Saving A Fortune. Stock & ETF Options Trading Made Easy: Including SPY, Apple and Google

If you are trading options contracts, you should consider a number of factors. Two very simple ones are commissions and liquidity. SPY (SPDR S&P 500 ETF) is one of the most liquidly traded options. By liquid I mean that the difference the bid/ask price as a percentage of the value of the option is small (this evaluation only pertains to out of the money option). Small would likely mean less than one or two percent. The narrower the bid/ask spread, the greater the likelihood that you will make a profitable trade. In addition, one should evaluate the cost of commissions when trading. Analyzing these two elements is essential for establishing profitable trades.

While options traders should be completely aware of other factors which help determine whether the trade that they are entering makes sense, understanding costs is a good place to start. In addition, traders must evaluate technical and fundamental factors associated with the underlying instrument before establishing the position and analysis of options valuation. While it may seem like a laundry list, our Options Guide provides a detailed look at the following essential issues: 1) historical and implied volatility, 2) the implied volatility skew, 3) relative value of options, 4) the appropriate options trading strategy given the market or volatility bias and 5) risk management. A combination of analyzing costs and the key options trading factors mentioned above provides an options trader with the best opportunity to make money.

Analyzing costs when initiating a strategy is relatively simple. You can easily determine the difference in the bid/ask spread and you know exactly what your commissions are per contract traded. Unfortunately, when the time comes to liquidate the position, those cost parameters may have changed dramatically. Exercise or assignment costs for in the money options can be dramatically different than the typical expense when initiating the transaction. If I am short a call spread in which both options are in the money, the transactional costs may be much higher than I expected. Be sure that you understand the cost differences. In addition, market liquidity of deep in the money options is typically much wider than those that are out of the money. If your position involves in the money options, you have to expect that liquidating costs are going to be higher.

The table below shows some options prices for the September expiration cycle. The snapshot of prices was taken at the end of the day. Measuring liquidity in the 219 Calls, the difference between the bid/ask spread is less than two percent. Earlier in the day, however, the spread was less than one percent. One final caveat that you may not have considered is that on the final day of trading, as the day goes on, the bid/ask spreads tend to get wider. Waiting until the final hours of trading before expiration can find you in a situation in which, if you are trying to liquidate to avoid exercise or assignment fees, can also be costly. The goal is always to keep controllable costs low so that if you analyze potential trading costs, your bottom line will likely be better. While you have no control over liquidity, by trading at times that options tend to be most liquid, you increase your chances of making money. Evaluating liquidity costs and your trading firms cost structure is essential. If you have any questions: Contact Us.

 

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.

Subscribe To Our Mailing List:

* indicates required

The Bull Market Is On, In Soybeans. Commodities Exposure Trading Limited Risk Options Strategies

Not only did stocks rally again on Monday, making new highs, but Soybean Futures gained almost 3% with the November contracts closing above $10 for the first time since July 29th. For the year the September E-mini S&P Contract has rallied 7.5% while November Soybeans have rallied 12.5%. Although Soybeans traded a high of 11.86 in June there was a sizable sell-off that followed and took November Soybeans down to a low of $9.43. This volatility is significant and provides speculators an opportunity to participate in a market that has significant upside potential.

The September Contract for Soybeans has been closing at a premium to the November contract which may be an indication of an expected shortage. Other grain contracts, like Corn and Wheat trade in a typical carrying charge market. This means that the price of the front month contract is less expensive than the second and farther out contracts. This would typically signify that there is not a shortage or a concern of a shortage. In the case of Soybeans, however, the front month contract is the most expensive contract on the board. Therefore, there may be the perception of a shortage. The Chart below gives a view of the November Soybeans contract since March.

 

I am no expert on Grains however the Soybean market provides an interesting environment for one who may be interested in getting long a commodity and doing it through a limited risk options position. The strategy set forth below is a long strategy for November Soybeans. It is designed to take advantage of the implied volatility skew which has a slight advantage and enables you to risk, if you were to trade in the middle of the bid/ask spreads, $928 to make $1072. It involves buying a call spread and selling a put spread to create a long position. The idea is to create a long speculative strategy with good value.

