Remember when social media stocks were all the rage? It already seems like a long time ago when the market eagerly awaited any social media company going IPO. Typically the shares were snapped up right away and the stock would soar.

Twitter (NYSE: TWTR) is probably the best example of this fad. The microblogging site went IPO in 2014 and the stock soared above $50 per share. It was still above $50 about a year later. But, by mid-2015, reality hit.

Investors started to figure out that, besides Facebook (NASDAQ: FB), it was very difficult to generate ad revenue growth on social media platforms. As the numbers started coming out, TWTR stock got hammered, dropping below $15 in 2016.

However, when a company has several hundred million users, you can’t just write them off entirely. Lately, TWTR has gotten the attention of the investment crowd again, and is back above $30.

Just last year, we probably had the biggest social media IPO since TWTR, in the form of SNAP (NYSE: SNAP). SNAP’s Snapchat was one of the most popular social media platforms out there, especially for the younger crowd. It also debuted to much fanfare and investor excitement.

You can see where the stock immediately shot up after its IPO. But this time, it didn’t take long for the reality of the numbers to set in. Just like TWTR, the investment community wanted to know how SNAP would monetize its user base. When no obvious answer was forthcoming, the stock dropped.

SNAP has mostly been in the $12 to $16 range for the last year, although it did briefly spike above $20. So is this one-time social media darling about to move again? At least one trader thinks the stock could make a big move… in either direction.

This past week, a trader purchased the May 4^th 15 calls and the 14.5 puts with stock trading at $14.88. Buying both calls and puts in the same expiration at the same time, but using different strikes is called a strangle. This particular strangle cost $2.20, which means breakeven points for the trade are $17.20 and $12.30.

That’s a pretty big move in either direction for such a cheap stock. Plus, the trader bought 375 strangles which is over $80,000 in premiums. Why would he or she spend $80k for a two week trade with long odds? It’s all about SNAP’s earnings. The company releases earnings on May 1^st, and the strangle buyer is obviously expecting the market to react strongly.

I have no problems with this kind of trade, as long as you keep your quantity low. SNAP is definitely the sort of stock that could move $3 (20%) after earnings. But, you don’t want to use up a bunch of capital on a two-week trade that requires such a sizeable gap.

Instead, this is the type of trade where you buy 1 to 3 lots and hope to double your money. You don’t base your trading strategy off of these kinds of trades. However, it’s not bad to take a flier every once in a while during earnings season if you have strong conviction a stock is going to move, but no opinion on the direction.

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Source: Investors Alley 

For the last couple years, perhaps no investing strategy was more popular than shorting volatility. The short volatility trade was the primary source of yield for many investors, both institutional and retail. With interest rates so low, selling volatility seemed like one of the few easy ways to generate consistent income.

There are several different ways to sell volatility, but using short VIX ETPs (exchanged traded products) was definitely the most popular, at least for the retail crowd. No doubt, institutions used these ETPs as well, but they also had access to several other products in the space (volatility swaps and other OTC instruments, VIX futures, etc.).

There certainly was evidence that mom-and-pop traders were using the short VIX ETPs to sell volatility. (And don’t forget the manager from Target who quit his job to start his own volatility selling fund.) Which is why when volatility exploded on February 5^th, many non-institutional investors got hurt. The short volatility ETPs either imploded (XIV) or were substantially defanged (SVXY).

And then market volatility stopped going down.

You probably know the story. VIX (the Cboe’s S&P 500 volatility index) shot up above 20, which is roughly the long-term average, and it stayed there basically for two months. Of course, the VIX – a measure of implied volatility – shot up because realized volatility was also way up (i.e. the market was moving around a lot). However, it’s pretty clear that the lack of volatility sellers, and far fewer easy choices for selling volatility, added to the slow (or lack of) mean reversion.

At least until recently. Finally this week, the VIX dropped all the way to below 15, a level not seen since before the February 5^th selloff. Does that mean the short volatility trade is back? We won’t know until we have a few more weeks of data, but at least volatility is beginning to behave like things are going back to normal.

What’s more, at least one big trader is betting a hefty sum that short volatility is the place to be right now. The trade is betting on volatility either dropping or staying where it is by selling calls in iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). VXX is the most popular ETP for trading short-term volatility.

To take a short position in short-term volatility using options, the easiest thing to do is buy puts on VXX. The next easiest thing to do is selling calls in VXX. Of course, with call selling you don’t have to have VXX go down, you just don’t want it to come back up. On the other hand, the risk is much higher when selling calls than with buying puts.

