All posts by Jay Soloff

Jay Soloff is an options analyst with Investors Alley. Jay was previously the Chief Options Strategist at Hyperion Financial Group where he was the editor for over six years of several successful options newsletters. Prior to joining the online investment world, Jay was a floor trader and market maker on the CBOE, the world's largest options exchange. His experience includes trading a multi-million dollar options portfolio in equities options as well as serving as a consultant to Wall Street options trading groups. Jay also spent time as a senior analyst at a hedge fund of funds, where he analyzed professional options funds as well as traded option strategies for hedging purposes. All told, Jay has 20 years of options trading experience. He received his undergrad degree in Economics at the University of Illinois - Champaign, and his MBA and Master of Science in Information Management from Arizona State University.

Is The Housing Market About To Hit A Top?

I don’t spend a lot of time writing about real estate in this space. It’s not that it isn’t important, in fact it’s quite the opposite. Of all the sectors most impacted by a change in interest rates, real estate is at the top of the list.

However, I just don’t find real estate that interesting compared to options trading. Housing prices tend to be slow moving, and unlike options trading, there just isn’t a lot of action involved with investing in the real estate market.  However, what if we combined the two areas… real estate and options trading? Now we’re talking about a topic I can relate to.

Of course, we can’t trade options on individual mortgages – and derivative trading on groups of mortgages is generally an OTC market limited to institutions. (Let’s not even mention that derivative trading on mortgages is a big reason why we had the financial crisis of 2008-2009.)

Fortunately, ETFs have emerged which allow investors and traders to get easily involved with real estate and mortgages. REITs tend to focus more on the mortgage side of things, while real estate ETFs often invest in stocks such as homebuilders and storage companies, as well as REITs.

Probably the most popular real estate ETF is iShares Dow Jones US Real Estate ETF (NYSE: IYR). IYR trades over 8 million shares a day on average and almost 20,000 options. As you can see from the chart, IYR has done very well the last few months (in line with the overall real estate market).

However, could real estate – especially housing prices – be in trouble in the coming months? Higher interest rates generally slow or stall the increase in housing prices (due to more expensive mortgages). Are expected rate increases going to derail the bull market in housing?

Let’s look at the options market for clues…

A large trade in IYR last week could suggest the real estate sector could take a downturn by the beginning of 2019. Or, perhaps a big investor is hedging his or her exposure to real estate. Either way, it’s worth paying attention to this trade.

More specifically, the trader bought a large put spread in January 2019 options with IYR at $80.60. The trader spent $1.15 to buy the 72-77 put spread (buying the 77 strike, selling the 72) strike a total of 15,000 times for a cost of $1.7 million. Max loss on a debit spread like this is simply the premium paid, aka the cost of the spread.

The breakeven for the trade is at $75.85 (77 long strike minus the cost of trade or $1.15). Max gain is at $72 or below by expiration and is the spread width (5) minus the cost of $1.15, or $3.85. In total dollar terms, the trader can make $5.8 million on the trade.

Whether this is a hedge against a long position or a bet that IYR is going lower, it is quite a lot to spend. Someone is, at the very least, concerned that IYR could lose 10% by early next year. That would be a pretty sizeable down move in the real estate market. If you have similar concerns or believe housing prices are going to peak in the next few months, this is a reasonable way to get almost six months of time for the thesis to play out.

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Source: Investors Alley

Are Options Traders Telling Us To Stay Away From Emerging Markets?

If you’ve been reading my articles regularly, you’ll know that I spend a lot of time talking about block trades.  These are the huge trades that show up on your options volume screeners, typically in increments of 1,000 or bigger.  They can be unusual volume in a normally lightly traded name, or they may be very big trades which occur in high volume names (such as index ETFs).

Options analysts like to look at block trades to see where the action is.  Usually very big trades are executed by traders with abundant capital.  Of course, lots of capital usually means access to copious amounts of research as well.  In other words, block trades are often done by people who have very good information.

Many times, the reasons behind these really big trades are easy to figure out.  Hey, someone bought 20,000 calls in Apple (NASDAQ: AAPL), it’s probably going up!  Or, sheesh, someone bought 50,000 puts in SPDR S&P 500 ETF (NYSE: SPY), it’s probably a hedge against a correction!

