Because energy products are produced and trade throughout the world issues such as the most recent aspect of the Arab Spring, the uprising in Syria, have a bearing on prices. Likewise, the painfully slow resolution of the Greek debt crisis is dragging down expectations of any early economic recovery on the continent. Further unrest in the Middle East could spread throughout oil and gas producing regions, driving down production and driving up prices. A prolonged recession in Europe will drive down demand and natural gas prices as well. The long term view in natural gas options trading has been that production is up and demand is down and that it will not change soon. Natural gas futures have fallen to just over eighty percent of their previous values in just the last month. US DOE reports show that Alaskan production is up almost fifteen percent to record production levels. There are estimates of natural gas prices falling substantially farther in 2012. If this turns out to be the case, when to buy puts on natural gas may be now. On the other hand producers could scale back, the Middle East could settle down, and Europe could fix its debt dilemma.

The advantage of natural gas options trading on futures instead of trading futures directly is twofold. First of all an options trader limits his risk by buying puts or calls on a commodity or stock. The most he stands to lose is the price of the options contract, even if futures prices move unexpectedly and dramatically opposite to what he expects. Second, in natural gas options trading, the trader is using less money than would be required to satisfy the purchase of a futures contract. Nevertheless the movement in futures price will be the same in buying or selling futures directly or in natural gas options trading on futures. The return on investment on an accurately anticipated movement in natural gas futures will be greater with options trading than with directly buying or selling futures. For many the best way to profit from futures may well be to learn how to trade futures options.

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Six days after the IPO opens rule will permit that Facebook becomes available for options trading. Traders will have thoroughly analyzed fundamentals and will closely watch market sentiment. If the expected excitement of private investors comes to pass, the stock will likely become overbought. Traders seeing that situation coming will buy puts on Facebook. Traders who expect to see the stock keep climbing will buy calls. Hedging risk with options will also be useful for those who get in early and see a substantial stock rise. Investors who believe that Facebook will replicate the Google experience will not want to sell their stock too early. On the other hand they may choose to protect their gains. They can do this by buying puts on Google while holding their stock. If the stock continues to rise the investor will simply have paid insurance in the form of his put contracts. However, if the stock falls in price he will be able to sell the stock at the options contract price and purchase again at the now lower price. On the other hand he can also simply exit the options contract and use his profits to offset a loss of share price.

As volatility of the stock increases that could also increase the price of both puts and calls when trading Facebook options. As we often remark, selling options tends to be more profitable over time than buying them. However, selling options in a volatile market is the work of professionals backed by large institutions with deep pockets. For small investors selling can be risky business. One useful tactic for anyone interested in trading Facebook options could a long straddle. The trader buys both calls and puts with the same expiration date. He will win whether the stock goes up or if it goes down. His cost of doing business is the price of the options contracts. The worst he will do is lose the price of these contracts if the stock price does not move. As always do your homework and stay out of trades that you do not thoroughly understand.

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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.

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The Much Anticipated Demise of the Euro

In an attempt to bring fiscal order to the European Union the members of the EU amended their treaty. One of the things they did was give more power to the European Central Bank. The bank also has a new president, Mario Draghi. Mr. Draghi not only went to MIT, like US Fed chairman Bernanke, but Mr. Draghi may well be following the prescriptions of the Fed chairman as well. Bernanke is a recognized expert on the causes of the Great Depression. His recipe for avoiding another depression is commonly referred to as the Bernanke doctrine. A key facet of this doctrine is that printing money and buying the country’s own debt, with printed money, will keep credit flowing and avoid another Great Depression. Soon after Draghi took office he issued loans to banks across Europe in excess of $600 Billion when measured in US dollars. The point is to keep banks solvent and provide money for business to function. The point is also to bail out the faltering economies of the southern tier of Europe. With the printing pressing going at full speed it may well be the profitable options trading in Forex may well be to buy puts on the Euro keep counting one’s profits.

Gold, Oil, and Chinese Real Estate

Trading gold options has had the potential for profit for the last decade as the price of the shiny stuff has both risen and fallen as the price has moved upward for a decade. Gold bugs are still predicting $3,000 an ounce but many contend that the recession, at least in the US, is nearly over and that stocks will take off. If that is the case take a look at what happened to gold at the start of 1980’s. Oil should go up if the Euro and dollar inflate but that assumes an economic recovery. A new recession in Europe, the world’s second largest economy could put a damper on oil prices but profitable options trading could result from successfully reading the ups and downs of oil prices. A wild card that many do not seem to see is the state of China, especially its real estate market. Remember in the late 1980’s when Japan, Inc. was about to take over the world. When things went to heck in a hand basket over there it turned out that there were a lot of back room, handshake, good old boy loans that supported the system. China apparently has the same situation. The country is soon to have half of the skyscrapers in the world. But, when there is no one to fill them profitable options trading on Chinese stocks could well be all puts. And, as usual use this discourse as means of stimulating thought and do your own research before trading options on anything.

