Portfolio Returns: Stocks Are Up 6%, But Numerous Commodities Put That To Shame: Strategy Outlook

Stock market returns look great as the recovery from Brexit has propelled the market to record highs. However, the returns on stocks, as measured by the E-mini S&P are substantially smaller than the returns of at least eight popularly traded commodities.

If you've just been trading equities this year, it's surprising the returns you've missed out on. Unfortunately, commodities are highly volatile, leveraged instruments that although they have performed beautifully since December 31st, could easily reverse course. For example, this week Gold had a range of more than $57 and closed the week at 1337.70 almost $40 from its highs.

The Table below provides the returns of numerous trading vehicles since the end of the year. If you are a contrarian, there are a number of contracts you may consider getting short in. Options contracts are an excellent way to speculate on market direction with limited risk. Our Options Guide PDF is a comprehensive look at options trading and should provide pointers for traders at all levels of the knowledge spectrum. The Table includes information about the British Pound, the Euro, the Dollar Index, Crude Oil, Cotton, E-mini S&P, Gold, Copper, Coffee, Natural Gas, E-mini NASDAQ , Sugar, Silver, Corn, Soybeans and Wheat. It provides the prices at 4PM ET Friday for the contracts listed above and their returns on the year.

 

There are numerous options trading strategies which can be useful with speculative capital, but I wouldn’t consider trading options unless I had a complete understanding of the Guide above and our Webinar Preview PDF, a more advanced version of the first PDF. Both resources should provide you with a test of your options understanding. There are so many ways to lose money trading options that it is essential for a trader to be prepared. Understanding comparative values of spreads, conversions and butterflies enables you to discover the best opportunity for trading. Reviewing liquidity is essential.

Strategies to be considered might include:

BULL STRATEGIESPurchase of Outright Calls

Purchase of Call Spreads

Purchase or Sale of Ratio Spreads

Bull Fence

Long Options Pairs

Sell Puts

Sell Put Spreads

BEAR STRATEGIES

Purchase of Outright Puts

Purchase of Put Spreads

Purchase or Sale of Ratio Spreads

Bear Fence

Short Options Pairs

Sell Calls

Sell Call Spreads

VOLATILITY STRATEGIES:

Long Straddles

Long Strangles

Long Outright Options

Long Condors

Long Ratio Spreads

Long Butterflies

Short Straddles

Short Strangles

Short Outright Options

Short Condors

Short Ratio Spreads

Short Butterflies

If you are comfortable with these strategies and understand the main concepts behind synthetic options pricing, in and out-of-the money options, butterfly and spread valuation techniques, then you are prepared to implement options trading strategies to speculate (with risk capital) or hedge your risk requirements using options contracts. The year has provided significant movement in the commodities space, utilizing the appropriate strategy may permit profitable participation in the future. If you would benefit from an Individual Options Training Webinar Session: Contact Us. We can help clarify the essential knowledge base needed for 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. 

 

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Hedging Portfolio Risk: Reducing Anxiety and Exposure at Stock Market Highs

If you are sitting on stocks for retirement that you have accumulated outside of your 401k or IRA, then you may feel particularly vulnerable to a stock market correction. Depending on your adversity to risk, there are ways to lessen the impact of a correction. Options trading provide numerous strategies that can be used to lessen the effects of an adverse move in the market.  The main question is your risk tolerance and would you be willing to put more money to work at lower levels?

Everyone has a different level of tolerance for risk. The diffference can consist of psychological composure, stage in the life cycle and numerous factors that are very complicated. Those with risk capital should likely be willing to purchase more stocks, or an index of stocks like the S&P 500, when markets decline rapidly. Others, who are looking to soften the blow on the way down, may have completely different strategies that will meet there needs.

There are numerous options trading strategies that would be good choices for individuals interested in hedging some of their portfolio risk; here are two of them.

1)      Purchase of Outright Puts: in a low implied volatility environment this may be an effective strategy for you if you have excellent timing regarding a correction. Out-of-the money options frequently expire worthless and unless your timing is good you end up purchasing an option whose implied volatility is in excess of the historical volatility of the underlying. Due to the recent volatility in the stock market, options are priced (implied volatility) significantly below the historical volatility. An example of this pricing structure is shown below. The Options Guide PDF may clarify a few of these points.