Other times, trying to figure out the purpose of a block trade can be a puzzle.  Sometimes, you never know what the traders are trying to accomplish.  It’s not like we are seeing the actual trading books of these traders… just one big trade at a particular point in time.

Still, there is a lot that can be gleaned from watching block trades, especially in stocks and ETFs which don’t trade that often.  They may give you an idea of where the underlying asset is headed or if volatility is going to pick up, among other things.

Here’s a very interesting block trade I came across this week…

The trade involved the purchase of over 20,000 puts on Invesco Emerging Markets Sovereign Debt ETF (NYSE: PCY).  Now, an emerging market debt fund may not sound all that interesting to you, but there are some very unusual factors to consider regarding this trade.

First off, PCY is a fund that buys government debt in emerging market countries.  It’s got about $4.5 billion in assets, making it the second largest ETF in this space.  However, the largest fund in the emerging market debt space is far bigger.  In fact, iShares JP Morgan USD Emerging Market Bond ETF (NASDAQ: EMB) has $12.5 billion in assets.

And that’s not all…

Not only is EMB the more popular fund, it’s also much more heavily traded.  Average daily options volume in EMB is about 10,500.  In PCY, the average is 8.  That’s right… 8 options per day.  When over 25,000 options trade in one day in an ETF that normally averages 8, it definitely draws attention.

In this case, it wasn’t actually one huge block trade, but several smaller blocks of the September 27 puts (with the stock around $27.25).  When you have a name like PCY which isn’t liquid in options, you may see the trade broken into many smaller parts to get it filled.  And sure enough, there were lots of pieces traded, from roughly 200-lots up to 1000, with prices ranging from around $0.60 to $0.80… mostly purchases.

This would lead us to believe the trader (or traders) think the ETF is going down by the end of the summer.  That in turn means there’s a fair amount of money (something like $1.5 million) betting that emerging market government bonds are going to take a hit in the coming weeks.  You can see form the chart that PCY has been on a sharp run higher the last week or so.

This leads to several questions….

If it’s a hedge against a downturn in emerging market debt, why not use the much more liquid EMB options?  For that matter, even from a speculation standpoint, you could probably get better fill prices on EMB options.  Their implied volatilities were about the same at the time of the trades, so it doesn’t seem to be a relative value proposition.

I can think of two reasonable explanations, although I’m sure there are others I’m not considering.  First off, the trade could have to do with the actual bond holdings of the particular ETFs. On the surface, it looks like PCY and EMB have similar exposure to countries and credit ratings groups. But, drilling down may show one has more or less exposure to a potential default candidate.

(For the bond nerds out there, EMB does have quite a bit shorter duration than PCY, but that’s probably not much of a difference maker.  Perhaps more importantly, EMB has over 400 bonds in its portfolio while PCY has just over 100.)

The other potential explanation is more nebulous.  Perhaps there’s something about the actual structure of the PCY ETF which is amiss.  It may be that someone very smart has figured out that given the structure of the bond portfolio, the ETF price should be lower than it is.  That’s not the sort of thing I can prove, but we should know by September if PCY drops more than EMB.

No matter the reason, it may not be a bad idea to take a flier on PCY puts, especially if you’re bearish on emerging market debt.  After all, we have all kinds of tariffs to consider which could hurt emerging market countries.  And, the debt problems in Italy could spill over into emerging market bonds as well.  For under $0.75 a put, it’s not a bad gamble to make for those looking at something a bit more speculative to trade.

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What Does This Huge Options Trade Mean For Oil?

When I write about large options block trades, it’s generally for one of two reasons.  First, a lot of smart money is active in the options market.  If a very big (i.e. capital intensive) trade occurs with options, it can often be a signal that there’s going to be action in the underlying asset.

Second, sometimes I just find an options trade very interesting and worth discussing.  It could be because it’s an unusual trade or is an original way to handle risk management.  Of course there are times when I write about a large trade because it’s interesting and may provide meaningful insight into the underlying asset.

A trade last week I came across meets both of those criteria.  More specifically, I noticed a massive covered call trade in United States Oil (NYSE: USO).

USO is the most active oil ETF.  While it has its flaws, trading USO is probably the easiest way for the average trader/investor to trade oil.  Beyond trading oil futures themselves, USO is likely the most direct way to trade oil as well.

