Index Bullish December 23 Call Options
  6. S&P 500 SPDR November 106 Put Options
  7. PowerShares QQQ (NASDAQ:QQQQ) December 44 Call Options
  8. Caterpillar (NYSE:CAT) December 45 Put Options
  9. Caterpillar February45 Put Options
  10. Human Genome Sciences Inc (NASDAQ: HGSI) January 10 Put Options
Judging by today's activity which was a bit lighter than yesterday's, we can see many are still extremely bullish on the U.S. Dollar. The November 23 Calls on the UUP traded over 200,000 contracts today making it over 550,000 in the past two days. The UUP spiked at about 2:30 PM and this particular call more than tripled in value from yesterday's close. Also we can see that speculation on a stronger U.S. Dollar has poured into the December option contracts. With a huge up day it is not unusual to see more put betting on the S&P SPDR (SPY) than calls, but I was startled to see that such heavy calls traded for the November 44 strike on the Q's (QQQQ), this would indicate to me someone thinks the techs will continue to outperform the S&P 500 in the coming months. It is very rare to see Caterpillar (CAT) trade among the most actives without a dividend being spun out, but this can be explained as a strong dollar trade as well. Let's assume the dollar gets stronger and exports decrease, which is a big part of Caterpillar's business right now. The volumes for the two months are almost identical today, which would indicate to me a trader is expecting a stronger dollar sooner rather than later, and decided to purchase the December puts while selling the February puts for a net credit of more than $100 per contract. Both contracts traded over 60,000 today which is extremely high! This seems like it would be a very good play if the dollar gets stronger sooner rather than later, or does not move too much by December expiration.

I took advantage of the strength in the market today and bought some puts on both the S&P SPDR (SPY) and Dow Diamonds (DIA). If we get an extremely ugly number tomorrow (again it will be ugly period, but anything over 10%) I think we could see a very big sell off. However if the number comes in better than expected, I think we'll see a nice rally. I will use strength to close many of my short put positions I have opened in the past week, and weakness to sell puts on some stocks like American Express (AXP), Buffalo Wild Wings (BWLD), Palm (PALM), Perfect World (PWRD), Rackspace (RAX), and Research in Motion (RIMM). I am also looking at adding to my Natural Gas Position on weakness. Happy trading! Sphere: Related Content

Wednesday, November 4, 2009

Most Active Stock Options November 4, 2009 & Trading Activity

As of today the top ten most active option contracts traded were:
  1. PowerShares DB US Dollar Index Bullish (NYSE:UUP) November 23 Call Options
  2. iShares Russell 2000 Index (NYSE:IWM) January 54 Put Options
  3. SPDR S&P Homebuilders (NYSE:XHB) November 16 Call Options
  4. S&P 500 SPDR (NYSE:SPY) November 105 Put Options
  5. Citigroup (NYSE:C) November 5 Call Options
  6. iShares Russell 2000 Index January 49 Put Options
  7. SPDR S&P Financials (NYSE:XLF) November 15 Call Options
  8. S&P 500 SPDR November 106 Call Options
  9. SPDR S&P Financials December 13 Put Options
  10. S&P 500 SPDR November 104 Put Options
This activity is the more bullish than the previous trading days. Something that stands out to me in a BIG way is the November UUP 23 Calls being the most active options with over 327,000 traded. This is really started to hint at a stronger dollar going forward, and as promised I will try to get to write an article on a strong dollar trade this weekend at the latest. I have been very sick lately and have not been able to write as much. Today's option activity gave us a very nice mix of different stocks/ETFs. One ETF we don't see to often is the Homebuilders (XHB), perhaps someone is speculating in a big way that we will see the home buyer tax credit extended. I sold November 23 puts on Cisco (CSCO) and November 5 puts on Conseco (CNO) today on increased levels of implied volatility before earnings. I will look to close both tomorrow morning on strength in the underlying. I am still very bullish on Visa and am leaving my position on the table for now. I purchased back some of the put options I sold just before earnings on Las Vegas Sands (LVS) today for 20% of the premium received. I will look to let the remaining position expire or purchase it back for less than a nickel a share if there is more than 10 days remaining the in the contract. Happy trading! Sphere: Related Content

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