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 15^th 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.

After over a year of basically no volatility in the stock market, we had something of a volatility revelation which began on February 5^th. 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 5^th 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 15^th 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 5^th 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 

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 

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 5^th 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 25^th 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 25^th 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 15^th 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 25^th 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

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.

  [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 

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.

  [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 

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!

  [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 

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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