2)      Another technique that is particularly worthwhile for those that are hedging stock market exposure involves using the implied volatility skew to provide a pricing advantage. The strategy involves selling a call spread and buying a put spread equidistant from the current trading price. The structure of the curve provides a pricing advantage that you can see below. While the strategy does not provide a significant hedge in the event of a market collapse, it does provide the opportunity for hedging against a portion of the market decline. The Table below includes the basic strategy which can be modified to meet the individual’s needs.

The Table below provides options prices from Monday afternoon and the structure of the strategies discussed above. The out-of-the money puts described in the strategy of outright long puts in section one can be analyzed using the prices and implied volatilities in the Table. It is clear that the options market does not believe that future volatility will be anything like what we’ve had in the last 20-days. The Table shows that while the Historical Volatility (shown in the bottom right) is 24%, the out-of- the money put shown in the 2070 put has an implied volatility of only 13.73%. The differential between implied and historical volatility is staggering. Normally the implied volatility of the out-of-the money puts is higher than the historical volatility. But the last several weeks has produced an extraordinary trading environment. If you’re nervous about an outright correction and confident in your timing, the outright purchase of puts may be the correct strategy for you.

My favorite hedging strategy for a portfolio is described in the second strategy and is also shown in the Table below. It provides a no lose position if you’re already long stocks, because if the market rallies you still make money on your long stock. If the market goes down, at least you’ll make some money on your hedge. It is a pure hedge of any amount that you’d like to trade and the market, due to the skew, allows you to receive a credit to initiate it. It is available in the E-mini S&P Futures as shown or in SPY (S&P 500 ETF Trust) in a slightly modified version. The Table below outlines the hedge which sells the 2160 calls and buys the 2190 calls thereby establishing a short position with limited risk. At the same time, we will purchase the 2100/2070 put spread which is also a limited risk short position.

The Table shows that while the put and call spreads are equidistant from the current trading price of the E-mini S&P you can actually get short the market for a credit of 3.38 on a 30 point spread. In contrast, if you were to sell the 2190 calls and buy the 1970 puts, also equidistant from the current trading price, you would have to pay more than 9 points. The reason for this is the implied volatility skew. If any of this is unclear to you, consider a complementary individual webinar to clarify some of the mysteries of options trading.

 

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. 

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Gold’s Price Is Indicative of Turmoil, But Stock Prices Dispute That Theory

The tremendous rally in Gold this year has at times seemed somewhat reasonable. The Chinese markets brought volatility to America’s Stock Markets and “Brexit” provided a continued element of uncertainty to worldwide markets. The Post-Brexit environment however, has been nothing but up for U.S. Equity Markets and without uncertainty in these markets, what’s propelling Gold Prices?

The Chart below shows a three year comparison between the price of E-mini Futures and Gold. Although the correlation between the two markets is currently quite high, that is an anomaly. The chances of Gold Prices remaining high and a continued rally in the E-mini S&P 500 seem highly unlikely. The problem is deciphering which market will reverse course.  Just analyzing the price movement since the beginning of the year might be an indication of which market will peter out first. Since the end of 2015 the E-minis are up approximately 4.75% while Gold Prices are up more than 22.5%. Unless there is new economic turmoil, or the next round in earnings season is very disappointing, it seems unlikely that both Stocks and Gold will continue to rally.

 

Since June 9th when Gorge Soros was widely known to have created his short stocks, long gold position, the price of stocks has increased slightly while gold prices have soared about $100. While I can speculate that Mr. Soros has made a lot more money on his Gold position than he has lost on his short stock position, for those that are considering both markets now, there must be a concern about buying a commodity that is overbought. Gold has a Relative Strength Index of greater than 75 on a 20-Day basis and greater than 80 on a 9-Day Basis. (These numbers are from early in the evening session on Sunday night.)

Like all commodities, they have a tendency to trade towards the mean. Given Gold’s current level of trading, it is quite possible that in the not too distant future it will begin to correct. The market has been spurred higher by a number of seemingly bullish events. It seems likely that any continued downward movement in the British Pound will help Gold. Should, on the other hand, tensions around Brexit continue to ease and the U.S. Equity markets continue up, the August Gold Price at the time of this article (1373.00) may well seem inflated.

