On June 25th, 2010, Weekly Options were made available for 4 common stocks: Apple (AAPL), Bank of America (BAC), British Petroleum (BP) and Citigroup (C). On July 16th, Weekly Options were made available on four more stocks: Amazon (AMZN), Ford Motor Co. (F), Google (GOOG) and Microsoft (MSFT). On July 23rd, Weekly Options were available on 5 new stocks: Barrick Gold (ABX), Baidu (BIDU), Goldman Sachs (GS), Potash Corp. of Saskatchewan (POT) and Exxon Mobil (XOM).

Why were Weekly Options made available on 5 new stocks in this cycle rather than 4? It appears that Microsoft (MSFT) no longer has Weekly Options available. After the first set of Weekly Options expired for MSFT, on July 23rd, a new Weekly series was not released. We are unsure if Weekly Options will be available at a later date for MSFT…but we will keep tracking that for you.

If you wanted to know more about Weekly Options, watch our recently archived presentation: Introduction to Weekly Options. Click the ‘Options Strategies Archive’ and then select the Weekly Options presentation. Michael Chupka, PowerOptions Director Of Options Education, reviews the history of Weekly Options, the rights and obligations of Weekly Options and discusses suggested strategies for implementing the Weekly Options using the patented PowerOptions suite of Tools.

You can also view the archived presentation on YouTube here.

For more information on Weekly Options, please visit CBOE.com here.

Quarterly Options Update:
Quarterly Options have been available for some time on broad based ETFs such as the S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQQ) and the DIAMONDS (DIA). In April, 2010, Quarterly Options were recently made available for the SPDR Gold Trust (GLD). Quarterly Options have the same rights and obligations as standard options. The only difference is that the Quarterly Options expire on the last trading day of the quarterly month. The cycles are: March, June, September, December.

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For more information on Quarterly Options, visit the CBOE website here.

Technorati Tags: AAPL, Apple Computer Inc., ABX, Barrick Gold Corp., AMZN, Amazon.com Inc., BAC, BankAmerica Corp., BIDU, Baidu.com Inc., BP, British Petroleum Co., C, Citigroup Inc., DIA, DIAMONDS HOLDRs Trust ETF, F, Ford Motor Co., GOOG, Google Inc., GS, Goldman Sachs Group, MSFT, Microsoft Corp., POT, Potash Corp. of Saskatchewan Inc., QQQQ, PowerShares QQQ Trust ETF, SPY, S&P Depositary Receipts Trust ETF, XOM, Exxon Mobil Corp.

AAPL – Apple Computer, Inc.

BAC – Bank of America Corp.

BP – British Petroleum Co.

C – Citigroup, Inc.

Late last week, on July 16th, Weekly options were made available on four more common stocks:

AMZN – Amazon.com Inc.

F – Ford Motor Co.

GOOG – Google Inc.

MSFT – Microsoft Corp.

Weekly options carry the same rights and obligations as standard calls and puts. The only difference is that the expiration time frame is shorter. Weekly options are typically released on Thursday or Friday and will expire the following Friday.

If you would like to know more about Weekly options, join PowerOptions’ Director of Options Education, Mike Chupka, for a free presentation on Monday, July 26th at 4:30 PM Eastern Time: https://www1.gotomeeting.com/register/738392785

Mike will discuss the specifics of Weekly expiration options, common strategies used by PowerOptions’ subscribers using the Weekly options and of course, how to use the patented PowerOptions’ tools to identify strategies utilizing the Weekly options.

Weekly options, also called short-term options or short dated options, have been available for some time on broad based market indexes: S&P 500 ($SPX), Nasdaq 100 ($NDX) and Russell 2000 ($RUT) for example. Earlier this month weekly options were released for certain ETFs: SPY, QQQQ, DIA and IWM. Today weekly options were released on four popular stocks:

AAPL - Apple Computer, Inc.

BAC - Bank of America Corp.

BP - British Petroleum Co.

C - Citigroup, Inc.