Anyhow, in this case, the trader chose to sell calls, over 17,000 of them in fact, with a June 1^st expiration. With VXX at $40, the trader sold the 55 calls for $0.73. He or she collected over $1.2 million in premiums. Breakeven is $55.73, which is obviously quite a bit higher than where we currently are.

Even though $55 in VXX is an unlikely level to hit by June 1^st, keep in mind that volatility moves really fast (just glance at the beginning of February in the chart above for a very clear example of this). Plus, there’s unlimited risk on this trade if volatility were to spike and remain high.  That’s why I’d rather buy puts to sell volatility.

For example, the May 18^th 38 puts (the 30-delta puts) are trading for around $1.50. VXX needs to get to $36.50 for them to start making money but that’s very possible over the next month. Additionally, the most you can lose is the $1.50 per contract you spend on premiums.

Of all the selling going on in the stock market these days, no sector has been hit harder than tech. Although I believe the overall selling has been too harsh, the tech sector was certainly overvalued relative to other sectors.

Keep in mind, the tech sector has almost always been the biggest area of growth, so it does make sense to some extent that its companies would have the highest valuations. However, there were certainly some companies whose valuations were very difficult to justify.

Of all the ultra-pricey stocks out there, probably none was frothier than Tesla (NASDAQ: TSLA). Of course, Tesla has been a cult stock for some time, and its CEO Elon Musk could basically do no wrong. By the way, some people call TSLA an automotive stock, others an energy stock, but above all else, it’s a technology company.

Take a look at the chart of TSLA over the last 3 years. You can see the huge jump last year and the big selloff over the past week.

The selloff was sparked by production concerns over the company’s Model 3 automobile. The highly sought-after $35,000 electric vehicle is not being produced as fast as expected. There is real concern that buyers will walk away as they become frustrated with the wait time. TSLA has simply not been able to keep to their ambitious production schedule.

Between the tech selloff, the sky-high valuation, and the production issues, TSLA certainly has plenty of short-term bearish catalysts. Could we see a drop all the way to $200 or below in the next six months? At least one big options trader thinks it may be possible, but also is prepared if the stock goes right back up.

This trader sold a massive September straddle in TSLA at the 265 strike. Selling a straddle is when a trader sells a call and a put at the same strike in the same expiration. It’s a strategy used when the strategist believes a stock is going to be range-bound, or settle at or near a certain price at expiration.

In this case, the trader believes TSLA won’t be too far from $265 in September (right about the current price as of this writing). How can he or she be so sure? Well, in this case, the trader has a huge range to work with because the straddle was so expensive.

Selling the straddle generated a credit of $78! That means the stock would have to close lower than $187 or higher than $343 at September expiration to lose money. That’s a gigantic range, and any price in between those strikes means the trade is profitable. At max gain of $265 at expiration, the straddle seller – who sold 800 straddles – would make over $6 million.

So is this sort of trade you and I should do? Definitely not. We don’t want that kind of risk, or more importantly, the kind of margin necessary to hold a short straddle in our portfolio. Instead, we can generate decent income by selling put spreads in TSLA.

While TSLA has its share of problems, the company’s products are also extremely popular (and typically high quality). Elon Musk has always been successful at whatever large company he’s been behind (PayPal (NASDAQ: PYPL)Space X, SolarCity). As such, I believe there’s a floor on TSLA’s stock price, at least for the next several months.

The straddle seller is protected down to $187 and until September. Let’s say we wanted to cut some time off that and look at June options. Selling the 180-190 put spread in June (selling the 190 put, buying the 180 put to cap risk) would generate about $1.00 in income.

Now, you’d risk $900 for every $100 you generate with this type of trade, so you would only do this strategy if you feel TSLA isn’t going below $200 or so. Also, if TSLA does continue to drop, you’d want to roll or close your positon pretty quickly. However, if you are believer in TSLA, this is the sort of strategy you could use every 3 months to generate additional income in your portfolio.

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Source: Investors Alley 

Well this past week has certainly been interesting.  After a pretty terrible week for stocks, the Dow Jones Industrial Average is now down 5% for the year and the S&P 500 is down about 3%.  This certainly isn’t the year most investors expected, especially after the market reacted so positively to the reduction in corporate taxes.

I’ve said many times before that politics usually only has a very short-term impact on the stock market.  However, the rules change if politics end up impacting the economy, or the potential for the economy to grow.

Tax reform was generally viewed as a positive for the economy since companies planned on using tax savings to buy back shares (or possibly increase dividends).  On the other hand, the recent tariff announcements have had the opposite effect.

