Investment U’s resident options contributor, Karim Rahemtulla, expands his lesson on analyzing the CBOE Volatility Index and using it to guide profitable options trades.

Karim Rahemtulla (Investment U):

The stock market kicked off 2010 with a bang, as the major indexes used strong manufacturing data to scoot to 15-month highs.

As always, though, the movement of the CBOE Volatility Index (^VIX) dipped under the radar. Based on options activity on the S&P 500, this widely watched – but poorly reported – gauge of fear and complacency among investors quietly slumped by more than 6%, edging toward the 20-point mark.

This means little to many investors. But savvy onlookers know that now is the time to pay more attention…In my column on volatility and the VIX a couple of months ago, I warned that a drop under 20 implies that investors are becoming more complacent about the market – and that it might be time to tighten your stop-losses, or lighten your positions as a result.

Moreover, a move toward 10-15 points is a signal to sell your positions, as it indicates that investors are buying significantly more S&P call options than puts. Such an imbalance suggests a high level of complacency, with a market correction usually imminent.

We’re not quite there yet. But that doesn’t mean you still can’t make money at current levels. The question is: Do you know how?

What You Should Do When the VIX is Low

When the VIX is this low – and trending lower – you can capitalize by buying put options, especially longer-term ones. The reason is two-fold…

• Time: Long-term put options give you plenty of time for a market correction to occur, thus making you money. For example, if you buy a two-year put on the S&P 500, you’re betting that the index will fall at some point over the next two years – a pretty sure bet in my book. 
• Low Volatility: What makes the trade even better is the fact that the VIX is low. That’s because when the VIX is low, it means stock volatility and options premiums are also low, which gives you cheaper entry points.

And when it comes to the price of options, it’s the underlying volatility of the stock in question that is a crucial factor. (Others include time to expiration, the share price and risk-free rate of return, but volatility is the key driver.) Given that the volatility number is low – as it is now – option prices are  correspondingly low.

Click here for the rest of Mr. Rahemtulla’s article, including useful volatility impact charts, at Investment U.

Article first published on Today's Financial News

Vix Volatility – a deeper look into a complacent market

Here’s another basic lesson in options from Investment U’s options expert Karim Rahemtulla.  In this article he looks at how the CBOE Volatility index – essentially a barometer of investor sentiment – can be used to guide successful options plays.

Karim Rahemtulla (Investment U):

There are only two driving forces that move the stock market: fear and greed.

Based on these two hugely influential factors, many investors simply watch the market’s daily gyrations and listen to the folks on television scream and shout about it – without offering any solid, profitable advice.

But one index holds all the clues you need.

It’s called the CBOE Volatility Index (^VIX) and it essentially measures investor sentiment, based on how options are trading on the S&P 500. It’s sometimes referred to as the “Fear/Greed Index” because at specific points in time, the VIX has been an excellent predictor of the market’s future direction.

Here’s how it works – and how you can use it to your advantage…

What You Should Do When the VIX is High or Low

Want to know the best times to buy and sell stocks? Just look at the VIX…

• When The VIX is High: Any time the VIX hits 50 points or higher, it usually signals that investors are fearful, or panicking. This is the best time to buy stocks.
• When The VIX is Low: If the VIX drops under 20, or close to the 10-point level, it implies that investors are complacent and you should lighten up on your positions.

So what’s going on today?

The VIX currently sits around 25 points – a pretty low level, indicating that the market is relatively stable. However, based on what we’ve seen over the past few months, it would be ridiculous to imply that volatility has disappeared from the market.

We’re clearly not out of the woods when it comes to volatility… yet the market is proving people wrong on a daily basis. So let’s turn the tables on the market by using volatility to our advantage. If you’re a longer-term investor, listen up because Christmas has come early. Here’s why…

The Four Ways to Price Options Through Volatility

Volatility is a key component of how options are priced, not the whims of market makers. The pricing formula involves four components, determined by the Black-Scholes Model…

Click here for the rest of Mr. Rahemtulla’s report at Investment U.

Article first published on Today's Financial News

VIX: The CBOE Volatility Index

Karim Rahemtulla, options specialist for Investment U, analyzes the latest moves in the gold market, and how playing options can profit from the corrections.

Karim Rahemtulla (Investment U):
Amid all the media hoopla and rampant running of the bulls, not many people saw the shock lurking around the corner.

