Index of Option Spreads

many a times, we can make sound assessment on where an underlying maybe heading towards but quite lacking the correct skillsets to capitalize on that judgement.

for most investors/traders, buying or shorting stocks, indexes, ETFs, even commodities are just about the only ways to engage the market.

fortunately, Options as the derivative, can be deployed in more ways than one, either to manage portoflio risks, obtaining acceptable risk/reward returns, or simply to profit, and thus may be used as an alternative investment vehicle to trading the actual underlying.

over time, i hope to dwell into each of these Option Spreads and strategies, postulate when each can be deployed under different market conditions, their associated risks, rewards and profit potential.

meanwhile, below lists the various Option Spreads and suggests which ones can be deployed under 4 different market conditions.




a word of caution. not all option spreads are suitable for the retail trader/investor and some may have associated unlimited loss potential.

hence, it is not wise to begin trading any of the above option strategies until one has sufficient knowledge about options trading.

SPX = Mother Resistance Up Ahead 1320

XLF - Big Time Call Buying

i get very worried whenever i see a very lobsided affair...and it's becos, the pigs always get slaughtered. better to err on the side of caution...

XLF.... beautiful rally for the last 3 days

a peek at the Put/Call Ratio of this ETF....my, my, my it is 0.218; ie. for every Put on XLF, there are 5 Calls on it. Very aggressive option buying happening here, anticipating the financials to rally going forward.

DOW - It's Never Easy To Rise to the Top

As anticipated, the coiling triangle gave way to a rally this morning on all Indexes, including the DOW.

We've also noted since some weeks ago that all major indexes have several hurdles(resistances) to clear on any attempts to ascend.

It is not surprising then that the DOW has now 11700 resistance to clear; this being the immediate challenge. It's been attempting to clear past this level since late morning and it does not appear to be succeeding at this time (210pm US time).

If DOW is able to clear this 11700 convincingly, the Bulls will have reason to be joyful, as the next level of resistance appears to be at ~12000 or about 300 points further north.




In an earlier post, we mentioned the need to go easy on Short volatility positions. I hardly think a burst out of the gate with a 3 digit register, a mild market. This morning showed how aggressive indexes can become after a slight nap.

So, it now appears to be showing some signs of bullish bias, judging from the direction in which the DOW index moved out of the triangle apex, BUT only if this 11700 hindrance is very quickly overcome... Hence, adjust your positions accordingly...

it is not a time to hope, if one should be fearing.

good luck to all !!!!

Massey Energy (MEE) - Why Implied Volatility is Important Factor

MEE, an energy company, in recent weeks have come under pressure from the sector sell off. This has been reflected in its shares, which is currently trading at a discount of >30% of its high of ~$95 in Jul 08

IKH, a TA technique recently introduced by a friend and a fellow forummer, Grandrake. I have been intrigued by this tool and have been expensing some time at it.

Base in IKH indicators, I gather the following opinion on MEE.



So, what then of this opinion? What use is it if we simply form an opinion, sit on it and sleep over it? It can only be useful, if we act on them with 2 objectives : 1) Risk Management 2) Profits

It can be said that just about any trades must have these 2 objectives encapsulated, in addition to other trading agenda; which could be hedging or income generation.

As for MEE, one possible option strategy may be to SELL a Call Vertical.

In this case, the following trade can be considered :

SELL MEE Sep 70Call and BUY MEE Sep 75Call for a credit of $1.60
(See analyse of this trade below)



Risk and Profit Potential of this trade :
Maximum loss of $3.40 ( a probability of ~49% of this happening)
Maximum profit of $1.60 ( a probability of ~51% of this happening)

This simply put, means, one is risking slightly a little more than $2 for $1 potential profit. Does not sound like a great proposition, does it ? Indeed, this is not a good strategy.

But more importantly, why is this happening?

The reason is in the current Implied Volatility (IV) of MEE's price action. The current IV is at ~70% as compared to ~95% in late Jun08. As a consequence of a lower IV, the premiums on options have all become "cheaper".