Weekly options carry the same rights and obligations as standard calls and puts. The only difference is that the expiration time frame is shorter. Weekly options are typically released on Friday (in this case Friday, June 25th) and will expire the following Friday (July 2nd). Weekly options can be used in various strategies just like standard options: Covered Calls, Collars, Married Puts, Vertical Spreads, Condors and Butterfly positions. The premiums will be slightly lower compared to the standard expiration options naturally due to the lower time value.

The patented SmartSearchXL tool on PowerOptions can be used to identify potential positions using weekly options in over 23 different strategies. With a few simple clicks you can adjust the filters for expiration time frame (less than 7 days to identify weekly opportunities) while still filtering for your desired return, net credit or net debit, implied volatility ranges and probabilities.

Weekly option data is also available on the PowerOptions Option Chain.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

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PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: weekly options, $NDX, Nasdaq 100 Index, $RUT, Russell 2000 Index, $SPX, S&P 500 Index

British Petroleum’s current annual %dividend is in the neighborhood of 10%. For those investors invested in BP depending on the dividend, this could be traumatic, especially if they don’t want to sell their BP stock because of tax reasons.

What should an investor stuck in this situation do?

Well, one thing they might do is to enter covered call positions for BP. A covered call investment consists selling a call option against a stock. The covered call strategy can be considered similar to renting out a house, except with stock.

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For example, a covered call position for BP for the 2010 July call option with a $31 strike price has a potential return of 8% - and that’s in only 30 days! An investor accustomed to receiving BP’s dividend could potentially make up the difference for the loss of income due to canceled dividends in a couple of months. Another nicety for an investor with existing BP stock entering a covered call position is that is does not require any additional capital!

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A profit/loss graph for three contracts of this covered call position is shown below:

A downside to this strategy is if the price of the BP stock were to increase, then the investor would not participate in the price appreciation of the stock. But, it doesn’t look like the price of BP’s stock is going to rise anytime soon, and if BP’s stock price does increase, then the covered call position can be rolled up in price in order to potentially generate more income and prevent the BP stock from being called away.

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To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

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Investors concerned the price of BP’s stock might continue to decrease might consider entering a collar position instead of a covered call position. A collar position is basically a covered call position combined with some downside protection. The downside protection is provided by a put option. The amount of downside protection can be selected up front. For example, an investor might be comfortable with a loss of 8% for BP. Based on this a collar can be entered for the covered call mentioned above by purchasing a 2010 July put option with a 27.5 strike price. The potential return of the collar is 3.5%, which is less than the 8% return of the covered call, but the position is protected against a drop in BP’s stock price of greater than 8%. The collar with a 3.5% return could still enable an investor to make up for the loss of BP’s dividend, but within three months instead of two months as is the case with the covered call.

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A profit/loss graph for three contracts of this collar position is shown below:

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

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PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

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PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: oil spill, Gulf of Mexico, BP, British Petroleum Co.

Insurance With VIX Options

It is also possible to insure a diversified portfolio of stocks with the Chicago Board Options Exchange Volatility Index ($VIX) call options. The VIX is a weighted blend of prices for a range of options for the S&P 500 index. When the market starts to drop, the VIX moves in a counter direction, so purchasing VIX call options can be used for portfolio insurance. The counter movement of the VIX versus the S&P 500 index ($SPX) is illustrated in the chart shown below:

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As shown in the graph, at each instance of a drop in price for the SPX (see red oval areas), the VIX countered with a spike upward. A purchaser of VIX call options could see a significant increase in the value of the options during a market downtrend, so VIX call options can be used to hedge or insure a portfolio of stocks.

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Option Insurance Analysis

We analyzed insuring a portfolio of stocks over the time period from 2007 to May of 2010 using PowerShares ETF (QQQQ) put options, SPDR S&P500 (SPY) put options and VIX call options. For this analysis, we selected an option with an expiration of one month out for QQQQ, SPY and VIX on the Monday following options expiration and with an option value close to $0.50. In the analysis, we assumed one contract of an option would cost 0.5% of a portfolio for insuring the portfolio. For example, a portfolio of $10,000 would require one contract with an option price of $0.50, which would require $50 to purchase the option (not including brokerage fees and commissions). The results of the analysis are shown in the table below:

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2008

However, in 2008 which was a terrible year for the stock market with the financial crisis and the bankruptcy of Lehman Brothers, the VIX call options performed the best with a +18.0% return versus a +5.1% return for the SPY put options. For a portfolio of $10,000, the SPY put options would have returned $510, but the VIX call options would have returned a much greater profit of $1,800.

