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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Hedging risk with options is done to protect investments and cash flow. Thus the company or individual doing this limits himself to the stocks he owns, the currencies he trades, or the commodities that he buys and uses or makes and sells. Beet farmers trade options on beet futures and airlines trade options on aviation fuel of simply crude oil. Companies in the US dealing with companies in Europe may need to trade options on the Euro. This limits the range of equities that these folks trade but, since they are protecting their investments that is the limit of their interest. On the other hand a currency speculator can choose the currency on which he wants to trade options based solely on profit potential. He can buy calls on gold or sell puts on oil simply because he expects to profit from a big price move.

The risk scenario is different for those hedging risk with options versus speculators. A US company buying machine parts from a German company will need to pay in Euros, no matter what the exchange rate. The only risk the company sees is a change of the exchange rate between signing a business contract and payment for receipt of the product. The company already has the cash or credit to make payment and there is typically no leverage involved. On the other hand a currency speculator may sell puts on the Euro versus the Yen if he expects the Euro to recover. He will be making this trade using a margin account and stands to lose the entire margin account or even more if the EU comes not come to happy resolution of the debt dilemma and the Euro falls significantly instead of rising. This same scenario plays out when buying puts on LinkedIn or any other stock. The risk of substantial loss when selling puts and calls is why the business of selling puts is commonly limited to large institutional traders with very deep pockets. Large US multinationals may have even deeper pockets but their business in hedging risk with options is commonly limited to reducing currency risk in international business transactions.

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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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What follows is a current list of funds available for foreign stock options trading from the CBOE:

BKF – iShares MSCI BRIC Index Fund

DGT – streetTRACKS® – DJ Global Titans Index Fund

EEB – Claymore/BNY BRIC

EEM – iShares® MSCI Emerging Markets Index

EFA – Options on iShares® MSCI EAFE® Exchange Traded Fund

EWA – iShares® MSCI Australia Index Fund

EWC – iShares® MSCI Canada Index Fund

EWD – iShares® MSCI Sweden Index

EWG – iShares® MSCI Germany Index

EWH – iShares® MSCI Hong Kong Index

EWI – iShares® MSCI Italy Index Fund

EWJ – iShares® MSCI Japan Index

EWL – iShares® MSCI Switzerland Index Fund

EWM – iShares® MSCI Malaysia Index Fund

EWP – iShares® MSCI Spain Index

EWS – iShares® MSCI Singapore Index Fund

EWT – iShares® MSCI Taiwan Index Fund

EWW – iShares® MSCI Mexico Index

EWY – iShares® iShares MSCI South Korea Index Fund

EWZ – iShares® MSCI Brazil Index Fund

EZA – iShares® MSCI South Africa Index

FXI – iShares FTSA/Xinhua China 25

GXC – SPDR S&P China ETF

HAO – Claymore/AlphaShares China Small Cap Index ETF

QDF – BLDRS Emerging Markets 50 ADR Index Fund

VGK – Vanguard European ETF

One aspect of foreign stock options trading is that it shares similarities with Forex options trading. Although a given set of stocks in a foreign country may not change very much it the home currency that currency may rise or fall versus the US dollar making foreign stock options trading in a given foreign based ETF very profitable. As always the twin values of options trading are the leverage that options trading provides investors and the degree of risk management inherent in trading options. No matter how bad the market goes when one buys puts or calls the trader’s risk is limited to the price of the options contract. Also in purchasing options a trader can do so with less invested capital than when buying or selling a stock or ETF directly. He need never own the equity in question buy can simply execute the opposite trade in order to exit his positions, ideally with a tidy profit.

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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.

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Some finely made copper products require stock piling before use and uses of petroleum products, such as airlines trade copper and oil options in order to secure a stable, and favorable, price for purchase of these products. An early sign that China was starting to lead the way out of the recession a year or more ago was the report that Chinese electrical appliance device manufacturers were ordering large quantities of high quality copper wire of the type used in high end computerized products. In options trading traders will buy calls on oil and copper futures if they believe that the economy is recovering and puts on oil and copper futures if they believe that the economy is falling. Currently prices are falling and those who purchased puts in copper and oil options trading have profited. The ratio of puts to calls in copper and oil options trading is also useful in predicting the profitability of stocks. ExxonMobil – XOM – the oil company and Freeport-McMoRan Copper & Gold Inc. – FCX – who mine copper and gold are obviously affected by changes in oil or copper demand. Delta Airlines – DAL – and other transportation stocks are affected by high oil prices and a falling economy whereas companies like Hewlett Packard – HPQ – are directly affected by a falling economy.

