Options Trading Blog
Options Trading Tips and Strategies
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Other news around the world, “Iran is seeking to close grain purchases using gold and oil as payment..” Brent crude futures settle at 118.59/bbl and the USD was up 1.5% for the trading session. Crude oil is down 3%. Copper/gold also weak. Looks like Risk is back off for the time being.
After the bell Thursday: LinkedIn Posted earnings of .12 a share. Quarterly profits beat analysts’ expectations, LNKD showed strong subscription growth. Its Revenue doubled. Activision posted earnings and revenue that beat analysts’ expectations. Also, Activision raised its dividend to .18 cents (16.5 cents in 2011s). Rio Tinto also hiked its dividend.Rios revenue came in light as its aluminum business slowed. Investors should be cautious on how strong the US economy really is. PepsiCo’s Revenue rose 15 percent to $66.5 billion from $57.84 billion.2011, its net income rose 2 percent to $6.46 billion/$4.03 per share. That compares with $6.33 billion/$3.91 per share. PepsiCo also plans to increase dividends and share buybacks in 2012 says CFO Hugh Johnston.
The TVIX mirrors a 200% move in the VXX. These two ETN’s can be incredibly lucrative trading vehicles if traded properly. There is a very important difference between an ETN and an ETF. An ETN is an “Exchanged Traded Note”, which contains investment products issued by a bank or institution. An ETF is an “Exchange Traded Fund” and contains actual securities. ETN’s use futures, derivatives and options to mirror their underlying instruments. One of the two most important factors that an investor or trader needs to be aware of is backwardation and contango. When the VXX is in backwardation that means that spot prices exceed forward prices and in contango forward prices exceed spot prices. When you get big run ups in volatility, curves get skewed towards backwardation which is exactly what happened from August to October in 2011. The VXX was up over 150%. When the premiums for put protection came down, the VXX cratered and went from $50 to $27. Meanwhile during this time period, the Inverse Volatility (XIV) ETN has rallied over 90%. Think of normal market conditions as equilibrium between where the backwardation and contango curves intersect. As outliers occur, such as the August crash, this equilibrium gets stretched. This is where the most money is to be made. A $55 high on the VXX on October 3, 2011 was made when the ^Vix hit $45 that day. Only once in history has the ^Vix hit $45 and been higher two months later. The only time was in 2008 when the ^Vix ran to $90. “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” – Paul Tudor Jones.
11/04/11 $87.50 $82.37 $-5.13 (-5.9%)
08/05/11 $95.52 $91.36 $-4.16 (-4.4%)
Average Magnitude of Post Earnings Return 5.1%
UPDATE: 2.10.2012 With LNKD ripping more than expected, I am short LNKD at $80, but I stopped out at $85. I will leave this trade on and hope the stock sells off to $83, so my losses are not as much. This trade has not been a winner, but I still have time left to hope this works out. On to the next trade
UPDATE 2.11.2012 This spread expired worth the maximum it could be worth, $5. I was stopped out at $5, I risked $3.50 to make $1.50 and I thought it was a great risk vs reward, so yes sometimes I do lose money so on to the next trade.
In other news, we see AAPL raging to the upside by $17 and approaching 500$ level shortly. Analysts price targets have all risen and ipad 3 should be a positive growth driver. I think this AAPL momentum to the upside is proven and you cant making money shorting APPL. Somtimes the best trade is no trade.
We have not seen any unusual option activity today but we have seen a huge volume Feb 35 Call buyer of EXPE. We have seen EXPE rally more then 2.5% to the upside. However, with poor results from TRIP this call buyer could be selling stock against its Calls creating a straddle. I will put on a EXPE position minutes before the closing bell. More unusual options activity we have seen is call buyers in solar names such as JASO,SOL, TSL. KOTM took profits on the calls they were long and we are currently flat solar stocks