Iran has threatened to close the Straits of Hormuz in retaliation for the EU embargo of Iranian oil and other sanctions. This would block about 12 percent of world oil production from leaving the Persian Gulf. The US Navy Fifth Fleet patrols the Persian Gulf, Red Sea, Arabian Sea, and the African coast down to Kenya. One of it carriers, the USS John Stennis recently passed through the Straits of Hormuz during Iranian naval exercises in the area. Should Iran choose to follow through with its threat it would sure come head to head with US Naval forces in the area. Part of the reason for Iran’s threat to close the straits is that Saudi Arabia and other Persian Gulf oil producers have indicated that they will ramp up their own production to make up for what the world might lose if Iran production finds no buyers. In this sort of impending crisis options trading allows traders to hedge investment risk. If, for example, a trader buys calls on oil futures he will be expecting them to go up. If Iran comes to its senses, agrees to open its facilities inspection, and forego any attempt to develop nuclear weapons sanctions could be lifted and the price of all would likely fall. By purchasing calls on oil futures instead of buying calls the trader hedges his risk when trading oil after an incident such as the EU embargo of Iranian oil.

If a trader chooses trading options on oil futures instead of buying options he is leveraging his investment capital. The costs of options are commonly much lower than the costs the commodities themselves. If the EU embargo of Iranian oil leads to a substantial rise in oil prices the trader can execute the options contract and profit. He will have done this with substantially less capital than if he had purchased oil directly. This argument applies primarily to oil producers and refiners but also to transportation companies such as airlines who can hedge their fuel price risk by trading options on oil as opposed to buying huge stocks in anticipation of a price rise. Although such times are worrisome they can go good times for trading options as futures prices may rise and fall precipitously in response to actions of or threats by the principals involved.

More Resources

Useful Specifics

• Nonfarm payroll rose by 200,000
• The most job gains occurred in transportation, warehousing, retail, manufacturing, health care, and mining.
• Total unemployment stands at 13.1 million
• The unemployment breakdown by major groups is as follows:
  • Adult men: 8%
  • Adult women: 7.9%
  • Teenagers: 23.1%
  • Whites: 7.5%
  • Blacks: 15.8%
  • Hispanics: 11%
  • Asians: 6.8%
• Long term unemployed (>27 weeks): 5.6 million, 42.5 % of total unemployment
• The number of part time workers whose hours have been cut or who are working part time as they are unable to find full time work declined by 371,000 to 8.1 million in December.
• Two and a half million people have worked in the last twelve months or looked for work during that time but have not looked for work in the last four weeks.

So, in what sector do you trade options on the US economic recovery? If you are interested in Forex options trading you need to compare the US economic figures with those of Europe, Great Britain, Japan, or whatever nation whose currency you choose to trade. As Europe sinks deeper into its debt dilemma there could be a steady rise in the dollar versus the Euro. If this turns out to be the case traders could profit by scalping profits on the falling EUR/USD ratio as the dollar climbs and the Euro falls.

Are US stocks the best way to trade options on the US economic recovery? Many thought so last year but the rally fizzled out mid-year. Of course one of the reasons that traders buy options is that they can limit their risk. Even if an options trader expected US stocks to continue to rise, or fall, and was mistaken his losses were limited to the price of the options contracts he purchased. For those who read the markets correctly the leverage offered by purchasing options provided greater return on investment that traders would have earned if they had simply bought and sold or sold and bought stocks. In the case of those who wish to trade options on the US economic recovery with commodities options, traders need to consider what a recovery economy does to various commodities. For example, oil prices rise with a recovery economy while those trading gold options may well see bullion fall.

More Resources

The economic picture in the European Community is not clear. The southern tier nations have come near going into default on their sovereign debts. The risk of a breakup of the EU has driven stocks and the Euro up and down for the last couple of years. Now that the EU ministers have agreed to closer economic integration there may be light at the end of the tunnel. However, no one expects quick fix and a renewed recession in Europe could lead to a global economic downturn. Folks who are buying puts on SAP may be looking exclusively at Europe or at the bigger picture. However, a recession will likely hit SAP sales and stock price. The stock has traded between $50 and $68 a share in the last year and is at the bottom of that range and heading lower if the folks buying puts on SAP are correct. To a degree some traders may be simply hedging risk with options . Anyone who bought the stock nearly a decade ago bought at below $20 a share. They may still expect the stock to rise but do not want to get caught in a short term fall in stock price.