When choosing any SELL option strategies, it is vital to do so when IV is at the HIGH end of the historical volatility.

The reason that HIGH IV is a friend of options sellers, is because of the GREEK VEGA...but we shall leave this VEGA topic for discussion at another time, where it can be demonstrated that VEGA is capable of impact the value of option price significantly.


HENCE, is deploying the below strategy meaningful ?

- 1/+ 1 MEE Sep 70/75Call

IMO, the risk/reward is not justifiable.

FXP - An Indication of a Chinese Rally ?

i've not looked into FXP Ultrashrt Xinhua 25 Proshares before since i dont focus on chinese bourses.
however, this chart just caught my attention recently.... hope this helps the folks who are trading chinese markets...

good luck all...

DOW - Coiling Tighter Than Ever (Ready for a Break)

perhaps, DOW is getting ready for a decisive move.... see the triangulated movement for the last 1 month.
repeatedly, whenever resistance was reached, index was retarded, and when index reached support, it also promptly rebounded.
this cannot go on forever.
given the low volume, and a p-c ratio = 1 on the DJX index options and the midway RSI, coupled with DOW trading right at MA50, it appears, no particular bull or bear camp has an upper hand.
however, i strongly suspect that the majority of the sideliners are getting ready to pounce, whichever way the index breaks out of.

it is, hence wise, not to have any range bound positions; such as a Neutral Option Position, a Short Straddle or Strangle in the portfolio in the days ahead. if there is any ratio spreads, be certain to lighten up on the Short side if the ratio is >2:1, you wont want your Short options to suddenly get ITM via gap up or down in the succeeding days ahead.

good luck and wish you huat huat !!!

BroadCom - BRCM (Where Might be a Good Entry)

Although BRCM is currently sitting on the MA200 support line, there have been instances where this MA200 line did not support well.
In addition, the price is currently in no man's land where Fibonacci immediate support and resistance is.
A noteworthy point is BRCM's Implied Volatility. It is currently at ~41%, and this is a low IV when compared to it's recent historical high of ~67% set in Jun08; ie it is more meaningful to consider some form of Long position for this counter

However, the "fanning" out of the price shows that it might be better to await for price to reach either side of the Green Lines.




Alternatively, these positions could be established...although not ideal as IV is pretty low.

Position #1 - Credit Spread
Sell Sep 26 Call and Long Sep 27.5 Call

Position #2 - CRedit Spread
Sell Sep 24 Put and Long Sep 22.5 Put

ie...an iron condor position.... which must mean that, one has to be pretty sure, this share is going no where from here but be ranged bound...preferably between $24 and $26...

the analysis of this iron condor position looks like this...

a picture

DOW - Late Afternoon Action (Ichimoku Kinkyo Hyo)

what does IKH tell me ???

BEARS everywhere ? unsure, as i have just started toying with this new TA tool...

DOW - Testing Crucial Support

DOW - Blocked at 11600

few days ago, there was a highlight on the need to be cautious on Long when and should DOW recover to 11600 region...becos of a GREEN Monster...

that resistance point is here...who knows if this resistance will stop and retard advancing index.... we wont know until later...but what we can do is to either lighten up on Longs or get ready to go Short...this is all short term trades...

DOW - Broke Channel Support

looks like weakness prevails for now..

sillypics

Will Doji Reverse The 8 Month Downtrend?

here's an indicator that this major index may turn around soon. soon, in the context of a 10 year monthly chart. so, it's not tomorrow or next week, but the next successive 2-3 months ahead. by the time, it is clear that the DOJI formed in Jul08, is indeed a reversal candle, a significant rally would have taken place by then, perhaps taking DOW up beyond 12000 level.

any TA is only good if it is to be used in conjunction with trading/investment strategies.

now, i usually trust the TA tools i use. occasionally, i rely on candles. so far, there has been enough evidence that japanese candles do wonderfully well, in especially on long term charts. this is actually evidenced in the following 10 year monthly chart, where time and again, dojis pre-signal some form of directional change in the index.