So when it happened last Friday, many people got a nasty surprise.

I’m talking about the huge decline for gold, as traders shaved around $50 an ounce off the price – one of the biggest daily drops in recent memory.

Fortunately, I tipped you off about gold prices falling right here just two weeks ago.

I did so by simply looking at the options activity among gold stocks, noting that volatility had increased and the market was indicating a series of large moves for gold shares.

The question now is: Does this signal the end of the party for gold? Here’s what my latest analysis suggests…

Is Gold’s Run Over? Why $900 Is a Key Level

In short, I don’t believe that Friday’s big drop means it’s the end of gold’s run. Not at all.

However, it doesn’t mean that you should use the decline to load up on the metal either. While buying on dips is often a very good strategy, keep in mind that the gold market has shot straight up for months now, so a correction of some magnitude was inevitable – and still is to some extent.

Friday’s move was either a sharp, one-day reaction to the threat of higher interest rates (gold’s near-term nemesis), or merely profit-taking in a crowded, overheated market.

But regardless of the reason, gold still remains in a definite bull uptrend and the technicals suggest that it would have to slide below the mid $900 level for the upward trendline to be broken (over the short-term anyway).

So what do you do? Sell your gold shares and hope for a chance to buy back lower? Or hold on tight for the next rally?

Trying to Time the Market is a Fool’s Game… Do This Instead

Sensible investors know that hiccups like this happen all the time – especially in markets that launch straight upwards. There are always moments when prices correct.

That makes trying to time the market a very dangerous and unpredictable exercise.

There are two strategies that can help you combat such events – and profit:

Sell covered call options against your gold share positions.
Sell put options in order for you to buy gold shares at lower prices – and gain passive income, too.
And here’s the best part about both those strategies at the moment: The increased volatility in gold shares means you can collect a tidy amount in options premiums.

Last month, for example, I sold some puts on Yamana Gold (NYSE: AUY) for about $1.05 per contract. Last week, I bought them back for about $0.65 – not a bad haul. The worst case would have forced me to think about buying Yamana for $7.50 – not a bad option either.

And if you’re really worried that you’re overweight in gold shares, you could take put options and “marry” them to your gold shares…

Click here for the rest of Mr. Rahemtulla’s article at Investment U.

Article first published on Today's Financial News

How to Play Gold’s Latest Corrections for profit

Karim Rahemtulla, options guru at Investment U, offers his analysis of Deep-in-the-Money plays and how they can help rebuild portfolios.

Karim Rahemtulla (Investment U):
Take a quick glance at the share prices of certain companies today and you’d think the savage 2008 was a distant memory. But 2009 has confounded the “experts” who called for more of the same this year, with stocks rallying sharply, giving investors a chance to recoup some of their losses – and even turn a profit.

However, not everyone jumped aboard. And during the greatest destruction of wealth in our generation, few could blame them. So if you feel like you’ve missed the boat on some of Wall Street’s resurgence this year, I have some great news. Companies like Apple (Nasdaq: APPL), Google (Nasdaq: GOOG), Cisco (Nasdaq: CSCO), Dow Chemical (NYSE: DOW), and Freeport McMoran (NYSE: FCX) are all trading at multiples of their March lows.

Having embarked on such a run, you might think that the shares are now out of reach. But that’s not the case if you think they’ll go even higher over the next year or two. Actually, in some cases, you can still buy them at discounts of up to 50% or more from their current prices.

Just one thing before we start, though: You must not want to “own” these shares for more than a year or two. We’re more focused on nimble trading. So lace up your sneakers because the strategy that accomplishes what I’m talking about is referred to as deep-in-the-money (DITM) investing.

Deep-in-the-Money Investing with High Deltas

Buying options that are deep-in-the-money means they have strike prices (the price at which you can buy the shares) that are well below the current price of the stock.

This is also known as high delta investing.

Don’t be confused… it’s pretty much the same thing. Delta is an options term that simply refers to change in share price versus the change in option price. The higher the delta number, the more correlation there is between the movement in the price of the underlying shares and option.

The highest delta you can get is 100. This means the price of the option will move in lockstep with the movement of the shares. If the shares rise by $2, the options will climb by $2, too. If the shares fall by $3, the option will also drop by $3.

So, why use deep-in-the-money options, or those with high deltas?

Click here for the rest of Mr. Rahemtulla’s article on Investment U.

