Should you buy in- or out of the money options?

Believe it or not, this is probably the most emailed question I receive in my inbox about option trading. When you look up options for most underlying securities you're usually presented with a long list of, you guessed it, options. But is it better to buy an option that is in-the-money or out-of-the-money. Out-of-the-money options are definitely cheaper, but does that automatically mean that it's a good idea? It really all depends on your trading strategy and how quickly you expect the underlying asset to increase in value - so keep in mind the time frame. An out-of-money option is cheaper for a reason; there's a greater chance that the option will become worthless upon expiration. But it also yields higher returns when the underlying security does trade in your favor, the option may jump from $0.10 to $0.20 in a day, that a 100% increase! You basically can insinuate that if someone who is choosing an out-of-the-money option over an in-the-money-option contract, he or she has a higher expectation that the price of the underlying asset will rise/fall in their favor drastically. For those who are more cautious, want to reduce risk and don't expect a whole lot of volatility, I recommend to use in-the-money options, the returns aren't that high and it's more expensive to buy, but there's less risk involved (remember, your in-the-money option already has intrinsic value from the moment you buy it. In order to fully understand the basics of ITM, OTM or ATM options it's best to look at a chart that gives a visual presentation how ultimately an option trades, like the chart below.

Visualization of an Out-of-the-money Call Option; courtesy of FuturesOptionsETC.com

When the stock price was $50 when the call option was purchased (strike price of $52.50), you won't break even when the stock price moves to $53.10. Anything beyond $53.10 is profit.

There is a way to calculate your trading strategy outcome before you make the trade. You can use a so called options calculator. For instance, this is my result when I use the following values:

the September 27th $18.00 call for the VXX. Price per option = $0.53, 1 contract = $53 (100 x 0.53). With the table below I'm able to see the following:

Estimated returns:

• VXX at $17.04 on 31st Aug 2013
• Initial outlay: $53 (net debit) see details
• Maximum risk: $53 at a price of $17.15 on day 27th Sep 2013
• Maximum return: infinite on upside
• Breakevens at expiry: $18.53

Click image for a larger version.

You can use your own values and see what happens until the option expires at optionsprofitcalculator.com.

-Happy trading!

Stocks or Options for your portfolio?

Should you invest in stocks or options? Options are a lot cheaper to buy than stocks, but there are some significant differences, advantages and disadvantages. It also requires a bit more knowledge than simply buying and holding a stock. If you're not interested in long term investing or dividends and you're not planning to hold on to a stock for very long then you may want to consider trading options. Let me explain.

Coming soon, options education! Learn to trade options the easy way.

In the next few weeks I'm going to explain a few things about options trading. They'll include:

• What is option trading?
• Why should you use options?
• How do options work exactly?
• Different types of options.
• Why are options better than stocks if you are a short to mid term trader.
• How do I trade options and how much does it cost?

All these will be addressed and explained by me. All the options trading books and websites I've seen so far  make it unnecessarily difficult to comprehend. Learn how a relatively easy trading instrument can be added to your trading toolbox. Mark this post if you are interested in simple lessons about options trading as I will update it with links to the appropriate sections of this little 'e-book' about options!

Once done it also will be added to the 'Education' section of the site.

Trouble in the middle east and Japan? Markets don't seem to care.

This is one some of the strangest trading weeks I've ever had. I usually post some of the higher probability trades once in awhile on the blog, but due to lack of market direction I really can't come up with any.

What is up with the markets?

A lot of things have been going on in the world, turmoil in the middle-east, Japan's radiation leak, a severely over valued Euro and the markets show no sign of fear (VIX), rather a smooth recovery, in fact the VIX hasn't traded so low in a long time. The Dow Jones Industrial Average seems to be trading sideways now, so it's hard to be bullish on anything, is there a global collapse in the near future? Or are we going to continue to see positive numbers? One of the main reasons is, despite all the negative news that has been going lately in the world, is that companies are hiring again and the people that filed for unemployment dropped, making the unemployment rate drop a nice 0.1%.

Will this be enough? Obviously, collapsing governments and rebellions against the existing governments in the middle east doesn't seem to affect the global markets and economy. To me, this can only mean one of two things either;

A: Once the markets settle down (how it's trading sideways right now) the anxiety will kick into a lot of investors, wondering why the markets aren't pulling back as much as they show 'under normal circumstances' which will make the market move lower and pressure will build on the VIX and the markets,

or B: Trouble in the middle-east is viewed as 'nothing new' and the global economic recovery will steadily continue.

Regardless, the VIX trading at these low levels under the current economic situation is quite baffling to me.

This week I'm keeping a close eye on and being bearish or bullish on;

• VIX (VXX) ▲ is bound to trade higher by the end of the week. Target at 19.
• FXE ▼ The overheating Euro is bad for the European economy and intervention is highly likely. Target set at 1.400.
• SPY ▼ for May @ 130 Put
• QQQ ▼ for April @58 Put
• DIA ▼ for Arpil @ 120 Put

A quick glance at the VIX so far, incredible, especially with all that has been going on;

VIX trading in low pricing levels

This continues to amaze me... The volatility index trading under 20 while so much is going on in the world. From turmoil in the middle east (which now seems to be escalating beyond Libya, Egypt and Tunisia) to the nuclear crisis in Japan with toxic radiation jeopardizing not only the environment and on a humanitarian level but also economic situations that seem to be spreading globally. On top of that, there is still the emerging markets putting pressure on the global economy and somehow the VIX seems to be trading below 18.

