Forbes Article

I wrote an article for Forbes 3 weeks ago and went to check it out on their site today, and it wasn't there. Aside from feeling neglected, I think there might be some good facts in the article, so I am going to post it here first. The trade example will prove just how old it is, but still might be helpful for some.

Weigh Your Options
Jeff Kohler, Investools.com

Before purchasing a new car from a car dealership, you need to determine if the car is over- or underpriced. Luckily, there are several resources to help consumers find the fair market values of the automobiles they want to purchase. If customers know what the fair prices are, they can avoid paying unreasonable prices.

Imagine walking into the options market under the same circumstances. You have a great stock in mind, and are looking to use options to profit from this idea. You narrow it down to the make and model you want (month of expiration and strike price); however, now you must examine the option premium to determine whether it is over- or undervalued.

When trading options, there are a couple methods you can use to determine whether options are over- or underpriced. The first method you’ll want to use is the Volatility Index (VIX), see Figure 1.
Figure 1 – Volatility Index (VIX)

The VIX is commonly referred to as the fear gauge of the market. It measures implied volatility (fear) of S&P 500 Index options. Subsequently, options are priced by this fear. If the VIX is relatively high, options will be expensive. If the VIX is relatively low, options will be cheaper.


Figure 2— One-year chart of the VIX

Figure 2 is a one-year chart of the VIX, to help illustrate where the VIX should be considered high and where it should be considered low. Notice how the VIX is currently on the high side of its recent price trend, which means that options are generally priced higher. Use this measurement to help determine your trading strategy. If you can see that options are expensive, consider strategies where you are on the receiving end of these premiums. Alternatively, if options are cheap, consider strategies where you are the purchaser of these premiums.

After you have determined how the marketplace has contributed to the overall pricing of options, you will need to determine how options are priced on the stock you are looking to trade. For an example, let’s look at Bear Stearns (BSC) in Figure 3.

Figure 3 – Bear Stearns (BSC)

The banking and broker/dealer indexes are heading lower and Bear Stearns is breaking through a major level of support. The company attracted some negative press regarding a few of its hedge funds, and the stock price is generating some good signals indicating that it is likely to continue moving downward.

The next task is analyzing the BSC’s options. In general options are expensive, but you should check the options you are trading to see whether they are high or low priced. Figure 3 Includes a graph of the average implied volatility of Bear Stearns options. For a larger sample, see Figure 4.
Figure 4 – Bear Stearns Option Pricing

Figure 4 displays how options are priced on Bear Stearns, and as you can see, the fear gauge is higher than normal. Because the options are relatively high priced, you wouldn’t participate in a buying strategy, but instead, you would focus on selling strategies.

A common strategy employed to take advantage of high-priced options, while limiting your risk, is a bear call spread. This strategy is accomplished by buying and selling call options with the same expiration month but different strike prices.

The July 145 call is currently bid for $2.90, while the July 150 call is asking $1.55. To execute this strategy you would sell the 145 and collect $2.90, and buy the 150 call for $1.55. This would leave $1.35 in your account (2.90 – 1.55 = 1.35).

Before you start looking for places to spend this money, understand that you are unable to use this premium until the trade is closed. If the stock closes below $145 at expiration, both options expire worthless and the premium is yours to keep. If the stock closes above $145, you’ll need to calculate your maximum risk. To determine what your maximum risk is in this trade, you will take the difference between the strike prices (150 – 145 = 5) and subtract the premium received ($1.35). This means that your trade has a maximum loss of $3.65 (5 – 1.35 = 3.65).

It is essential to find the right stock to create a higher probability of a successful trade. For the bear call spread, look for a downward trending stock, like Bear Stearns. With all the negative press on the company, this trade has an even higher likelihood of profit.

Options pricing can weigh heavily on finding the most appropriate strategy to participate in. Remember to glance at the fear gauges of the market and your stock before choosing an option strategy. It could make all the difference between profits or losses in the options market.

Recommendation: I will try to tone it down a notch today.

Long: Volatility

Short: Theta

Excellent article! Forbes doesn't realize what they're depriving their readers of!!! Thanks Jeff!

Raimo,

COH you're looking at the bounce down to at least $46? By the way...still here although in and out today...and no I wasn't the Phantom Poet either...someone else can claim that...or not!

Lori,

Thank you for the comment regarding subscribing to comments. I am using Internet Explorer, but only version 6.0. Do I need to upgrade? Any things else?

Eric.

Eric,

If Tim is around or maybe he has an e-mail listed in his profile, he's the go-to guy on this, although other's may also know.