In order to participate in the fall of Gold or a continued rally in Stocks, the implied volatility of both provides a curve that is attractive. The implied volatility of Gold is increasingly lower the farther you get out of the money. Therefore, out-of-the money puts a priced comparatively lower than out-of-the money calls in Gold. The reverse is true in the E-mini S&P. The implied volatility skew enables you to get long for significantly less than it would to get short using out-of-the money options. Just compare some out-of-the money puts to calls in the E-mini which are equidistant from the current trading price and you may be astonished by the difference in price. If any of this is unclear to you, consider a complementary individual webinar to clarify some of the mysteries of options trading.

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. 

 

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Options Strategies: Using Market-Maker Skills to Find Strategies in S&P, Gold and Crude Oil

In order to trade options most efficiently a trader must think like a market-maker. The goal of the market-maker is always to get the best value possible. While traders focus on Charts, Fundamentals and developing other market biases, once they have completed their analysis and are ready to trade it is the time to utilize market-making skills to enhance value. This skill involves looking at a series of options in order to get the best value for your transaction.

If, for example, you wanted to sell the 208/209 Call Spread in SPY (S&P 500 ETF Trust) for 67 cents but the market was 65 Bid and Offered at 66, what alternatives might you have? You could leave your offer in or you could look and see where the Put Spread was trading. Since the market is very efficient, in all probability the Put Spread was trading 34 Bid and Offered at 35. As market-makers know, Put Spreads and Call Spreads are the same thing. They have an inverse relationship. If, however, you could buy that Put Spread for 33 then you would have completed your objective and could withdrawal the Call Spread offer.

 

Whenever you make trading decisions, understanding the relationships of the options and why one option or spread is better than another, can help you get better value. As a market-maker who understood the relationship of options through conversions, reversals, butterflies, boxes and implied volatility plays, I was able to get an extra advantage when making trading decisions. These relationships are not that complicated, but by understanding them a trader can certainly save themselves plenty of money setting up their positions.

In markets like SPY (S&P 500 ETF Trust) or E-mini S&P 500 Options, analyzing the implied volatility skew, coupled with some of the techniques mentioned above, provides interesting trading opportunities. Market-makers enjoy trading illiquid markets because they get a significantly larger edge on each transaction. Don’t make the mistake of trading illiquid markets. SPY and the E-minis provide the liquidity needed to establish positions efficiently. Analyze the markets you’re trading and see how its liquidity compares. Always compare how the Bid or Offer you are establishing compares to the other Bids and Offers in the series. By merely comparing the value of spreads and butterflies around it, you get an excellent idea of the value you will attain. The example below shows a classic mispricing of options if you take the midpoint of the Bid and Offer: can you find the option you wouldn’t want to sell?

 

The 95 Put is the Strike Price that is over-priced. If you can buy the 100/95 Put Spread for .20 and sell the 95/90 Put Spread for .25 then you have established the butterfly for a credit. Our Options Guide reviews many of the essential elements of options valuation. We have a couple of PDFs that can improve your understanding of options valuation. If you are interested in learning in an individual options training webinar, we’ll focus on the trading skills that will save you money. If you are evaluating spread prices, liquidity, the price of the surrounding butterfly spreads, historical and implied volatility, the skew and choosing the appropriate options trading strategy to meet your goals, you are making the effort that market-makers do when evaluating trades.

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.

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Mega Millions Jackpot Breaks 1/2 Billion But Options Trading Provides Much Better Returns Than Lotto

Get out there. For a miniscule wager, riches are a possibility. It’s a dream. Why not dream for a while. Look at it as a small investment of risk capital. That’s the thought process of many Mega Millions players. With millions of options contracts trading per day on stocks, ETFs, commodities and other futures contracts, the mentality is the same. For a small investment you might make really good returns on your money. When I traded commodities in the options trading pits between the 1980s and up to 2010, it was estimated that 90% of the people that traded commodities lost money. That’s still quite a better than Lottery players. At least commodity trading was a zero sum game. Now it’s time to look at Lotto versus options trading.