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2009

In 2009, the stock market had a banner year and each insurance method, QQQQ, SPY and VIX, resulted in a loss (or cost) of around -6%. So for a portfolio of $10,000 the insurance would have cost $600, which makes sense as we are using 0.5% of the portfolio each month to purchase stock insurance (0.5%*12=6%).

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2010 and the Flash Crash

In the first half of 2010, the stock market experienced the "Flash Crash", where the market sustained a very large loss and recovery in a matter of a just a few minutes. Each of the insurance methods had a positive return, however, the VIX call options had a very nice +5.5% return versus +1.2% and +0.8% for the QQQQ put options and SPY put options, respectively. For a portfolio of stocks worth $10,000, the VIX call options would have returned $550.

2007-2010

The real benefit of using VIX call options for portfolio insurance is exhibited over the years from 2007 to May of 2010 with a total return of +15% versus returns of +1.5% and +6.1% for the QQQQ and SPY put options, respectively. Insuring a portfolio of $10,000 with VIX call options would have returned $1,500.

QQQQ + VIX Call Options

We wanted to show the combined result of insuring a portfolio of stocks using VIX call options, so we selected the QQQQ ETF as a proxy for a portfolio of stocks. We analyzed the result of insuring the QQQQ ETF with VIX call options over the time period of 2007 to May of 2010 with the results shown in the table below:

QQQQ + VIX Call Options Analysis

As shown in the table above, the QQQQ ETF returned +3.8% in 2007, but the VIX call options returned -2.0%, so the resulting return was +1.8%. In 2008 with the financial crises and the bankruptcy of Lehman Brothers, the QQQQ ETF lost -33.4% which was offset by the +18.0% gain of the VIX call options resulting in loss of -15.4%. In 2009, the QQQQ ETF returned +64.0% and the VIX call options had a loss of -6.5% which resulted in a combined profit of +57.5%. And for the partial year of 2010, the QQQQ ETF was down -0.8% and the VIX call options returned +5.5%, which resulted in a profit of +4.7%.

2007 to May 2010

Overall for the 2007 to May 2010 timeframe, the QQQQ ETF returned +2.6% (note: the +2.6% is not the sum of the returns for the prior years, but rather the actual return of purchasing QQQQ in January of 2007 and its value as of May of 2010). The net return for the VIX calls over the 2007 to May 2010 timeframe was +15.0% and the combined return of the QQQQ ETF and the VIX call options was +17.6%.

Overall Analysis

An investor purchasing the QQQQ ETF in January of 2007 would have experienced a measly +2.6% return as of May of 2010, and would have suffered through a terrible loss in 2008 of -33.4%. However, an investor purchasing the QQQQ ETF in January of 2007 and also insuring with VIX call options would have a cumulative return of +17.6% and would have only had to experience a loss of -15.4% in 2008. Insuring the QQQQ ETF with VIX call options from 2007 to May of 2010 not only significantly increased the return, but also softened the nasty market downturn of 2008.

VIX & European Style Options

The options for the VIX are European style options, which means they can only be exercised on the options expiration date and can’t be exercised early as in the case of American style options. The VIX is also a mean reverting index with the average value of the VIX around 19. So if the value of the VIX is greater than 19, then there is a greater chance of it falling than continuing to rise, and vice-versa. The combination of European style options and the mean reversion nature of the VIX results in option prices having values which are counter intuitive for the VIX. For example, on May 7, 2010 the value of the VIX closed at $40.95 and the value of the May call option with a strike of $30 was at a price around $6. For a normal in-the-money call option (not mean reverting like the VIX), the intrinsic value of the call option would be the difference between the underlying and the call option strike price, which in this case would be $10.95 ($40.95-$30). So the price of the May call option with strike of $30 should have been at least $10.95 based on the conventional wisdom for option pricing, much higher than the actual price of $6. The VIX options can still be bought and sold, but the price received may be significantly different from what is normally expected. Incidentally, the price of the VIX settled at 34.53 for May 2010 and the price of the VIX May 30 call option would have received $4.53 after exercise, not too far from the $6 price on May 7, 2010.

