This metric estimates how much risk your overall account is subject to from a 20% move in a single security in your portfolio.  Think about it as checking gap risk for all your names.  You should not put your whole account at risk because of one stock.  Individual stock risk is real.  You need to be cognizant of the risk in an individual position compared to the overall risk in your entire account.

With a 20% move up or down in symbol, you are at risk of losing [%] of your current account value.

10 = >50%

8 = 50-31%

6 = 31-16%

4 = 16-9%

2 = 9-3%

0 = 3-0%

For customers who use our iPhone and/or iPad trading solutions, you may experience issues when trying to download new updates or applications.

Apparently, you may still be getting older versions and, in some instances, iPhone apps for the iPad. We have confirmed these issues are not specific to OptionsHouse. There appears to be some broader Apple Store issues. Apple is aware of the issues and is working to resolve them.

If you are encountering issues with the iPhone update, we suggest you keep trying to get it from Apple. Just know that until Apple resolves these issues, even if Apple says you are downloading “2.0″, you still may be getting the older version.

When you have the app downloaded, check the login screen. If there is a line of text at the bottom that says “Version 2.0.30″ you have the update! If you don’t see that, it’s the old version.

We actively working with Apple to try and get these issues resolved.

I have traded options professionally for over 25 years. This chosen profession has been a wonderful choice for me as I can think of no other profession where every day you can answer the question, “Did you have a good day today?” with such objective clarity.

The secret to longevity in trading derivatives is very serious however. It is very simply mitigating risks and eliminating uncertainties whenever and wherever possible.

I have seen far too many retail traders do the exact opposite of this discipline with disastrous results. They are tempted to attempt to make a quick couple of bucks on expiring options rather than follow the discipline that serious professional traders carry out around expiration. Professional traders eliminate risks! I am embarrassed to say that many of our customers add additional HUGE risks for the potential reward of MERE pennies. This is insane!
At the end of last year, the SPY quarterly options expired at the end of the day on the last trading day, December 30, 2011. In the last 20 minutes of the session, traders actually sold the 126 -127 call spread for 2 cents! Typically a credit call spread is a limited risk / limited return strategy. On expiration day, the risk/reward is even worse than giving the 50 to 1 odds on a 1 dollar call spread!

This is due to the fact that the 127 calls which were purchased were really very far out of the money with so little time to go before they expired. So this is really the equivalent of selling the 126 calls naked for two cents. The seller of these options actually took “pin risk” into their portfolio for a measly 2 cents! Pin risk is the uncertainty of the exercise outcome due to the underlying closing price being very close to the short strike price position.

The SPY closed that particular session at 125.50 but the options and futures in this ETF continue to trade for 15 more minutes on the exchanges. Additionally the stock continues to trade in the post market session. During this time the SPY stock price rallied thru the 126 level all the way up to 126.20 before settling at 3:15 p.m. CT at a price of 126.05. This price action caused many of the long 126 calls to be exercised further causing assignments to the short call positions. Likewise many 126 strike puts were NOT exercised. This resulted in my customers being surprised over the long weekend with a short stock position in the SPY! The market gapped higher on the first trading day of the New Year, January 3rd , resulting in RegT margin calls and large losses in these short stock positions.

It is important to realize that during the expiration of the options this is actually no longer a short call spread but rather a resultant short stock position that has unlimited risk to a market move higher. All this risk for only a limited potential return of 2 cents!

As foolish as it is to open a spread with a maximum potential gain of only 2 cents, it is equally foolish for the traders who did not cover their short option exposure before expiration. They too were allowing all that uncertainty and risk to enter into their portfolios. This inaction, to me of not covering a short position at 2 cents is the same as shorting that position for only 2 cents!
Weekly options volume has exploded and expiration now is an every Friday occurrence. These proliferation of expirations makes every Friday a potential for disaster without proper monitoring and managing open expiring positions.

The lesson learned here is professional traders take expiration risk OFF their sheets. How? By closing down short expiring options before they have a chance to turn into a stock position that is unwanted, uncertain and unlimited in the potential loss. Remember, the long holder of options controls the decision around exercising. Short option holders have only obligations to buy or sell stock and are at the mercy of the exercise decision whims of the long holders.

With the continued march to a world of sub-20% VIX¹ readings, premiums required to purchase out-of-the-money debit spreads have continued to decline.  Couple this lower premium with the almost 6% rise in the S&P 500 Index (SPX) since the start of this new year and you may discover some compelling trading opportunities.

Whether you believe an upside breakout may be coming or you are concerned about a possible retracement in market prices, lower-cost debit spreads may be one way to limit your risk while potentially profiting through a limited-risk limited-reward strategy.

