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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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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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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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.

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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.

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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.

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