From a global perspective, tariffs are almost always a bad idea.  They can result in trade wars which end up raising prices for everyone involved (and for those not involved as well).  The steel and aluminum tariffs were already causing some issues in certain sectors.  Now, the introduction of new tariffs against China could create problems across a variety of industries.

The market clearly does not like the idea of a trade war.  I already mentioned how the major indexes are down.  Volatility is also way up, with the VIX (S&P 500 volatility index) up from a low of 17 last week to 25 on Friday’s close.

We barely even saw 15 in the VIX prior to this year.  Now, we’re experiencing higher-than-20 levels on a semi-regular basis.  It seems investors are really worried about a continued market correction.

Here’s the thing…

A trade war is a very bad thing for the economy – but it tends to take a while to have any impact.  Over the short-term, the panic selling we’ve been seeing doesn’t make any sense to me.  I think the selling is overdone and volatility is too high.

At least one big trader agrees with my sentiment.  This trader executed what’s called a risk reversal last week in iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX).  VXX is probably the most popular method for trading short-term volatility.

A risk-reversal is a synthetic method for getting long or short VXX stock.  In this case, the trader bought puts and sold calls at the same strike (47) in the same expiration (April).  This is the equivalent to going short VXX at that strike, except it expires in April.

With VXX at $47.75, the trader purchased the April 20^th 47 puts while selling the 47 calls for a $0.65 credit.  To simply what can happen with this trade, basically above $48 in VXX loses $500,000 per dollar while below $47, it gains that amount per dollar.  It’s obviously quite risky, so the trader must have strong conviction that short-term volatility is dropping soon.

I agree that we should see a reversion in VXX in the coming weeks.  However, this trade is far too risky for my taste.  Instead, a basic put spread makes more sense to me.  For example, using the same April 20^th expiration and the same starting strike, we can buy the 42-47 put spread for about $2.00 (with VXX around $49.50).

That means you’re buying the 47 strikes and selling the 42 strike.  Your max loss is just the $2 you spent, which also makes the breakeven point $45 in VXX.  If VXX goes to $42 or below by April expiration, you make $3.  That’s a 150% returns on an event which seems like it has a good chance of happening!

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Source: Investors Alley 

This week, we get the next installment of the FOMC meeting – the big Fed meeting where they decide what to do with interest rates.  The meetings are a bit more interesting these days since rates are going up and some sort of definitive actions tends to take place.

Keep in mind, we had several years where the only thing investors were concerned about is what the Fed was doing with QE (Quantitative Easing).  Interest rates weren’t even in the picture at that point.  These days, we’re back to some level of normalcy, with rates slowly heading higher.

The market is expecting the Fed to raise rates by a quarter point.  According to the CME’s Fed Fund Futures, there’s about a 90% probability of it happening. That part isn’t really what investors will be focused on.

Instead, it’s what the Fed says about the economy and inflation that will really be the primary focus of the market.  Of course, inflation concerns are a big part of why we had the early February selloff.  It’s not entirely out the question that the Fed says something which will subsequently send stocks much lower (or much higher).

What the central bank sees in the economic data, especially in regard to inflation statistics, should go a long way towards defining their rate increase strategy this year.  In other words, it could very much be an important FOMC meeting.  It could also be a complete snooze fest.

Regardless, plenty of traders will be positioning themselves in various assets in preparation of the announcement.  One popular instrument for trading the Fed meeting is iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT).  Bond prices are based almost entirely off of interest rates and interest rate expectations, so action in TLT makes sense ahead of the FOMC meeting.

While a quarter point increase is already built in to the market, further increases may or may not be accounted for.  If investors believe interest rates could go higher faster than originally anticipated, bond prices could take a dive.

At least one trader in TLT is betting on treasury bonds having pretty decent downside potential over the next month.

Here’s the trade…

With TLT at $120, the April 20^th 115-118 put spread (buying the 118 put, selling the 115 put) traded for $0.48.  The vertical spread, as this sort of trade is called, was executed 500 times.  That means the max loss is just the premium paid, or $24,000, if TLT remains above $118 over the next month or so.

Breakeven for the trade is $117.52 and max gain is at $115 or below by April expiration.  Max gain is $126,000, so the trader has the potential to generate 425% returns on the trade.

This is exactly the type of trade I’m a big fan of.  It has minimal risk with very strong return potential.  It’s the kind of trade I frequently make in my options trading service. The timing suggests it’s related to expectations of higher interest rates post-FOMC meeting, which makes perfect sense.  In fact, there’s nothing wrong with doing an exact copy of this trade in your own trading account.

