All Entries in the "Stock Option Trading" Category
Stock Market – Up or Down? Please Vote
Wow, it’s been quite the interesting ride the past few weeks. I kept hearing rumors of a market correction before the election and then a market climb as the Republicans take back the house and possibly but not likely the Senate. It’s been quite the opposite as the market continues upward hitting new highs. So has the market recovered and will it continue to climb, or will we see a significant drop (defined as 6% or greater drop in the Dow) before the end of the year? I’ve spoken to as many people predicting gloom and doom as I have people thinking we have turned the corner to recovery. The pros and cons of a continued strong stock market:
Pro’s
It’s earnings season and so far the results have been pretty good. Profits are up, guidance is for the most part more positive than negative. Unemployment is down, companies are cash rich and expectations are for a strong retail holiday season. That all sounds good huh. See, the recovery is HERE.
Cons
Not so fast, although the above is true, although profits are up, gross margins are not. The jobless rate has not come down. Companies are buying back stock or buying other companies, but they clearly are not hiring. There is talk of quantitative easing (in essence printing more money to stimulate the economy) but that is a short term fix that will cause more damage long term Not to mention the rising deficit. Need I say more.
So now it’s your turn to weigh in. Please leave a comment and let me know what side of the fence you are on and why. Your opinion matters!
Trading the VIX
The market recovered almost all the losses of yesterday on the further weakening of the dollar. As the dollar goes down, the market goes up. Its an inverse relationship that is having its effect. The dollar is down 2.63% vs the Euro year to date and down .88% vs the pound just today.
As Geithner said recently, “We can’t devalue our way to prosperity”, but isn’t that exactly what the government is doing? We continue to spend, spend, which puts downward pressure on the dollar. Interest rates are akin to zero and now we are hearing about the upcoming QE2, which will send the dollar even lower. So is this really a good thing for the stock market long term.? Clearly NO! If we don’t get spending under control we should expect to see a near collapse of the dollar.
Net net, not a good thing for the US economy and were on shaky ground as it is.
I anxiously await what’s next. I’m still expecting a significant downturn and I’m even more convinced of the inevitability of it now. So how do I intend to protect myself and make money on the downturn? I’m trading debit spread puts and I’m trading deep out of the money calls on the VIX. More on the specifics on my VIX strategy tomorrow.
Correction On the Horizon?
After today’s big stock slide, does this indicate a much anticipated correction? My personal thoughts are that we are headed for a correction, although I thought the market would hold high or continue higher until the November election. After today, perhaps we will see the market continue downward. Only time will tell. It’s earnings season, and although some of the reports have showed increased revenue growth and stronger than expected results, at the end of the day, gross margins and guidance has disappointed. I wouldn’t be surprised to see a continued downward trend. Tomorrow I will post some thought on how to make money if and I believe when a correction occurs. Stay tuned!
Trading Tax Strategies – Save Big!
STOP leaving thousands of dollars of unclaimed expenses on the table TODAY and put that money in your pocket.
If you are an active investor who would like to get more tax breaks and keep more of your earnings at home, keep on reading and sign up for your FREE video today. Go to the sign up box on the right of this post and get your FREE video and start saving money today!!!
You probably know that your trading activity doesn’t qualify for the IRS “definition” of a trader, and so you are not able to claim the tax benefits that the IRS extends to that elite group of people. And even if you are trading as your primary source of income, the IRS may still dis-allow expense deductions that can legitimately benefit your bottom line. We have developed solutions that allow you to reduce the amount you pay in taxes on your profits. All legal and accepted by the IRS.
Sign up NOW for your free video! Go to the box in the upper right hand corner of your screen and register for your FREE video.
A New World Order
What really is going on here? The market is on a tear, although volume continues to be low and as far as I can tell most Americans are not any better off than they were 6 months ago, in fact, I can make a case that most Americans are worse off. They fear for their jobs, or most likely fear they won’t find another job after losing the the one they had over the course of the last year. Many still fear losing their homes and if the news reports are accurate, we haven’t stemmed that bleeding yet. So what’s up? I have come to the conclusion that the market aka investors are inherently bullish and that any crumb of good news takes the market higher… Until the day that one piece of bad news comes along, and Wham! correction.