Safety Net

Based on our study, we have decided to introduce the PowerOptionsApplied "Safety Net". Each month we will publish a VIX call option trade in order for our customers to insure their portfolios. The Safety Net will be made available for all of PowerOptionsApplied’s TradeFolios^TM for trading and will be especially useful for customers investing in Titanium’s covered call trades. Even customers trading Iron Condors or Double Diagonals should find the Safety Net useful, as it may help offset a loss when the market decides to take a tumble. There’s no additional charge for the Safety Net, as it is included as an add-on for all of PowerOptionsApplied’s TradeFolios. Customers may also find the Safety Net useful for insuring a portfolio of long positions in stocks. In general, customers could use 0.5% of their portfolio every month as insurance. A portfolio of $100,000 could be insured for $500 per month. Unlike auto and home insurance, the VIX call insurance provided by the Safety Net can actually return a profit over the cost of the insurance. The Safety Net is more similar to life insurance, except the person gets to enjoy the benefits of an insurance distribution instead of the beneficiaries.

Autotrade the Safety Net

Any customer of PowerOptionsApplied may opt to have the Safety Net automatically traded in their accounts using autotrade with select brokers. For example, a customer desiring to insure a portfolio of $100,000 using 0.5% of the portfolio per month could opt to enter $500 as the Trade Amount with the trading parameter set to Specific Dollar Amount (calculated as $100,000*0.5%). Every month we will post a new trade to the Safety Net and the broker will purchase VIX call options for the account. For the $100,000 account example using 0.5% per month, the broker would purchase up to $500 of VIX calls each month as portfolio insurance for the account.

For example, customers can sign up for the Safety Net with optionsXpress after logging into their account by selecting "Account", then "Xecute", then selecting the Investment Publisher as PowerOptionsApplied and then selecting the Service as "Safety Net".

Market Volatility

The stock market has been extremely volatile over the last ten years, dot.com bubble, 9/11, housing bubble, financial crisis and the flash crash of 2010, for example. We hope our customers will take advantage of the Safety Net for taking some of the “bumpiness” out of the stock market and maybe sleep better at night.  We are going to add a new trade for the Safety Net on Monday 6/21/2010 and we also plan to add new Safety Net trades on every Monday following option expiration.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: $SPX, S&P 500 Index, $VIX, CBOE S&P 500 Volatility Index, QQQQ, PowerShares QQQ Trust ETF, SPY, S&P Depositary Receipts Trust ETF

The market event that occurred on May 6, 2010 is now known as the “Flash Crash”. “Flash Crash” accurately describes the situation, as the market crashed for just a flash, as seen below:

Over before you know it…

For those not watching the market closely and not having stop orders, the “Flash Crash” happened and everything was pretty much just as before. But for investors watching the market tank and selling in a panic or for those investors with stop orders set, the “Flash Crash” was most likely a disaster.

Optium, Chromium and Meridian…

The Iron Condor trades posted for Optium, Chromium and Meridian are configured with contingent orders for the short options. Contingent orders allow trades to execute automatically when a certain point is reached. Following execution of a contingent order, we follow-up with trades for closing the offending long put or call option. If there is a large amount of value in the offending long option, then we usually close it immediately, like we did yesterday. If there is little value in the long option, then we may leave it open in order to prevent further losses and also potentially generate a profit. During the “Flash Crash”, a stop-loss for one of Optium’s trades was executed by managing the long put option in this manner and was profitable. Orders were transmitted to close the long puts in a similar manner for the other positions as was executed for the Optium trade, but the market recovered too quickly resulting in losses for the positions.

Contingent orders…

Previously, we offered four options for contingent orders for exiting an Iron Condor when experiencing a stop-loss:

Close “offending short option with contingent order:

• and if not much value in long option, leave long option open for an extended period of time.
• and if significant value in long option, close long option immediately.
• and if moderate value in long option, close a portion of the long option and leave a portion of the long option open.
• and if not sufficient funds to close short option, close everything.