Covered calls can be intriguing to analyze because they can be successful in many different types of market conditions.  However, one of the few situations which are “bad” for covered calls are when the underlying asset price blows through the short call strike.  (It’s not entirely bad since you are still making money, but you could have made more money by just being long the asset.)

So, is this covered call trade suggesting there’s a limit on how far oil prices are going to rise?  Let’s take a closer look at the position.

The trade involved a massive 60,000 USO January 2019 calls, which means 6 million shares of USO were purchased against the calls.  The call strike sold was the 15, and the stock was right around $15 at the time, in other words, the calls were sold at the money.

The 60,000 options were executed in two separate blocks.  And, if you average the prices together between the two blocks, you get an average call sale price of $1.35.  That works out to $8 million in premium received (or a 9% yield over a roughly 7 month period).

With the short calls being sold at the money, the trader clearly does not expect USO (and thus oil prices) to continue climbing through next January.  Otherwise, he or she would have sold out-of-the-money options instead to give USO room to climb.  (Clearly, as you can see in the chart, oil has already seen sharp gains in recent weeks.)  With the at-the-money trade, the max gain on the trade is right at $15 at January expiration.

On the other side, the call premium collected means the USO shares are hedged down to $13.65.  Plus, the trader may not expect the shares to be offset by the short calls next January.  Instead, he or she may be happy to be left long the shares for an effective price of $13.65, and could always continue writing calls against those shares moving forward.

If you believe oil’s price increase has run its course, this is a good way to generate income on it, while still giving you a chance in to be long the shares next January.  If you think oil has more room to run, you can always sell a higher call strike.  The 16 strike trades for about $0.75.  That’s not a bad credit to receive, while also giving yourself a bit of upside potential in the stock price.

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How You Could Make 650% On This Copper Trade

The only thing certain when it comes to trading in 2018 is that this year has been far less predictable than previous years. While the last few years were marked by low volatility and a mostly bullish stock market, it’s obvious that 2018 is an entirely different animal.

So far, 2018 has been characterized by significantly more volatility than we’ve seen in recent times. While it wasn’t reasonable to assume low volatility would last forever (and it did feel that way for a time), the extreme moves in market volatility have caught many traders off guard.

The biggest source of market volatility has been the US administration, particularly the administration’s position on tariffs and international trade. In a nutshell, the US is levying new tariffs on international goods, and it’s slowly leading to a trade war. Whatever your opinion on trade wars and tariffs, it’s very clear the stock market doesn’t like the idea (based on substantial downturns in stock prices whenever a new tariffs is mentioned in the news).

Tariffs can be used to tax all sorts of trade goods, but are often levied on commodities and raw materials. The first ones used this year were on steel and aluminum imports, for example. These sorts of tariffs can wreak havoc on the commodities markets as well as stocks that are involved with the affected goods.

On the other hand, the global economy has been quite strong lately, and is showing no signs of abating anytime soon. So how do you weigh the pro and cons of investing in certain commodities? What do you do with an important trade good such as copper? The widely-followed industrial metal tends to perform well when the economy is growing, but also could feel the sting from a trade war.

As always, I like to look at the options markets for clues on traders’ sentiments. Options action can give insight into investing trends in all sorts of assets and products.

One very bullish case for copper came in the form a massive call spread in Freeport-McMoRan (NYSE: FCX). FCX generates revenues from several products, including copper, gold, and oil. However, roughly 60% of the company’s revenues come from copper, and it’s the largest copper company in the world. As such, the stock price tends be very sensitive to the price of copper.

This week, a size trader made a very big bet that FCX (and thus copper) is going to be climbing this summer. The particular trade was the August 17th 17-20 call spread (buying the 17 call, selling the 20 call) for $0.41. The stock was around $15.50 at the time of the trade, and breakeven is $17.41.

The trade was executed 19,500 times, which means the trader is risking $800,000 on the strategy. That’s no small sum, so he or she must be pretty confident that copper has some upside. What’s more, the trade can make $2.59 in profit should FCX go to $20 or above by mid-August. That’s over $5 million in profit or 650% gains!

