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 

One of the early financial market themes for 2018 is the renewed interest in commodities.  We’ve seen early gains so far in gold, oil, and natural gas, to name a few.  At least one of the drivers behind the buying is the expected increase in interest rates.

As a reminder, commodities are usually priced in dollars on a global scale.  As such, when US interest rates go up, it generally pushes down the value of the dollar and makes commodities more affordable on a relative basis (in non-dollar currencies).

Because interest rates are set to go higher this year – perhaps more than initially expected – commodities are starting to attract buyers.  If inflation is finally starting to rear its head, it means the Fed could be forced to raise rates faster than planned.  Commodities prices may or may not add to the acceleration of inflation, but they definitely experience increasing demand in periods of rising inflation.

It’s probably not a surprise, but traders may be positioning for a rise in commodities pricing.  The usually not-too-heavily-traded PowerShares DB Commodity Tracking Index (NYSE: DBC)had a fair amount of action last week, for example.

A trader looks to have purchased 10,000 April 17 calls for around $0.50, which the ETF trading just under $17 per share.  That’s a $200,000 bet that DBC will be at least $17.50 by April expiration.  The trade will generate $1 million for every $1 above the breakeven point.

Here’s the thing…

I’m not a big fan of DBC as a commodity tracking ETF and wouldn’t recommend emulating this trade.  It’s not that I disagree with the premise – in fact I do believe commodities are going to rally – but I’m not a fan of the instrument itself.

You see, DBC is supposed to track a broad-basket of commodities, but over 50% of the index weighting is based on energy commodities (mostly oil).  As such, the price of DBC is going to be heavily skewed by what happens in the energy markets.  My feeling is, if I want to have that much exposure to energy commodities, I’ll use a targeted energy ETF.

For a broad-based ETF, I actually want all the important commodities to be as equally weighted as is reasonable.  A much better product for this type of weighting is the iPath Bloomberg Commodity Total Return ETN (NYSE: DJP).

DJP doesn’t trade a lot of options, but it’s viewed as a good representative of the commodities market as a whole.  Energy commodities only have 30% weighting in DJP, which is in-line with the number of commodities it contributes to the index.  DJP does a better job of representing metals and agricultural products.

As I said, DJP doesn’t trade a lot of options, but it does have options listed.  If you’re bullish on commodities in general (as opposed to specific commodities) you could put on a DJP call spread in April for a reasonable price.

For example, the April 25-27 call spread (buying the 25, selling the 27) should only cost about $0.40 with the stock trading around $24.50.  That gives you a breakeven point of $25.40 with max gain of $1.60, and over 3 months of control.  With the options so cheap, you could conceivably generate returns of 300%.

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Source: Investors Alley 

Investors often try to figure out themes in the financial markets once a new trading year hits.  2017 was all about low volatility, cryptocurrencies, and tax reform.  With tax reform out of the way, we still have low volatility and cryptocurrencies/blockchain tech on the board.  What else could be in store?

Obviously, the jury’s still out on what the new trends will be this year – if there are any new ones.  So far, conditions have been a lot like 2017.  However, I believe we’re going to start hearing and seeing more about inflation.

You see, the economy is already doing well.  Add in tax cuts for individuals and businesses, and there’s going to be even more money floating around.  That extra money could easily make its way into the consumer/business spending ledger.  If enough money is spent on goods and services, we could finally see a ramp up in inflation.

Investors are already showing some concern about inflation, with the move into gold this year.  So far, the price of gold is up about 8% since-mid December.  It’s the first time since last September that gold is closing in on $1,350 per ounce.  Keep in mind, gold is a very common hedge against inflation.

Here’s the thing…

Besides gold, most commodities generally serve as a good inflation hedge.  Commodity prices tend to go up as the price of the dollar goes down (a recipe for inflation).  Many investors look to precious metals in these scenarios, but energy is also a big beneficiary of inflation hedging.

Crude oil is already up close to 7% just this year (all two weeks of it).  Natural gas is up close to 9%.  What’s more, energy stocks are following suit.  The Energy Select Sector SPDR ETF(NYSE: XLE) is up over 7% year-to-date.

At least one very well-funded trader believes XLE and energy stocks are going to continue their run higher. With XLE trading around $76.50, the trader purchased 27,000 March 77 calls for $1.67.   That means the trader will start generating profits above $78.67 at expiration.