1)      Mega Millions involves little preparation

2)      Mega Millions involves an extremely small investment

3)      Mega Millions involves no brokerage account

4)      Mega Millions can take several days to know whether you were a winner

Options trading is quite a bit more complicated than playing the Lotto. If you take it seriously, it requires quite a bit of preparation. The Options Guide PDF is a primer about basic knowledge pertaining to options trading.  If you’ve mastered the basics such as the trading of simple Call and Put Strategies, then you are well beyond the skill required to pick lottery numbers. The next problem is capital. If you have several thousand dollars of risk capital, hopefully far more than you would put into a lottery “investment”, you can open up a trading account and get started. For lessons on understanding option trading: contact us.

 

The amazing thing about options is the leverage you can attain. For example, for about $70 you can control $82,000 worth of Google (GOOGL Alphabet A) stock. If Google was to rally a bit more than 16% between now and the expiration of August options you would have the opportunity to participate in being long GOOGL from $82. Of course, you could trade out of the option at any time. While this doesn’t seem too likely, only a few weeks ago traders of LinkedIn turned investments of $100 to $300 into between $5000 and $6000 depending on the strike price they were trading. Their returns may have been even more substantial depending on the strike prices and expiration series they chose.

Unequivocally, the likelihood of making money trading options contracts is substantially higher than buying lottery tickets. It all comes down to investment capital. For those that like the opportunity to make a bundle for nothing, it’s hard to replace the dream that the lottery provides. For those that are willing to take risks for a significantly higher probability of making money, options trading provides excitement, liquid markets with constant valuation and the opportunity to potentially develop a skill that playing the lottery doesn’t’ provide.

Trading is often described as a sport. If you have the skill to trade, you will likely make money in the long run. Half a billion dollars is quite tempting, but I would rather evaluate the odds of making money on an options position. If you happen to read this article and win the half a billion dollar lottery, contact me, because just like a good options trader, you beat the odds.

 

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. 

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British Pound Pushes Gold and Silver Higher and Stocks Lower: Options Strategies for Bulls and Bears

Unfortunately, there is not a good vehicle for trading British Pound Options, otherwise volume would be excellent. Between the ETF Currency Shares British Pound Sterling, which has extremely limited liquidity and Options on British Pound Futures, which although significantly more liquid is not in the league of either Stock Indices like SPY (S&P 500 ETF Trust) or Options on Euro Futures, they provide an Options Trading Platforms for either speculating on the direction or hedging one’s requirements in the British Pound. The key to long-term successful options trading is not only having the correct market bias, but insuring that you get the best value possible when trading any options contract.

Tuesday’s trading, which included trading from Sunday night and Monday as well when considering the ranges of the market action, included tremendous volatility in both Silver and Crude Oil. Silver’s range of 8.3% was colossal while Crude Oil fell more than 4%. When trading options in volatile markets understanding the Delta of the contract provides a clue as to how far the underlying has to move in your favor to make money. If there is not significant liquidity, then a lower delta options contract requires a larger move for you to make money. The Options Guide PDF provides an A to Z look at Options Trading.

Whether you are Bullish or Bearish, if you have a long-term outlook, the Implied Volatility Skew can help you create an Options Strategy that should meet your risk/reward requirements. Whether it is a Bull or Bear Fence (always be sure to take a look at the Skew) or an Options Pairs Strategy of Selling Call Spreads and Buying Put Spreads (or vice versa), strategies are available if you are creative.

If you feel that Gold is topping out and that the Relative Strength Index is too high, you can Sell a Bear Fence and take advantage of the Implied Volatility Skew. This is particularly helpful for those of you who are already long and would like to put on a hedge. Otherwise, as with all Short Options Strategies, since you are short a Call, you have unlimited risk. By reviewing the Options Chain and comparing the price of different strikes, you can locate the proper strategy for you.

The British Pound is clearly a market leader now. It used to be Crude Oil, but should the Pound continue to fall, it can’t be great for global equity markets. At OSN we focus on providing the appropriate options trading strategy to meet an individual’s risk/reward parameters. Sign up for an Individual Options Trading Webinar to get started on analyzing options as a market-maker would. Understanding the implications of liquidity and delta, historical and implied volatility, the skew and its impact on a wide array of Options Trading Strategies will help you understand options in a different way.