This is exactly the sort of long options trade that I would recommend. You aren’t risking too much in capital, and the returns are outsized if you get it right. Plus, you are buying a decent amount of time for your thesis to work out. If you think copper has a bullish future (though this summer), you’ll be hard pressed to find a more efficient trade than this one.

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A Quick 185% on an ETF That’s Just Now Bottomed

If you have any interest in economic policy, especially macroeconomic policy and repercussions, now is about as interesting as it gets. I realize most people don’t get a hoot about macroeconomics, but it can be very useful for analyzing trading opportunities. (For me, it goes beyond that since I have a degree in economics which focused heavily on the macro side of things.)

We’re experiencing a real life experiment on how tariffs and trade wars are bad for an interconnected global economy. Tariffs can gain political traction because they are supposed to create or protect domestic jobs. However, as soon as other countries imposed their own tariffs, it generally just comes back to bite the industries that initially were supposed to be insulated.

For a developed nation like the US, a trade war would probably result in something like a 3% decrease in GDP. That’s a big deal when you’re talking about trillions of dollars, but it’s also not catastrophic. On the other hand, tariffs can be extremely detrimental to the growth of emerging market economies.

iShares MSCI Emerging Markets ETF (NYSE: EEM) is an extremely popular ETF for trading a basket of emerging market stocks. The heavily traded EEM does almost 70 million shares per day in share volume plus 400,000 options on average.

As you can see from the chart below, emerging markets have taken a pretty big hit lately. EEM started trending down when tariffs became a major news item. Since the actual implementation of the tariffs, it has dropped even lower.

However, a massive options trade last week in EEM suggests that the ETF is done falling for the rest of the month. This trade, known as a put ratio spread, involved a 100,000 by 200,000 put spread – which is about as big of an options trade as you’ll ever see.

More specifically, a trader purchased the June 29th 42.5 puts 100,000 times (with the stock at $43.50) while simultaneously selling 200,000 of the 42 puts in the same expiration. Now, buying a put spread is normally a bearish strategy, but the trader actually collected a credit of $0.06.

That means if EEM stays where it is or moves up, the position will generate $600,000 in profit. The max gain is at $42 on expiration, where the trade would earn $0.56 or $5.6 million. However, below $42 in EEM is where the risk comes in. Every $1 below $42 would result in roughly $10 million in losses. Clearly, there’s big money betting on EEM staying above that level through the end of June.

I like the idea of this trade, but obviously not the risk involved. In fact, selling a put spread is tough in general because the options are so cheap. I think you may be better off betting on a reversal straight up using a call spread.

For instance, with EEM at just under $44, you could buy about a month of time and get the July 20th 44-46 call spread for about $0.70. Break even is $44.70, you can make $1.30, and max risk is just the $0.70 you pay in premium. That’s a very reasonable amount to pay for a month-long trade that has 185% max gain upside.

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Big Money Is Betting That The Markets Will Remain Calm

The days of sub-10 VIX may be gone for the foreseeable future, but that doesn’t mean traders have stopped betting against higher volatility. In fact, the short volatility trade seems like it may be returning with a vengeance.

Well, let me step back a bit. The short volatility trade may be returning on the professional level. Retail traders still appear to be wary of selling volatility – and with good reason. It was the retail crowd that mostly got hurt on February 5th and the aftermath back when XIV, a popular inverse volatility ETN, imploded.

Access to short volatility isn’t quite as easy as it used to be, and I imagine there are plenty of gun-shy retail investors who got burned back in February. Nevertheless, making money on short volatility can be a great way to increase yield and trading returns. Moreover, the big money may be stepping in now and selling volatility in chunks.

XIV, which was basically the inverse of iPath S&P 500 Short-Term Futures ETN (NYSE: VXX), is now out of the picture. ProShares Short VIX Short-Term Futures ETF (NYSE: SVXY) has been redesigned to provide only 50% short exposure to front month VIX futures. As such, it has fallen on VXX and VIX futures options themselves to carry the lion’s share of the volume of volatility trades.

VXX only has exposure to the first two VIX futures months, while any VIX month with a future can be traded using futures options. For the most part, VXX has maintained strong volume since the February 5th volatility event, trading about 44 million shares a day on average over the last 90 days, while options have traded a brisk 363,000 average per day over the same period.