I’m a pretty conservative investor – with the exception of my last post – The Debit Spread – and I look to basic fundamentals when it comes to the market. Well over the course of the last year and a half, I’ve had to release my mental hold on the belief that the market moves based on economic fundamentals. I think the market has changed, and I think it has changed for the long haul. I totally get that although the US stock market is made up of US companies, most of the companies making up the DOW are global companies with an increasing percentage of their profit coming from overseas. I’m not referring to that, I’m referring to a market that now moves with much greater volatility on emotion. Emotion often times a result of NEWS! We seem to have gotten away from the fundamentals of how our American companies are prospering and seem to trade with what gets reported by CNBC. Now don’t get me wrong, I love CNBC, it just seems to me that the market is overly bullish without the basic fundamentals to back it up.
We are in a new era of the US stock market – low volume, electronic trading, flash crashes, and emotional trading. I’m trying to get used to the new world, adjusting my strategies along the way. Having said all that, there is one thing I’m sure of, even though the rules may have changed, there’s still money to be made!
Happy trading!
Vertical Roll Limitations
The market is moving up, up 6 of the last 7 sessions. I have a call vertical spread position on the NDX and the strike price is moving uncomfortably close to my position so this morning I vertical rolled up and out, meaning I rolled my position further away from the current strike price and moved my position to next months options. I trade primarily the iron condor, which consists of vertical put spreads and vertical call spreads on the same index. So after executing my vertical roll to the next month, I wonder whether I would be able to complete my iron condor by getting puts in the current month. Of course the answer is no, not without additional buying power. So be aware that when you vertical roll, you will need additional buying power to complete the iron condor in current month, or if you already have puts and you want to vertical roll your calls, you are going to have to close your put position prior to vertical rolling if you don’t have additional buying power. The vertical roll is a very valuable strategy, but it has its limitations.
Happy Trading!
The Dog Days of August
I cant get my orders to fill, why, lack of volume. As expected, August is a slow month. I guess everyone is on vacation, maybe I should be as well. I place an order and it sits, this month for weeks before it finally fills. Some of my orders dont fill at all. It’s frustrating, so instead of bucking the trend, I’m going to chill, maybe the beach is a better option for today. Get it, option…..
Beware of a Bull Market
Wow, its been quite an interesting and volatile last couple of weeks. The “Flash Crash” notwithstanding, it seems that the correction we saw last week has disappeared in a wisp of smoke fueled by what I feel is false confidence. I get that people are relieved that Greece has been bailed out for now and that the European nations have bonded together to support the Euro, but the bailout is a band aid at best. As worst it has served to delay the inevitable and the inevitable is BAD. So as the market regains all it lost last week, we are back to where we were, totally ignoring basic fundamentals and basking is the belief the economy is in a V shaped recovery. Who are they kidding???? We just got through Q1 earnings announcements and they were for the most part positive. So the market screamed up, up, up. Don’t investor realize that earnings were up based on managed inventories and cost cutting and not revenue growth? The job market has not gotten significantly better, jobs are not being created, so why the optimism? I just don’t think things are getting that much better that fast. Call me a pessimist, but I just don’t get it. And let’s talk about the deficit. The IMF bailed out Greece to the tune of trillions of dollars. Okay, good to stem a catastrophic slide, we did it with TARP to keep our economy from crisis, but at the end of the day, who funds the IMF? Guess who? WE DO. the US makes up 20% of the IMF so in essence, we the US taxpayer is bailing out Greece. Where’s that money coming from? And the market screams up. I’m not an economist, and these are just my thoughts. So are we teeing up a big correction? Bigger than the flash crash of last week? A market slide based on fundamentals that makes last week look like a bump? No one knows and I do believe we are in a slow economic recovery and that the markets will be up 10% or more by the end of the year. Just beware, rocky roads are ahead.
