Options Trading

Alan Brochstein identifies nine stocks that may be close to breaking out of consolidation patterns There are many ways to look for new potential investment ideas, and, as a veteran blogger and market observer, I can testify that many like to focus on stocks near their lows.

Recap for Tuesday, May 15 by Kevin CorriganDid you miss Tuesday’s TradeKing Midday Market Call?

Rob Smith (Smithsintheblack.com) A Review of the Dow’s 1st QuarterRob Smith does not currently hold any positions in the securities mentionedin 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 (Smithsintheblack.com) A Review of the Dow 30Rob Smith does not currently hold any positions in the securities mentionedin 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.

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TradeKing Senior Options Analyst Brian Overby discusses the tricky VIX option contracts and some of the pitfalls that traders are running into when trying to track it.    Hello Traders, The CBOE Volatility Index (symbol VIX) is trading at the low end of it's yearly range. This has brought many speculators to the VIX option contact and to many other products that try to track the VIX index's wild swings. When the VIX option contracts were in their infancy I wrote a blog called, "Decoding the VIX" that was quite popular in the TradeKing Trader Network. In this blog, I described in detail an odd fact: the VIX options are not priced off of the VIX index, they are actually priced off of the movement of the VIX future contract. This is because the market makers in the Chicago Board Options Exchange VIX pit cannot buy the actual VIX index to hedge positions. Because of this, they use the VIX future contracts to hedge. Therefore, the main factor affecting VIX options prices is the movement in the corresponding VIX future contract with the same expiration as the option contracts. There are many times the future contract does not move in tandem with the actual VIX index or know as the spot index in terms of the future contract. Below is a graph of the price movement of the a future relative to the spot index. (Note: VIX option contracts are European Style expiration which means they can not be exercised early, they can only be exercied at expiration. You can open and close contracts in the marketplace at any time though.)  The above graph highlights the differences between the two products. It covers most of the life of the Feb 2011 Future contact, from 6/21/2010 until the expiration of the future 2/16/2011.  There are three points I would like to highlight about the graph:  1) Throughout most of the life of the future contract the VIX future is valued at between 7 to 10 points higher than the actual VIX index. Using this as a standard means, lets focus on the August 5th date, where the VIX is close to 20 on the graph. If you look to buy a 20 strike call that would be considered at-the-money relative to the quoted VIX index, but relative to the future you are buying a really deep in-the-money contract. Obviously, in-the-money contracts are more expensive than at-the-money contracts and if you are unaware of the relationship of the future to the option it would be hard to determine why it was so expensive.  2) In the June month on the left side of the graph you see a big spike up to around 35 in the VIX index while the future has a more muted move. Then when the VIX roars back down and touches the 25 level, the future just hangs around the 31 to 33 level and stays in the area for the next month. Once again, a much more muted move than the actual index. This is a period where VIX option traders might expect to see big moves in the values of both calls and puts with February expirations. However, the option price swings didn't happen because of the tamed move of the future relative to the VIX index.  3) Lastly, on the right hand side of the graph you see the future start trading in tandem with the index. This behavior is expected because at expiration of the future the value of the VIX is used to determine the settlement for both the futures contract and VIX options. Which means the future will equal the VIX index value on the end date. This time period in the life cycle of a VIX option is the one time where the actual index plays a "big" roll in the pricing of the options.  Obviously you must grasp the concept of the futures driving the VIX option contracts prices before you ever trade VIX options. You can learn more from my other blog and video on the VIX options. Also, you can find out more and receive delayed quotes on the VIX Futures on CBOE.com.  Next week we will cover the implied volatility component of the VIX contracts and what pitfalls are involved with trading these options with such high implied volatilities.  Regards, Brian Overby  TradeKing Options Guy and Senior Option Analyst www.tradeking.com Follow Brian on Twitter or visit TradeKing on Facebook and YouTube. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.  While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.  Online trading has inherent risks dues to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading.  Any examples used in are for illustrative purposes only — they should never be construed as recommendations or endorsements of any kind. No particular trading strategy, technique, method or approach discussed will guarantee profits, increased profits or provide minimization of losses. Past performance, whether actual or indicated by simulated historical tests, is no guarantee of future performance or success.  While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.  At the time of publication and in the preceding month, TradeKing and/or Brian Overby did not have ownership greater than 1% in any stocks mentioned; did not have any other actual, material conflict of interest known at the time of publication; have not received compensation from a public offering nor from investment banking services related to any companies mentioned within the past 12 months, nor expect to receive any in the next 3 months; nor engaged in market making in the securities mentioned. 

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Anyone can dream...but we can Stream!

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Alan Brochstein examines some companies leveraged to key Energy TrendsEnergy stocks have been hot the last few years, though the sector is off to a slow start in 2012, up about 6.

Nicole Wachs analyzes MWW option data to sum up the market's expectationsThere’s been a lot of action in MWW over the past several weeks.

I was looking at my Market Trends Indicator this weekend and I noticed that the Dow 30, the S&P 500 and the Nasdaq are all showing very bullish signals in both the long term and the short term.

POST TITLE: Today's Chart of the Day: Citigroup © Get Quick Takes Pro's Chart of the Day via email.

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