Article first published on Today's Financial News

Options: Going Deep-in-the-Money to find new highs

While the commodities markets focus on gold, silver and even pork bellies, one domestic commodity is having a very tough year. It’s bad news for natural gas bulls.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): If natural gas is the worst performing commodity of 2009, why have I been writing so much about its profit potential over the past two months?

Simple. It’s an options investor’s dream come true.

With the nation’s natural gas inventories now at historic capacity and recently eclipsing the 99% full mark, we have way too much of the stuff. The funny thing is, greedy drillers don’t know when to quit. Even with the markets screaming “no mas,” producers are stuffing more and more gas into the country’s pipelines.

The action is sending prices lower and lower and lower. Just today, natural gas’ value has plunged by nearly 6%.

That means options investors – at least the ones who followed my advice and bought put contracts– are sitting on big gains. Over at TFN Strategic Trader, members locked in gains of 400% just a couple of weeks ago.

If the action continues, four more sets of triple-digit gains could be on the way.

Headlines say it all

During a relaxing post-holiday weekend, I had plenty of time to sit down and pour through the nation’s headlines. It was confirmation after confirmation.

This morning, the Charleston Daily Mail wrote, “Vast supply alters gas industry.”

Saturday’s edition of Pennsylvania’s Beaver County Times featured “Marion Twp. rig could be the beginning of boom beneath us,” an article describing the region’s first Marcellus Shale rig.

Friday’s edition of the Patriot News (PA) had an op-ed piece, “Pennsylvania ‘Wilds’ benefit greatly from Marcellus Shale,” that discusses the estimated $2.3 billion economic impact of recent massive drilling efforts.

In Bloomberg today, the global news outlet sports a headline, “Natural gas glut overwhelms speculators, defies rally.”

And finally (I could go on but won’t), the Fort Worth BusinessPress writes, “Winter outlook not great for natural gas drillers.”

It’s fair to say, the headlines speak for themselves. If they are not speaking of the massive glut, they discuss the industry’s record-shattering expansion.

This is not hyperbolic commentary to get attention. These are the facts.

The nation has too much natural gas. Our inventories are weeks away from overflowing and drillers are still tapping new wells.

It’s a recipe for disaster, at least for the longs. For us shorts, it is an incredible profit opportunity.

Read my updated report right here.Similar Posts:

• Natural gas industry braces for impact – October 7, 2009
• How to play the Exxon news – December 14, 2009
• Gas pain: The International Energy Agency weighs in – November 5, 2009
• High fives for the bears – December 3, 2009
• 342% gains from natural gas implosion – November 10, 2009

Article first published on Today's Financial News

Worst-performing commodity of 2009

Karim Rahemtulla, resident options expert at Investment U, examines how to play corrections in the climbing gold market.

Karim Rahemtulla (Investment U):
Of all the great investments you could have made in 2009, gold is right up there among the best of them.

The price of gold has surged this year, taking gold shares upwards with it. Readers of my Xcelerated Profits Report have rung the register with 45% profits on Goldcorp (NYSE: GG) and a triple-digit winner on Golden Star Resources (NYSE: GSS). We’re also up big on Yamana Gold (NYSE: AUY) at the moment.

All is good, right?

On the surface, perhaps. But not if you believe what the options market is saying…

Yamana Options Signal a Share Price Drop

Using Yamana as an example, the options market is betting that over the next 12 months or so, Yamana may fall from current levels of around $13 back into the single digits again.

Just take a look at the January 2011 $7.50 put options (the right to sell Yamana shares at $7.50), currently trading at $0.70 cents per contract. This means the put buyer thinks Yamana’s price will fall to $6.80 – almost 50% below current levels – in order to be in the money. The $6.80 price is derived from subtracting the price of the option from the strike price ($7.50 minus $0.70 = $6.80). This tale is similar across other gold shares, too.

These put options are expensive relative to Yamana’s share price – the result of gold prices moving sharply in previous weeks and causing the volatility in gold stocks to increase.

As a quick refresher, the price of an option is based on four major factors:

The price of the underlying shares
The options strike price
The time to expiration
The volatility of the underlying shares
Two Ways to Play Gold Prices… But Only One Viable Option

So if you’re a gold investor looking to participate in the market, what can you do to protect your profits, or buy shares at a lower price? Here are two potential ways…

If you own gold shares at the moment: Buy put options to protect your profits.
If you don’t already own gold shares: Sell put options to lock in a lower price for your shares and get some cash from the bargain, too.
However, only one of these options is viable right now – at least with Yamana anyway.

