Philip Saunders | Weekly Options | Weekly Options Trading

The Weekly Options Report: Markets Are Looking gRIMM?

December 08, 2011 Philip

What seems like our favorite tech company of late, Research In Motion (RIMM), is scheduled to report 3Q financial results next week on Thursday December 15^th after the market close. Shares of RIMM have averaged a +/-10% move over its last 8 earnings announcements, with 5 of the reports pushing shares strongly to the downside (see chart below):

RIMM Historical Earnings Volatility

The $64,000 question for options traders this time around is will shares of RIMM exhibit the type of volatility seen in the majority of its most recent earnings related moves? My guess is NO and here is why…

On December 2^nd RIMM announced that 3Q results would come in significantly below prior guidance due to lower than expected demand for its Playbook tablet device. RIMM now expects 3Q EPS to come in slightly below the midpoint of its $1.20-$1.40 original guidance and revenue to be slightly lower than previous guidance of $5.3 bln-$5.6 bln. Shares of RIMM responded by immediately falling 10% on the announcement. This, however, is not the primary reason I believe volatility around RIMM earnings will fail to meet expectations. One needs only look at the company’s 1Q earnings announcement on June 16^th of this year which followed a negative pre-announcement and still resulted in a 21% one-day decline in RIMM shares following the official report. Proving that clearly RIMM shares have the potential to move meaningfully in the face of pre-announced results.

What makes this time around more interesting is the price at which RIMM shares are trading relative to the book value of its equity. RIMM continues to trade well below book value, which measured around $19 using last quarter’s balance sheet figures. At $16.33 I remain convinced (until proven otherwise) that downside in RIMM over the near-term is limited. With that being said, upside in RIMM in the absence of a take-out also seems to be limited.

So what options strategy should one consider to express a limited range view of a stock in a short time frame? I’m suggesting long shareholders of RIMM consider selling 15-17.5 weekly strangles in RIMM, taking advantage of heightened volatility in the weekly options due to its forthcoming earnings release and to express a limited price range view of RIMM shares. Using Thursday’s closing prices, traders could collect $0.80 for the 15-17.5 weekly strangle sale, resulting in break-even levels of $14.20 (-13%) on the downside and $18.30 (+12%) on the upside. The short-term duration of the trade severely restricts the time frame for a potential acquisition, which could push shares of RIMM meaningfully higher. A strong move lower would require you to purchase additional shares of RIMM which wouldn’t be all that bad for those that believe the company will eventually be purchased at price higher than current book value.

Chart of the Week (courtesy of TradeMonster)

In this week’s chart we highlight unusual trading activity, more specifically unusual call volume, from Thursday trading. Institutional trading desks typically follow atypical trading flow to both protect and position their portfolios to take advantage of outsized moves. Unusual call volume is sometimes a harbinger for potential M&A activity.

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How To Profit During Times Of Economic Chaos [video]

December 07, 2011 Philip

Mike Dillard and the team over at The Elevation Group have put together a series of videos revealing how to create (or recover) incredible wealth during today’s economic crisis. His team has generated returns of over 280% since 2008, while most investors are still recovering from the massive losses incurred during the down swing. So for that reason alone I recommend checking out the first video in the series by clicking on the video below, it may change your whole approach to trading and investing:

The Weekly Options Report: Here Comes The Pain

November 17, 2011 Philip

Traditional options expiration is upon us, and as such today we will continue our discussion on options expiration strategies, which we briefly touched upon in last week’s report. But before we dive in, let’s talk RIMM. With shares of RIMM trading at $17.58 last week we suggested traders consider purchasing the Dec 17.5-16 1×2 put spread to take advantage of elevated volatility and position for shares to either fall slightly from current levels or move higher through December. We initiated the trade, collecting $0.46 at inception. Using yesterday’s closing prices, the 1×2 put spread could be closed at $0.23, locking in 50% of the initial credit. With time decay (theta) working in our favor, no specific catalyst scheduled for next week, and recent Street upgrades, I’d suggest letting this one ride for now.