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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.

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The recent EU summit arrived at two useful solutions. One is that going forward Euro Zone economies will be more closely linked, with the end result that it will harder for nations to overspend. The other is that the European Central Bank now has more flexibility and independence in dealing with both insolvent banks and insolvent nations. The bank recently made loans of roughly half a trillion Euros to stabilize the continental banking system. Investors and traders were first relieved that the bank was putting things in order. Then everyone seemed to change their minds and worry that the various banks needed so much money in the first place. Nevertheless, the fact that the EU seems to have a clearer game plan and that they are taking firm action seems to have pleased the markets. The French austerity plan is a good case in point. Now the news that manufacturing is stronger in Germany, the continent’s leading manufacturer, leads traders and investors to believe that a Euro Zone recovery is in the works. It also does not hurt that manufacturing in China came in ahead of forecasts and that the US economy seems to be finally picking up steam.

A Euro Zone recovery will not necessarily mean that all stocks will rise. For example, investors and traders are more interested in German companies as the German economy is stronger and more stable. As evidenced by the rise in stocks and fall in the Euro recently it could well be that a developing Euro Zone recovery might not be linked to a stronger Euro, at least in the short term. This is, of course, one of the reasons why many buy options. Whether it is dealing with volatile foreign currency rates or a chaotic stock market, traders can hedge their investment risk when buying calls or puts on stocks or currencies. Likewise the ability to leverage investment capital gives options traders the opportunity to multiply their gains should a strong Euro Zone recovery emerge.

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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.

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Normally options traders look at the put to call ratio, stock fundamentals, or technical price patterns of the stocks whose options they trade. However, year end options trading also needs to take into consideration the tax calendar as well. When tax laws change investors may buy or sell stock in large quantities in order to take advantage. Portfolio managers (we mentioned those guys) like to show nice year end profits and may sell winning stocks and hold cash at year end in order to avoid unexpected market variations that could tarnish their performance. In an uncertain year end market traders may use strategies such as a long straddle in order to lock in profits no matter which way the market moves. Nothing in life is absolutely certain except death and taxes but the odds are usually pretty good that there will be profitable year end options trading for those who do their homework and watch the markets closely.

We are coming off of a very volatile year. Some have lost money and some have gained. Those who have lost may choose to sell stock and use their losses for tax purposes. As with the money manager scenario we mentioned above the sale of sufficiently large blocks of stock can drive prices, in this case down. Throughout the year we have written about Netflix options, buying calls on Caterpillar, puts on LinkedIn and more. Anyone who has traded options on these stocks or simply done a bit of research and followed up will be aware of which stocks and which options have been active. Having done a bit or prior research will help the options trader pick the right stocks for year end options trading. Then the job of the options trader is to update his research and be ready to buy or sell calls or puts depending upon the results. As always we are not suggesting that one trade the stocks or options on the stocks listed but rather that they use the thoughts and information here to develop a profitable strategy for year end options trading or trading throughout the year.

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Fix Hedge Currency Risk with Futures

Here is a quick example. A Japanese airline wishes to buy a Boeing 787 Dreamliner. Payment will be made in US dollars. Plane will cost around $200 million. Every one percent change in the value of the Yen versus the dollar will change the cost of the delivered airline by $2 million. In the last few months the USD YEN currency pair has varied by 5% from high to low. That would translate to a difference of $10 million in what the Japanese airline might have to pay to Boeing. There are a couple of ways that the Japanese airline might use to reduce currency risk. The first is to buy currency futures. The airline will pick a futures contract that will come due around the time that the airplane will be delivered. They will not need to spend any money with the futures contract but will obligate themselves to purchase dollars for YEN at the contract price on the settlement date. This strategy fixes their cost of doing business as of the expiration dates of their futures contracts but has its drawbacks. Rather the company will buy options and on the options expiration dates will only need to execute the contracts involved if doing so is profitable.

Hedge Currency Risk with Foreign Currency Options Trading

The better alternative in this situation is to buy calls or puts on the USD with the YEN. When to buy calls is when the trader believes that the USD will go up in value versus the YEN by the time that payment is due. When to buy puts is when the trader believes that the USD will fall in value by the time in that payment is due. If the dollar does, in fact, go up in value the trader executes the options contract and buys dollars at the strike price of the contract, the original value of the dollar versus the Yen. As the figures noted above demonstrate, a savings of $10 million on this sort of contract is possible. The trader would only buy puts in this instance if his company already has money set aside in dollars to pay for the plane. If the dollar plummets in value the trader who has purchased puts on the dollar with the Yen can simply exit his contract and take the profit. Thus he will have the same benefit is if he had kept Yen and converted at the time of payment. Speculators can use all of the same techniques but do so in seeking profit in whichever currency pair they are trading.

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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.

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