This stop-loss contingent order strategy has worked fairly well over the previous five years. This strategy allows an investor the possibility of recovering from a loss and potentially making out like a bandit. The strategy also allows an investor to hedge other positions against further losses. However, this strategy is a disaster when experiencing a market condition like the “Flash Crash”, as the short option is closed by the contingent order, and then further losses are experienced for the open long option when the market suddenly recovers.

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New contingent order potential strategies…

Based on the experience of the “Flash Crash”, we’re proposing three different strategies for protecting against another “Flash Crash”. Unfortunately, there’s a good chance two of the three are not supported by your broker. The three contingent order possibilities are:

• Four-legged contingent order (may not be supported by broker)
• “Other-trigger-other” spread contingent order (may not be supported by broker)
• Four contingent spread orders

Four contingent spread orders…

Since brokers may not support the first two options, we’ll focus on the third option, four contingent spread orders, which is supported by some brokers. For the four contingent spread order option the following contingent orders are entered:

• Two contingent orders to close non-offending spreads
• Two contingent order so close offending spreads

A profit/loss graph for an Iron Condor illustrating the four contingent orders is shown below:

For example, consider an iron condor with a put spread of 385/395 and a bear-call spread of 500/510. For the new contingent order strategy, a contingent order for closing the bull-put spread could be set for a 1% margin at 399. Additionally, a contingent order for closing the bear-call spread could be set for a 1% margin at 495. Then two contingent orders for closing the non-offending spreads could be set inside of the first two contingent orders. For example, a contingent spread order to close the bear-call spreads could be set at 404, just inside of the contingent order to close the bull-put spreads. Additionally, a contingent spread order to close the bull-put spreads could be set at 490, just inside of the contingent spread order to close the bear-call spreads. The resulting profit/loss graph would look like this:

Falling market…

For a falling market, the contingent order for closing the bear-call spread would be executed at 404. Since the bear-call portion of the Iron Condor position should be profitable, there shouldn’t be any issues with closing the bear-call spread. With a continued market fall, the contingent order for the bull-put spread would then be executed at 399.

Rising market…

For a rising market, the contingent order for closing the bull-put spread wold be executed at 490. Since the bull-put portion of the Iron Condor position should be profitable, there shouldn’t be any issues with closing the bull-put spread. With a continued market rise, the contingent order for the bear-call spread would then be executed at 495.

Trade-offs…

Implementing this new contingent order strategy has some positive and negative trade-offs. On a positive note, an Iron Condor position can be more cleanly exited with the occurrence of a “Flash Crash” as was experienced on May 6, 2010. Additionally the amount of reserve capital required for closing a position is none or minimal. On a negative note, recovering from a loss after experiencing a stop-loss has now been taken away, as the long option is not left open after a stop-loss condition. And on a further negative note, hedging other positions against further stop-losses not possible with this contingent order strategy.

Positives outweigh negatives…

The positives for the new contingent order strategy outweigh the negatives, especially when considering the potential for “Flash Crashes” occurring. With this new contingent order strategy, we may be attempting to shore up our defenses for the 20 year flood, but the market has been extremely volatile over the last ten years, so the next “Flash Crash” could be just around the corner.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: Flash Crash, bear-call spread, bull-put spread

A key to successful investing is knowing when to get out of a position. For example, the PowerOptionsApplied Titanium TradeFolio(tm) was invested in a covered calls position for Transocean Offshore (RIG). On April 20, 2010 RIG’s Deepwater Horizon drilling rig caught fire and subsequently sank leaving in its wake a huge and growing oil slick in the waters of the Gulf of Mexico. The Deepwater Horizon was being operated by British Petroleum (BP).

The initial impact to RIG as a result of the sinking drilling rig did not appear to be very traumatic, as the rig was insured and British Petroleum appeared to be set up to take the brunt of the blame. However, the oil spill continued to be a focal point of the news media, so even RIG’s stock price was taken to the woodshed.