Now, it’s easy enough to take a short position on volatility by purchasing puts on VXX. Of course, puts make money when VXX goes down, and VXX goes down when volatility retreats. That’s a perfectly reasonable strategy. But keep in mind, buying puts does come with time decay risk. Long options are always decaying as they approach expiration, so you do have a timing variable that comes into play.

On the other hand, selling calls on VXX means time is on your side. Being short calls also benefit from VXX going down (or sitting still). But, being short options means you collect time decay rather than pay it. The risk is if VXX spikes higher, your losses can be staggering.

One way to protect yourself against a spike in VIX but also get the benefits of time decay is by selling a call spread instead of selling naked calls. Selling a call spread (selling a call closer to the stock price, while purchasing a farther out call) lowers your premium collected, but caps your losses.

Take for example, this very large trade that occurred in VXX earlier this week. A trader sold the June 8th 37-43.5 call spread for $0.59 with VXX trading at $34. Selling the call spread means the trader sold the 37 calls and bought the 43.5 calls. The spread was executed over 6,200 times meaning the trader collected over $367,000 in premiums.

If VXX closes under $37 in the next 17 days, the trader keeps the entire premium collected. On the other hand, if VXX spikes above $43.50, the trader is at risk of losing $5.91 ($6.50 spread gap minus the $0.59 premium collected).

It may seem like $0.59 isn’t a lot to collect versus a max loss of $5.91. However, the trade only lasts for 17 days. Moreover, with the China tariff situation seemingly resolved for the time being, there aren’t a lot of potential volatility catalysts on the horizon.

Still, while I like the idea of selling a call spread, I’d probably go a bit higher out of the money and go farther out in time to compensate. For instance, the June 29th 39-44 call spread would result in around $0.70 in premium versus a max loss of $4.30. You have to wait a few more weeks until expiration, but it would take a pretty major event at this point to push VXX to $40 or above. To me, that’s a reasonable trade off to make.

To learn more about trading volatility for quick profits check out my new training video, Simple Steps You Can Take Right Now to Trade Volatility Like a Pro. It’s completely free and no registration required.

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The Latest Gaming Craze Could Lead To a Quick 468% Return

The video gaming industry is extremely competitive, but can also be immensely profitable if a developer hits big on a certain game or franchise. Success stories in video games range from relatively simple mobile apps to massive projects with huge development costs.

Much like a movie, production costs for video games are mostly upfront. A popular game can scale very efficiently and generate very high margins. However, as I mentioned before, there’s also a ton of competition in the space and relatively low barriers to entry.

Popularity of video games goes in phases, like many other aspects of pop culture. A certain game or type of game may capture the crowd’s attention for a month or a year. Inevitably, copy cats of the most recent successful game or game type will start springing up. Some may even improve on the original concept, although many are just cash grabs.

The latest video game phenomenon is the so-called “battle royale” video game. This is a game where a set number of people (usually 100) are dropped onto an island with no gear. The players then have to run around and find weapons, shelter, etc. and it becomes a last man standing match. The popularity of this genre of game is at least in part because it’s platform agnostic – that is, it’s played about equally on game consoles, PCs, and even smartphones. (I’ve tried out a couple of the popular titles, and I have to admit, they are quite fun and engaging games.)

Here’s the thing…

With the success of several new battle-royale games, it is no surprise that the heavyweights of the gaming industry have turned their attentions to developing new games in the genre. Most recently, Activision Blizzard (NASDAQ: ATVI) has announced its extremely popular Call of Duty series will have a battle-royale mode in the next edition of the game.

Call of Duty titles always sell well when they are released, and often break sales records whenever a new game comes out. Adding a battle-royale mode could move the needle even more significantly. Taking one of the industry’s most popular titles and adding it to the most popular genre is obviously a strong move for ATVI.

The good news did not fall on deaf ears, as investors quickly jumped into ATVI stock. But, the real action was once again in the options market.

A size trader purchased 10,000 ATVI June 15th 75-77.5 call spreads for $0.44 with the stock at $71.40. The call spread involved the purchasing of the 75 calls while selling the same number of 77.5 calls. This strategy is done to reduce the cost of the trade, which subsequently reduces risk.