This really puzzles me. And if anyone thinks he or she has a logical answer to this, feel free to reply to this post. I'm dying to hear what anyone else has to say about this since it's nowhere addressed really on any of the major financial news agencies. 

I pretty much started full time trading and my interest in it during, and a bit after the 'great recession', so for me I'm not really used to see the VIX trading anywhere under 20. (it topped 90 at one time in Nov of 08). The recession on Wall Street may be over, but Main Street sure still feels the pinch. 

So again, if anyone can explain this phenomenon please let me know, I'm curious to see what you have to say about this. 

For now, I just can't resist to be bearish on the VXX, an aggressive Call 35.00 strike price by April 16th, and judging by the open interest I'm the only one that believes this is a good Call.

Japanese stocks rise again

This morning I was writing an article about the markets over reacting. Look what's going on now; Japanese stocks are rebounding. Markets are up over ▲ 460 points!
Turns out investors realized it sooner then I thought the 'panic' and aggressive selling of Japanese equities was an over reaction, they've must been reading my blog :P.
This 'positive wave' will have its effect on the European markets tomorrow, with the US to follow. All trading recommendations given this morning are confirmed and all valid!! This is amazing! Crystal ball? No, I wish, but so far I'm pretty accurate! Good news all around. Let's make some money.
The major player in the field I think is EWJ. (The EWJ is an ETF that trades if basically Japan were trading like a stock)

As you can see on the chart EWJ is in major oversold territory. An aggressive out-of-the-money call option with April as expiration is not an unwise investment decision.

Read the post below for this morning's analysis. Again; trade recommendation; (unchanged)

ETN: OIL ▲ Bullish, Expiration Month: March

SPY and QQQQ: ▲ Bullish, Expiration Month: March

VXX: Bearish ▼ , Expiration Month: March

EWJ: ▲ Bullish, Expiration Month: April

Global stock markets panic due to Japan's crisis.

Just as you thought things couldn't get any worse, they did. A huge sell-off occurred on all major exchanges around the world. Japan's Nikkei 225 index lost another astonishing 1,015 points (▼ 10.5%) due to fears of a nuclear meltdown. This morning the Dow Jones was down over 200 points and European stock markets booked similar losses. The VXX ETN shot up almost 5% (trade recommendation yesterday).




Are the markets overreacting?

I think this huge sell off of Japanese stocks is clearly an 'aftershock' reaction. A sell off of this magnitude is in my opinion a little bit exaggerated, but it will take some time for investors to realize that. When that momemt comes we have to start looking for bargain stocks. At the moment we have to pay close attention to volume on the Japanese stock exchange. How much is being sold at a given time. And it seems to me, the downwards spiral has just begun.  Unfortunately things will get a lot worse in Japan before they will get better. A global chain reaction is imminent.

Take a look at the Nikkei 225 index so far this week;

Not a pretty picture at all. For the past 4 days, nothing but losses with the last two trading days (after the quake) being the worst. In the last week alone the Japanese stock market lost over 18%.

This trading week is crucial. As soon as we start to see some positive numbers it means we have more buyers then sellers and could mean the bottom has been reached. If not, I'm afraid we'll see more substantial losses over the course of the rest of the month.

I'm waiting for any positive sign, at the moment, getting the nuclear plant under control would spark that. As of right now I'm staying away from any stock. My main focus is on ETFs/ETNs.

The following targets for short term trading (end of this week) once news from Japan settles in;

ETN: OIL ▲ Bullish, Expiration Month: March

SPY and QQQQ: ▲ Bullish, Expiration Month: March

VXX: Bearish ▼ , Expiration Month: March

EWJ: ▲ Bullish, Expiration Month: April

Here we go again, playing the VXX ETN trade

Rising violence, chaos and instability in Egypt have surely an impact on the markets. There are numerous ways to approach several trading opportunities regarding this issue, like oil for instance, but I think I'm sticking with keeping an eye on the VIX, or the Exchange Traded Note (ETN) the VXX that tracks the movement of the VIX.
Now here is my setup for this trade; as always, any comments or questions are welcome.

First, a technical overview of this trade; the VXX

I'm taking the Feb19 Call Option on the VXX with a strike price of 31 for $1.33 (the VXX1119B31) with unlimited profit potential. Makes sense? With an important turn is history for the middle east where about a third of its total population is demanding revolutions in their respective countries, I think it makes total sense, it has to have an impact of the 'fear gauge' the VIX, therefore the VXX.

The intraday chart of the VXX1119B31;

Yesterday's trading alert results in almost 108% profit!

