Tuesday, January 23rd, 2018

Stock Option Trading in 2014


In order to prepare for stock option trading in 2014 let us consider the events that are likely to occur and how they will affect markets. The long awaited reduction in the Fed quantitative easing stimulus program has begun. As a result interest rates are going up. To the extent that the economy continues to improve the Fed will likely continue to reduce its monthly bond purchases and further drive up interest rates. Higher interest rates in the USA usually result in a more expensive US dollar in the Forex markets. And this may affect US exports and in turn selectively affect US producers. The oil boom from the use of fracking technologies will continue and will continue to result in cheaper oil and gas in the USA. Cheaper fuel leads to substantial savings and increased profits in several industries. In selecting your focus for stock option trading in 2014 think about who will win and who will lose due to higher interest rates coupled with cheaper oil and natural gas.

Utility Stock Option Trading in 2014

A good way to take advantage of interest rate fluctuations can be to trade options on utility stocks. These are typically very stable companies. As an example, The Southern Company started 2004 with a valuation of $33 a share. It has paid 41 dividends in the last ten years and currently has a dividend yield of just less than 5%. Its quarterly dividend has crept up from 35 cents a share a decade ago to 50 cents share today. Its stock went for $48 a share in May of 2013 when the Fed announced its intent to eventually ease off its quantitative easing program. The stock has fallen to $40 a share and will likely fall more as interest rates go up. However, its dividend will likely remain the same as it is a very stable business. In fact the company has benefited from lower energy costs due to the use of fracking technology in the USA. If you believe that the stock will fall in the coming months now may be the time to buy puts on the stock or sell calls. If you believe that the stock will bottom out later this year that will be the time to buy calls on The Southern Company or on other utilities. Here a few utilities to consider:



Price, Jan 2013

Market Cap

DUK Duke Energy Corp 68.24 48.25B
NEE NextEra Energy, Inc. 84.28 36.38B
SCG SCANA Corporation 46.02 6.49B
D Dominion Resource… 63.66 37.00B
ETR Entergy Corporation 61.83 11.03B
TE TECO Energy, Inc. 17.01 3.70B
NRG NRG Energy Inc 28.59 9.61B
AEP American Electric… 46.20 22.55B
CNL Cleco Corporation 45.76 2.77B
XEL Xcel Energy Inc 27.55 13.73B

How Far Will Gold Fall?

Gold bullion prices go up when interest rates are low and when currency values fall. In the coming months it may well be that the Fed will further decrease its stimulus program driving interest rates up and increasing the value of the US dollar as well. If you believe that gold will go down in price you can buy puts in trading gold options via ETFs or gold mining companies.

Forex Options

In Forex options trading the value of the dollar may well rise due to a reduced Fed stimulus program and resulting higher interest rates. If you believe that the dollar will rise against other currencies in 2014 it may well be a good idea to forsake stock option trading in 2014 and buy calls on the US dollar with Yen, British Pounds, or Euros. Or one can look at European stock options with a view that the value of the Euro may well fall versus the dollar.

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