Chip,

that is correct. Be nice if it breaks through too.

The phantom poet was gret too!! LOL...

In case anybody missed it on the bottom of the last thread. I am not taking credit for this though. JOYG is breaking out. It was from Brett's list last week. I am just following up on it.

Jamie

Hi Jeff,

I think that article you wrote for Forbes is really helpful. Where on the Forbes site would they typically post that article? I just looked in the Equities section and couldn't find any educational articles like the one you wrote.
Do they usually have similar articles on their site somewhere?

Thanks

Jeff,
I'm printing out the article and will read it later while waiting for client.

Meanwhile, I posted on the last thread (before I knew it was 'clean cups' time) in answer to Jamie, my OTM CAT is now firmly ITM and up about 90% since I bought it Monday morning.

Doji Girl,
That's why I bailed on BSC a day or so ago when it hit 145. I had a tight stop and July options, and it seems to make a move and then take it away from you. If I had had longer options, I would have waited, but it is a mover.

Jeff, thanks for the post.

Brett,
I didn't take the ICE trade, although it looked excellent, because I am playing BEN and CME (too highly correlated) and trying to stay diversified. I did take the CMI trade early this morning. Not a perfect entry, but it may be the only chance to get in if the market takes off (small stock position.) Thanks for all the great plays.

Michelle

Anyone watching ICE..looks like breaking out of C&H today..comments?

CandleTrader

AMY,

On the Investools, searches page under Strategy Searches/Momentum there is a slick search called "Uptreding stocks with good momentum" (aptly named) that returned a couple additions to my fast mover list.

FTO, HTE, HOC, SII

A bunch others on that search are worth watching. SII is real near a bounce opportunity.

MikeH

Dear Phantom Poet,

You rock! My sides hurt.

MikeH

Doji Girl,

Amber just explained to me what the "clean cups" reference is all about.

Hilarious.

Jeff

Hi all,
Thanks Jeff for a great article.
Re: the prior discussion on CME. What I see is an inverted H & S starting in March with a neckline at 559. T=620 in 4 mo. Today looks like a successful retest of the neckline. Another view could call it a C&H 3 mo. pattern/same target. I'm not in it, gets a bit rich for my blood; also it's so news driven lately. But, in line with Jeff's article maybe I will look at either a bull call spread or a bull put spread and see what that looks like.
And a big thanks to all you 'regular' bloggers for your great trade watches & discussion. And not to forget the great humorists we have on board here!!!!
Loretta

Jeff, or Amber or DG,

Anyone care to enlighten me on the clean cups?
I would appreciate it

I am trying hard not to understand this market.

There are so many stocks breaking out of their channels and they just keep going up. I dont get why people are so bullish. Look at the charts, doesnt anything look too hot to you?

The sell off from yesterday was enough?

Does anyone understand this thing?

Marsha

Marsha,
I am not sure what you are asking.
The sell-off, who knows. The market does what it does. As far as why everybody is bullish, look at the DOW and other major indices and it will show you were are in a bull market regardless of the pull-back days. Hope that answers your questions some.

Ladd,
"Clean cups, everybody move down..." Not sure if I quoted that right. I believe it's from Alice in Wonderland. Doji Girl might be able to give more detail.

Michelle

ASFI is rolling down again from diagonal resistance. Low risk entry.

Marsha,

Are you trading the market, or stocks?

SLM, ugly....

Ladd,

Michelle is correct. In "Alice In WOnderland", Alice, Mad Hatter, et al are having a tea party where every few minutes the Dormouse (or someone) calls out "Clean cups! Clean Cups! Everyone move down to clean cups", whereupon everyone slides down the table to a new seat. In my twisted mind, every time Jeff posts a new thread we all slide over to our 'clean cups'.

Mike,

Thanks for the list and search. Now, I just need to be patient and wait for the retest of some the movers I missed.

You mentioned ASFI...it doesn't fit the equation. Do you trade outside of the fast movers?

Awesome post! I am still trying to understand volatility and this post really provided great insight/direction. I went back to some of my trades and understand now what I should have/could have done. Thanks.

Ana

DG, comedy
thanks

ORCL bouncing today with no earnings coming up. AMG ready to bounce too, and no earnings either.
Peter V

DECK really hitting the DECK today. I don't know if they're just trolling for stops, or if something really bad is happening. Anyone have any clues here?

Now that BSC has started to behave, maybe Forbes will go ahead and post Jeff's article.

Brett:
No clues on DECK, But it is strange that this stock weathered the down day yesterday so well only to drop today.