Weekly Options Catalyst Catcher:

Hewlett-Packard (HPQ) earnings highlight a rather uneventful and typically slow Thanksgiving holiday week. HPQ is scheduled to report 4Q financial results on Monday after the close. Shares of HPQ have averaged a +/-5.6% move over its last 8 earnings announcements, with a massive 20% move observed last quarter as highlighted in the chart below:

HPQ Historical Earnings Volatility

Weekly Options Research Corner

“Pin Risk” is a term commonly used around the trading activity of certain highly liquid, optionable stocks on options expiration Friday. More specifically, Pin risk is typically defined as “the risk that the underlying asset of a traditional option will close near the strike price at expiration. In these situations, the option seller does not know and cannot predict whether or not the option holder will exercise the option. The seller must then decide whether or not to cover the position by taking an equal but opposite position in the underlying asset. If the seller covers the position and the option is not exercised, he/she may be forced to hold securities that will result in a loss. Likewise, if the seller does not cover the position and the option is exercised, he/she must rush to fulfill the contract, which may also result in a loss.”

Why is this important? To avoid the risk of pinning, institutions, which are usually short options, trade stock around their options positions, which tends to move stocks towards strike prices with heavy open interest at expiration. This phenomenon presents a nice opportunity for directional traders to place high probability trades on stocks moving towards the strike of maximum pain. Traders on binary options platforms have increasingly been using “pin risk” strategies to place positive expected value trades during the last couple hours of expiration.

Here comes the pain: Heading into an expiration Friday I like to head over to our friends at Option Pain to quickly determine potential pin strikes of highly traded, optionable stocks on my watch list. According to the Option Pain website: “In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group.”

As of market close on Thursday, the maximum pain pin strike for Apple (AAPL) is $390, a roughly 3% increase from current levels (see chart below):

Chart of the Week (courtesy of TradeMonster)

In this week’s chart we highlight options with 30-day implied volatility levels trading below 30-day historical realized volatility ranked from the largest difference to the smallest. We use this chart, and ones similar, to help assess the richness/cheapness of implied volatility. Do note we have not altered the chart to filter for names that have known catalysts occurring in the next 30 days.

The Weekly Options Report: Living Life Above The RIMM

November 11, 2011 Philip

Last week in The Weekly Options Report we highlighted 2 strategies to consider heading into the coming week: 1) selling downside puts in Yahoo (YHOO) and 2) long weekly straddles in Cisco (CSCO) heading into earnings. While the YHOO trade was clearly a winner, the CSCO trade, for some, is still up in the air with one trading day remaining. Why do I say “for some”, because most perceptive traders would have exited the trade for a nice profit prior to the earnings announcement. Let me explain:

We initiated the CSCO weekly options straddle (18-strike) trade last Thursday before the close, paying $1.21. According to our analysis the CSCO 18 straddle looked cheap considering the large historical earnings related moves shares of CSCO have experienced in its recent past. A purchase of the at-the-money weekly straddle enabled us to capture daily stock movement and volatility changes (basically for free) heading into the earnings event. Now you may be asking yourself, what about the exponential time decay in weekly options? In the absence of any known catalyst, time decay would absolutely eat away at the value of a long weekly options straddle position. However theta concerns are significantly diminished when a known catalyst such as earnings is scheduled prior to expiration AND the implied volatility inherent in the options at the time of purchase appears to be cheap. Now clearly the latter part of the explanation is subjective, but if you have the tools and analysis to make a case for the relative richness or cheapness of implied volatility (see the Free TradeMonster Volatility Tools) you can find yourself placing long weekly options trades with limited downside. For a more detailed explanation of this highly profitable strategy I suggest picking up a copy of Trading Options At Expiration by Jeff Augen.

I mention this because just prior to Wednesday’s close, the 18-strike weekly options straddle in CSCO could be sold for $1.42, or an approximate 17% return without enduring an unknown earnings related move. I think most smart traders would prefer to lock in a 17% return vs. risking it all for no guarantee.

Weekly Options Catalyst Catcher:

Next week is lining up to be a big one for retail, with Wal-Mart (WMT), Target (TGT), Home Depot (HD) and Lowe’s (LOW) scheduled to report quarterly results. Having a bias for the tech sector though, the name I’ll be following most closely is DELL, which is set to report 3Q results on Wednesday. Shares of DELL have averaged a +/-6.4% move over its last 8 earnings announcements, with a high move of 13% occurring last quarter.