Total risk on this trade is simply the amount paid, or $440,000. Max gain on the other hand is $2.06 if ATVI goes to $77.50 or above by mid-June. In that case, the trade pulls in more than $2 million, or a flashy 468% in gains.

As you can guess, especially if you normally read my articles, this is the type of trade I love. It’s low risk, high upside, and has a solid thesis behind it. Needless to say, I would definitely recommend this trade if you believe the company is going to have yet another huge hit on its hands with the next Call of Duty game.

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Is This Trade Really Going To Earn 24,900% Returns?

After over a year of basically no volatility in the stock market, we had something of a volatility revelation which began on February 5th. The selloff that day and the subsequent implosion of certain volatility products (like XIV) created a major jump in market volatility.

As you can see from the chart, iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) shot up above $50 on the day of the big selloff. Afterwards, it remained essentially above $40 until just this past week or so. As you can see at the start of the chart, VXX was far lower before the volatility event in early February.

As a reminder, VXX is a very popular ETN and is used to trade short-term volatility based on the VIX indicator – the most common measure of market volatility. VXX is one of the few exchange traded products to maintain a brisk business (i.e. volume) after the volatility blowout.

While many traders like to use VXX to speculate on volatility movement, it is also used to hedge against higher volatility. As an easy-to-access method for getting long short-term VIX futures (that’s what VXX does behind the scenes), it’s one of the simplest ways to protect long stock portfolios.

But what about tail-risk? That’s when something extreme happens, like a major market selloff. February 5th is an example of a “tail-risk day”. Can VXX protect your portfolio in that case?

At least one trader thinks so. This trader is using VXX as tail-risk hedge for the next month. Perhaps he or she thinks the Iran/Israel situation will escalate. Or, it could just be a cheap way to protect against a worst-case scenario.

The trade I’m talking about is an extra-wide VXX call spread. The trader purchased 10,000 June 15th 70 calls while at the same time selling an equal amount of 100 calls. The total cost of the call spread was only $0.12. The spread was so cheap because VXX was only trading for around $36 at the time of the trade (meaning it would need to double just to be in-the-money).

Of course, chances are this trade will expire worthless. And, while the trader spent $120,000 on 10,000 spreads, it’s not a lot to spend from an institutional standpoint. In other words, if this is a tail-risk hedge for a fund or major portfolio, it’s a relatively small price to pay.

As you would also expect, the trade pays off huge if the market does collapse and VXX goes to $100 or above. In that case, the trader would generate 24,900% returns! Granted, even the February 5th correction only pushed VXX from under $30 to about $55. A move above $70 is not likely to happen at any point, much less in the next month.

Regardless, if you’re looking for an ultra-cheap way to protect against a black swan event, this trade is a decent way of doing so. After all, tail-risk hedges are much more about peace of mind than they are about making profits.

Source: Investors Alley 

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Could This Forgotten Tech Stock Be On The Road To Recovery?

The tech sector can be very unforgiving. A tech product is generally only good until the crowd finds more interesting technology to buy or obsess over. Think of how often Apple (NASDAQ: AAPL) releases new iPhones.

Sometimes, there isn’t a substantial difference between iPhone models, but the company is constantly pushing its latest tech. That’s because management knows buyers will get bored and move elsewhere unless there are new features added on a frequent basis.

This conundrum is even more apparent in the video game industry. You do have the occasional video game that seems to have everlasting longevity. Although, even those games (like Minecraft) get pretty consistent updates. For the most part, video game developers need to regularly release new games in order to stay relevant. And who knows if the new games will be popular…

Related: 3 Stocks for Profits from People Playing Video Games All Day

There’s no better example of this situation than with Zynga(NASDAQ: ZNGA). The company became incredibly popular with its FarmVille game on Facebook. Games like Words With Friends also have done quite well on mobile platforms.

However, by the time the company had its IPO, it was already starting to lose momentum. The new games could not attract customers like they used to. There were a lot more competitors in the mobile space, and that’s where all the casual gaming was taking place (as opposed to social media platforms).

ZNGA’s stock soon dropped below its $10 IPO price and hasn’t been back there since. Today, the stock is trading under $4 a share.

However, this last quarter, ZNGA surprised investors with increases in both mobile users and mobile revenues. The company also announced a new $200 million share buyback. And, it appears the company’s aggressive acquisition strategy has been paying off. As you can see from the chart, the stock jumped over 3% on the news.

