“As U.S. stocks enjoy a big summertime rally, one option investor went on the defensive on fears the Standard & Poor’s 500 .SPX benchmark could suffer significant losses between now and December. Put option volume swelled to about 1.53 million contracts Read more…
At least one investor is expressing bullishness, betting on iShares Silver Trust ETF (SLV Quote) and boosting normal daily volume more than 20-fold today.
Between 1 p.m. EDT and 2 p.m. EDT, an investor sold 100,000 SLV Jan. 2010 13 puts and simultaneously bought 75,000 SLV Jan. 2010 14 calls. He also sold 100,000 Jan. 2010 19 calls in the name. Normal daily options volume in SLV is around 10,000 option contracts, but approximately 220,000 SLV options have traded with about half an hour left to go in the trading day. Read more…
Exchange traded funds (ETFs) are useful investment tools and trading options on ETFs is one of the many ways you can maximize the benefits of them.
Trading options on ETFs could potentially allow traders to use the leverage of derivative markets to increase gains from ETF trades, writes David Penn for Yahoo! Finance. It should be noted that not all ETFs have liquid options, which means most investors should stick with more widely-traded index ETFs and liquid country ETFs.
Calls are options used when the prices are thought to be heading higher – they give an investor the right, but not the obligation, to buy a stock at a pre-set price.In other words, you’re “reserving” today’s prices for an item that you think may be priced higher at a future date.
Penn says the basic options strategy for ETF traders is buying deep in the money calls with long signals in ETFs, or buying deep in the money puts to fulfill short ETF signals. Let’s translate that.
“Deep in the money” refers to calls that have a strike price that is 2 or 3 strike prices below the current price of an ETF. As an example, if an ETF were priced at $44 and a long signal on the close was received, a deep in the money call would be a call with a strike price of $40 or even $35.
With short ETF signals, traders may use puts if prices are thought to head lower and increase in value as the markets abate. Buying puts deep in the money is a way to use puts on overbought ETFs.
An option trader takes a position that will pay off if this retail sector ETF takes a 15% tumble in coming weeks.
Retail Select Sector SPDR ( XRT – news - people ): The retail exchange-traded fund appeared on our ‘most active by options volume’ market scanner after one investor appears to have initiated a ratio put spread in the near-term May contract. Shares are slightly off by about 1% for the fund to $27.45. The sale of 6,600 puts at the May 25 strike price for 36 cents apiece was spread against the purchase of 3,300 puts at the May 27 strike for about 97 cents each.
The net cost of the bearish position amounts to 25 cents and yields a maximum potential profit to the trader of 1.75 if shares decline to $25.00 by expiration this month. Shares would need to fall by about 9% from the current price in order for maximum gains to be realized. Losses needn’t accrue until shares breach $23.25 to the downside.
After 6 weeks of smooth sailing, options traders are anticipating volatility in emerging-market exchange-traded funds.
Activity spiked yesterday in the MSCI Brazil Index (EWZ) and MSCI Emerging Markets Index (EEM), which both witnessed above-average volume. In 1 of the session’s largest trades, an investor purchased 33,000 contracts of EEM May 28 puts for $1.69 and an equal number of May 28 calls for $1.49.
This so-called straddle trade will be profitable if EEM falls below $24.82, or rises above $31.18. EEM rose 1.45% yesterday to close at $28.07. (See optionMONSTER’s Education section.)
Another large transaction showed how 1 trader bet on a limited decline at very low cost. This strategy bought 5,000 May 26 puts in EEM for $0.96 and sold 10,000 May 24 puts at an average price of $0.465. By selling more puts at the lower strike, the cost was reduced to just $15,000 before commissions.