Click here for the rest of Mr. Rahemtulla’s analysis, posted at Investment U.

Article first published on Today's Financial News

The Coming Gold Correction: Two Ways to Play the Move

Karim Rahemtulla, options guru at Investment U, explains the basics of In, At, and Out-of-the-Money plays.

Karim Rahemtulla (Investment U):

To put it bluntly, some people are just downright afraid of the options market.

It’s too bad. Most believe the popular misconceptions and myths about options – among them, that they’re too complex, too confusing and too risky – or are just reluctant to the leave the relative comfort zone of stock investing.

It’s also a mistake. Many investors are missing out on some huge gains when all it really takes is a better understanding about the options landscape.

And that’s what I’m here for. Because while options terminology is different, it’s not really that complicated. So let’s run down a few of the basics…

Options Terminology 101

When it comes to option trading, you’ll find that there are two basic varieties – calls and puts.

• Calls: A call option is the right, but not the obligation, to buy a stock at a certain price. This is called the strike price. It’s the right, but not the obligation, because you’re only on the hook for the amount of money that you paid for the option. So right off the bat, you know you can never lose more than what you paid. The extra bonus is that the upside is unlimited. If you want to bet on a higher share price, you buy a call option.
• Puts: A put option works in the opposite way to a call. It’s the right, but not the obligation, to sell a stock at a certain price. So if you’re betting that IBM (NYSE: IBM) will decline, you’d buy a put option. And again, the strike price that you choose is the level at which you have the right to sell IBM. However, you’re not obligated to do so.

Now let’s break it down a bit more by detailing the kind of options that you can buy and sell…

Click here to read the rest of Mr. Rahemtulla’s article on Investment U.

Article first published on Today's Financial News

Options Basics: Understanding the terminology

The dollar is moving the equities market. It may be creating profits these days, but it won’t last. This may be your last shot at protection.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): What exactly are you purchasing when you buy a stock these days? You used to call your broker to purchase a share of a company’s future revenue stream. The value of your position would rise and fall inline with market estimates.

But now, things are a bit different. Sure, you are technically buying the same underlying asset.

Nothing has changed fundamentally. But the correlation between rising revenues and a rising stock price have been tossed out the window.

As of late, when you buy an equity, you bought yourself a bet against the dollar.

It is not a positive trend.

Now that the House has passed a healthcare bill onto the Senate, Pelosi and her gang are moving towards the next issue. The rhetoric and pressure surrounding the health debate have waned, making room for discussions on the value of the dollar.

That can’t be good

It has been a central theme for Obama during his Asian visit. Bernanke even made rare comments about the value of the dollar yesterday. And today’s economic data shows inflationary pressure is not nearly as high as some thought.

What’s more, data released this morning shows foreign holdings of American Treasuries was on the rise during September, with a net increase of $40.7 billion during the month.

That means while all of us financial pundits think it is crazy for foreign states to purchase massive amounts of U.S. currency, buyers appear to have few other viable choices.

Combine all of the recent economic “noise” with the increased political pressure from the Fed, the Treasury and the White House and we will certainly see less downward pressure on the dollar.

That is not good news for Wall Street’s growing herd of bulls.

With the equities market moving in tandem with the weakening dollar, a turnaround in the greenback’s valuation will spell a turnaround for the recent surge in prices.

What’s the best way to play the situation? As the guy at the helm of an options-trading service, what else could I recommend but an options strategy?

With the markets threatening a marked pullback, a covered call strategy is an excellent play. Back up the largest positions in your portfolio by selling their out-of-the-money calls.

That way, if prices dip, you have the income generated by selling the contracts to protect your bottom line. And if prices continue to rise, you will have an established exit strategy to help you lock in the gains.

It is all about the dollar these days and you had better not forget it. Fortunately, the options market is there to protect us from dangerous situations like this one.

If you haven’t checked out all the options market has to offer, do it now.Similar Posts:

• Protect yourself against the double dip – October 2, 2009
• Profit opportunity: Get ready for a volatile earnings season – October 5, 2009
• Market dip: What to buy now – September 24, 2009
• Warning! Crash imminent – December 4, 2009
• TFN eNews 10/02/2009: This simple covered call strategy buys you “plunge protection” – October 2, 2009

Article first published on Today's Financial News

Worried about the dollar?