This is obviously an extremely bullish trade.  The trader is betting $4.5 million that XLE is going to keep going higher.  Every $1 XLE rises above the breakeven point will result in $2.7 million in profits.

Now, this is a nice, easy way to make a bullish bet on XLE.  However, if you want to save some money, you could also do this trade as a call spread.  Using a call spread (selling a higher call against your long call in the same expiration) would substantially reduce costs, but also cap your gains.

For example, at the time this trade was executed, you could have sold the 81 calls for about $0.50.  The total cost of the trade would have been reduced to around $1.15.  To find max gain potential you just find the width between the long and short strikes ($3) and subtract the price paid ($1.15) and you get $1.85.  That’s potential gains of 160%.  A call spread like this is an easy way to lower your risk without sacrificing too much in potential upside.

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Source: Investors Alley 

It’s no secret that options are often the investment vehicle of choice for “smart money” traders.  Big funds and trading firms regularly use options to establish their biggest positions – sometimes in conjunction with stock holdings, other times just using options.  It’s especially true for the most heavily traded ETFs and stocks.

Less often, you’ll see big money trades occur in low-activity options chains.  Stocks that don’t have very active options chains tend to have wider bid/ask spreads and aren’t nearly as liquid as the active options products.

If you scan the biggest options trades from any given day, you’ll see a lot of familiar names.  There will be the heaviest traded index ETFs and volatility ETFs.  There are also usually some of the big tech names near the top.  It’s relatively rare to see a name on the list that’s unrecognizable by most investors.

However, that’s exactly what happened to me just the other day.  I came across a ticker that I’m not sure I’ve ever seen on an options screener before.  The name of the company is Blackhawk Network Holdings (NASDAQ: HAWK) and the company provides prepaid products and payments services such as prepaid gift and telecom cards.

I admit, I had to look up HAWK to see what the company does.  Moreover, it trades all of 300 option contracts a day on average.  In other words, when there’s a big options trade, it’s easy to notice.

So here’s the deal…

Someone made a massive trade in HAWK – and I mean massive, especially when compared to average volume.  This trader bought 10,000 February 35 calls while selling 20,000 40 calls in the same expiration.  This type of trade is called a ratio spread and it helps reduce the cost of the trade.

In this case, the trader paid around $0.50 total.  That makes the breakeven point $35.50 at expiration in February, with max gain at $40.  Even with the double-short call at the 40 strike, the trader still dropped about $500,000 on the trade.  But, max gain is in the neighborhood of $4.5 million.

At the time of the trade, the stock was sitting at $34.  After the trade hit the wire, HAWK shot up 7% on the day.  It’s almost certainly due to the trade, which is a lot of money to spend in such a low volume options name.  It’s also obviously a very bullish trade on the stock.

There’s nothing wrong with replicating a trade like this in your own portfolio, as someone with a ton of capital clearly believes the stock is going up.  However, you probably want to avoid doing a ratio spread since it opens up your risk considerably to the upside.

Instead, I’d recommend paying a bit more and doing a simple call spread.  The 35-40 February call spread costs about $1.75 with the stock at $35.65.  That’s not too steep a price to pay since the spread is already in the money.  You can still make $3.25 on the trade, which is definitely a reasonable haul in this situation.

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Source: Investors Alley

It’s only the first week of the New Year, and there’s already plenty going on in the financial markets. While there hasn’t been much in the way of volatility, that’s only because stocks are mostly going up. In that sense, 2018 is acting much like 2017.

On the other hand, one major stock that isn’t going up is Intel (NASDAQ: INTC). In fact, it’s quite the opposite situation. As of this writing, INTC was down 5% to kick off 2018.

Here’s the deal…

News broke this week of a potential design flaw in Intel processors which could pose a security risk. Moreover, the fix (patch) for the flaw allegedly slows down the performance of the chips by as much as 30%. This flaw supposedly only impacts Intel chips and not its competitors.

You can see why this would be very bad news for the company. Not only will it likely push consumers to other chip producers, but it also will open up lawsuits or expensive fixes/replacements for Intel. It’s clearly the reason why INTC stock is down and competitors like Advanced Micro Devices (NASDAQ: AMD) and NVIDIA (NASDAQ: NVDA) are up.