 

The Table above provides all of the details of the trade. As you can see if you were to get long Soybeans by buying the 1040 Call and Selling the 980 Put, which are almost equidistant from the current trading price near the end of Monday’s trading, you would have to pay for the trade. While you would have greater upside potential, you would also have unlimited risk to the downside. While I am always looking to devise options trading strategies with a significant implied volatility skew advantage, this simply does not exist in the current trading environment in Soybeans. If however, you want to get long Soybeans with a bit of an edge and participate with a defined risk and reward, this is the type of strategy you should be looking at in any options contract. Each market has a different skew so it is essential that you evaluate the implied volatility skew before trading. If you have any questions: Contact Us.

Whether it is stocks or futures, options speculating or hedging, options trading provide the opportunity to be creative and potentially find good value to meet your risk reward requirements. Our Options Guide provides information about trading strategies that should be reviewed. The example for Soybeans is ideal for one who is interested in trading from the long side only. The transaction would not be recommended in reverse if you wanted to get short. Options trading provide leverage and versatility not provided by just trading the underlying. Be sure to understand the rules of trading before putting risk capital to work.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Stocks Providing Wealth Across The Board. Amazon, Google, IBM And Walmart All Set Year Highs

Stocks made all-time highs on Thursday with shorts caught off-guard, again. Since Brexit, the market is up well in excess of 7%. Given that the risk-free return is practically nothing; those who have sought excess returns through investments in equities are quite pleased. Amazon (AMZN), Google (GOOGL), IBM and Walmart (WMT) all participated by setting new highs for the year. The question remains, will this trend continue through the election, or is the stock market, as represented by the SPY (SPDR S&P 500 ETF Trust), topping out. For those that want to participate in the market through options trading, there are bullish and bearish strategies which provide a statistical Black Scholes advantage if held for a significant portion of the vehicle’s trading period.

 For example, SPY provides liquid (small differences between the bid and ask prices) options on the S&P 500 Index. It provides the investor an opportunity to trade an ETF (Exchange Traded Fund) that essentially equates the movement of all of the components of the S&P 500. It provides diversification and the investor can trade one item (SPY) and her returns over time will replicate those of the S&P 500. (There will be a slight tracking error due to the cost of trading the ETF; it is a very small error). Therefore, buyers can both buy and hold the ETF or trade options contracts on the ETF with little expense.

If one chooses to trade options on the ETF, then there is the opportunity to design positions which are either bullish or bearish, but either can potentially provide good value. The first position to be discussed is for bullish traders. It is the long fence. The long fence (shown below and priced early on Thursday) involves buying an out-of-the money call and selling out-of-the money put. The key feature of the trade is that SPY’s puts, like those in most stock indices, are far more expensive in absolute price than a call with a strike price equidistant to the current trading price. In terms of Implied Volatility, the out-of-the money puts have significantly higher Implied Volatilities than the equidistant out-of-the money calls. In the example below you can see that while the out-of-the money put is much farther from the current trading price, it is still more expensive than the call we are buying. Keep in mind that because you are selling a naked put this is a bullish strategy with unlimited risk.

 

Should one want to get short the SPY or hedge their long positions since SPY and the S&P 500 are trading at all-time highs, the following strategy (also priced early on Thursday) provides the opportunity to get short with good value. It involves selling a call spread and buying a put spread. Each transaction provides an implied volatility advantage and despite the fact that the call spread and the put spread are approximately equidistant from the current trading price, you can establish the trade with a credit. This means you can risk less and make more for a strategy which gets you short with limited risk. If either of the strategies is unclear: Contact Us.

 

Options trading provide tremendous opportunities to establish positions to meet your risk/reward requirements. They enable traders to utilize significant leverage and if the trader’s timing is good, can provide the environment for significant returns. Our Options Guide PDF provides material for review. Consider that a $300 investment in LinkedIn turned into more than $6,000. For the buyer of that call option, it was a true blessing, but for the sellers, it may have been disastrous. Before trading options, be sure you have an understanding of the following topics: 1) liquidity, 2) in and out of the money options, 3) synthetic options, 4) spread valuation, 5) implied and historical volatility, 6) the Implied Volatility Skew, 7) options trading strategies and 8) risk management. Understanding these concepts will greatly increase your chances of profitability when trading options. 