however, since nothing is ever guaranteed, exercising caution in money management, trade executions and risks control will always be in order.

given the very clear Doji formed in Jul08, i will be hesitant to be mid term short. this is not to say, i wont trade a month long short positions, i may. but i would be sabotaging myself if my trade strategies include 3-6 months SHORT side.

given so much bearishness in current sentiments, and my unwillingness to be too Short for too extended a timeframe, perhaps, i would consider the following :

a) Selling Puts on stocks that I am willing to buy into at a specific low entry price
b) May Sell Verticals; ie credit spreads
c) Credit Ratio Spreads; perhaps even > 1:2 ratios for meaningful credit amount
d) Covered Call strategy, but only for stocks that I am willing to hold until at least Jan 09

good luck everyone and wish you Huat Huat !!!!

picture perfect entry for dow?

15Aug08 - DOW is still in Rally Mode

DOW Hourly Chart

15Aug08 - SPX caught in between

Selling Put Options - Get Paid to Wait

How To Profit from Selling PUT Options?


In a bear market situation, no one should bottom fish. But sometimes, for most of us, having cash idling almost feels sinful.

Do you want to get paid for your cash idling in your trading account while waiting for your target buy price to be reached?

Then, perhaps you should consider SELLing Puts options!

There are several good reasons for Selling Puts.

1) You are being paid to wait for price to reach your intended buying price
2) You pay a lower price for a stock that you wish to add to your account
3) You stay disciplined in not "chasing" after price rallies and get rewarded

To understand the above, one needs to understand what Selling of Put options entails.

In a gist, selling or known as WRITING a Put option is an act of undertaking an obligation to purchase the underlying stock at a predetermined price. See option chain on Citibank as an example.

Suppose, you WRITE 1 contract (equivalent to 100 shares) of Citi $15 Put Strike Price to expire in Sept08, then you will receive $0.45 credit or $45 (100 x 0.45) into your trading account.

The 4 scenarios that can happen by Sept08 expiration are as follows :

Scenario #1 - C Price Remains Roughly Unchanged
Since C price is above $15, then you will keep all of the $45 premium.
Static return is 45/1500 = 3% (there are only 36 days to expiration) or 30.4% annualized (3% x 365 / 36)
The reason I chose $1500 as the denominator is because this should be the money you should have in your account, standing by and ready to purchase C at $15. While this amount is not actually utilized, it should not be redeployed or else a margin call can occur, if C price tanks drastically. In actual fact, your brokerage will not require you to post 100% as margin. But it is always safer to ensure you do not bet using money you do not have.

Scenario #2 - C Price Rallies
Since C price rallies, your WRITE Put option will never be exercised. Similar to scenario #1, you keep all of the premium credited into your account.

Scenario #3 - C Price Drops Modestly
If C price drops but stay in this range $17.81 > C > $15, again this Put option that you sold, will expire worthless and again you keep all of the $45; ie 30.4% annualized returns.

Scenario #4 - C Price Tanks Below $15
Suppose C price drops very quickly and even before expiration date, C price went well below $15. What happens then. It is very likely you will be assigned 100 shares of C at $15. Why? The reason is because, when you WRITE 1 C Sep08 15 Put, you have assumed the obligation to be assigned (BUY) 100 shares of C at $15 from someone who LONG that C Sep 15 Put. That person has a right to sell to you 100 shares of C at $15 as and when he chooses to do so. Remember that in american style options, assignments can be done at any time before and up to expiration date.
Since now C has dropped well below $15, obviously, he will sell you 100 shares of C at $15 and goes to the exchange and buys C at a lower price, hence making a profit from the differential.
Does this then sound silly? The answer is NO. The reason is simply because you had wanted to purchase C only at $15 originally and not any higher. Now that C has come down to your price target, why would you lament about being a proud owner of C at $15? In fact, you are[/] not [b]paying $15 but actually $15 - $0.45 = $14.55 or a total of $1455 for 100 shares of C. This is a discounted price!