G'day all,
I had to leave early this morning on a family mission and the account was up nicely. Just got back and all yesterdays winners are down dramatically today. DECK, ZOLT, and DO are killing me, while AMX, GRMN (again), PCU (again), and DRYS are cusioning the blow. What a wild day!

Trying to catch up on the blogging and poetry... some really good stuff. Just heard from Liz and Grant and they won't be able to meet in Edmonton. Family issues have conspired against us meeting. Rats.

Feel like I'm missing out on some great trades today. Half my profits in DECK have evaporated today, but it's hardly a blip on it's chart. Don't want to let much more slip away, but I don't want to hang on to a shooting star, either. And I just put it in my 401k yesterday to take the place of MLM.

Huh.

Chris

GOOG

For the past three or so days GOOG resting...getting ready, taking it easy. Soon, very soon....lets see if 542 ish holds.....

Brett,

Pardon my ignorance, but what is “trolling for stops”?

John Logan, market-makers pushing a stock lower to pick up a few cheap shares. They see where stop orders are placed below the market and on a slow day kind of move it down there to trigger a few, then move the price back up.


Jamie

There is a rumor on Deck that they might warn on profits, also that the teva sandal will not do as well

I saw this on the message board of Yahoo.

I can see the sandals not doing that well, as Crox may be taking market share.

Who knows just follow the price action

What say you on AMX low risk entry right now?

John,

Typically, they do some short selling as well and then buy back at the lower price near the end of the day and scalp the difference. If they trigger enough stop orders, they get a big move. Like DECK and maybe MLM yesterday.

Joel R.

Bastardos!!!!!

Bob,
I am looking at the market and lots of stocks trying to find something to buy. Am I looking too macro and not at enough individual stocks?

Marsha

Oh, Thanks! I was overcome with emotion...

Anyone riding EXM?

Also, Jeff's baby CYMI FINALLY confirmed today.

David$
I've been following AMX too. Looks like a good support bounce (S=$62.70)so, therefore a low risk entry point to me.
Loretta

Brett, David$, Joel and of course John Logan!

That sounds possible with DECK, it seems to be holding on its diag trendline 'area'...dang thang is bouncing around like a 5 year old on soda pop and chocolate!

This might be a good time to add or enter, I'm full up or would consider adding again...let's see how the day plays out.

AMG right above diag trend, may be at an add or enter point, keep watch on this.

POT is in a little asc triangle and likely will pop soon...not today...anticipatory if you go today...

Has anyone ever had this happen? I bought some puts on REG a few days ago.. the Oct $75 babies, to be exact. Moving along nicely and then today there's no bid on them. None. Zero. Nada. As John Logan would say... "are those bastardos dicking with my option?" Normally it seems to have decent volume. It seems highly irregular that there's not a single sucker... er "client" out there who wants one. The ask price is up a buck and this would really help alleviate some of the sh&%@ kicking I've taken on DECK today.

Chris.

Is anyone else enjoying the ride on PCU? I've got Sept calls and so far we're up almost 300%. Not that I'm counting... but this is a stock that would bear putting into a 401k, too.

Chris,
I just bought some REG and noticed the N/A on the option you are talking about. I think this would be a good question to throw at Jeff. I didn't know what that meant either.

Michelle

Marsha,

I pay attention to the markets in general, but I trade the chart of the stock I am in. I care more about the chart of my stock than I do the chart of the markets in general. If you buy at or close to your exit, it helps to remove emotion and trade more relaxed. At least it does for me. Hope this helps.....

Chip,

I have AMG at a potential horiz support line at $130ish, and retesting the breakout (would have liked to have seen more volume) if you will on 7/2. It may still pullback to $129ish, you can wait and see, or use that as an exit...

Yes it does! Thank you Bob!
Marsha

There's not a DRYS eye in the house!

C&C,

I've been riding PCU and FCX and loving it. Also DRYS, wow!

I notice DECK had a big down day just prior to their previous earnings anouncement. Then a big spike after earnings. Could the pattern be repeating?

Joel R.

PH

is this a break out of a sym. triangle?

is anyone else wathcing this one?

Bob Raimo,
Hope you got you some CME. Look at the move today.

Michelle

denise,

PH, close, but not yet, at least not for me. I need more volume and a difinitive price move above the upper trendline, which I just don't quite have...

No Michelle I did not...I got in Bretts Rec of ICE....

anyone still in AHM, glad I held onto this one.

GWW around support been sitting in this area, earnings in a few days though.


gh
long island, ny

Raimo,

AMG, agreed, I too have ~$130 as horizontal support. Looks like it's holding, at least for the day.