Think about it this way:  if your preferred strategy is to sell out-of-the-money SPY (SPDR S&P 500 ETF) puts as a strategy to gain neutral-to-bullish market exposure, the premium you now receive by selling put options is considerably lower than it was two months ago.² You either have to sell options with strike prices that are significantly closer to being at-the-money (ATM)³ to receive the same premium, or you have to sell options that are the same distance out-of-the-money for much lower premium.

Is it worth it?  The maximum reward for a short/sold put is limited to the premium collected upfront (while risk is unlimited down to zero).  Perhaps the strategy is still worth it for some traders, but those concerned about the risk/reward of short options might look to the lower-volatility environment for current opportunities that are present in long debit call spreads. It may make some sense, because if options are too cheap to sell, they may be a value to buy.  The risk to buying debit spreads is 100% of the premium paid, while the profit is limited to the difference in the traded options’ strike prices less this premium.

Conversely, if you don’t believe this rally, what could you do?  Well, with the market run-up and the volatility decline, there are symbols on which you can buy debit put spreads that would be in-the-money if the underlying stock retraces back to trading prices just 30 days ago on January 1, 2012.   The prices of these debit put spreads are now lower than they have been in the recent past and may once again provide compelling limited-risk, limited-return trades.

We have two useful tools to assist our traders in analyzing the possibilities:

The Trade Generator in our suite of platform tools has a debit-spread finder, which is ideal for scanning for these opportunities. You can access the Trade Generator from the latest version of the OptionsHouse platform by clicking on the Tools tab.  You can also click on any down arrow, select Tool Navigator, and get to the Trade Generator from there.

The Debit Spread tool inside of the Trade Generator (which you can select from the strategy drop-down menu)  allows you to  search by industry group, Watchlist or a single security, for debit call spreads and debit put spreads based on your selected criteria.  A comparison between historical and implied volatilities is generated and the ideas will populate based on maximum potential ROR.⁴

For example, say you think that Apple shares could retrace back toward the price the shares were trading on January 1^st, 405.00.  The Trade Generator highlights trades such as the April 12 420/415 debit put spread (going long the 420 put, shorting the 415 put) for $1.20 per spread. If AAPL is trading below $415 when the spread expires, the profit maxes out at $380.00 (before commissions).  The risk is capped at the $120.00 premium paid.   This represents a 316% return on risk on this trade.

We also have a Spread Investigator tool in our suite, which shows potentially inexpensive call and put spreads currently available in the market.  This has less qualitative screening capabilities and is intended to show lower-cost debit spreads, which oftentimes are very far out-of-the-money (OTM⁵). Be forewarned, the farther out-of-the-money the spread is positioned, the lower the probability exists that they it become profitable at expiration.

In conclusion, this is not intended to be any sort of buy or sell recommendation but is rather aimed to stimulate your thoughts around trading the volatility environment that currently exists.  When volatility levels are lower, it may make sense for long option spreads.  For more information on vertical spreads check out our webinar archive for presentations on long call spreads and bear put spreads.

MarketWatch had a great article Friday in which Howard Gold discusses what he calls the “Worst Investment Ever.”  He was talking about levered exchange-traded funds, the very popular segment of the ETF family.

These levered ETFs provide double and triple daily returns (or inverse returns) on the underlying index on which they are based. Investors have flocked to these instruments to the tune of $40 billion in assets.  In my opinion, the majority of these assets are being used very incorrectly and to the detriment of the user.

The reason is these products are designed to replicate a multiple of the DAILY movement of the index.  The ETFs themselves use futures to achieve the desired geared changes.  Therefore, in order to provide double and triple the returns (positive and negative) on a daily basis, they are required to sell more futures on days the market is down and buy more futures when the market moves higher.

This process of chasing the market, buying high and selling low, causes a negative drift over time for the asset when the overall market is volatile.    The problem is, investors are holding these for multiple days and even months.

Over time, with the ups and downs in the market, these products are designed to underperform.  When looking at the pair of three-times levered ETFs on the financial sector over the past three months, many investors would expect if the bearish ETF (Direxion Daily Financial Bear 3x Shares – FAZ) were lower, the bullish ETF (Direxion Daily Financial Bull 3x Shares – FAS) would be higher.  Not the case.  FAZ is down over 20% and FAS is down over 30%!

Those investors who have held either of these ETFs have lost a significant percentage of their investment.

It is imperative for traders to remember these are designed to be intraday trading instruments, not a longer-term (or even shorter-term) hedge.  The problem is the market can gap lower on the open, making it tempting to hold the inverse Bear ETF overnight in your position as part of a hedged position.  Using put and put-spread strategies may be much more effective over time relative to owning a triple levered Bear ETF.