For longer-term investors, the real action in ZNGA happened in the options market. That’s where you can find a couple very large bullish trades. In September options, a buyer grabbed 8,600 of the 4 calls for $0.25 (for a breakeven point of $4.25, stock at $3.80). Going farther out, someone also bought over 1,200 of the January 2019 calls, also at the 4 strike, for $0.41 (breaking even at $4.41, stock at $3.60).

Straight call purchases like these are about as bullish as you can be on a stock, especially when you are buying that much time. Of course, since the stock is so cheap, longer-term calls don’t cost all that much. The other benefit is since the stock is at such a low price, there isn’t a whole lot of downside left for short sellers. As long as the company stays in business, it essentially has only one direction it can go.

The mobile video gaming space is enormous, and there’s still plenty of room for ZNGA to make a splash – particularly if it continues to make shrewd acquisitions. As such, I think either one of these trades I mentioned above is a reasonable, cheap way to get long the stock. While the stock isn’t like to go back to $10 anytime soon, it won’t take a big move for these calls to pay off.

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Source: Investors Alley 

Make 220% on This Popular Volatility Fund

Market volatility is like a zombie.  You keep thinking its dead, but it keeps coming back to life and shambling onward.  It’s been about 10 weeks since the February 5th selloff but high market volatility refuses to die.

As you can see from the chart below, the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) has basically been unable to stay below $40 for more than a day or two.  Keep in mind, prior to the February correction, VXX was mostly sitting well below $30.

VXX has become the go to method for trading short-term volatility.  It was always popular, but with XIV gone (the inverse of VXX), it’s easily the most active ETP (exchange traded product) for volatility.  VXX trades over 40 million shares a day on average, and has close to $900 million in assets.

So what is keeping volatility from returning to its normally low levels?

We actually have a confluence of events which are contributing to higher than usual volatility levels.  These include political concerns (Mueller, tariffs), economic concerns (higher interest rates, tariffs), and financial worries (poor earnings).

Related: This Former Hot IPO Stock Could Be Ready To Move

On their own, none of these concerns would merit a major reaction from the investment crowd.  However, all these event together are ramping up concern over the expansion of the current bull market.

Nevertheless, some options traders (with lots of capital) aren’t convinced volatility is going to remain elevated.  In fact, there are sizeable options bets that VXX is going to be at around this level or lower both in the short-term and medium-term.

One trader elected to sell over 11,500 May 25th VXX 53 calls with the stock at $43.  The trader collected $1.46 in premium per call, which amounted to over $1.7 million in premiums.  Breakeven is about $54.50, but anything under $53 on May 25th will result in the full premiums being collected.

Another (or possibly the same trader) made a similar trade except for in June instead of May.  This trader sold over 11,000 June 15th VXX 55 calls with the stock at $44.50.  The premium collected in this case was $2.32 per contract or $2.6 million in premiums total.  For this trade, breakeven occurs at around $57.50.

I feel both trades are likely to be successful.  Even if VXX spikes above $50, it isn’t likely to stay there for long.  Still, I would never recommend being short naked calls for any trader, as the risk is virtually unlimited.

Once again, I prefer to use put spreads when taking a short position on VXX.  For example, the May 25th 36-40 put spread (buying the 40 put, selling the 36 put) costs about $1.25 with the stock at $44.  For a month long trade, you’d only spend $125 per spread with the breakeven at $38.25 upon expiration.

Even better, your max gain potential is $2.75 or $275 per spread.  Since max loss is only $1.25, that means you can earn a 220% return on this trade.  That’s clearly a very juicy return possibility, and your downside is capped.  It’s the best of both worlds if you believe VXX is going lower over the next month.

  [FREE REPORT] Options Income Blueprint: 3 Proven Strategies to Earn More Cash Today Discover how to grab $577 to $2,175 every 7 days even if you have a small brokerage account or little experience... And it's as simple as using these 3 proven trading strategies for earning extra cash. They’re revealed in my new ebook, Options Income Blueprint: 3 Proven Strategies to Earn Extra Cash Today. You can get it right now absolutely FREE. Click here right now for your free copy and to start pulling in up to $2,175 in extra income every week.

Source: Investors Alley