At its low, the British Pound fell more than 2% in the trading session beginning on Sunday night and ending Tuesday evening. This is a significant amount of volatility for a currency, but these are clearly extraordinary times for the Pound, Metals and Stocks. Volatility provides great trading opportunities, but be sure that you trade with appropriate risk management techniques. Options Trading provides tremendous leverage; that’s not always a good thing.

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.

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Silver and Gold Have A Volatile Weekend: Short Silver Traders Lose A Fortune In Their Own Fireworks

Thanks to electronic trading, markets traded over the weekend as usual. Beginning Sunday night when most people were celebrating the holiday weekend in the United States, the futures market opened for trading. Stock Indices, Crude Oil, Gold, Silver and a number of other Futures Contracts were available for trading. This opportunity for trading, when there were even fewer traders participating than usual, provided for a spectacular move in the Silver market.

Frequently, traders will maintain overnight positions in anticipation of market movement that will aide their cause in the overnight session. All they have to do is establish a stop-loss order and they can liquidate their position with a reasonable loss. In the old days of commodities trading in pits, floor traders would “gun for the stops” in order to produce a bevy of either buy or sell orders and then cover their positions.

For example, let’s say I was short Crude Oil and I wanted the price to go down farther so that I could buy back my short position at even lower levels. If I was a big trader, and I had a pretty good idea that there were stop orders below the market, I might sell extra contracts to attempt to move the market in the direction of the sell stop orders. When the flood of sell orders came in, I would buy back my short contracts at a lower level. On the trading floor, this was not an uncommon practice and some traders did it quite effectively.

On Sunday night, in all likelihood, a similar event occurred in the Silver Market. The Chart below shows the activity in Silver which has had an enormous 8.3% range in the Holiday, Sunday/Monday/Tuesday trading session. Silver traded from a low of 19.61 to a high of 21.23 and then quickly back to the 20.00 level. Keep in mind that a move of $20 to $21 in Silver is worth $5000 per contract. It is a highly leveraged contract so, if you had a stop-loss order, chance were you may not have been filled near the price of your order.

 

Now that algorithmic trading has taken over where pit trading used to occur, trading sessions are practically twenty-four hours and depending on the market, liquidity can be excellent. The problem with a market like Silver, and it is a question that should likely be asked, if there isn’t adequate liquidity, like Silver probably didn’t have over the weekend, should it trade practically twenty-four hours a day. I’m sure that if you had a buy stop to cover your shorts in Silver and were filled at a price significantly away from you stop price, you may have an opinion.

Overnight trading sessions tend to have reduced liquidity and particularly in Silver, there is a possibility to suffer significant financial loss in a short period of time. As always, there can be numerous causes for a brief rally of this magnitude, but a combination of short covering and the initiation of new positions based on breaking through the 20.00 level were contributing factors.

For those of you that are interested in trading Silver with the best leverage possible, Silver Futures are for you. For those interested in trading on a smaller scale, SLV (IShares Silver Trust) may be a better route. Although their options contracts are not the most liquid, SLV does provide a fair and reasonably good environment for trading Silver. For those interested in learning more about options trading our Options Guide and Options Trading Syllabus provide a significant amount of options trading information.

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. 

 

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Five Techniques To Improve Your Chances Of Making Money In Options Trading; SPY, VIX, Gold et al.

With millions of Options Contracts trading across product lines, it is easy to find the lure in trading them. Due to the number of participants, the competition can be fierce. It’s not easy for an individual trader to execute efficiently against algorithms. There are, however, things to look at and assumptions to be made before a trade should be executed which will improve your likelihood of making money.

The first essential detail to watch is the liquidity of the product that you are trading. If markets are wide then the market-makers/algorithms will know exactly when to pick off your order and thereby you will have executed your end of the trade at the worst price possible. If you are trading liquid markets like those in SPY (SPDR S&P 500 Trust ETF), GLD (SPDR Gold Trust), AAPL (Apple, Inc.) and QQQ (NASDAQ 100 Powershares) the cost of trading is vastly reduced. To evaluate liquidity, simply take the difference between the Bid and Ask Prices of out-of-the money options and take that value as a percentage of the Ask Price. The lower the percentage, the better it is to trade in that market. Use SPY as your guide.