At the time of the incident, the Titanium covered call position for RIG was significantly in-the-money, so a small drop in price would not affect the overall profitability of the position. However, as the enormity of the oil slick situation began to unfold, the price of RIG began to sink, so-to-speak, and we exited the covered call position for RIG on April 30, for a loss of approximately 8%. An outright long position in RIG over the same time frame would have resulted in a loss of about 14%, which demonstrates the power of investing with covered calls. Instead of realizing a loss of 14% we realized a loss of 8%. And it most likely won’t take too long to recover the 8% loss with investments in other covered call positions.

The price of RIG continues to fall and may continue falling as long as the oil slick situation continues to be front-page news. So for now, we will avoid long investment in RIG.

When to fold’em…

It can be difficult to know when to fold a position and move on. A company reporting a slightly reduced forecast is probably not a situation for making an exit. However, a company involved in a major disaster which is making front page news for several days in a row is definitely a situation where making an exit may be prudent.

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What’s next…

Ultimately this disaster will be resolved and the price of RIG will most likely recover. Investors who are able to accurately time their entry point for RIG could be rewarded handsomely. The capital recovered from the RIG covered call position will be invested in other positions, hopefully recovering the loss sustained for the RIG investment.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: drilling rig, oil slick, Gulf of Mexico, Deepwater Horizon, BP, British Petroleum Co., RIG, Transocean Offshore Inc.

American vs. European

The underlying for options for $OEX and $XEO are based on the same index, the S&P 100. However, options for the $OEX are American style and options for the $XEO are European style. American style options may be exercised early and European style options may not be exercised early.

$OEX vs. $XEO

For the Iron Condor positions we trade for the PowerOptionsApplied Optium and Chromium newsletters, we select positions which are initially significantly out-of-the-money and avoid allowing positions to go in-the-money. In this case, the $OEX or $XEO options may be used in a similar manner, as the likely-hood of an out-of-the-money option being exercised early is remote.

However, the option prices for $OEX and $XEO will often differ. Additionally, the liquidity for the $OEX is much higher than for the $XEO. Typically, there is significantly more open interest and volume for the $OEX options than for the $XEO options.

Example

For example, consider an Iron Condor that was successfully traded for the PowerOptionsApplied Optium newsletter and was initially entered on 11/30/2009. The options entered for this position were the DEC 455/465 put options and the DEC 545/555 call options. We were able to receive a net credit of $0.60 for this position which represented a return of 6.4%. The net credit of $0.60 was received for the midpoint between the bid/ask for all of the options. For the $XEO options on the same day, it appears it would have only been possible to receive a net credit of $0.40, which represents a potential return of 4.2% which is significantly less than the 6.4% return experienced for the $OEX position.

When It Matters

For certain strategies the difference between $OEX and $XEO with respect to American versus European style should be considered. For example, traders of Butterfly spreads which have two short options at-the-money should probably only enter positions for the $XEO index, as the short options may not be exercised for the European style $XEO index. With a Butterfly spread there is a high probability that one of the short options will move in-the-money which could result in the option being exercised and forcing a trader to compensate for the early exercise.

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Conclusion

Investors trading out-of-the-money short options, Iron Condor for example, for the S&P 100 can trade either $OEX or $XEO, however in most cases the potential returns possible will be greater for the $OEX than for the $XEO. However, traders seeking to trade short S&P 100 index options which are at-the-money or in-the-money should consider trading $XEO as opposed to $OEX in order to prevent an early exercise from occurring.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: OEX, XEO, European style, American style, out-of-the-money, at-the-money, Butterfly spread, $OEX, S&P 100 Index, $XEO, S&P 100 Index - Euro. Style

Using the PowerOptions screening tool, we developed a set of screening parameters to find these potential opportunities. When these parameters were applied to our historical database, we were able to discover the opportunities as outlined in the article. However, these selections were not isolated, as there were other stocks that also met the screening criteria. Some of these stock selections were also very successful. In our screening efforts there were also some selections that were unsuccessful, similar to those mentioned in the Whitfield article. Whitfield did not specifically mention an exit strategy or a stop loss strategy. IBD often supports the idea of exiting if a stock drops in price by 8% from the initial purchase price of an investment. This is one way to limit losses and another way that we favor is to exit if the stock price falls below the 25 or 50 day moving average of the stock price.

