Options Trading

Mark Wolfinger reviews the choices a spread trader faces upon expiration / assignment Warning: today's post isn't the shortest, but I wanted to give this trader a comprehensive response to the questions posed (which are themselves not too simple). If you're new to options and particularly to spreads, I'd urge you to follow along. This Q&A illuminates some critical gaps you'll want to make sure are filled before you trade with real money.

Mark Wolfinger addresses the question on every options trader's mind: how to prepare for debt-ceiling endgame?  Everyone knows that the United States cannot default on its obligations. The results would be catastrophic for the whole planet.

Dan Passarelli gets basic - elemental, even - and explores the 3 major drivers of options value  Ancient Babylonian philosophers considered all things to be constituted of one or more of the four classical elements: earth, air, water, and fire. In this world view, the natural environment consisted of objects composed of varying portions of each of these fundamental elements or forces. While modern atomic theory has supplanted this concept, these historic constructs can help us understand the importance of primal forces impacting various option trades.

Dan Passarelli continues his exploration of the 3 major drivers of options prices In part 1, I introduced the 3 primal forces of the options world: price of the underlying, time to options expiration, and implied volatility (IV). Like the classical four elements of nature - earth, water, air and fire - most if not all options action stems from the interaction of these 3 drivers.

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Alan Brochstein Looks at Some Companies With Potential to Do Well in a Weak Economy

Alan Brochstein checks out utility stocks for income-seekers It has been several months since I examined utility stocks for potential bargains. Most recently, I looked for high-yielding utilities with low debt and low pay-out ratios, highlighting 11 utilities yielding more than 4.5% in March. Most of them have performed well, including DPL (DPL), which I had called out as the most interesting of the eleven and subsequently entered into an agreement to be acquired. In light of the recent sharp decline in the market as well as the drop in interest rates and the yields on bonds, which compete for investor dollars, I wanted to take another look at the sector.Utilities seem to be a safer bet than stocks in general in a potentially weak economy. Today, I am tilting the focus towards not only high yield and increased safety but also the potential for dividend growth. Here are the screening parameters: • Yield > 4.0% • Net Debt to Capital < 65% • Payout Ratio < 75% • Dividend Increases:  At least 3 in the past 5 years • 5-year Dividend Growth Rate >5% • Market Cap > $1 billion The goal is to find higher-yielding companies without excessive leverage and reasonable payout ratios that have been increasing their dividends in recent years. Here are the 8 that made the cut: [click on the chart above to enlarge it] As always, remember that these are not recommendations.  Further, while the companies have been raising their dividends, there is no guarantee that they will continue to do so.  By focusing on payout ratio and the amount of debt, we are hopefully eliminating any companies that might be constrained from continuing to raise dividends. Looking at the list, the yields run from 4% to as high as 5.3%. Half the companies have raised their dividend in each of the past 5 years. I have also included a column for P/E (based on 2012 estimates) as well as a column that compares the current P/E to the average of the past 5 years. With the exception of Westar (WR), which also has the highest payout ratio and highest net debt to capital, all of the stocks are trading below their average P/E. I have kept Exelon (EXC) on the list because the payout ratio appears to low enough that the dividend is likely to be maintained, but I want to point out that earnings in 2012 are supposed to decline significantly (29% from 2011 according to analyst estimates) as hedges roll off. I would also note that PPL (PPL), which has recently transformed itself with a large acquisition in the UK, is expected to see earnings decline slightly in 2012. The other six names are expected to grow earnings in 2012, with Westar (WR) currently expected to grow 16% after declining slightly this year. When evaluating Utilities, there are many factors to consider beyond those that I have used to create this list, including the strength of the local economies in which they conduct business, the company's relationship with regulatory authorities, the amount of non-regulated business and the mix of fuel types. I continue to believe that investors should be considering alternatives to bonds. Along with Real Estate Investment Trusts and high-quality dividend-paying companies, utility stocks offer reasonably high yield with the potential for growth. While the growth potential might be less than the other areas I mentioned, utilities should fare better if the economy weakens further or goes into recession again. They should also perform better than long-term bonds should the economy strengthen and interest rates rise. The screen I shared is designed to identify higher yielding utilities with signs of sustainable dividends. I encourage you to explore this sector and look forward to hearing your observations.

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The recent market downturn has been broad-based, with aggressive selling pretty much across the board. When the majority of stocks are falling uniformly, some stocks end up getting penalized perhaps too harshly. While the pundits are debating the increasing likelihood of slower growth or even another recession, it seems that stocks generally are priced very pessimistically already, with the overall valuations, as measured by P/E ratios, similar to where they were at the lows in early 2009.

Mark Wolfinger untangles how professional traders vs. individual investors hedge their risks As I catch up on All-Stars posts, I see I missed a few juicy observations by TradeKing forum regulars. Case in point: back on 8/18, when the markets were still roiling after the debt ceiling crisis, stoicathos asked the forums: What effect, if any, will options expiration this weekend have on the market? Can we expect some positive pressure tomorrow as options traders close their short stock positions that were covering the puts (now in the money) they sold?Hello Stoic,

Mark Wolfinger helps a trader weigh the question of how to react as options expiration day nears I'm catching up after a summer hiatus from my All-Star blogging and found an interesting question from TK maven Spshapiro. It's too late to inform his choice in advance for this particular trade - and I hope everything turned out well with that one! - but it did get me thinking. I thought maybe others might find the following scenario useful to consider. Spshapiro writes:  

Alan Brochstein screens for "deep value" stocks

Rob Smith does not currently hold any positions in the securities mentioned in this post.At the time of publication and in the preceding month, TradeKing and the third-party content provider did not have ownership greater than 1% in any stocks mentioned here and do not have any other actual, material conflict of interest known at the time of publication.

Rob Smith does not currently hold any positions in the securities mentioned in this post.At the time of publication and in the preceding month, TradeKing and the third-party content provider did not have ownership greater than 1% in any stocks mentioned here and do not have any other actual, material conflict of interest known at the time of publication.

Recap for Tuesday, December 18th by Kevin CorriganDid you miss Tuesday’s TradeKing Midday Market Call?

ALAN BROCHSTEIN LOOKS FOR SMALL-CAPSWith just a few weeks to go, it is looking possible smaller stocks could again underperform bigger ones in 2012, though not by as wide a margin as last year.

Alan Brochstein Shares Four Ideas  I must like robots!

Recap for Tuesday, December 11th by Kevin CorriganDid you miss Tuesday’s TradeKing Midday Market Call?

Alan Brochstein Takes a Look at Shoe StoresI have a confession: I hate to shop for clothes.