 

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Amazon, Apple, Facebook and Google Bring Good News, But S&P Dillydallies, VIX To The Rescue?

Despite a week of good news, after hours S&P Trading on Thursday evening provided flat trading. It’s a bit disconcerting that with 4 of the 8 largest capitalized stocks in the S&P 500 not only rising in price, but exceeding expectations, the overall market was unable to pick up any substantial steam in Friday’s trading. The E-mini closed Friday’s session with a gain of about six points.

This might be the perfect opportunity for traders to consider hedges or short positions in stocks. If that type of position is something you are thinking about, there are numerous ways to establish short positions in either the E-mini S&P or SPY (SPDR S&P 500 ETF Trust) using options strategies which can mitigate risk or establish a short position. If markets can’t rally with good news, then the likelihood is that they will go lower.

There are several ways to use options trading to develop a position to meet your risk/reward requirements. One extremely popular vehicle for protecting downside risk is through the trading of the VIX Options (CBOE Volatility Index). Futures contracts are also traded on the volatility index and VX (CBOE Volatility Index Futures) represents the implied volatility of S&P Options. In addition, the VIX provides options on numerous Strike Prices which, by purchasing Calls or Call Spreads on a particular series of options, creates an opportunity to protect an equity portfolio. While the VIX is an intriguing product, on lower priced options the liquidity of the product, despite its substantial volume, can be cost prohibitive. If you are establishing the position as a long-term trade and determine that it is a reasonable value, then the VIX, particularly at its current low price level, can be an appropriate hedge against long stock portfolios.

The Table below provides a view of September VIX options prices towards the end of the day on Friday. I have also included the futures price associated with the underlying VIX options contract. If you’re looking at the cash price of the VIX and trading the various months that are traded, the price of the options can be confusing. Always be sure to look at the month associated with the VX (CBOE Volatility Index Futures) when making your trading decisions. As you can see in the example, the September options series trades at a price significantly above the current cash price (which is shown on the top right). By merely taking the difference of the Bid/Ask spread and dividing it by the offer price, you get a comparable liquidity percentage. Compare that with other options you are trading to consider if the market is tight enough for you.

 

While options trading provides a multitude of methodologies to get short any market, the liquidity and Implied Volatility Skew of the E-mini S&P enables traders to either hedge or get short the S&P 500 with liquidity and value. Given the market’s lackluster response to solid earnings results from Amazon, Apple, Facebook and Google, I have attached a strategy which may be used as a guide for establishing a short position with good value. If the market continues to rise, you will lose money on the hedge but make money on the balance of your portfolio that is not hedged. If you use it to establish a short position, you have a defined risk/reward scenario. For a greater understanding of these concepts, Contact Us for an educational webinar to dramatically increase your options learning curve.

The strategy, shown below, involves selling a September Call Spread and buying a September Put Spread. The details are in the Table. The key to the strategy is that you derive an implied volatility advantage on each spread you execute. By purchasing the Put Spread you buy an option with a lower implied volatility than the one you sell. The same is the case in the Call Spread. Analyzing options which meet liquidity standards, evaluate historical and implied volatility and the implied volatility skew are essential in utilizing the appropriate strategy to meet your trading needs.

 

Despite all the good earnings news this week and large cap stocks trading higher, the S&P 500 put in a lackluster performance on Friday. This may be a call to action for hedging your portfolio. Options analysis and trading can provide numerous methodologies to meet your objectives. The two markets discussed above, in a relatively limited way, are just the tip of the discussion for what may be appropriate for you. If you have any questions, Contact Us.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Apple and Facebook Rise on Earnings, But The Market Has No Legs; Amazon and Google Are Next.

