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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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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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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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.

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When to buy puts on stocks like LinkedIn is when the trader believes that the stock price is likely to fall. However, the price of the option, it premium is important. Over time options writers tend to make more money than options sellers because they price options according to the risk they are taking. If a trader buys puts in stock options trading he does so after careful analysis of the strengths and weaknesses of a company and evaluation of market sentiment. When a new, popular stock hits the street investors can get carried away and keep buying even when the stock price rises too high to support the logic of their purchases. Usually this is when investors believe that the stock has huge growth potential and that it will continue to rise. In stock options trading a trader buys puts in this situation in the belief that the stock will correct.

Another reason for buying puts in stock options trading is to protect profits. For example, investors who purchased LinkedIn at the IPO price of $45 dollars now hold a stock that is selling at just below $90 a share. They may well believe that the company will continue to grow and that the stock price will continue to rise. However, they may believe that the stock is overpriced today. How to trade stock options in this case is to buy puts on the stock. If the stock continues to rise the investor will simply have paid for a little insurance but will benefit from the rise in stock price. If the price falls substantially the investor will be able to sell at the contract price, the strike price, even if the fall in price is dramatic. He will execute the contract and sell the stock or he will simply execute the opposite trade and pocket the money. In the first case he is out of the stock and can either buy again or can keep his money. In the second case he keeps the stock at the lower price and has money in the bank.

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What are stock options worth on LinkedIn? Trading in standard options on the stock will start shortly. Apparently stock investors took little notice of the large number of outstanding employee stock options at LinkedIn as first day trading rose as high as 140% over its opening price. When standard options trading opens in a few days, traders will assess the likelihood of a further rise in stock price versus a correction after the initial excitement. Options trading of LinkedIn may be a more risk free endeavor than directly buying or selling the stock. The buyer of a call or put contract on this stock will be under no obligation to exercise the options contract and will only do so in the event that the stock price moves as he expects. By trading options on the stock the options trader will be able to leverage his investment as he need only pay the premium need to buy a put or call on the stock. Should he succeed in anticipating a large price swing the options trader need only exercise the opposite trade in order to profitably exit his options contract. As such he will never pay the price of the stock.

Those holding employee stock options are essentially holding call options except that they have paid the premium on the contract by working for the company. Unlike call contracts employee stock options typically do not have an expiration date. Thus the employee can wait for months or years until he or she decides to cash in on a high stock price or take a partial payment in the form of stock options in order to make an unrelated purchase. Standard options traders will want to watch when the principals of the company choose to exercise stock options as they may well do so when they expect the stock price to fall. When to buy puts on LinkedIn may be just as the last anxious investor antes up his hard earned cash in hopes of a continued rally. It may also be when all of the officers and large holders of employee stock options choose to exercise their rights and take cash.

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In regard to questions about the rating of US debt options trading can a several forms. The most direct means of US debt options trading is trading interest rate options on US treasuries. How to options work on US Treasuries? Interest rate options are cash-settled, European style options on the yield of US Treasury Securities. The available securities are as follows:

13-Week Treasury Bill – IRX

5-Year Treasury Note – FVX

10-Year Treasury Note – TNX

30-Year Treasury Bond – TYX

According to the Chicago Board Options Exchange, “IRX is based on the discount rate of the most recently auctioned 13-week U.S. Treasury Bill. The new T-bill is substituted weekly on the trading day following its auction, usually a Monday. FVX, TNX and TYX are based on 10 times the yield-to-maturity on the most recently auctioned 5-year Treasury note, 10-year Treasury note and 30-year Treasury bond, respectively. LEAPS are long-dated options that expire in approximately two to three years from the date of initial listing. Options are European style exercise and are available in up to three near-term months followed by three additional months from the March quarterly cycle. LEAPS expire in December of the expiration year.”

European style options are only settled at expiration. When to buy puts and when to buy calls, in US debt options trading will depend upon where the trader expects the interest rate to go in the near term. The S & P announcement referred to a decrease in the rating of US debt in the next few years. Options trading of the 13 week Treasury bill is very short term. However, the options on 5, 10, and 30 treasuries expire in two or three years, which is the time frame, alluded to in the Standard and Poors announcement. In all likelihood pressure on both major US political parties will bring about an agreement that will raise the debt ceiling and come to grips with mounting debt. For those interested in profiting from doubt that the US will handle its debt and expectations that it will have to pay higher interest rates on US debt options trading of US treasuries could be profitable.

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An options trader will not always buy calls on a promising stock. He may buy puts as well. The trader buys calls when he thinks that the stock will go up in price. When it does he exercises the contract to buy the stock or simply executes the opposite trade and takes a profit. If he believes that the stock will go down in value he will buy puts. This gives the right but no obligation to sell the stock in question. If the price does, indeed, go down in price he can sell stock that he already owns but at the contract price, the strike price. He can then purchase at the, now lower, market or spot price. If he does not own the stock to begin with he can purchase the stock at the lower price and use that stock to sell when he executes the options contract. Like with calls the trader can also exit his contract and take his profit without touching the stock in question. How to trade stock options, for many, is just like that. Now, what are call options or put options to the seller?

Options writing, or selling options, is typically more profitable over the long term than buying options. Professional options writers only trade stocks in which they have substantial expertise. They are typically large institutional investors with substantial amounts of cash behind them. Thus, when an options trade goes badly, such as with a put option where the bottom falls out of the stock, they have the reserves to absorb the occasional large loss. What are call options and what about selling them for investors who own stocks? This can be a nice source of income, like getting a dividend check in the mail. The owner of a cyclical stock can sell calls on stock that he owns. If he only sells when he believes the stock will not go up substantially in price he will likely not need to sell stock because the buyer of the option will not execute the contract. The investor can sell options on his stock every quarter and profit each time. The down side is that if the stock suddenly moves up in the value the buyer will execute the option contract and the investor will lose out on the price rise of his stock. When to buy calls and when to buy puts is a learned skill. The trader needs to learn fundamentals, practice technical analysis, and engage in risk management. Then what are call options? They can be a profitable way to trade stocks.

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What are stock options worth? The value of a stock option is based upon the underlying equity, the stock. The value of the option is directly related to the stock price on call options. The value of the option is inversely related to the stock price for put options. What are stock options as relates to calls and puts? In a call option the buyer of the option purchases the right to buy the underlying stock. In a put option the buyer of the option purchases the right to sell the underlying stock. Knowing how to trade stock options profitably starts with understanding the difference between puts and calls as well as buying and selling options.

Of the kinds of options trading, selling options and buying options are really different places inhabited by different people. What are stock options to the seller? They are a way to make money on stocks that, the seller believes, will not change in price, at least in the direction the buyer believes. It turns out that over the long run it is commonly more profitable to sell options than to buy them. However, there are two types of risk in selling options. In selling a call option the seller runs the risk of missing out on a substantial rise in stock price as the buyer will exercise the option and only have to pay the contract price. In selling put options the risk is that the stock price will drop substantially. Then the buyer will sell at the contract price. The seller will pay the contract price for the stock but own an equity that is substantially less valuable. Because of this risk most of the traders selling puts are large institutional investors with the financial reserves to absorb the occasional large loss.

What are stock options to buyers? For both occasional options trading and for making a living trading options, selling options provides the buyer with a great deal of leverage. He or she can purchase the right to buy or sell for a few percent of the value of the stock in question. If the stock price moves as the buyer anticipates it is possible to earn a multiple of what is invested whereas the buyer of the same stock may only profit by a fraction of the capital invested.

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