Options 101: Karim Rahemtulla, options expert at Investment U, offers his review of the Married Put Strategy.
Karim Rahemtulla (Investment U):
Here’s the situation… We have an uncertain, volatile stock market that can’t figure out its next move.

Thanks to the rally for much of this year, many investors have recovered a good chunk of what they lost in 2008. Some are even sitting on some big profits in a few positions.

What do you do now?

Some investors will lock in their gains and retreat to the sidelines. Others will stay invested and take their chances.

Whose approach is right?

Neither. There’s a better way to protect your profits without selling anything, and you can do it by executing a married put option strategy. Here’s how it works…

The Art of Put Options

Put options primarily used to accomplish two things…

Selling stocks: When you buy a put option, you have the right, but not the obligation, to sell a stock at a certain price (strike price).
Buying stocks: When you sell a put option, you’re obligated to buy the underlying stock at the designated strike price, as long as the shares are trading below that strike price.
Today, we’re going to focus on the buy side.

Let’s say we bought Intel (Nasdaq: INTC) for $13 back in March. Today, we’re sitting on a $6 profit.

In a market like this, that gain could evaporate in a hurry. Alternatively, it might not if the market heads higher. So we’re stuck, right?

Well, no.

Most ordinary investors would employ a simple 20% trailing-stop from current levels, meaning they’d sell the position if the stock falls by $3.80. An important admirable strategy in order to protect profits, or limit losses – and one we frequently preach here.

But what if you could actually protect your downside for less money for a pre-determined period of time?

Click here to read more.

Article first published on Today's Financial News

Options Basics: A review of the Married Put Strategy

The votes have been counted and gambling is coming to Ohio. That is fantastic news for Penn National (NYSE:PENN) shareholders. Even better for options players.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): It is easy to get political on a day like this, but I promised myself I would not do it. After all, yesterday’s election results speak for themselves.

While most pundits discuss the news from New York, Virginia and New Jersey, I’ve been pouring through the figures streaming out of Ohio’s polling places.

For Penn National (NYSE:PENN) investors, the news is fantastic.

Shares of the gambling-facility operator are up by nearly double digits today thanks to 53% of voters saying yes to Issue 3, a constitutional amendment that will allow gambling in four of the state’s largest cities.

Whether you are in favor of gambling or not, you cannot deny the fiscal boost it provides to local governments, especially when proceeds are hit with a 33% tax rate. For many failing state governments, gambling revenue is a last resort financial life ring.

Now that Columbus, Cleveland, Cincinnati and Toledo will open casinos, Ohio becomes the 39th state to welcome the industry. It is a fantastic trend for Penn National.

No gamble here

The company has steadily increased its revenues as states have revised their law books. As one of the few casino operators without a property in Las Vegas, Penn National has been largely shielded from the city’s devastating real estate and tourism bust.

Its stockpile of cash allows it to grow while its competitors fight to stay out of bankruptcy court.

Today, Penn announced it will have casinos built and operating in all four of Ohio’s gambling towns in just over 24 months.

The plans are proof that Penn’s own gamble, spending $35 million to help push voters to say yes, has paid off. With 47% of the vote saying nay, the odds were barely in its favor.

There are still eleven states left that have not yet legalized gambling. If you ask most industry experts, they agree it is just a matter of time.

Pennsylvania is the next key state. It already allows slots, but the state legislation is currently working on allowing table games. It is yet another revenue-generating opportunity for Penn that has the potential to send shares even higher.

Today’s price pop is no surprise to TFN Strategic Trader members. I recommended playing a set of the company’s call contracts back in September. The options have surged by 200% today. Nice!

Thanks to the news out of Ohio, playing Penn National is far from a gamble. This company has growth potential written all over.

Article first published on Today's Financial News

A $35 million bet pays off for Penn National

Ford (NYSE:F) had some good news today. Now it is time for Dana (NYSE:DAN) to impress the market. Here are several ways to play tomorrow’s announcement.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): Need a play for tomorrow? Thanks to Ford’s (NYSE:F) billion-dollar surprise this morning, the auto industry was a market leader today, with the sector climbing ahead by over 5%.