Apple stock rose more than seven dollars after Tuesday’s earnings announcement and provided a temporary boost to the E-mini S&Ps , but one stock doesn’t make a market and despite the capitalization of Apple, the market headed south in the mid-morning. Earnings season can have an enormous impact on the overall movement of the stock market, but even Facebook’s strong showing after the close on Wednesday, although it faded quite a bit when the market opened,  has had little effect on moving the market (other than the NASDAQ 100) higher. Amazon and Google will get an opportunity to have their impact after the market close on Thursday.

Strong results in Apple and Facebook would have suggested an opportunity to carry the overall S&P to higher levels. That, coupled with the Federal Reserve’s non-event announcement, seems to have left the S&P in a holding pattern. Tonight’s news about Amazon and Google may make the determination on market direction. Given the high price of both stocks, the potential for a significant move based on an earnings announcement is likely.

The Table below shows the price of the at-the-money straddle for Amazon and Google which expire tomorrow after the close. For AMZN that straddle costs more than $51 which means that there is a very real chance that Amazon will move more than that amount after the earnings announcement. For Google, the expected price movement is quite a bit lower and the at-the-money straddle is priced at just shy of $39.  The Table also provides the price of the straddle with an extra week to trade and shows the implied volatility for each option. Notice the substantially lower implied volatility of the options just one week out. Contact us to learning about individual options training webinars.

 

The second Table provides option prices for out-of-the money options expiring tomorrow. You can see how the market is pricing the options for a large move. The Table provides prices, taken Thursday morning, for several Strike Prices. The Table gives you the opportunity to evaluate the Implied Volatility, Vega, Delta and the liquidity percentage for each strike price. When analyzing options, these are essential bits of information whether you are trading one day options or vastly longer term options. In fact, the less time remaining, the less implied volatility, Vega and Delta really matter. By tomorrow morning, the value of most of these options will be decided.

 

A look at our Webinar Preview PDF will provide information about analyzing options in an organized fashion. While tomorrow could be a big day for the market as a whole, option traders of Amazon and Google better understand the risk associated with their positions. Options trading provide tremendous leverage and if the risks are not analyzed properly, the consequences can be extraordinary. I’m cautiously optimistic that if Amazon and Google come in with good reports, coupled with the news we’ve already had from Apple and Facebook, that the stock market can make a move higher. Without that good news, the summer may end with a negative tone.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.

Subscribe To Our Mailing List:

* indicates required

Big Week For Earnings: Opportunities To Purchase Amazon, Apple, Facebook and Google For A Discount?

Earnings season provides numerous opportunities to develop options trading strategies that are intriguing in high implied volatility trading situations. Stock indices experienced that during the Brexit vote and many individual stocks are experiencing that now. The choice of options trading strategies is limited, but the number of scenarios in stocks, ETFs and futures is limitless. This week’s earning announcements in Amazon, Apple, Facebook and Google provide an opportunity for those that are interested in purchasing the stocks at lower levels to design a position that enables them to earn income and potentially buy the stock at a lower level.

Inflated implied versus historical volatility typically exists when there is an anticipated news event. In the case of Brexit, this divergence of implied and historical volatility was prevalent in currency options but, surprisingly, not in stock index futures. This created an enormous trading opportunity if you realized the potential of the stock market’s movement after the Brexit vote.

The same scenario currently exists in the disparity of inflated options prices in certain individual stocks as compared to historical volatility and contracts like the E-mini S&P whose implied volatility, due to the rally, is significantly below its 20-day historical volatility. The recent rally in stocks to new highs has provided for low implied volatility in stock indices and, because of expected earnings announcements, high implied volatility in a multitude of individual stocks.

These differences enable traders with a significant amount of risk capital to establish interesting implied volatility positions which can meet their directional or volatility needs. In the case of Amazon, Apple, Facebook and Google, all with earnings announcements this week, there is significantly inflated implied volatility compared to historical volatility and for good reason. Earnings announcements will likely move the stock prices significantly. The question is what options trading strategies can we use to provide a methodology to produce some income and potentially an opportunity to get long the stock at lower levels?  Our Options Webinar Preview PDF provides a detailed look at some of these strategies.