Intel hasn’t denied the existence of the flaw, although the company says it will impact multiple types of chips across various devices and is not just an Intel-specific issue. Regardless, with INTC controlling 80% of the microprocessor market, it will certainly be hit the hardest.

This scenario is also playing out in the options market, where AMD is seeing quite a bit of bullish options activity. The day the news hit the wire, about 80% of the money going into AMD options was of the bullish variety. (About 125,000 more options contracts traded that day than what’s average in the stock.)

One trade which caught my eye was a purchase of over 1,500 April 12 calls with AMD trading around $11.75. The buyer paid $1.20, which means AMD needs to get to $13.20 by April expiration for the trade to break even.

The call buyer is spending over $175,000 on these contracts, so there clearly is some belief that AMD is going to keep going up. Over the last 52 weeks, AMD has been as high as $15.65, so it’s definitely not out of the realm of possibility that the stock runs quite a bit higher.

It will be interesting to see if the exuberance around AMD’s prospects diminishes once the news sinks in a bit more. As you can see from the chart, the stock already came back down to earth somewhat the same day it spiked higher.

If you believe AMD is ripe for a move higher, but you don’t want to drop $1.20 on 3 month calls, you could buy a call spread. That’s when you purchase a lower strike call, such as the 12, and sell a higher call, like the 14, to save money on the position.

An April 12-14 call spread like I just described only costs about $0.60, or half the cost of the straight call purchase. Your upside is limited to $1.40 because of the short 14 strike and the $0.60 cost of the trade. But, you are spending a whole lot less on the position. Plus, spending $0.60 for the chance to make $1.40 is not a bad payout ratio at all.

This simple strategy can easily add thousands of dollars of income to your savings over the next 6 months, and I want to show you step-by-step how to do it 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

It’s that time of year again … and I love it.

We get to take out our crystal balls and predict what 2018 has in store for us.

I’m taking an easy one today. Easy, but a highly profitable prediction that will undoubtedly come true.

That’s because the market has a natural ebb and flow to it of ups and downs that we’ve come to expect each year.

But in 2017 we saw an uncharacteristic market.

I wrote a few weeks ago about 2017 having the smallest drawdown so far this year since 1994. In short, the S&P 500 has only pulled back by 3%.

In a market like this, volatility has been kept to a historically low level as well. But, next year, this will change … and there’s one strategy that you must take advantage of.

Spikes in Volatility

Volatility, as tracked by the CBOE S&P 500 Volatility Index (VIX), reflects a minimal drawdown year as you’d expect — with minimal volatility.

But when you look at volatility over the past 12 months, you might think we saw some considerable spikes.

Take a look:

And indeed, at those blue points, it spiked. But without any meaningful sell-off throughout the year, volatility quickly fell back to minimal levels.

On this chart, you will notice the blue line.

That represents the 20 level for the VIX. This is my sweet spot. Once we see volatility spike above 20, it usually doesn’t take long for the market to settle down.

Knowing this, and understanding that the market is not yet near a point to enter a bear market, a spike in volatility is an ideal time to collect income by selling put options.

Selling Put Options

Selling put options is the main focus of my Pure Income service.

And the goal when selling a put option to collect income is for the options price to be higher. The higher the price of the option, the more income you collect — it’s that simple.

And when the VIX is going up, it means all things being equal, the price of that put option is going to be higher.

As you can imagine, seeing the VIX spike above 20 gets me a little excited about taking advantage of it by collecting income.

But, as the first chart showed, we haven’t had this opportunity over the past 12 months.

We’ve still been able to collect income, it is just tougher to find the good opportunities.

In 2018, it will get much, much easier as volatility picks up — and I’m excited about all the money that lies ahead for us.

If you want to learn more so that you can take advantage of this too, click here.

Regards,

Chad Shoop, CMT

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Source: Banyan Hill

One of the great things about options is how flexible they can be for custom-designing strategies to meet your needs.  With options, even something as mundane as hedging can be done in an interesting and creative manner.

This is especially true since volatility ETPs (exchange traded products) have become widely popular among traders and investors.  Being able to buy or sell volatility (related to the level of the VIX) is something which used to be restricted to the realm of the professional options trader.