The timing is good for Dana (NYSE:DAN), a major component manufacturer. The company is due to release its latest earnings figures tomorrow. After a topsy-turvy ride, investors are ready to hear news of growth.

After nearly plunging into the bankruptcy abyss earlier this year, shares of Dana have made a steady climb forward. Since March lows of $0.19, shares of the Ohio-based company climbed a whopping, get this, 3,815% all the way to $7.44.

With shares currently trading at $5.79 a piece, investors are getting a strong discount to last month’s highs.

If the news is good tomorrow, today’s buyers could be selling for profits in no time.

Unfortunately, it won’t be so simple. A lot of good news is already priced into the stock and the industry’s troubles are far from over.

Play to win

Don’t forget the third quarter was host of the infamous Cash for Clunkers program that jump-started the market. Since then, however, the industry’s batteries appear to have run dry.

There are several ways to play tomorrow’s news.

First, like always, you can buy the underlying shares and go long. Simple.

Or, if you think good news is already priced in and we are set for more red from the major indices, you could borrow a few shares and sell them short. A bit more complicated, but still pretty simple.

If you are a fan of the options market, it is a similar situation. But thanks to the ability to buy puts, shorting the stock is super easy. Buy calls if you are expecting good news.

But easy is not often best, especially if the path ahead is far from clear.

That’s what makes the options market so interesting… and lucrative. You can find a way to prosper no matter what happens.

An options straddle allows you to gain if the underlying stock moves significantly in either direction. By purchasing puts and calls with the same strike price and the same expiration date, you can overcome the two sets of premiums if the stock makes a big move in either direction.

For Dana, volatility is high, which means the options are fairly expensive, but a quick look at the November spread shows some profit potential if tomorrow brings  a big surprise.

No matter what you do, there are no excuses for missing out on the profits if Dana makes a big move in either direction tomorrow.

Article first published on Today's Financial News

Three ways to play Dana’s earnings

The equities market is getting dangerously volatile. That means it is time to take advantage of the options market. The profit potential is increasing by the minute.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): I am dreading next week. Not because my “evil” mother-in-law is coming to town. She’s far from the kind of dreaded in-law that create sudden desires to move overseas and change the lock on the front door every few weeks.

I’m dreading the coming days because when my mother-in-law enters our front door, women will become a super-majority in a once evenly divided home.

They will have control of the dinner menu, control over my schedule and, worst of all, control over the remote.

I can only imagine the scene when we decide to go out for a nice dinner. There I will be, sitting in the driver’s seat of the car, gently tapping my thumb against the steering wheel, while Vote Number One and Vote Number Two decide what to wear.

Just as one of them prances down the front steps, appearing to have come to a final decision, she’ll turn around and shoot right back through the front door. Four hundred or so thumb taps later, she’ll reappear in an entirely different outfit.

If you think about it, the market is not much different these days. It’s as fickle as a seventeen-year-old getting ready for prom.

We are all waiting for the final result, some of us less patiently than others.

Better shot at scoring than prom night

We could be patient and wait for the markets to naturally appreciate, although it could be another decade until we reach previous highs.

Or, better yet, we can do something not possible when the mother-in-law is in town… put our foot down and take action.

The options market offers fantastic opportunities in a choppy market like this one. Just look at the CBOE Volatility Index (VIX), a key measure of option price spreads. After hitting a fresh 52-week low last week, the “fear gauge” has surged ahead.

It means options investors are getting rich. As the VIX rises, it shows that demand for options is increasing. This week, as investors look to hedge against further downside, demand is soaring.

That is good news for those of us sitting on a portfolio filled with strategically chosen contracts.

Over at TFN Strategic Trader, the group’s options-trading service, a wishy-washy market is anything but bad. These day-to-day surges create incredible buying opportunities.

Just last week, I recommended three ways to play the natural gas industry. Two of the three picks soared this week to gains of over 150%. The third was up by double-digit proportions the last time I checked.

Our lone retail-related pick doubled in value this morning after the underlying stock moved ahead by just 5%.

As much as I know the week’s negative action has hurt many investors, I don’t want it to stop. It is flat-out powerfully lucrative to options investors.

If you are not hedging your portfolio with the powerful investing tools, do it now. It may by your only shot at profits over the next few months.