The strategy I’d like to focus on is the 1X2 Put Spread which provides some income and in a worst case scenario provides the opportunity to get long a stock that you want, at lower prices. For traders who execute the strategy it is important to realize that it is an unlimited risk strategy and the amount of money generated is miniscule compared to the cost of the stock you would be required to take delivery. That said, if you wouldn’t mind taking the delivery of the stock at lower levels it’s an opportunity to take advantage of elevated implied volatility and the implied volatility skew.

The example below is for a 1x2 Put Spread in Amazon taken during trading on Monday. I’ve chosen the August expiration however; you can structure the trade to meet any of your timing needs. You can pick different Strike Prices or expirations, all of these parameter will provide you with appreciably different opportunities and amounts of risk. In the Amazon example shown, you buy one 700 Put and sell two 675 Puts for a credit of 1.75 or $175 per 1x2 Put Spread. If earnings are not what was expected and Amazon tanks, you’ll be required to ultimately take delivery of the stock at $648.25 which is a little less than $100 from its current price. If the stock rallies, you’ll collect the premium. If the stock deteriorates there is always the chance to make significantly more money at levels near or between the Strike Prices.  If you have any questions about this strategy, or want to learn more about options trading, Contact Us.

Although the Implied Volatility Skew in this particular example is not as great as I would normally look for, the 1X2 Put Strategy provides traders with the opportunity to establish a mildly long position with a number of factors in their favor. Earnings season can be particularly volatile, but that volatility creates a wealth of trading opportunities for those with significant risk capital. It is essential to evaluate the liquidity of the options you are trading, make a comparison of the implied and historical volatility and understand the risk/reward scenarios of your trade.

 

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

S&P At Highs Before Critical Earnings Week: Amazon, Apple, Facebook and Google Report, What’s Next?

Stocks finished the week with the S&P 500 closing at a new all-time high. Is the market prepared for next week’s gargantuan earnings revelation? Amazon, Apple, Facebook and Google are all strong market leaders and an earnings surprise can influence the overall market. Apple reports on Tuesday after the close. Facebook discloses it numbers after Wednesday’s close and Amazon and Google bring in their key earnings numbers on Thursday after the close.

Earnings reports from industry leaders (all with significant market caps), which defines all of the stocks above, can have a definite impact on the overall stock market. All four of these stocks represent a significant portion of the value of the S&P 500 and are in the top eight of stock market capitalization of U. S. Stocks. If they should all produce either good, or bad results, the overall market will certainly respond accordingly.

With the S&P 500 trading at all-time highs, excellent earnings could be the impetus for trading at higher levels. If, on the other hand, the earnings reports of all four were disappointing, then the market would certainly be in for a bit of a correction. Unfortunately, earnings season provides a significant gamble and Amazon, Apple, Facebook and Google are volatile enough to cause the overall market to respond.

The Options Table shown below provides a look at the at-the-money straddle prices for the stocks we are discussing. For Options Settling next Friday, the price of the at-the-money straddle is indicative of the volatility that is expected in the next week. A comparison is also given to the options which expire in two weeks. In the lower right hand corner of the Table we provide the 20-Day Historical Volatility of the stock. If you compare that to the Implied Volatility of the options, you get a clear idea of the differential between past volatility and expected future volatility. The pricing discrepancy is enormous.

The Table which was a snapshot of options prices at 3:55 PM ET on Friday provides a fascinating look at options pricing. Interestingly, the one week straddle prices are very similar to the closing ranges for each stock since a month ago. Trading options going into earnings is definitely a risky proposition, but if one could execute the straddles with the differences indicated with the one and two weeks until expiration and the individual stock didn’t move substantially after the announcement, they would own the second week’s straddle for a very good price level. Like most options strategies that you might trade going into expiration, there is substantial risk, but if you are buying one straddle and selling another, you have defined risk.

While the Table gives you insight into just one set of options comparisons, there are a multitude of strategies which may be interesting during earnings season. Our Webinar Preview PDF provides valuable information pertaining to Options Trading Strategies. Whether you consider one by two put spreads, fences, or just selling put spreads, there are numerous ways to get long going into earnings. Be sure that no matter what trade you are considering that the liquidity is good and the risk/reward of the strategy meets your requirements. If you are interested in learning more, Contact Us.