Why Index Options?
Today was a good day in the market. It’s expiration week and my put positions are looking a lot safer than they were. 11 days ago my NDX and SPX puts were under water – yikes. I shared with my trading buddies that I felt like I needed to be revived -grab the paddles – CLEAR!! – a couple of times. But I also knew we still had time in front of us. Still I don’t know where we will end up this trading session, but I do know a couple of things.
Volatility and the Stock Market
Stock market volatility can be defined as the degree to which the market goes up and down and up and down. Sounds pretty simple, right? Well of course there is a lot that goes into market volatility, and while we won’t address in depth factors that lead to market volatility here, we will instead focus on indicators that can help us determine where the market is headed.
Some say that market volatility is a measure of investor nervousness, and while there may be some truth to that, most investors are professionals that are lead more by fact than by fear. At least we can hope this is true. Another misconception is that a market going up, up, up is a volatile one, well, that just simply is not true. Volatility if a measure of the speed in which the market goes up and down, up and down. So a market which slowly goes up, up, up over the course of time is seen as having very little volatility.
How is volatility measured and how can we use it to our advantage? In 1993, the Chicago Board Options Exchange (CBOE) introduced the CBOE Volatility Index, known as the VIX. Originally it was designed to measure the market’s expectation of the 30 day movement of the at-the-money S&P 100 Index (OEX) option prices. In 2003, the CBOE updated the VIX so that it better reflected the movement of the overall market. As of 2003, the VIX is based on the S&P 500 (SPX) index option prices. The VIX estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices. If you are interested in learning more about how the VIX is calculated you can find the mathematical formula on the CBOE website at www.CBOE.com. In February 2006, CBOE launched VIX options which, since inception, has grown to more than 100,000 contracts traded per day.
All options used to calculate the VIX are either in the front month (nearest to expiration) or the second month. Technically, the VIX estimates the implied volatility of what an at-the-money option on the S&P 500 would be with 30 days left till expiration. The VIX is quoted in numbers between 0 and 100 and normally trades at the lower part of that range. Lets look at an example. On March 11, 2010 the VIX was trading at 18. That number represents the movement – both up and down – that could be anticipated in the S&P 500 over the next 30 days. What that means is, based on implied volatility in the S&P 500 options, the index is expected to move approximately 1.5% (the VIX at 18 divided by 12 months) over the next 30 days. Okay, that’s interesting, but how do I make use of the that information? What that means is that within the next 30 days you can project that the S&P 500 will move 1.5% either up or down. It gives you a range in which you can expect the index to move. Using our example of March 11, 2010, the S&P 500 closed that day at 1150. Option traders and investors anticipate that between March 11, 2010 and April 10, 2010 the S&P 500 is likely to trade between 1132.75 and 1167.25. Of course that doesn’t mean the S&P 500 will actually trade in that range just that investors and traders anticipate that to be the case.
Keep in mind that the value of the VIX is constantly being changed and is only a measure of the expectations of traders and investors. Historically speaking, a very low VIX is an indicator that the market is ready for a sell off, if the VIX is high, that indicates a rally. Others argue that while that used to be the case, in today’s market there are so many other factors that influence market movement that the past behavior of the VIX is a poor indicator of where the market is headed. In either case, the VIX is just another tool in your toolbox to help gauge movement in the market.
One important thing to also know about the VIX, it’s expiration schedule. The VIX typically expires on the 3rd Wednesday of the month, but that is not always the case. If you are actively trading the VIX, please consult with a VIX expiration calendar so you are not caught unaware of the actual expiration date. Just Google “VIX expiration calendar 2010″ and you will find the current schedule.
While this article has primarily dealt with the VIX as an indicator of volatility as it is one of the most utilized and understood, there are a number of other calculations and tools available to determine market volatility. To learn more about stock market volatility, I recommend The Swing Traders Bible – Strategies to Profit from Market Volatility by Mathew McCall.