Using Thursday’s closing prices, the at-the-money weekly straddle in DELL could be purchased for $1.08, implying a 7% move over the coming week, which seems fair given the recent earnings related volatility we highlight in the chart below:

DELL Historical Earnings Volatility

Weekly Options Research Corner

A fairly risky trade I’m considering involves one of my favorite tech names to trade Research In Motion (RIMM). Through a series of failed product introductions, increasing competition, and general company mismanagement, shares of RIMM have lost over 70% thus far this year. Finishing Thursday at $17.58, RIMM is currently trading well under book value (~$19) for the first time in over 9 years. With an extensive library of patents some value in excess of $4 billion and a significant subscriber base (70 million), RIMM, in my opinion, is more likely to be acquired than to fall into oblivion in the near future. However all of my MarketClub Indicators suggest further weakness in the name in the near term. Volatility in RIMM remains elevated; 30-day implied volatility in RIMM is currently trading at 30 points over 30-day realized (see last chart), a pretty significant gap even with earnings scheduled for 12/15.

To take advantage of elevated volatility levels and a near-term short leaning bias I suggest purchasing the RIMM Dec 17.5-16 1×2 put spread. Using Thursday’s closing prices the1x2 put spread could be initiated for $0.46 credit, with a maximum profit of $1.96 occurring with shares of RIMM trading at 16 (or ~84% of book value) upon expiration. A graphical representation of the P/L of the 1×2 put spread is highlighted below:

Under this structure I profit as long as RIMM stays above the $14.04 level, a 21% decline from current levels and roughly 74% of book value). Disclaimer: You would have to be comfortable with the idea of becoming a long shareholder of RIMM in the event shares significantly fall upon entering into this trade.

Chart of the Week (courtesy of TradeMonster)

In this week’s chart we highlight options with 30-day implied volatility levels trading above 30-day historical realized volatility ranked from largest to smallest. We use this chart, and ones similar, to help assess the richness/cheapness of implied volatility. Do note we have not filtered the chart for names that have known catalysts occurring in the next 30 days.

The Weekly Options Report: The Case For Serial Put Selling

November 04, 2011 Philip

Vol is Back…or is it? Another eventful week coming to a close, as markets have seemingly been able to shake off Euro Zone concerns and look poised for positive weekly gains. After spending a few solid days below the 30-level, the VIX skyrocketed 16% on Tuesday only to give much of it back by market close on Thursday. Our MarketClub Signals System had a pretty solid week producing 2 winning day trades and 1 break-even. For specific details on how to put the Weekly Options Mastery System to work make sure to sign up for the Free Course by entering your name and email in the box to the right.

This week in The Weekly Options Report we highlight upcoming weekly options catalysts, including a potential opportunity surrounding Cisco (CSCO) earnings; we discuss the pros and cons of implementing a serial put selling strategy on shares of Yahoo (YHOO); and we analyze the risk/return dynamics of trading on the weekend. Enjoy!

Weekly Options Catalyst Catcher:

With earnings season still in full swing, a few heavy hitters are set to report quarterly results during the November ’11 weekly options trading cycle, most notably: Priceline (PCLN), General Motors (GM), Green Mountain Coffee Roasters (GMCR), NVIDIA (NVDA), and Cisco (CSCO). CSCO is the name I’ll be most focused on given its importance to the tech sector and its recent history of volatile swings around earnings. Shares of CSCO have averaged +/-8.6% over its last 8 earnings announcements, with 4 out of its last 5 moves in excess of 10% absolute. That is some extraordinary volatility for such a large, mature company. ….

Using Thursday’s closing prices, the near at-the-money weekly straddle in CSCO could be purchased for roughly $1.21, suggesting a +/-7% move over the coming week, which seems a little low considering its previous weekly and one-day earnings related moves. Is a long weekly straddle in CSCO ahead of earnings in order?

Weekly Options Research Corner:

As previously mentioned, Yahoo (YHOO) is a name we’ve been playing from a weekly options perspective over the last month or so. Rampant speculation that the company is considering a range of strategic alternatives, including a complete sale, has investors positioning for near-term upside in the name. While speculation this time around feels a bit stronger, we have been down this road, off and on, for the last 4-5 years so forgive me if I’m not rushing out to buy way out of-the-money lottery tickets. However, one strategy that I do like, to take advantage of the elevated volatility and increased buy-out prospects is serially selling weekly put options.