The screening parameters used in our analysis were for the purchase of long calls using some of the key parameters mentioned in the Whitfield article:

% Stock Price > 10% (large price change in one day)

% Stock Volume > 200% (price change supported by large volume)

% Option Volume > 200% (option volume also increased)

Stock price > 20 Day Moving Average (stock in an uptrend)

% Earnings per share growth > 10%

Calls with expirations between 60 and 245 days out in time

Delta between .4 and .8 (calls at or slightly in the money)

Implied Volatility > .3

This screen found the stocks mentioned in the article and resulted in some very nice back testing gains of 40%+ as outlined by Whitfield. In our analysis PowerOptions proved to be a very powerful tool for finding the kinds of opportunities as outlined by Whitfield.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

Free stock option newsletter » return goal > 2% / month » works in any market

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: IBD, Paul Whitfield, Option Volume, Delta, Implied Volatility

The Double Diagonal is a neutral stock options strategy. The Double Diagonal strategy is similar to an Iron Condor and can be considered a combination of a Calendar Call spread and a Calendar Put spread.

The Calendar Put spread portion of the Double Diagonal is entered by selling an out-of-the-money put option and purchasing a further out-of-the-money put option having an option expiration further out in time.

The Calendar Call spread portion of the Double Diagonal is entered by selling an out-of-the-money call option and purchasing a further out-of-the-money call option having an expiration further out in time.

Another way to look at a Double Diagonal is an Iron Condor which has been “diagonalized”.

Advantages of a Double Diagonal over an Iron Condor:

• Potentially lower brokerage fees and commissions
• Increase in volatility increases attractiveness of position
• Increased profit potential at short put option and call option strike
• Less risk/smaller potential losses with wider breakeven range

Similar NDX Iron Condor and Double Diagonal positions will be analyzed in order to illustrate the differences between the two strategies.

The NDX Iron Condor position selected to be analyzed is shown below:

Buy 10 contracts of $NDX 2010 MAR 1,600.00 PUT @ $4.20 $4,200.00

Sell 10 contracts of $NDX 2010 MAR 1,625.00 PUT @ $4.90 ($4,900.00)

Sell 10 contracts of $NDX 2010 MAR 1,950.00 CALL @ $1.45 ($1,450.00)

Buy 10 contracts of $NDX 2010 MAR 1,975.00 CALL @ $1.00 $1,000.00

The NDX Double Diagonal position selected to be analyzed is shown below:

Buy 1 contract of $NDX 2010 APR 1,475.00 PUT @ $4.10 $410.00

Sell 1 contract of $NDX 2010 MAR 1,625.00 PUT @ $4.90 ($490.00)

Sell 1 contract of $NDX 2010 MAR 1,950.00 CALL @ $1.45 ($145.00)

Buy 1 contract of $NDX 2010 APR 2,050.00 CALL @ $0.70 $70.00

The short put options and short call options are identical for the two positions with the long options having different months of expiration. The long options for the Iron Condor position have a month of expiration of March and the month of option expiration for the Double Diagonal long options are in April.

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Brokerage Fees & Commissions

For this example, the Iron Condor position was entered with 10 contracts, whereas a similar Double Diagonal position was entered with only 1 contract. An investor may be able to realize reduced brokerage fees and commissions when investing with the Double Diagonal over the Iron Condor.

Volatility

The long options for the Double Diagonal being further out in time than for the Iron Condor presents a nice advantage for the Double Diagonal over the Iron Condor with respect to an increase in volatility. An increase in volatility will have a larger impact on the long options for the Double Diagonal than for the long options for the Iron Condor. An increase in volatility will cause the value of the long options for the Double Diagonal to increase more than the respective long options for the Iron Condor resulting in increased profitability for the Double Diagonal. Additionally, the increased sensitivity of the Double Diagonal to volatility spikes results in smaller losses for the Double Diagonal when exiting a position due to a stop-loss.