I think this one can go in the books as my most accurate and profitable trade ever! I once in awhile issue trading alerts (marked by a red rectangle box in the post). On Thursday I issued a trading alert regarding the VIX trading low and I quote myself

"I think it's the calm before the storm. In fact, there hasn't been a major storm in quite some time. One is bound to happen,"

And it sure did.. The option I mentioned in the alert rose to $2.70, a 107.69% increase to be precise...

Take a look at the last candle stick, it skyrocketed to 20.04.

This is the option quote price (for a 17.00 February 16 call) in the box below;

What happened?

I knew it right away when I logged on this morning and the Dow Jones was down over a hundred points (closed today at 11,823.70 -166.13 (-1.39%). Usually that means the VIX (panic index) has risen, and not just by a little bit, it was up 24%

Why?

Unrest in Egypt that may destabilize the middle east could be a reason investors are cautious to make investment decisions. Besides that, economic volatility news from around the world has been relatively quite, for me, it's a little unusual seeing the VIX below 20 points.

What's next?

In my opinion, monitoring the markets on Monday is a good idea to see what the next direction could be. If it stays down, or it looks there's no sign of improvement I don't recommend any trade at all at the moment.
However, if the stock market turns out to be a bargain bin (especially the S&P500, today was its biggest decline since August) focus on call options on for end of February ; SPY, QQQQ and the Diamond (DIA).

Still can't believe I made an stunning 107.69%+ profit! I'm going to celebrate this weekend!

Trading Alert: The VIX Feb 16 2011 17.0 Call, who's with me?

This is an option alert! I've been monitoring the VIX (the panic index) for quite some time now. What has happened recently is quite incredible! I think anything that's trading under 18 in this index in these economic times is a bargain, and what amazes me is that it has been trading under these levels for quite some time now. I think it's the calm before the storm. In fact, there hasn't been a major storm in quite some time. One is bound to happen, at least before February 16, when this contract expires. My money is one the VIX Feb 16 2011 17.0 Call. Here's a little snapshot of the option contract intra-day. It's last price was 1.55 with a high of 1.95 and a low of 1.50! Amazing!

and here's the bigger picture:

As you can see, the VIX is really to low levels, trading around it's bottom. The MACD signals a reverse trend pattern and the RSI indicating a under sold price. 

Your call.

Time to buy the following ETF options

This is what I did to diversify my ETF option portfolio in a single trading day to limit risk. Let's say when after analysis you came to the conclusion a trend may be forming in a certain sector you can buy or sell different investment vehicles that are somewhat correlated with each other, I usually do this within the same day.
The Dow slipped below 10k today, crawling back up closing at 10,060. The index has lost a lot of points over the last few days as a result of missed estimates, probably the biggest one being the housing market. Despite all the negative news it managed to maintain a close slightly above the 10k mark. To me, this is an indication the DJIA is trading around psychological levels. In fact, given all the doom and gloom out there at the moment I was quite surprised about the 'minimal' losses the index endured signaling an uptrend soon.
As I am talking about this index it makes sense to focus on an ETF that tracks this index (DIA) and ETFs that correlate with it. My picks are; DIA, SPY (S&P 500), QQQQ (NASDAQ) and the FXE, and their associated option contracts. All of these are Calls, even the FXE (tracks the Euro) that has the tendency to move upwards when the Dow moves in that direction too.

Take a look at the chart below;

From that, I bought  the call option DIA1018I100 which mean it will expire September 18, for the purchase price of $2.34, trading around the close at $2.60.
The same goes for:

• SPY1018I109 @ $0.86, now @ $1.05
• QQQQ1018I44 @ $0.94, now @ $1.13
• FXE1018I126 @ 1.60, now @ 1.53

As you can see, I'm losing a bit of money on the FXE option, but that's not as big of a deal since I made a profit on all the others. Besides, I still have until the 18th of September to decide whether I want to sell the option or let it expire. I usually hold on to these unless something drastic happens, which is not often the case.
There are tons of other ETFs out there that are somewhat correlated with each other. Like Gold and Silver, or Oil and the USD Index. If one investment goes up, the other might veer off the path a bit, but it's not like you put all your eggs in one basket, and if you're right, all your investments will go up!

I switched to Zecco

After extensive researching other brokers like Scottrade, E*Trade and a few others my vote fell with Zecco. I finally switched to this 'deep discount' broker for all my trading needs. Yes all, they even offer Forex trading so I didn't see any need to stick with my old broker that just specialized in Forex trading, in the end it doesn't make any difference anyway. They're both the same price and have the same spreads on all major pairs.
What I'm really excited about is stock, ETF and option trading though them. I'm going to shift more towards these trading instruments since Forex trading, my main occupation at the moment, carries too much risk, and since the CFTC changed the leverage policy, the reward isn't what it used to be. I will still be trading Forex and give trade recommendations on the website, but be prepared to see more information about for example stock alerts, and articles about general investing in stocks, ETF's and options!
So far, I've been very pleased with Zecco. Their research instruments are far beyond what I have seen on any other website and their community is fantastic too. I'll probably be sticking around for a little while.