Although these may not be a good times for owning stocks these may well be good times for options trading . Buying puts or calls on a stock, provides investment leverage for the options trader. It also allows the trader to hedge investment risk. The buyer of an options contract is under no obligation to buy or sell the stock in question. However, if the price of the equity moves as expected the options trader can do so and profit thereby. The price of an options contract is significantly less than that of the stock in question. In chaotic times such as these traders take advantage of options trading in order to earn profits while limiting risk. Those buying puts on SAP expect the stock price to fall and will profit if it does. However, they have limited their risk in case of a rise in stock price to the price of the options contract.

More Resources

When the market crash and worst recession in 75 years started in 2008 the EU followed the US in providing economic stimulus in order to help keep businesses alive and keep credit flowing from banks. However, several European nations experienced substantial unemployment. This required increased unemployment and other benefits at the same time as tax collection suffered. Greece, especially, has had a hard time with civil unrest in response to austerity measures. Government bonds in Greece, as well as Italy and the rest of the PIIGS group, dropped significantly in value as governments needed to pay higher and higher interest rates to borrow. It came to a point at which sovereign debt default was not only possible in Greece but it Italy, the third largest economy in the EU. On top of this the various economies of the EU have not experienced the growth leaders had hoped for. This fact, by itself, has tended to drive down prices of Euro Zone stocks. In order to profit from the volatility inherent in this evolving story, traders need to know how to sell or how to buy stock options on Euro Zone stocks.

In trading options on Euro Zone stocks on can trader with NYSE – Euro Next or simply trade options on American depository receipts of Euro Zone stocks. In buying options on these stocks on can buy calls in expectation of a rise in stock prices or buy puts in expectation of a fall in stock prices. As always traders need to follow both fundamental and technical analysis of the stock they choose to trade. To a degree trading options on Euro Zone stocks in Euro options trading as these stocks are denominated in Euros. However, a lower priced Euro may actually turn out to be beneficial for many European companies as it will make their exports more competitive.

More Resources

Many long term investors are, no doubt, looking at Japanese stocks as underpriced, when compared to forward looking earnings, the intrinsic value of these stocks. However, the post-earthquake, post tsunami Japanese industrial recovery is coming just as the global economic recovery is petering out. Here is where trading Japanese stock options, as opposed to buying Japanese stocks, comes into the picture. When we look, again, at the top stories of the day we see that the European Central Bank may need to put a cap on interest rates in order to avoid a financial disaster and renewed recession in Europe. Likewise, the perceived inability of the US congress to come to grips with necessary budget cuts and tax increases puts the US recovery in doubt. In regard to investing in the Japanese recovery all is not certain. Japan may just get its power grids back on line and industrial production up just in time for the second dip of a worldwide recession to reduce global demand. Such a scenario could well result in a much less impressive recovery and much less impressive performance of Japanese stocks. When to buy calls and when to buy puts will depend upon the belief of the trader as to whether the Japanese recovery or a faltering of the global picture will predominate with Japanese stocks.

In trading Japanese stock options traders can limit their risks as the most the buyer of an options contract can lose is the price of the contract. Also when buying, in stock options trading, one only invests the price of the options contract, not the price of the stock. These two factors provide risk limitation as well as investment leverage. Another feature of trading Japanese stock options is that it gives traders something to trade that is not purely a play on global economic recovery or failure of the same. The other factor here is the recovery from the tsunami. This is pretty much an assured thing. The unknown is how much of a global market Japan will have to sell to when it is fully recovered. As always how to trade options, on Japanese stocks, or any equities, is to fully research fundamentals of the stock or index in question and studiously follow technical pricing patterns along the way.

More Resources

The extreme polarization of US politics has tended to make effective governance a remote possibility, just at the time that cool heads and compromise should be the order of the day. If the dollar falls, if interest rates rise, or if stocks plummet trading options on equities or trading options on futures contracts could be lucrative even though the worldwide economy could fall into the second dip of a prolonged recession. Whether one looks to trade puts on oil or profit by buying calls on Caterpillar , predicting how the US and Europe will deal with mounting debt is critical. In a sense much of options trading today is proxy for trading options on US debt.