Hence, in WRITING Put option, the 1st premise MUST be that you already had the intention of purchasing that 100 shares of C at $15. If you do not have such an intention, then you should not be writing that Put option.

The Probability of Success
In 3 of 4 scenarios described above, you make a 30.4% annualized return. This strategy offers a 75% chance of success ! Isn't this a good strategy? It is, if you know exactly what you are doing.

The Icing on the Cake
Now that you are a proud owner of 100 shares of C, what next?
Refer to my earlier post on Covered Call Writing; ie, you can begin Writing Covered Call on your 100 shares of C....and should your Covered Call be exercised, meaning you have to deliver those 100 shares of C, this is a happy "problem". Remember that if you 100 shares of C are "called away", it only means that C price has moved up. You have C shares and it can only mean profits for you if C price rallies. The "if-called" return is always very good return on investment. If your Write Covered Call is not exercised, then you simply keep the premium. You win again.
Repeat WRITE Put Strategy detailed in this post and when you should be assigned again, repeat the Covered Call strategy once again. Do this exercise repeatedly.

If you stay disciplined and choose the correct Strike Price, Expiration Month, understand the Greeks and Implied Volatility, you will be a successful investor of your money in the long run.

The biggest misconception about Options Trading is that it is all about Long Call and Long Put. It is not. The most successful investors combine both stocks and options to maximise their capital.

I wish you success and HUat HUat !!!!

Buy/Write - A Covered Call Option Strategy

Reasons for Writing Covered Calls or a BUY/WRITE

I will attempt to explain the reasons why Writing Covered Calls is essential in maintaining a more wholesome investment strategy

For a start, any and all investment strategies must achieve 2 main objectives; namely a primary objective to Profit and a secondary objective to Conserve Capital Invested. Hence, when we open an equity position, our aim is to close off that position with a predetermined profit or loss.

Writing Covered Calls can achieve these 2 specific objectives.

The simplest explanation of a Write Call option, is the act of SELLING a Call Option at a specific Strike Price and at a specific month.

Since most of us are more accustomed to LONG positions, the chosen example shall be LONG stock and Write Call option. This is classically known as Buy/Write position.

Let's use Citibank as an example. See what C is trading currently and the Option Chains(the choices of Calls and Puts) available.

Supposing you decide to LONG 100 shares of Citibank and Write a Sep08 20 Call. Fyi, 1 contract of option = 100 shares of stock.

You would be Buying 100 shares of C at $18.54 and SELL 1 Contracts of Sep08 20 Call. You would have paid $1854 for the 100 shares of C and receive into your account $85. Your net outlay for this Buy/Write position is $1769.

When you establish this Buy/Write position, you have effectively enforced 2 very important principals of trading.
#1) You have predetermined your selling price. In this case, you have decided the target price of $20 as your selling price
#2) You have also predetermined a margin of error, which the risk of this trade

Let me explain further by citing 4 scenarios that can happen once you enter this Buy/Write position.

Scenario #1 - Citi Rallies Mildly
By the 3rd Fri of Sept. If the price of 18.54 < 1769 =" 4.8%" style="font-weight: bold;">47.4% when annualised. In other words, if you do this month after month, theoretically, you would have made a handsome 47.4% on your investment. Not bad.
More importantly, your primary profit objective is achieved

Scenario #2 - Citi Remains Roughly Unchanged
By some stroke of chance, C remains roughly at 18.50 region by 3rd Fri of Sept.
All of Scenario #1 applies; ie. you still obtain 47.4% of annualized return on your investment