The second thing you might consider is that just because you can trade in the middle of the Bid/Ask Spread, it may not be the best price. Consider the following example with Bids and Offers, the mid-point for trading and the Strike Prices.

Strike

Option

Trade Price

Bid

Ask

105

Puts

1.00

0.90

1.10

100

Puts

0.60

0.45

0.75

95

Puts

0.40

0.25

0.55

90

Puts

0.15

0.10

0.20

                                                         

In the example, if you look at the prices of the Bid and Ask and calculate the mid-point you might think you were getting a fair value if you could trade any of the Trade Prices shown above. Unfortunately, the price of the 95 Put is a bad deal. The easiest way to determine that is the spread prices. In the example, the 105/100 Put Spread is priced at .40. The 100/95 Put Spread is priced at .20 and the 95/90 Put Spread is priced at .25. The lower the Put Spread the less it should be worth. Therefore, the 95 Put is too expensive and is the best Option to sell if you can trade the mid-point in all of the Strike Prices. If you bought the 100/95 Put Spread and sold the 95/90 Put Spread you would own the butterfly for a credit. This is my kind of trading and a good way to look for valuation. Contact Us if you believe this kind of analysis is helpful.

For the third thing, if you are planning on scalping options, in addition to considering the liquidity of the option, consider the Delta of the option you are going to trade. If the width of the market you are trading is wide and the Delta is low, it may take a fairly significant move in the underlying contract just to break even. If you are planning on holding your option for a significant move, then this issue is not as important but for those scalping options, it is essential analysis.

The fourth factor to consider with any long-term options trade is the Implied Volatility Skew. The Skew provides the opportunity to create an options trading strategy which will meet your risk/reward requirements. If you have a significant market bias, using the Skew enables you to get long or short the underlying by building a strategy which has an edge. The perfect example is the E-mini S&P Futures. It has a significant Skew to the put side with the farther the out-of-the money puts having a greater Implied Volatility. Therefore, you are able, if you are bullish, to purchase out-of-the money calls at a significant discount to out-of-the money puts equidistant from the current trading price. While the position has unlimited risk, it provides the opportunity to get long with a bonus. After the significant move down with Brexit, it was the perfect strategy. You just had to have the desire to get long and the willingness to take the risk of being short the out-of-the money put.

For the fifth recommendation is a quick discussion of risk management. While it is much easier to manage risk with a long options positions and limited risk spread positions by designating a set amount of risk capital to any one idea or idea group, when selling options, risk management becomes much more difficult. It is essential to remain disciplined. Try to have pre-determined exit points. Traders must be willing to take losses or at some point selling naked options can be disastrous.

These are a few essential factors to look out for when trading options. Our Options Syllabus PDF provides an outline of a multitude of skill sets that should be understood when trading options. If you’re trading with the algorithms and don’t have a specific plan or a keen understanding of valuation, there’s an opportunity to improve your skills. Our Individual Option Training Webinars can make a difference in your results. 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. 

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Volatility Lessons For A Week Of Angst; Market Movement In Stocks and Futures Beyond Expectations.

When the Brexit deal was all but done and most traders and odds-makers had made their conclusions, the voters made their decision. It appears that many of the voters would be interested in changing their tally as the economic impact of their choice was far more wide reaching than expected. It is interesting, however, to analyze the volatility since last Friday and understand how much volatility markets can have and how so many experts can be so wrong. Even George Soros, who got long Gold and Short Stocks before the move thought that Brexit was not happening.

The Table below on the bottom shows the percentage ranges of many futures contracts since the Brexit Vote. The percentage is based on the starting point of the move. The volatility is somewhat staggering despite the extraordinary nature of the event. Almost everyone was caught by surprise and if there was a do-over, like there often was in my childhood, I believe the outcome would be different. I’m not sure if a do-over can be worked out to some degree, and if so, whether the British Pound would recover to the 1.50 level too quickly. Stocks have certainly had a nice recovery in the post “Brexit” climate.

The move provided the second opportunity in recent weeks when the appropriate positions in Option Contracts provided immense returns. The first case, the take-over bid of Microsoft for LinkedIn provided an opportunity for holders of Call Options to participate in a tremendous move to the upside. The open interest of deep in the money calls is staggering when you consider the changes in value that occurred. It provides the landscape for how options priced at a couple of dollars or less can explode when a stock goes from 130 to 190 overnight. In this case, two and three dollar options were worth approximately fifty-five to sixty dollars. The same phenome occurred with out of the money puts in Stock Indices after “Brexit”, although to a lesser degree.