Capital Requirement and Special Margin

The capital requirement for both positions is about $24,000 with potential returns in the 4.5% to 4.8% range. The Iron Condor position can take advantage of special margin since the difference between the put spread and call spread is the same (25) and the month of expiration for all of the options is the same (March). Since the Iron Condor can only suffer a loss for either the put spread or the call spread, some brokers allow for special margin for Iron Condors if the months of expiration for all the options the same and the put and call spread differentials are identical. Conversely, the Double Diagonal position does not qualify for special margin since the month of option expiration for all options is not the same. For the Double Diagonal, the month of expiration for the short options is March and the month of expiration for the long options is April.

The profit and loss charts for a similar NDX Iron Condor and NDX Double Diagonal position for expiration in March of 2010 are shown below:

Breakeven - Iron Condor vs. Double Diagonal

The lower break-even price of $1,612 for the Double Diagonal is smaller and more advantageous than the larger break-even price of $1,624 for the Iron Condor. Similarly, the upper break-even price of $1,957 for the Double Diagonal is higher and more advantageous than the break-even price of $1,951 for the Iron Condor.

Loss of Capital

Since the Iron Condor position takes advantage of special margin, the position can realize a total loss of capital if the price of NDX closes below the short put strike of 1,600 or above the long call strike of 1,975 at option expiration. In contrast, the Double Diagonal does not qualify for special margin and the largest loss the Double Diagonal can suffer is about 50% which occurs if the price of NDX closes below $1,475 or above $2,050 at option expiration.

The break-even prices for the Double Diagonal are more advantageous than for the Iron Condor, but the difference is really pretty small, less than 1%. However, the differences for the prices of maximum capital loss are significantly better for the Double Diagonal than the Iron Condor, on the order of 4% to 8%.

Advantages Summarized

To summarize, the Double Diagonal position has a similar return as the Iron Condor with less risk. At this point, the Double Diagonal appears to a better strategy than the Iron Condor, however, the Double Diagonal does have some disadvantages when compared to the Iron Condor.

Disadvantages of a Double Diagonal compared to an Iron Condor:

• Special margin not available
• Decreased profit potential near midway point between option short strikes
• Return calculation is not straightforward
• May require significant capital for implementing with indexes

Double Diagonal - No Special Margin

As discussed earlier, the Double Diagonal cannot take advantage of special margin as in the case of the Iron Condor. The Iron Condor can basically generate twice the return of the Double Diagonal for a given amount of capital invested.

Iron Condor Profitability Region

As can be observed from the profit/loss charts, the Iron Condor has a very uniform profitability region between the short option strike prices with a very sudden drop off in profitability (or loss) with underlying prices lower than the short put strike price or higher than the short call strike price.

Double Diagonal Profitability Region

In contract, the Double Diagonal experiences the most profit when the price of the underlying is near one of the short option strike prices at expiration. Additionally, and in contrast to the Iron Condor, the profitability of the Double Diagonal is not uniform between the short option strike prices and dips or drops near the midway point between the short options.

Straightforward Potential Return Calculation

For the Iron Condor, the potential return calculation assumes all of the Iron Condor options will expire worthless, so the calculation is very straightforward. However, since the short options for the Double Diagonal have a shorter timeframe for expiration, the potential return calculation is more complicated, as the price of the long options have to be calculated or estimated in some manner. This calculation is generally performed using the Black-Scholes option pricing model which is somewhat complicated and will not be discussed in this article.

Capital Requirement and Tax Advantages

For the example NDX positions selected, the minimum amount (one contract) that could be invested with the Double Diagonal was about $25,000, whereas the Iron Condor could be entered with a capital requirement (one contract) of about $2,500. Alternatively, a similar Double Diagonal position with a smaller capital requirement could have been entered for the QQQQ ETF. However, a Double Diagonal for an ETF would not be subject to some of the tax advantages available for a Double Diagonal position with an index as the underlying. More information is available for the tax advantages of Broad-based Index Options at this website: Tax Advantage.

Summary

The Double Diagonal strategy is a very powerful and flexible stock options strategy. The strategy is a neutral strategy with the potential to work in low volatile markets while providing an attractive risk/reward profile.

To learn more about the Double Diagonal stock options strategy check out this link: Double Diagonal.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: Double Diagonal, Iron Condor, Calendar Put, option expiration, Calendar Call, spread, out-of-the-money, brokerage fees, volatility, strike, NDX, expiration, strike price