Scenario #3 - Citi Price Falls
Any astute and long term stock player will know that taking a loss is part of the game. But the question is when to take a loss. Setting too tight a stop loss can result in unnecessary wastage of commissions paid and not allowing sufficient price whipsawing effect. Yet, setting too large a stop loss can result in depletion of investment capital. So, where is a good balance?
Using Buy/Write strategy, you allow yourself to absorb up to ~$85 of paper losses, without actually incurring a real loss. How so?
Remember, you paid $17.69 for shares of Citibank at a price trading at $18.54. Effectively, you have given yourself acceptable paper loss of $0.85 downswing on C before a REAL loss is incurred. Therefore, if C price drops to $17.69, and you sell off your LONG C stock at this price, you would have accepted a loss of $0.85, or did you? In reality, you did not. This is because you have been credited $0.85 at the moment you WRITE Sep 20Call and received $0.85 credit. Although you would have suffered a loss from selling C at a lower price, you have already gained from Writing a Covered Call option. This results in a net neutral balance in your account (less any commissions). It provides you with a safety margin.
This is a disciplined way of ensuring your 2nd objective of Conservation of Capital is achieved.

Scenario #4 - C Rallies Past $20
What if by 3rd Fri of Sept, C price trades past $20.
This is wonderful ! It is a happy problem.
What will happen is that you will be assigned on your WRITE Sep 20Call. What this means, is that you will be obligated to deliver 100 shares of C to someone. This is done via selling your LONG 100 Shares of C at $20. Is this a problem? Absolutely NOT.
Remember that your original "purchase" price of C was at $17.69. If indeed C price zooms past $20, you would have profited handsomely.
Your return (known as "if-called" return) is calculated as
2.31 / 17.69 = 13% or 129% annualized... this is a bagger !

Happy trading everyone...and I wish you HUat HUat !!!!

13Aug08 - Possible LONG for Macy's?

12Aug08 - DOW (Rally Still In Tact?)

~11,370 needs to hold up else Jul's rally is considered dead...
meanwhile, today could be seen as a correction...

12Aug08 - SPX (Looking Good for Higher Grounds)

One additional not captured in this chart is $VIX.
It briefly dipped below 20 on 11Aug. Upside risks increases as VIX crosses below 20...

11Aug08 - BKX (Banking Index) Showing Some Strength

dunno why there is strength, could be lower CL price, could be govt's interventions to try solve banking problems, could be USD strength, could be a whole lot of effing reasons...who knows...it shows strength...so be it..

noteworthy is obviously, the resistance is coming up NOW...

11 Aug 08 - XLF - Testing MA200 Resistance....

this is a first attempt at MA200...and quite expectedly, given that we are in a long term downtrend, that this attempt is failing (at least today)... however, given all the weak financial situations (Freddie, Fannie, ABS buy backs, SEC's probes, etc), it is still amazing that XLF has risen to where it is....and yet still actually showing some strength.

the sellers of financials have either dried up or decided it is high risk to short financials, the fact remains that the sellings have slowed drastically.

as soon as XLF breaks out of MA200, this can be a very bullish signal for funds to enter Long into financials...

11 Aug 08 - Retailers - Getting Strong from the USD Strength

at this juncture, eur/usd has gone below 1.492. this is the first time that usd has strengthened to below 1.5 since at least Mar08.
CL has also plummeted to below 115pbl and that is despite a war in Georgia !!! the oil sentiment is undoubtedly very bearish and has been for some weeks now.
hence, as a result, the retailers are given some attention as the stronger usd can translate to better overall bottom line.

11Aug08 - XHB (Breaking Out?)

iShares DJ Transportation (IYT)

If buying only one sector in the market, healthcare (biotech, medical devices, pharmaceuticals) may be the best place to deploy your funds right now. However, transportation is another industry that's starting to pop. Last Friday, we initiated a new long position in iShares DJ Transportation (IYT), after it rallied above resistance of its recent consolidation. Moreover, it is also trading above its 20, 50, and 200-day moving averages, so there is much less overhead resistance to contend with. At just 5% below its all-time high, it would not take a lot of buying pressure in the broad market for IYT to zoom back up to test that level. The daily chart of IYT below illustrates the breakout:

Fibo - This Wonderful TA Indicator

7Aug08 - SPX

bascially, a very long term resistance is coming up at 1295.... worrying for Longs...