By “serial selling” I mean traders should consider selling the nearest downside weekly put option in YHOO, collecting premium along the way. In the event shares of YHOO closed above the weekly put option strike upon expiration, traders would simply bank the entire premium. Should shares of YHOO finish below the weekly put option strike, traders would be required to purchase shares of YHOO at the strike price (minus the premium collected). So if you like YHOO in the long term, feeling the strategic alternatives being considered will likely push shares higher over the next few months and you are comfortable with the downside of being an equity shareholder, then serially selling YHOO weekly put options over multiple weeks/months will in all likelihood provide a nice combination of premium collection while slowly building a long stock position in instances when the puts are assigned.

Weekly Touch Options Trading:

In addition to our focus on traditional weekly options trading we also like to look at the pricing of weekly touch options on some of the leading online binary options trading platforms. Two platforms of note, Banc de Binary and Anyoption, allow customers to place trades/bets on certain names on the weekend, paying a set return if the selected name finishes above (for call buyers) or below (for put buyers) the specified levels on any day over the coming week. For instance, this past weekend Anyoption offered a 180% return on Bank of America (BAC) if shares finished above $7.86 for call buyers or below $6.69 for put buyers on any day this week. BAC closed Tuesday below the magic $6.69 level yielding weekly touch put options buyers a handsome return.

For this type of trading I prefer to buy both the put and call, especially if I believe the name could face some decent volatility over the coming week. Prior to the late August uptick in market volatility Anyoption was offering 200%+ returns for weekly moves as low as 3%, but as to be expected, the weekly ranges have widen substantially to account for current market conditions. However even with ranges in excess of 8%, Bank of America (BAC) weekly touch options have yielded a profit in 3 out of the last 4 weeks. Anyoption provides weekly touch option trading on the weekend on a few select US equities.

Anyoption Weekly Touch Options Trading Platform

Banc de Binary is the other weekly touch options trading platform I like to check every weekend to gauge volatility expectations for the coming week. The offered returns on the Banc de Binary platform far exceed that of Anyoption, averaging in excess of 400%, but these returns require the underlying assets to move a further distance to yield a profit. I’ve found success purchasing both the high and low levels in names like Apple (AAPL) and Google (GOOG) when I knew there were company-specific events scheduled for the following week. Banc de Binary also offers pricing on select indices, currency pairs, and commodities.

Banc de Binary Weekly Touch Options Trading Platform

Weekly Options Midday Update for November 1, 2011 (TLT, MRVL, QCOM)

November 01, 2011 Philip

Markets are in a sharp decline today amidst renewed Euro Zone concerns. The VIX has gained over 20% on the day thus far, currently standing at 36. I know VIX options activity over the last few sessions has suggested investors were anticipating volatility to subside throughout the remained of the year, but I never got quite comfortable with the ‘fear gauge’ hovering below the 30 line.

Initiated 3 new weekly options positions this morning in accordance with MarketClub Signals. Purchased the deep in-the-money 116 strike weekly calls in the TLT ($3.20) and the deep in-the-money 14 strike puts in MRVL ($0.53). In addition, sold the 52.5-55 weekly call spread in QCOM, collecting $0.58 in the process. As of 1:25 pm the MRVL position is up 37% and the TLT and QCOM short vertical are both trading around break-even.

Weekly Options Midday Update

Weekly Options Midday Update & Analysis

October 19, 2011 Philip

Earnings season continues in earnest tonight with quarterly reports from AXP, EBAY, LRCX, RVBD, and WYNN scheduled for after the close. Earnings related options flow continues to dominate trading activity, but a few non-earnings related weekly options trades have piqued my interest heading into expiration Friday. Of note we’ve seen: 4k Oct 12 puts sold in biopharma company Pharmacyclics (PCYC), buyers of Oct 45 and 42.5 strike puts in Agnico Eagle Mines (AEM), and what looks to be front month call buying in Whiting Petroleum (WLL).

For more details check out the midday trading update courtesy of our friends at Marketclub:

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Apple 4Q Earnings Volatility Preview

October 18, 2011 Philip

Apple is scheduled to report 4Q financial results today after the close. The Street is expecting EPS of $7.24 on revenue of $29.5 biliion. This will be the first post-Steve Jobs earnings report so all eyes will be squarely on Tim Cook and how he approaches providing key information to the financial community. Things to pay close attention on the conference call include: gross margin guidance in the face of increasing competition, macbook sales results, further color on iPhone 4S sales, and iPad commentary. In the Steve Jobs era Apple consistently sandbagged forward guidance, will this practice continue under the Tim Cook regime?