Article first published on Today's Financial News

Options investing: Playing the mother-in-law effect

Earnings season is about to kick into high gear. That means volatility will rise and the options market will soar. If you are not in on the action yet, make your move now.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): If you have never made an options trade, now is the time to do it. The profit potential may not be as immense as last fall’s cataclysmic collapse (let’s hope so for the sake of avoiding an economic depression), but the next four to six weeks may put up a darn good fight.

For options traders, volatility is everything. The stronger or weaker the market’s swings, the higher or lower the value of a derivative contract.

In last week’s choppy, bearish market, volatility was on the rise. If you are familiar with options and how they relate to volatility, you know rising volatility means rising options prices. Late in the week, as the CBOE Volatility Index (VIX) climbed toward 30, options sellers, or writers, had the advantage.

So far this week, the table has turned.

As I write, the VIX is down over 5% on the day, printing at 27.19. Most likely, the index is headed back towards the low end of its recent range, right around 23. If it gets there, we will be sitting on a full-on buyer’s market.

Get your heart pills handy

It is important to remember we just closed the books on a pivotal third quarter. According to the equities market’s feverish surge forward, the Street believes quarterly earnings figures are going to be strong. During the past three months, the broad market rose by just shy of 20%.

Now it is up to nation’s companies to make good on the increased values.

You can bet investors are getting nervous. With the immense political and currency risk that has popped up over just the last month, It is no wonder safety plays like gold and Treasury notes have been popular investments of late. Risk adverse investors are taking their gains and sitting the next few weeks out.

But if you are an options trader, you want to do anything but sit on the sidelines for the upcoming earnings season.

With earnings season about to kick off – Alcoa releases its figures on Wednesday – and October’s contracts expiring next Friday, the next two weeks are going to be anything but calm.

As happens during any pivotal earnings seasons, the Street is likely to make wild swings as it tries to put together the earliest of earnings figures. Until we get a solid make-or-break picture, the markets will tend to overreact to even the slightest of surprises.

Market mistakes are good

It will be good news for savvy traders, but even better news for options investors that keenly use the power of leverage to their advantage.

Swings of 2%, 4% or 10% from underlying equities could lead to gains of 20%, 40% even 100% in a matter of hours in the options markets. For the folks bold enough to trade front-month contracts, you can add at least another zero, maybe two, to those figures.

To say it is going to be interesting is an understatement.

If you are unfamiliar with the options market, you have time. Start reading the how-to books and doing your homework now. In just a few days, you will be face-to-face with some of the best lessons in years.

Or, if you are fan of easy money, head on over to TFN Strategic Trader. I’ll do all the work; you just make the trade and count the money.

No matter how you do it, play the options market over the next few weeks. It will be worth your effort.Similar Posts:

• Forget Dubai: ValueVision is bigger news – November 30, 2009
• Oil investors: Keep your eye on that dollar – September 21, 2009
• Sonic Solutions: Easy options opportunity – September 23, 2009
• Only a few folks celebrating at Sirius – December 22, 2009
• Three stocks you must watch today – December 2, 2009

Article first published on Today's Financial News

Profit opportunity: Get ready for a volatile earnings season

This simple covered call strategy based on the S&P 500 gives plenty of upside potential if market strength continues, but buys you insurance in case the bears take charge once again.

by Andrew Snyder

Baltimore, MD — TFN: After several months of straight-forward action that led to the best third quarter in nearly a decade, the markets are getting nervous. As volatility rises, so does the risk of investing in the equities market. But for us options investors, rising volatility means rising valuations.

Over at TFN Strategic Trader, we just sold five plays for 351% cumulative gains. But we still have about a dozen open positions. Some are ultra-conservative. Others are nerve-wracking speculative trades. We even have a handful of low-risk, high-reward covered calls.

With the markets threatening to make a ‘double-dip’ formation that could ultimately test March lows, I am going to let you in on our most conservative pick. It’s on the house!

I assure you my generosity is purely self-serving: I need you to have some ready cash at hand should you want to join our service and get in on the plays with triple-digit potential. I can’t give those away for free: They’re far too small and volatile to unleash to a large readership!

But enough self-promotion. So how can you use options to protect yourself — just in case the markets suddenly plunge towards March’s low?

A simple covered call strategy based on the S&P 500 is all you need. It gives plenty of upside potential if the strength continues, but buys you insurance in case the bears take charge once again.