Copper at its lowest price in nearly ten months and oil futures fell almost three percent in recent trading. Those who believe that we are headed for another dip in the recession may be interested in buying puts in both copper and oil options trading. As the primary issue right now is the Greek debt bailout traders in copper and oil options, and virtually everyone else, are reading about the results of recent German elections in which voters expressed dissatisfaction about the willingness of German Chancellor Angela Merckel to risk German assets in propping up what Germans see as a profligate government in Greece. Factors as wide ranging as US Federal Reserve policy and the pronouncements of both European central banks and Chinese lenders have a bearing on copper and gold options trading both directly through the commodities markets and indirectly through stocks affected by oil or copper prices. Copper and oil options volatility are high these days due to the uncertainty of the markets. However, trading options on these commodities typically helps the investor limit his investment risk as his risk is limited to the price paid for the option in question.

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The risk Forex options trading lies primarily in selling puts. This is the same as in all options trading. When a trader sells a put he agrees to buy a currency at the contract price no matter if it has fallen dramatically. As an example a trader sells calls on the dollar in a Yen to US dollar contract. He agrees thereby to sell dollars for Yen on or before the contract expiration date. He does so because he believes that the dollar will remain stable in the currency pair or even rise in price versus the Yen. If he is wrong, which is what the buyer of the contract believes, the seller will need to buy dollars with Yen at the contract price even though the dollar is not worth a lot less. Because there is always a risk of a substantial drop in a currency the selling of naked puts is primarily the business of large institutional traders with deep pockets. Others who sell puts will typically include the selling of puts with buying puts and even buying calls or selling calls in a variety of Forex options trading strategies. When the trader is involved in Euro options trading , trading Yen or any of a variety of major or minor currencies the same principles apply.

In Forex options trading the trader watches a lot of the same fundamentals as in trading gold stock options or trading oil futures options. In each case profits come from anticipating the state of the global economy, national economies, industrial production across the world, and the monetary policies the large industrialized nations of the world. Forex options trading can be profitable but requires attention to both the fundamental and technical aspects of the Forex market.

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Last weekend the chairman of the US Federal Reserve gave a talk at a banking conference. He chose his words carefully and did not say much. However, the markets still reacted, some reading positive news and some reading negative news, as though reading tea leaves to see the future. Those trading bank stock options or buying calls or puts on any underlying stock may well be better served by looking for clear fundamentals and then looking for bargains as today’s markets overreact time and again. The value of trading bank stock options or any options these days is that options trading gives the trader a degree of leverage and a degree of risk protection. In trading options a trader only invests the cost of the contract. That is the limit of his risk. Although an options contract gives the buyer the right to buy stock in the case of a call or sell stock in the case of a put he need never touch the stock in question. If the price of underlying bank stocks perform as expected the value of these bank stock options buyers will go up. The trader need only execute the opposite trade in order to exit the trade with his profit. His return on invested capital will be substantially higher than if he had purchased the stock and then sold it. In deciding when to buy puts and when to buy calls on bank stock options traders are well advised to develop, strictly follow, and periodically revise an options trading strategy.

In today’s chaotic markets it is wise to remember that uncertain times for trading stocks are often good times for trading options . The combination of investment leverage and risk protection that buying options offers are often idea in volatile markets. As usual we are suggesting that traders buy or sell bank stock options or that they ignore the opportunity. We present this discussion as an example of the opportunities and risk involved in options trading.

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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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In trading options on stocks long term investors look for a margin of safety in the form of hard assets such as cash or property that the company can use during periods when sales falter. They also look for intrinsic stock value or forward looking cash flow. A long term investor will commonly buy calls on a stock which he believes is undervalued in terms of its margin of safety and intrinsic stock value. When the stock price moves upward to reflect the true value of the stock the option value will rise also. In options trading education the trader learns about strike prices and options prices in options trading. The strike price is the price specified in the contract and the spot price is the current market price. When the spot price moves favorably the call option buyer can execute the options contract and buy the stock in question. He will purchase at the strike price and can either sell at the spot price, for a profit, or hold a stock that he has purchased at a discount to the current price. He can also simply exit his options position by executing the opposite trade and pocket his profits.

Trading strategies in options commonly relate to prediction or price movement of the equity, market sentiment. Thus options trading education includes learning to use technical trading tools. The trader learns to anticipate price movement based upon the fact that market history tends to repeat itself. Learning common price curves helps the trader anticipate where the market will go next. Options trading education helps the trader learn when to buy puts and when to buy calls on stocks and other equities. Traders buy puts when they expect the price of an equity to go down and calls when they expect the price to go up. In an extremely volatile market a trader may use a strategy called a long straddle in which he buys both a put and a call on the same equity with the same expiration date. He can only lose the price of the premiums paid and will profit whichever way the equity price moves. His only loss is if the market calms down and the equity price stabilizes.

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