Well, March was an eventful month.  We had the world’s third-biggest economy suffer a massive earthquake and tsunami followed by an ongoing nuclear emergency.  If that was not enough, the massive unrest in the Middle East has continued to spread.  NATO is bombing the Libyan Army currently.

Finally, the problem children of Europe are seeing the CDS on their debt spike to new highs.  We got an initial sell-off, but since Japan has seemed to stabilize, the SPDR S&P 500 ETF (SPY) is now higher than it was on March 11 – the day of the earthquake, and within spitting distance of its February highs.  Likewise, after a quick spike in the CBOE Market Volatility Index (VIX), we are now back to a VIX reading around 18. Continue Reading

Chart Source: Bloomberg

When a stock price plummets, many sage old traders may warn, “Don’t try to catch a falling knife!”  This adage refers to a rookie trader’s mistake of buying a falling stock and hoping easy money can be made before flipping out of it when it (again, hopefully) bounces.

Many portfolios have been crushed owning weakened shares and waiting for a stock bounce that never comes.

The same warning may be appropriate when looking at volatility.  We have been weathering continued uncertain economic and sovereign debt outlook in Europe, inflation fears and interest-rate increases in China, continued high unemployment domestically, and most recently, the geo-political upheaval in the Middle East, which the U.S. stock market has largely shrugged off. Continue Reading

When discussing commodities-based stocks, there is usually correlation between the underlying commodity and the company’s share price.  As most of you know, there has been a pretty large rally in commodities stocks over the last few months.  Gold and copper are near all-time highs again.  Freeport-McMoRan Copper & Gold (NYSE:FCX), the copper mining stock, has followed copper higher to hit an all-time high of its own.  The stock is now trading around $115.

One commodity that has lagged in the rally is oil.  Black gold is stuck below $90, while its high was around $147 in 2008.    Again, much like the commodity, Exxon Mobil (NYSE:XOM) stock is trading around $72, well below its late-2007 high of $95.05. Continue Reading

Some things we learned as children:

“There is no such thing as free money.”

“If you see something that looks too good to be true (especially in options trading), it probably is!”

“A little intelligence is a dangerous thing.”

I am compelled to warn readers about a trap I have seen too many option traders fall into.  That trap is selling “boxes” on stocks for more than the difference between strike prices.  (A box is a 4-legged trade where you sell one combo and buy another combo.)  Theoretically, they may think, it cannot be worth more than that difference.  This is most definitely NOT TRUE.  They are forgetting about Dividends!

For example, I have recently seen traders looking at the options in the SPDR S&P 500 ETF (SPY).  The 120-125 box for instance.  In this example, the 120 calls would be sold, the 120 puts bought, and the 125 calls are bought while the 125 puts are sold.

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Stock or options trading can offer the opportunity to profit in bullish or bearish markets. We discussed earlier this week in our weekly webinar how investors using options (long calls or long puts) can gain limited risk exposure to these market moves.  Depending on their outlook, traders risk 100% of the options premium paid for unlimited profit potential should the stock move higher (calls) or lower with puts.    This characteristic is one of the primary motivations for investors when they begin trading options.

But wait – there’s more! Certain option strategies have the potential to profit in range-bound markets.  So in a scenario where a stock trader might be totally neutral on a stock’s outlook, – an options trader has the opportunity to profit even if the broad market (or a particular underlying stock) moves absolutely nowhere.

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Scenario: An OptionsHouse customer recently called in to the OptionsHouse trading desk and told the representative he was confused about a margin call notification he had received that day in his message center. The rep asked what type of margin call he had been issued and the client replied, “a Day Trading call.” He then went on to expound quite earnestly that he could not have possibly generated a Day-Trading call because he had “only made two day trades” in the past five days.

Sound familiar?

The Day Trading and the Equity Maintenance margin calls are frequently mistaken for one another by many of OptionsHouse’s clients. Because the ramifications of these calls (and the methods needed to satisfy them) are vastly different, it is essential to know the differences between the two. Continue Reading

Netflix (NASDAQ:NFLX) reported earnings Wednesday night that were viewed favorably by the Street overall.  The stock was up 13% on Thursday to $173.  Obviously, traders who were long NFLX stock or long a lot of deltas through a combination of long calls and/or short puts fared well in their portfolios for the most part. Conversely, those who were short delta exposure probably had a tough morning.

What gets interesting is analyzing what happened to the traders who played the ferocity of the move (otherwise known as the volatility) as opposed to a specific direction.  Traders could have done this by buying or selling straddles or strangles. A straddle consists of a long call and a long put purchased at the same strike price.  A strangle is a long call and long put at different strike prices (where typically the put strike is below the stock price and the call strike is above). Continue Reading

The leverage options provide can be tremendously appealing to investors, both professional and retail.  Potential returns can be exponentially large on a relatively small investment but this can lead to a myopic view of the entire risk landscape.

The idea of controlling 1,000 shares of Google (GOOG) with only 10 calls, for example, can be terribly enticing. So can the hopes of earning larger returns on a percentage basis.  It is important to remember, however, that the realities of the situation should not be overlooked, nor should the potential risks.

Incremental moves in the price of the underlying stock can be cause for great price movements in the price of options – higher or lower.  While leverage can afford the opportunity to control an otherwise inordinate amount of stock relative to account value, it also provides a clear picture of the amount of risk that can be incurred. Continue Reading

On CNBC this week, Bill Gross – managing director at Pimco – said the new normal for investing means saying goodbye to double-digit returns.  His basis for thinking this is the new, expanding regulatory environment, which will likely curtail the use of leverage.

What this means to his investment outlook, he wrote in his monthly investment outlook, is that future investment returns will be “far lower” than the historical averages.  With bond yields at 2.5% and the GDP growing between 2-3%, he does not see stock returns being that exciting in the future.

If Mr. Gross’ outlook is correct, it likely means a tough road for stock investors. Hedge funds de-leveraging and banks closing down their proprietary trading desks may mean fewer investment dollars buying stocks. There are option strategies that may be suited to lessen the impact from such a low-return environment. Continue Reading

Despite the strongest September in nearly 70 years, the market has yet to recover to its early-May levels – the area at which stocks were trading before the infamous May 6 “flash crash” that took the Dow 1,000 points lower in a matter of minutes. It’s been almost five months since this unsettling event, and officials are still looking for a culprit.

Those tracking the Securities and Exchange Commission officials researching the matter say new trading regulations could be announced soon that would hopefully prevent a similar event from transpiring in the future. One professional investor – Joe Saluzzi of Themis Trading – said the regulatory commission could opt to prohibit stop-loss orders (or at least limit the situations in which they can be used).

A stop-loss, also called a “stop order,” is an order type that allows investors to close a losing position, possibly limiting losses. A market stop order is simply an order to automatically buy (or sell) a position at the market, once that position has crossed a pre-determined price threshold. A limit stop order has a similar goal but limits the exit to the specified price. Continue Reading