 

No one knows what next week’s earnings will bring, but it is safe to say that an abundance of good or bad earnings reports will significantly influence the stock market’s movement in the short-term. Earnings provide volatility, but also a fresh look at overall market valuation.

 

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Gold Retreats As Stocks Continue To Rally: Followers Of Soros May Not Be So Happy

As early as May 16th and 17th it was clear to the public that legendary investor George Soros had made a significant investment in the Gold Market and had sold a large quantity of equities. While there has been more than two months since these disclosures were made, now is an opportunity to see how the small investor who had held these positions would be faring.

Due to significant volatility in both markets, there was an opportunity to make a significant profit on this trade. The Brexit vote alone gave holders of this position an opportunity to liquidate their long gold, short Stock position with tremendous profits. Unfortunately, it is not always easy to liquidate a position in a profitable manner. For those who are still holding the position, here’s a quick look at the returns on each position as represented by August Gold Futures and the September E-mini S&P. On May 17th, the E-mini S&P closed at 2044.50. The Chart below shows its last price this evening as 2167.75 for a return of 6% for the period. On the other hand the Gold contract closed at 1280.30 on the 17th and had a last price of 1314.60. This represents a return of 2.7%.

While it is impossible to determine how much capital Mr. Soros committed to each transaction or what trades he has made in the last two months, but if you put your capital to work using his ideas, it is unlikely that you are making money at this juncture. If you want to follow a particular trader, you should dedicate a designated amount of risk capital to the idea. Options trading can provide limited risk opportunities if you can design the appropriate strategy. Understanding options trading can take a significant investment of time, but it provides those with a creative instinct the opportunity to design positions to meet their risk/reward requirements. Our Options Guide PDF can get you started.

The Charts below show movement in the E-mini S&P and Gold since the middle of May, 2016. Due to Brexit, there was a significant period of volatility and that is particularly visible in the Chart of the E-mini S&P. The Implied Volatility of the E-mini options are currently trading significantly below the Historical Volatility of the underlying on a 20-Day basis. While there is a similar discrepancy in the Gold Futures Contract, it is not as accentuated.

 

While it is easy to get transfixed by the ideas of well-known traders, the most effective trading will most likely emanate from your own ideas. Following pre-determined entry and exit points to suit your own needs is likely to be far more successful than following someone public ideas. Ideas that are made public by traders have already taken place and therefore your price of execution is unlikely to be the same as that of the large traders. For options traders, understanding how to examine liquidity, evaluate Historical and Implied Volatility, the Skew and choosing the appropriate strategy to meet your risk/reward requirements can make using options contracts an effective trading tool. If you have any questions: Contact Us.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Stocks Rally In Anticipation Of Earnings: Next Week’s The Test With AAPL, AMZN, GOOGL and FB

Despite a negative report from Netflix regarding subscribers and a positive earnings report from IBM after Monday's close, the earnings with the most impact will arrive next week. Apple, Amazon, Facebook and Google, all highly capitalized stocks, will be closely monitored. Netflix fell 15% in after-market trading on Monday and continued its standing as a market leader in earnings volatility. Despite that, the E-mini S&P Futures were scarcely changed on the re-open in Monday night’s session.

Given the stock market’s recent ascent, it seems likely that a strong, one-sided collection of results would likely be an impetus for the next move of the S&P 500. Stocks with large market capitalization like Apple, Amazon, Google and Facebook, which have a potential for volatility that is not likely in ExxonMobil, could certainly make the market move unless the earnings reports were a wash.

There are options trading strategies which can set you up for an either bullish or bearish scenario given your market sentiment. For those of you interested in establishing a long position based on pending news, the E-mini S&P and SPY (S&P 500 ETF Trust) both offer calls with implied Volatilities which are very reasonably priced in today’s volatile environment. With the VIX (CBOE Volatility Index) trading at historically low levels in combination with the Implied Volatility Skew of the stock market, prices of out-of-the money calls may be inexpensive enough to speculate in if you have a strong bullish sentiment.