There are two time frames to consider when trading options on US debt by proxy with stocks, currencies, or interest rates. Over the long term both Europe and the USA need to reduce their debt burdens or do the previously unthinkable, devalue their currencies. If the two greatest economies in the world do not fix their debt issues the Forex world will devalue their currencies for them. Depending on the stock this may be a good or a bad thing. Companies that make things in Europe or the USA would benefit from cheaper currencies as their products would be more attractive in other markets. A perpetually falling dollar would tend to drive up interest rates, which would provide traders with further opportunities. All of this could play out over years. For such longer term issues traders might consider longer term options such as LEAPS. One can trade options on futures contracts that come due ten years hence but the options contract only last a few months. The other time frame is now. There are things going on today that will shape tomorrow. For example, the so called Super Committee was given exceptional powers in order to find a way to save a trillion dollars or so over the next ten years. Their apparent miserable failure is already driving markets and providing opportunities for currency, commodity, interest rate, or stock options trading as proxies for trading options on US debt.

More Resources

The end of October market adjustment is consistent with profit taking by those who successfully anticipated the rise in stock prices over the month. Many believe that US fundamentals are improving and that the many US companies sitting on substantial sums of cash will eventually start using that cash for R&D, expansion, or other purposes that will result in job growth and a stronger economy. Those folks will likely use the most recent retreat to buy calls on promising stocks. Those day trading options, on the other hand will likely just follow the shorter term corrections of the market. These folks virtually never buy stocks but rather buy and sell options contracts, essentially scalping profits from the market as it moves up and down. Successful options trading does not come from trading options on rumors . It comes from skillful analysis and execution of trades.

In day trading options traders look at both fundamentals and what other traders are doing. In options trading education traders learn than fundamental analysis for day trading options is really no different than what one does for trading stocks directly. Traders look at the intrinsic value of a stock and at its margin of safety. Then they use technical analysis to track stock prices and options prices. Markets tend to repeat themselves and technical traders believe that by watching a specific price pattern develop that they can predict, solely on this basis, where a stock price or options price will go next. This approach is especially useful when day trading stocks directly and day trading options. The fundamentals of the stock many not have changed from when the market opened until it is ready to close but traders will often have bid a stock price up and down in an effort to profit from further expected movement.

In day trading options, as in other stock options trading , smart traders always use trading stops. This means that when a trader buys calls on a stock at a given price he sets a limit order for the opposite trade on the same stock at a slightly lower price. In this way he avoids losing the value of his contract if new, negative fundamentals emerge. As the price of the stock and the option rises he will steadily increase his stop loss limit order. He will also decide on a reasonable amount of profit to expect and, hopefully, execute at the top of the price curve before a fall, when day trading options.

More Resources

The VIX is weighted measure of options on the S&P 500 index. It measures out of the money calls and puts. The VIX uses a mathematical formula to produce its number. Many traders are just as happy measuring simple past volatility as in using the VIX to predict future options and stock prices. An interesting comparison to VIX related stock gains is one of the Japanese Candlesticks, the Doji. This easy to read set of symbols has been in use for centuries, having had its origin in rice trading in ancient Japan. The Doji candlestick is vanishingly short with long upper and lower shadows. This signal tells us that the equity involved opened and closed at nearly the same price but that it traded substantially higher and lower during the trading period measured. It is considered a measure of market indecision and typically precedes a market turnaround. In this sense it is like the VIX which indicates volatility but not necessarily the direction in which options or stocks will move. A large part of options trading education is, in fact, to learn to use these tools effectively and profitably.

The current issue occupying the options market is the state of European debt crisis. Interestingly only a small percentage of US exports go to Europe and US banks are said to have little exposure to the national debts of the five PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain). Nevertheless the ongoing drama across the Atlantic seems to be impeding an otherwise promising US recovery as companies hold off on investments due to uncertainty about the global financial situation. The stock market has lost ground in big swings and sentiment has become bearish. A number of analysts are making the point that when virtually everyone thinks the market is bad that it is time for the market to turn around. This sentiment is in line with the history of VIX related stocks gains after the VIX hits historic highs. A reasonable way to interpret a really high VIX is that the market has overshot on its way down, due to individual investor and trader panic. Memories of the 2008 crash are fresh and no one wants to get burned again. However, there comes a point when stocks are woefully undervalued and it is time to buy. Those who believe that the market is set to rally can take advantage of options trading leverage and buy calls with the possibility of substantial profits if the market produces VIX related stock gains. As always we are not suggesting trading the S&P 500 or any particular stock or option. Rather we suggest that options traders learn to use and consider all market indicators when trading.