As if there hasn’t been enough political and economic news lately – now we have a trade war to contemplate. In case you haven’t been following, the current administration is imposing a 25% tariff on steel imports and 10% on aluminum imports. Non-US steel producing countries are sure to follow suit with their own tariffs, and thus a trade war is born.

Generally speaking, a trade war isn’t a good thing for the global economy. It may protect (or even create) jobs in the short-term, but in the longer-term other jobs will be lost somewhere else. In a zero-sum game, someone is going to be losing somewhere.

In the meantime, the new tariffs are roiling the financial markets. At the very least, we can try to find a way to profit from the stock market swings taking place as investors digest the implications of a trade war.

Of course, domestic steel and aluminum companies, at least the ones that source their raw material from the US, are attracting buyers. The whole point of these types of tariffs is to get buyers to purchase goods from local companies. It makes sense that a company like US Steel (NYSE: X) would go up on the news, for instance.

And as you can see, it did go up immediately on the day the news came out (second to last bar on the chart above). However, the next day, the stock dropped, basically back to even. That’s because the market realized a trade war would eventually hurt everyone (as foreign trade partners raise prices to compensate).

So how do you trade a trade war? Well, at least some big traders think the tariff will help some companies more than it hurts. Domestic steel producer AK Steel (NYSE: AKS) is one company that options buyers seem to really like.

On the day the tariff was announced, nearly 40,000 April AKS 7 calls were purchased for $0.21 with the stock at $5.60. Normally, cheap out-of-the-money calls like this are just fliers that traders take now and then… more like lottery tickets. After all, to break even the stock needs to get to $7.21, which is over 20% higher than the current price.

Nevertheless, when 40,000 contracts trade (over $800,000 in premiums), then there’s a real belief the stock is going up in the coming weeks. The type of large blocks that traded that day (over 10,000 calls per trade) are the sort of trades typically made by funds or very wealthy investors. It certainly adds some legitimacy to the thesis.

I’m okay with doing this kind of trade since the calls are so cheap. However, you need to go into a trade like this not expecting to make money. Twenty-cent options rarely expire in the money. There’s enough action in this strike that it’s worth a shot, but AKS certainly has an uphill battle ahead of it. On the other hand, if the trade does work, the returns could be pretty impressive.

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After a year of mostly moving higher, with barely any volatility to speak of, we’re finally seeing a shift in the financial markets. It’s not just stocks – bonds, commodities, and currencies are also moving into new territories.

Of course, much of the change is due to the expected change in interest rates and inflation (which are directly linked). It’s been several years since we’ve had any substantial changes in interest rate expectations. The arrival of higher rates is certainly inducing a sea of change to the financial markets.

Now, not every change to the market is going to be as extreme as the selloff we experienced at the beginning of February. The volatility spike was especially nasty (and probably way overdone). But, sometimes it’s a major event like the early February correction which begins a longer-term trend.

The trend in bond prices hasn’t exactly been subtle either, although it’s not as extreme as the move in stocks and volatility. You can see in the chart below of iShares 20+ Year Treasury ETF (NASDAQ: TLT), that long bonds have been in steady decline since the start of the year.

Keep in mind, bond prices and interest rates move inversely. So, if rates are expected to continue going up, then bond prices should also continue selling off. Subsequently, some big traders apparently think bond prices have a lot farther to fall. There’s been a lot of big options action in TLT this past week.

In one trade, a buyer grabbed 15,000 March 16^th 115 TLT puts for $0.62 with the stock just above $117. That’s a $930,000 bet that TLT will drop to at least $114.38 by March expiration. In another similar trade, the trader bought 10,000 March 16^th 116 puts for $0.84. That works out to $840,000 in premium with a breakeven point of $115.16.

Those are just a couple of the trades I saw betting on TLT’s downside. Clearly, there’s a lot of money being spent on a potential big down move in bond prices.

Given what we’ve seen with CPI data, employment numbers, and corporate results, I tend to agree that bonds are going to keep going down (while interest rates go higher). I also think TLT is one of the cheaper ways to bet on higher interest rates.

However, I wouldn’t necessarily purchase naked puts in TLT either. You can save some decent premium costs by using put spreads as an alternative. For instance, the March 16^th 115-117 put spread (buying the 117 puts while selling the 115 puts) only costs $0.80, with TLT stock just over $117.

Your breakeven on this trade is $116.20, while your max gain is $1.20. For only $0.80 you can potentially earn 150% returns if TLT keeps moving down. It’s a smart way to bet on higher interest rates without spending a ton of cash.

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Source: Investors Alley