While in the LinkedIn case, the Stock traded almost a third higher after the announcement, the British Pound, Natural Gas, Silver and Sugar have had ranges in excess of 10% since last Friday. They were very volatile markets. The contract with the largest percentage range was VX, (CBOE Volatility Index VIX Futures). It had a low of 16.07 and a high of 27.65 on the 24th. That’s a percentage range of almost 55%. It shows the explosive nature of the VIX and is a reminder to options sellers that limited risk positions, when possible, provide the best opportunity for risk management. As a low priced index with an esoteric format, the VIX is much more susceptible to large percentage moves than a product such as a Stock Index, Commodity or Individual Large Cap Company (although LinkedIn came close).

It is often necessary to go against conventional wisdom when finding an Options Strategy to meet your risk/reward requirements. For those that are trading options contracts, our Webinar Preview PDF is designed to provide Options Trading Strategies which are used to meet a variety of trading situations. Whatever your trading strategy, be sure to identify liquid markets, compare historical and implied volatility, analyze the implied volatility skew and find the strategy that uses these parameters to match your market bias. If you are trading options and are not comfortable with these terms: 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. 

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Trillions Are Recovered As Stocks and Commodities Rally In The Aftermath of ‘Brexit’ Panic

The last several days have shown the strength of the movement of futures contracts and their ability to recover from adverse moves. The most closely watched, for sure, is the E-mini S&P 500 Futures which has recovered more than half of its losses since the lows on Monday. Some may call it a short covering rally however the shorts may have suffered enough pain yesterday. Today’s rally may just be the Stock Market rebounding to a more reasonable level.

The E-mini S&P isn’t the only Futures Market to experience substantial movement since the Brexit vote. The biggest mover has been the October Sugar Contract which hit a low on June 24th of 18.41 and traded a high today of 21.20 Cents per Pound. That’s a move of 15% in just a few days. That dwarfs the move in the British Pound and shows that Futures Contracts, including the British Pound, can be extremely volatile.

The Table below shows the movement of various Futures Contracts since the end of the year. The snapshot was taken at 4:00 PM ET on Wednesday. For the most part, it has been the year of the commodity. Listed, in order, are three currency products, the British Pound, the Euro and the Dollar Index, followed by Crude Oil, Cotton, the E-mini S&P and Gold. The following futures contracts round out the list: Copper, Coffee, Natural Gas, the E-mini NASDAQ, Sugar, Silver, Corn, Soybeans and Wheat.

The final column provides the percentage gains and losses since December 31st. Sugar is the clear winner with gains of almost 31%. Silver and Soybeans also have provided returns in excess of 20% this year. Trading futures contracts is highly leveraged, so it is much easier to make or lose a lot of money on your investment than just by trading Stocks. The returns shown are based on changes in price, not the amount one would have made or lost on a margin based transaction in a futures contract. Each contract has a different margin requirement which will change based on the individual market’s level of volatility. Trading futures contracts is not like trading stocks in which you put up either 50% of the value of the investment or the full value of the stock. Futures trading typically provides for leverage of more than ten to one. Be sure you are aware of the risks before trading any of these instruments.

If you are not satisfied with the leverage you get in futures contracts, consider options on futures contracts which provide the ultimate opportunity for leverage.  If you have a strong understanding of options trading, be sure that you are analyzing the liquidity percentage of the options contract you are trading. Liquidity is essential to long-term profitability. In addition, analyzing the Implied and Historical Volatility, the Implied Volatility Skew and the appropriate options trading strategy to meet your risk/reward requirements are all necessary to ensure that you are performing your due diligence. The Options Guide PDF provides additional information on options trading.

As you can see from the Table, this has been a stellar year for futures contracts. Of those listed, Sugar, Silver, Soybeans, Gold, Crude Oil and Natural Gas all had price increases well in excess of 10%. It may be late to participate in these markets, but it always makes sense to understand the dynamics of markets, including stocks, futures and options. Our Options Syllabus is an outline of trading information.

 

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.

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