Profit opportunity: Get ready for a volatile earnings season
Today's Financial News - Posted October 5, 2009
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.
Next Article: TFN eNews 10/05/2009: Will the imminent collapse of Latvia be good news for the greenback?
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