7Aug08 - OIH

all angles point to OIH dropping down further ....at least until the 1st Fibo support...RSI is showing signs of OIH being pretty close to being oversold.... seems to coincide in timing for RSI to get oversold and fibo support kicks in...choon choon...

7Aug08 - USO

basically, i see USO can further tank a bit more before hitting the fibo 23.6% support. RSI seems to suggest weakening of the price as well...

a possible play is indeed to catch price at support and play a short term Long... with a tight stop loss just below the support line....or wait to see if price pushes down past the support line and then if it starts to bounce up again immediately...then enter a Long...

BUT becos Oil is overall getting into a bear trend, there must be some very good reasons to want to Long USO...

7Aug08 - APA

looks like between support and resistance....
no action is a smart action at this price....either await for price to hit resistance then Bear position it or reach support and Long it...
BUT since APA is clearly forming a downtrend, it is better to follow the trend and open bearish position...

6Aug08 - PreMarket Review (DOW)

11650 resistance up next....a mere 30+ points away... followed by 11730 MA50 resistance...

5Aug08 - BDH (Broadband HOLDR)

(i take no credit for this writeup below)

One ETF that has showed bullish divergence to the broad market recently is the Broadband HOLDR (BDH), which stealthily climbed 3.2% last week. BDH is comprised of a basket of 17 stocks related to the computer and mobile networking industry, although Qualcomm (QCOM) currently represents a weighting of more than 50%. Not only has BDH been showing relative strength, but the daily and weekly charts are both positioned for breakouts. First, take a look at the daily chart of BDH:

The dashed horizontal line on the chart above marks resistance of the prior highs of BDH, just over the $14.50 level. Last Thursday, BDH tested that resistance level, but pulled back slightly when the major indices sold off. Nevertheless, the ETF held up pretty well against the broad market weakness, so the slightest rally in the major indices this week should enable BDH to break out above the horizontal price resistance level shown above. Next, check out its longer-term weekly chart:

Notice that a rally above the resistance level illustrated in the first chart will also correspond to a breakout above the multi-year downtrend line of BDH, which began with the high of April 2006. When charts of various time frames line up with one another, it increases the chance of a rally following through to the upside. This is much better than, for example, if BDH was about to break out on its daily chart, but still would be trading below resistance of a primary downtrend line on the weekly chart. Since it now has convergence of bullish patterns on both time frames, we like BDH for a potential buy entry. Our trigger is simply above the horizontal price resistance shown above, over the $14.70 area. If buying BDH, just remember that it's heavily weighted by just one stock, unlike more diversified ETFs.

4Aug08 - Market Preview (eur/usd)

looks like ~1.6 was to be as high as eur/usd pair will go for now..

over the next 3 months, i am anticipating USD strengthening to around 1.45-1.5 against the euro

4Aug08 - Market Preview (DOW)

the trading range in the near term is

10860 - 11650.... whenever any of these is reached.... there's a possibility of a reverse...

right now, we are at about 11325, and so, we have ~300 points upside potential...

4Aug08 - Market Preview (GLD)

it looks like a possible downswing to a fibo support at ~$86
if this happens, it is a sign of inflationary fear subsiding...maybe good for equities in the short term...

1Aug08 - PreMarket Review (SPX Weekly)

sx broke down from a very long term support. this is very bad for bulls.

it is now attempting to rally up towards that resistance at about 1300. there exists also a shorter term fibo 38.2% resistance of about the same 1300 region.

looks for signs of shorting if tape shows weakness in buyings at that level

1Aug08 - PreMarket Review (DJI Weekly)

the longer trend is clearly down
th intermediate trend is showing some strength
in the short term, for tge most recent upswing to maintain course, BUYers MUST come in very soon. in fact, it is ideal that they come in today.
if dji can end the day, above the fibo 38.2% resistance at 11600, then we stand a chance for a more prolonged rally next week.