Here is part of a recommendation I recently emailed to TFN Strategic Trader subscribers:

Any time we want to play the overall market, we look towards the S&P Depository Receipts (NYSE:SPY), better known as SPDRs. This highly liquid ETF and its options are the best and most-accurate way of playing the broad market.

Any time I use a covered call strategy, my ultimate goal is gains of 15%. It creates the optimal balance between risk and reward: To hit that target this time, we will sell SPY’s March 114.00 calls (SPYCJ) and use the premium to buy the underlying ETF. At current prices, it gives us a target gain of just over 17%.

Obviously, with the March expiration date, this is a long-term play designed to give us protection from the volatility that is bound to lie ahead.

It is a simple play, but it perfectly exemplifies the power of options and the many different ways we can use the derivatives market to our advantage. With this play, we can lock in gains if the market moves up OR down. Thanks to this week’s action, this covered call strategy is a better buy than ever.

Take advantage of the power of options trading. Get in on this play and then get in on the truly monstrous money-makers lurking in our portfolio: http://www.todaysfinancialnews.com/TST/china/ETSTK702.htmlSimilar Posts:

• TFN eNews 10/02/2009: This simple covered call strategy buys you “plunge protection” – October 2, 2009
• TFN eNews 10/05/2009: Will the imminent collapse of Latvia be good news for the greenback? – October 5, 2009
• Sonic Solutions: Easy options opportunity – September 23, 2009
• Profit opportunity: Get ready for a volatile earnings season – October 5, 2009
• Worried about the dollar? – November 17, 2009

Article first published on Today's Financial News

Protect yourself against the double dip

Sonic Solutions (NASDAQ:SNIC) has soared over the past six months. Is now the time to buy? Savvy investors are checking out this easy options strategy.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): Battles for dominate, market-accepted technology are rarely good for the companies mired in the fight. Sony’s (NYSE:SNE) torturous foray in the VHS versus Beta battle is a perfect example.

But a divided market is not always bad.

Just ask Sonic Solutions (NASDAQ:SNIC) shareholders. As the entertainment industry slowly figures out if DVDs or Blu-ray technology will dominate the video world, Sonic’s shareholders had the chance to rake in a fortune.

Shares of the $175 million company have soared by 1,050% over the past six months as the global economy rebounds and Blu-ray production increases.

As the go-to firm in Blu-ray production technology, Sonic is embarking on an era of strong growth. Earlier this week, the company announced a list of nearly two dozen European firms that are now using Sonic platforms.

European growth?

The growth comes as authoring facilities increase their Blu-ray production to meet the split demands of the world’s consumers. Until one platform becomes the accepted winner, Sonic will benefit from the dual revenue streams.

Investors interested in this company should be aware of several factors before making the leap.

The first should be obvious. After such a remarkable six-month climb, any negative news event could instantly erode recent growth. In the software industry a new competitor or the advancement of stronger technology can easily send even the strongest of players to the end of the line.

Shares of the company are up by nearly 20% this week, making it a good time to sit back and wait for a better buying opportunity.

Another important variable for the company and its shareholders is the next set of quarterly earnings figures.

Shares surged in August when the company announced a solid quarter (it lost just $1.8 million). If the momentum is not carried through the current period, investors will quickly lose their willingness to pay a premium for the position.

Room for more

When a stock starts to get top heavy, as an options investor, one of the first things I look at is the possibility of a covered call position.

Sonic is ripe for the taking.

As I write, savvy options investors could have a shot at low-risk gains in the neighborhood of 45% by selling out-of-the-money calls and using the premium to buy the underlying stock. It is a relatively safe play (by selling options, you are creating a layer of insurance), with a strong upside.

As the Dow approaches 10,000 and the third quarter comes to an end, volatility and resistance will be on the rise. Now is the time to lock in a smart strategy to take advantage of the situation.

If you are interested in a covered call strategy that is already worth gains of 20% (we just entered it yesterday), check out TFN Strategic Trader.  There’s a good chance Sonic may be in our portfolio soon.Similar Posts:

• OshKosh vs Cat: Not much of a fight – October 20, 2009
• Peabody Energy: Playing China’s red-hot coal Industry – October 20, 2009
• No bailout needed: Good news from the rags – September 29, 2009
• Penn National: It’s not gambling if it’s a sure thing – October 21, 2009
• The end of an upside-down week on Wall Street – December 11, 2009

Article first published on Today's Financial News

Sonic Solutions: Easy options opportunity