Shares of Apple have averaged a lowly +/-3% move over its last 8 earnings releases. Measured over the entire earnings week, shares of AAPL have averaged a +/-6% move. Using yesterday’s closing prices, an Apple weekly options straddle (420) could be purchased for $24.70 (mid), implying a 6% move, in-line with historical weekly moves. A summary of previous Apple earnings volatility is highlighted in the chart below:

Apple Earnings Volatility Chart

Are We Nearing A Top in the S&P 500?

October 16, 2011 Philip

I’m passing along an article from the Options Trading Signals guys responding to this very question. The OTS team has done a remarkable job in calling the market’s recent upward momentum so I’m paying close attention to the key points they make and implementing some of their ideas in my weekly options trading activities. Highlighted below is the beginning of the article, click the link below the text to read the article in its entirety:

The S&P 500 is Getting Close to a Top

The past few months have been very difficult to navigate for retail investors and institutional money managers. The huge week to week price swings and increased volatility have made the current market conditions exceptionally difficult to maneuver. Day traders are about the only group of market participants that outperform during periods such as we have seen since the beginning of August.

Before I jump into the analysis, I would like to point out to readers that the S&P 500 Index (SPX) has rallied from 1,075 on October 4th to 1224.50 on October 14th. The S&P 500 has rallied almost 150 handles or 14% from the lows to Friday’s close in 10 calendar days. As an options trader and a market participant, I trade the market that I see, not the market that I want. With that said, ask yourself this question: Does a healthy financial construct rally 14% in 10 calendar days?

To put the recent price action into perspective, since the beginning of the year 2000 the S&P 500 would have had a poor track record on an annualized basis when compared to the past 10 calendar days’ trough to peak performance. Only in the years 2003, 2006, 2009, & 2010 would an investor have been able to best the previous 10 calendar days’ performance (Performance data courtesy of Wikipedia). The most amazing thing about the recent price action is that the S&P 500 Index is still underwater for the year even after rallying roughly 14%.

At this point two scenarios are likely to play out. One scenario involves a rally on the S&P 500 towards the key 1,250 – 1,270 resistance zone which is outlined on the chart below. The recent price action in the S&P 500 has been volatile and at this point it has gone nearly parabolic. The daily chart of the S&P 500 Index is shown below:

The resistance level shown in the chart above outlines the key 1,250 – 1,270 resistance zone that will be tested if the S&P 500 can breakout above the 1,230 resistance level. However, it is critical for traders to recognize that probabilities are starting to favor the short side. Let me explain.

If the S&P 500 is able to rally into the 1,250 – 1,270 level it would represent a gain of less than 4%. The bears will vigorously defend the S&P 1,250 – 1,270 resistance zone and it is unlikely that price action will be able to take out that resistance zone on the first breakout attempt.

With only 4% upside, the odds of some sort of correction are favorable at this point in time. Whether the correction begins early next week or whether we have to wait until the key resistance zone is tested, sellers will step back into the driver’s seat in the not-so-distant future.

Click Here To Continue Reading

Unusual Options Activity in Southwestern Energy (SWN)

October 14, 2011 Philip

While screening for weekly options to sell today, one name that stuck out like a sore thumb was Southwestern Energy (SWN) as implied volatility in the options expiring next week is up some 13% and the company just announced earnings will be released on October 27, which falls after October expiration. Clearly something is going on in the name, why all the sudden upside call buying (28k vs. 3k average)? M&A rumors of course…The latest is Exxon Mobil (XOM) for SWN with a target price north of $50 (unconfirmed). Looks like over 6k of the Oct 41 calls have been purchased on the day thus far.

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RIMM Historical Earnings Volatility

Chart of the Week (courtesy of TradeMonster)

Weekly Options Catalyst Catcher:

Weekly Options Research Corner

Chart of the Week (courtesy of TradeMonster)

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DELL Historical Earnings Volatility

Weekly Options Research Corner

Chart of the Week (courtesy of TradeMonster)

Weekly Options Catalyst Catcher:

Weekly Options Research Corner:

Weekly Touch Options Trading:

Weekly Options Midday Update

Apple Earnings Volatility Chart

The S&P 500 is Getting Close to a Top

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