The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

We love giving customers the features and functionality they want.

And today is one of those days. We have made some changes to our Watchlist feature that will allow you to interact with your Watchlists and other “list” components (Sector Monitor, Index Monitor, and Hotlist) in a different, more efficient, streamlined way.

From now on, you can trade directly from the Watchlist. Whether you’re trying to simply buy or sell stock or generate an advanced order, you can do so by simply clicking on the symbol in the Watchlist:

Not only that, you can send a quote for that symbol to the universal quote line at the top of the platform. If any components are linked to that top line (such as the option chain), then you’ll see an option chain load up for that symbol.

With these new changes, these components will have a cleaner feel that should make them easier to use.

But wait—there’s more!

We’re also bringing a new level of customization to the platform to the following components:

-          Positions

-          Orders

-          Watchlist

-          Hotlist

-          Index Monitor

-          Sector Monitor

We’re enabling a new feature that will make these components completely customizable. The new functionality includes:

-          The ability to pick from a variety of columns to display the data you want

-          Drag and drop columns where you want them

These features allow you to set up each component to show the exact data you want to see in the order you want to see it.

All you have to do is hover over the column headers and select the columns you want to see:

So if you want to see the high and low for a stock in your Watchlist, you can do that. Maybe you’d like to show the days to expiration of a position in your positions pane? You can do that too.

It’s all about exposing the information you want and hiding the rest.

Take a look at the new features, play around with them, and let us know what you think. Oh, and if you want to go back to the default column setting, you can always click on “Restore Defaults” and everything will go back to normal.

Last week we released a host of new features and general bug fixes for our Android application and we wanted to share some of them here. Click here to download the latest version or go to the market from your Android device.

Light Mode

Don’t like all the dark hues on the current app? Now you can switch to Light Mode and all that black will turn white. A lot of our users wanted this in our main trading platform, so we’ve made the change here as well. You can access Light Mode via Settings->Set UI Mode:

Tip: if you’re in the sun and need to fight glare, light mode might make it easier to see what’s going on.

Watchlist Love

We’ve added the ability to add and delete new Watchlists right from your phone. This feature didn’t make it into the debut version of the app, but now you can create brand-new Watchlists from your phone and they will automatically get carried over into the main trading platform.

System Alerts

System notifications will now show up automatically on the Home screen. This includes margin or day-trading calls, as well as other critical messages that would normally show up in red in the message center of the main trading platform.

Hints and Feedback

This new section on the home page makes it easier to send us your feedback and report issues with the app. We’ve also included a hints area that gives you some good tips on how to get the most out of the app.

One More Thing on Positions

We’ve gotten some feedback from customers wanting more information regarding their positions in the app. So we just wanted to clarify that there is an entire screen devoted to each position that’s accessible from the positions screen.

From this screen you can tap on any individual position and the position-detail screen will come up:

Here you can view things like cost basis, value change, and stock price change. You can also trade out of the position right from this screen.

As usual, we love hearing from our customers, so if you have any thoughts on how to improve the app, please let us know here in the comments. And if you love the app, don’t forget to tell the world on the Android Market.

The wait is over—we are proud to announce we have an Android app for OptionsHouse customers.

You’ll notice the app doesn’t look exactly like the iPhone app, and that’s on purpose. We built it specifically for all of our Android users instead of simply porting over our existing iPhone app.

The result? A fast-trading app that takes advantage of all the functionality and usability you’ve grown accustomed to on Android.

From the app, you’ll be able to:

-          Monitor your positions and orders

-          Trade stocks and options

-          Trade option spreads from the options chain

-          Trade out of your positions

-          View your watchlists and trade directly from them

-          View symbol fundamentals and charts

-          View charts in candlestick and OHLC formats

-          Set your trading defaults for app trading

-          Access your virtual account

Check out the app by accessing it directly from your device on the Android Marketplace. You can also send it to your phone from the Android Market website. Don’t forget to rate the app and send us your feedback.

With our Android app available, we now offer an easy, convenient way to access your OptionsHouse account regardless of the mobile device you use. If you aren’t an iPhone or Android user, you can access our mobile website at m.optionshouse.com.

Several weeks ago, we posted a blog about how to simultaneously set up a target and stop price when executing an initial stock order.  Good news – this process is now more seamless thanks to the bracketed orders feature we recently introduced.

What’s a Bracketed Order?

Less complicated than it sounds, a bracketed order simply “brackets” two prices (one stop price, one limit price) around an initial order.  That way you can choose the levels at which you want to exit a winning or a losing trade.  And when one order is activated, the other will automatically be cancelled. Continue Reading