The Table below shows the four stocks mentioned above and some pertinent information about their Historical and Implied Volatility, Relative Strength and Average Trading Range. During earnings season all bets are off, but the implied Volatility premium is indicative of the market’s willingness to pay inflated premiums for protection and speculation. During earnings season, there is frequently an incorrect assessment of the potential for movement in the stock price. For example, options on NFLX expiring on Friday priced the at-the-money $99 straddle at around $10 at the close.  Netflix fell in the aftermarket by about $16. It will be interesting to see where the stock trades on Tuesday morning.

 

If you are interested in trading the E-mini S&P or SPY in anticipation of a dramatic movement based on the earnings of Amazon, Apple, Facebook or Google then the following series of prices, shown in the Table below, gives you an idea of the Implied Volatility Skew and some of the tools to derive an Options Trading Strategy which may be useful when trading Stock Indices and other futures contracts. The Implied Volatility Skew listed on the left shows the curve of the supply and demand for puts and calls in the index. In addition, if you compare the prices of the out-of-the money options of puts and calls approximately equidistant from the current trading price, you get a feel for just how interesting the market is for options on stock index futures.

 

One important thing to make note of is that the implied volatility of all of the options displayed is less than the 20-Day Historical Volatility of the underlying futures contract shown in the upper left hand portion of the Table. If you would like to know more about trading options contracts: Contact Us. Every trader of options should be completely familiar with synthetics, in and out of the money options, liquidity, historical and implied volatility, risk management and the appropriate options trading strategy to meet their needs. Understanding value and risk provide traders the opportunity to manage their risk capital in an effective manner. These are all essential concepts to focus on when learning about trading options. If you are trading already, a focus on these elements of trading should improve your results.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required

Coscia Spoofing Case Brings Back Memories Of Pit Trading And New Enforcement Techniques

Spoofing is an illegal trading technique which under the Dodd-Frank Act carries a maximum penalty of 10 years in prison. In the days of trading Pits, what is now currently called spoofing was for a long time referred to as intimidating the market. Traders who offered contracts, or bid for them, in an attempt to move a market in a particular direction still had the risk of purchasing or selling those contracts that they may have “maliciously bid or offered”.  Since the trader took that risk, it was considered a reasonable trading technique. Since the Bid or Offer was good for significantly longer than a fraction of a second, there was probably a lot more risk to the trader than the current spoofing techniques.

Algorithmic trading has created an environment of constantly shifting bids and offers for stocks, options and futures contracts and their options contracts as well. The civil case brought by the Commodities Futures Trading Commission which subsequently ended in a three year sentence, seems quite harsh. The 2013 Complaint by the CFTC against Panther Energy Trading L.L.C and Michael Coscia is shown here.  Today’s electronic trading environment has numerous firms that participate as “liquidity providers”. These companies make constant markets and typically get rebates on fees from the Exchanges.

It is a common occurrence for a non-algorithmic trader to enter an order on an electronic platform and have an algorithm bid higher in order to induce the customer to pay a higher price for the contract that she was planning on purchasing. The difficulty is imagining how the CFTC chose to make an example of Michael Coscia and his Panther Trading when from my experience trading, and those of colleagues of mine, the problem permeates the trading industry. In markets where algorithmic trading companies pay little or no fees and have the speed of their algorithms competing against small traders spoofing is prevalent.

I applaud the CFTC for going after the problem of spoofing. I have serious reservations about whether enforcement against one individual is a fair and reasonable approach. If five firms would have been brought up on charges simultaneously, that would have sent a strong and fair message. For those of you who don’t understand the intricacies of spoofing or futures and options trading in general, our website provides excellent resources for traders.

The Order Ticket below shows a market that is wide enough that in all likelihood an algorithm would jump ahead of you if you were to bid or offer just above or below the current bid or offer. The next time you put in an order in an options contract with a wide market you can likely experience the phenomenon. Therefore, it is essential to understand what an options contract is really worth before trading it. Our Webinar Preview PDF might be helpful with that. If you have any questions: Contact US.

 

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

Subscribe To Our Mailing List:

* indicates required