More Resources

In trading newspaper stock options on the Washington Post traders should realize that the company is diversified into educational products and media sources across the globe. From professional training and English language programming to colleges with stable faculty and curricula the Post is set to profit from a range of services far and beyond its original status as the major newspaper of the nation’s capital. For those interested in stock options trading of WPO stock, there are two questions. Can this dividend paying stock reverse its losses of the last few years and provide the nearly 30% per year annual return expected by some analysts. And if WPO does rally how soon will stock prices and options prices reflect the change in fortune of the Washington Post?

We offer two comparisons to the Washington Post. The New York Times, like the Post, is a venerable newspaper. The New York Times Company – NYT, was trading at nearly $45 a share ten years ago. Today it trades around $7 a share. What many consider the world’s finest and most authoritative newspaper has fallen prey to the electronic age. Too many people watch TV and, especially, use the internet for their news. The paper that puts out “all the news that’s fit to print” has seen falling sales. The Times does not pay a dividend, has a thirty fold debt to asset ratio, and a minus 47 percent return on equity. In 2010 the Times reported that its “digital revenues” had grown to 15% of total income. Options traders can possibly profit from either a bearish or bullish stance on this stock depending upon the ability of the Times to diversify, contain costs, and generate more profits.

The other comparison is News Corp which in early 2009 NWS traded in the $6 range and now trades around $15 a share. News Corp is a good example of how a newspaper chain or media conglomerate can be more profitable than a single paper. The same content can be developed and written for a lead paper such as the Wall Street Journal, or the Times, or the Post, and then recycled at little extra cost throughout the chain of papers, TV stations, radio stations, and internet outlets. As always we are not suggesting that trading stock options on these companies will be profitable.

Rather we offer this discussion of newspaper stock options as an example of working through the opportunities available in options trading.

As a matter of perspective here are some recent circulation figures rounded to the nearest 100,000 subscribers.

1. Wall Street Journal – 2,100,000

2. USA Today – 1,800,000

3. New York Times – 900,000

4. Los Angeles Times – 600,000

5. San Jose Mercury News – 600,000

6. Washington Post – 600,000

7. New York Daily News – 500,000

8. New York Post – 500,000

9. Chicago Tribune – 400,000

10. Chicago Sun-Times – 400,000

More Resources

Factors current driving oil prices include the political unrest across North Africa and the Middle East where home grown demonstrations for democracy have overthrown the 30 year president of Egypt and unleashed a blood bath by the long term dictatorial rulers of the Baath Party in Syria. Factors driving oil prices, oil futures, and oil futures options also include a questionable economy. Industrial production figures have fallen from North American to Europe to China leaving pundits wondering if we are in fact headed for the “double dip” recession that many have feared. Another dip in the slowly recovering recession would likely reduce demand for crude oil just as Libya’s production comes back on line. Although Libya is not one of the top few ranking oil producers its 41.5 billion barrels of reserves are the largest in Africa and rank 9 th in the world. A drop in Libya production can be significant in a tight market when demand for crude is high. Puts on oil stocks and oil futures could be profitable depending upon how far oil prices drop in response to the promise of resumed Libyan oil production.

Trading oil options commonly requires that traders follow the economy to anticipate crude oil demand. Other factors include weather based decreases in oil production such as when a major hurricane passes over the oil rigs in the Gulf of Mexico. And, of course, major disruption caused by political and war related events can have major effects on the price of oil futures and oil futures options. Today there is a legitimate concern about a faltering worldwide economy, concern about a new Hurricane heading towards the USA, and the concern about how fast Libya can bring oil production back on line after the civil war is over.

As always we are not suggesting that traders buy or sell oil futures options but that options traders assess the risks and rewards of trading options in oil futures or other commodities. Trading oil futures options offers two advantages in comparison to trading oil futures directly. One is that in buying options, investment risk is limited to the price of the options contract. And, risk management in option trading goes hand in hand with the investment leverage that options trading offers. An options trade need never touch a futures contract. He can simply exit an options trade by executing the opposite trade and take his profits.

More Resources