DECK, it's broken diag support...at least the way I have it drawn, otherwise, looking ~$97...ugly, ugly, ugly...

And thank you Brett...that ICE candle is happy to see you!!

I like that buyers bought into GOOG at the end of the day...

I have been watching

AMG close to a bounce

AMX ready to bounce, I have traded this a few times and given that the TTH is also at support, this looks like a good entry

Glenn

Bob Raimo,

Thanks for your input. I wanted to make sure I'm not waiting too long like usual and miss out. I tend to over analize and then miss everything. (I don't have definate rules yet but I'm working on it!)

I know some things bounce off of decks, but how high do DECKs bounce?

John,

I don't know, I just hope the Bulls come back on DECK tomorrow...cuz, I held...and I'm waving a red flag for them!

Well, I may be confused about the market but I sold all my DECK yesterday! $$$ Now I dont feel so bad. Just looking for a possible re-entry.

Marsha

Yes Bob, ICE got a little 'excited' today. However, DECK is laying on its stomach. I was sad to exit today after a fabulous run. This is why you NEVER count your profits before you take them. Though it was a series of very profitable entries, a big chunk of profits was given up today.

And Chris,

I have the same options on REG. No bid and no implied volatility. It must be an error of some type. There's at least $4-5 worth of bid missing.

I too gave up DECK today after several weeks with it ... it went below my line at 12:30P central. I pulled out with profits but nothing like yesterdays highs - but that's OK - greedy isn't a good thing. There are other good ones out there and DECK is still on the radar for the right turn-around.

Been working on my balance of calls/puts .. That 500 point 'channel' the DOW is in is worthy of watching I think. It's been revealing as far as I can see. I sure want to be ready in this summer trading volume if it decides to pop below that magic 13,250 or above 13,750.

Good evening everyone!

Chris.... on REG. Just throw a $2 bid out there. Market maker may be looking at some other things because the volume is low. You throw bid out there that has intrinsic value in it and he'll wake up. I am in Oct 75's also.

PH is on my radar but I don't have it breaking out just yet.

NAT is consolidating. After the monster day FRO, DRYS, GNK had this shipper may be next.

Jamie

Michelle,
Marketmaker must have other fish to fry on REG. There is very little open interest in any of the Oct. puts so I guess the no bid is an error.

Chris,
Thanks for DRYS. I bought into it a while ago after one of your blog comments.

Jerry

I noticed the REG comments .. and this one has big-time confused me.

I got in last Friday .. there was no open interest and the spread was ridiculous. I took a shot at offering $.10 above BID which was about 1.50 UNDER ASK ... and got it! No one was more shocked than me. Thanks to that and the downward momentum of the stock .. I'm up over 50% today ... Go figure!

It may not happen again but it sure reminded me to NEVER offer BID... always lean toward ASK .. sometimes it works, sometimes it doesn't. I figure I have nothing to lose by trying.

Hope this is helpful.

I think that the reason there is an issue with the bid/ask abd the spread is that people from this blog are the only traders of REG options. Anyone notice the lack of open interest before taking a trade?

There were only 23 total contracts... TOTAL contracts calls/puts including all expiration months that were traded today.

Which one or two of you was it?

Well .. there you go!

The Kohler Option Addict Blog is moving the market!

Brett,

I'm also in EXM (stock) since $24. Loving it.

Thanks for the heads up on CYMI! Been waiting for another crack at that one. Hope to snag it tomorrow if I'm not too late by the time I get to a computer (early meeting that will last at least 3 hours....feh.)

REG - The other day when I wanted to trade it I noticed there was almost no open interest and a crazy several dollar bid/ask so I passed.

Jeff,
You are too funny. I only bought one contract today. Maybe I manipulated the market (laughter.)
I did what the other person up there did. I was not about to pay the difference between bid and ask, so I put in the price I wanted and got it. I was surprised it filled at all and surprised it filled so quickly. Okay. Now who wants to buy these things back at a higher price?

Michelle

Oh, and Jeff, you didn't stop the traffic on the blog. It is usually slow this time of day (people heading home from work, getting dinner, relaxing after the day.) But you probably know blog traffic better than I do. Hey, it's your blog. Thanks for being funny, and being there for us.

Michelle

Post a Comment
...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT... ...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...

About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
My profile

Prescriptions Here!

Other stuff

Blogarama - 
The Blog Directory
Directory of 
Finance/Business Blogs Finance 
blogs Top Blogs Finance Blogs - BlogCatalog Blog Directory