Now, a fund like iPath S&P 500 VIX Short-term Futures ETF (NYSE: VXX) is as commonly traded as just about any individual stock or ETF on the market.  In fact, VXX is one of the top 10 most actively traded equities, period.  It’s a useful instrument for betting for (or against) a short-term spike in volatility.  In particular, it makes for a great hedging tool for long stock portfolios.

Speaking of hedging, here’s a very interesting trade that hit the wire just recently in VXX…

With the VXX price at $31.50, someone sold a January 29 put while simultaneously buying a January 35 call.  This kind of trade is called a risk reversal and it’s clearly bullish on VXX.  The short put is used to help finance the long call.

In this case, selling the put brought down the price of the call to $0.57 (it would have cost $1.88 without the premium collected from the put sale).  The risk reversal traded 7,000 times, so the trade cost the buyer $342,000 in premium – a substantial amount lower than what the call would cost straight up.

Still, that’s a lot of premium to spend on a product known for mostly going down (as you can see in the chart).  As such, this trade is likely a creative way to hedge against volatility risk through mid-January.  If VXX stays where it is, all that’s lost is the premium amount (not bad for a hedge on what is likely a big portfolio).  However, if VXX climbs above roughly $35.50, the position makes $700,000 per $1 higher.

On the other hand, the position could lose $700,000 per $1 below $29 (along with the premium spent) due to the short put.  However, VXX isn’t likely to plummet that quickly due to macro event risk.  Rather, it is more likely to move down slowly – giving the trader time to adjust the risk reversal as necessary.

I think it’s an interesting way to hedge risk, as long as you are able to make adjustments as VXX moves lower.  It wouldn’t be too difficult (or overly expensive) to buy back the short puts as VXX approaches $29.

Keep in mind, this isn’t the sort of method most of us should use for trading VXX.  If you want to use VXX to hedge (or speculate due to event risk), buying straight up calls or a call spread has defined risk.  For keeping costs low, a call spread is the better choice.

For instance, the January 32-37 call spread (with VXX around $31.50) only costs about $1.  That’s a breakeven point of $33, and a max gain of $4.  You can only lose the $1 you spent in premium, so your payout ratio is 4:1.  That’s a reasonably cheap way to hedge, and balances your payoff with reasonable costs.

  [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

Let me tell you about an exciting new transportation technology. It’s ground-breaking. It’s game-changing. The entire face of shipping could be altered. It’s… er… railroads. Okay, so maybe not so exciting. Or new.

In fact, since the first major railroads were built around 200 years ago in the US, not much has changed. Trains are now powered by diesel or electric locomotives instead of steam – but the basic operation is essentially the same. More importantly, railroads are probably still the most cost effective way to transport raw materials and heavy goods on land.

Of course raw materials are then turned into construction materials or sources of fuel (which then also may be transported by rail). It’s these materials which help the economy function and expand. Without railways, the cost for these materials could be much higher – which would be passed on to the buyers.

As such, railroads tend to do well when the economy is doing well. They also can be a decent gauge of future economic activity. If an investor believes the economy is going to improve, one way to capitalize from the scenario can be investing in railroad companies.

In the US, the largest railroad company is Union Pacific(NYSE: UNP) with a market cap of $90 billion. UNP was founded all the way back in 1862. With its long history, it’s probably not a surprise the company’s rail network consists of over 32,000 miles.

If you want to invest in a growing US economy, investing in UNP is a reasonable way to do so. Moreover, at least one trader is placing a massive options bet on the company thriving over the coming year.

The trade I’m referring to is a January 2019 call spread, which traded a whopping 60,000 times. The trader purchased the 130 strike and sold the 160 strike for a total cost of $3.56. That means the trade breaks even at $133.56 by January 2019 expiration.

With the stock around $111 at the time of the trade, this is very clearly a bullish bet on UNP. In fact, the trader spent $21 million on the massive spread. Of course, max gain on the spread is also $158 million, so there’s definitely some serious upside to be had.

Personally, I like using UNP as a proxy for the economy. And, there are plenty of reasons to believe the economy is going to continue to grow. However, I’d recommend a more affordable trade.

The June 2018 125-145 call spread is a bit cheaper at $2.50 and is closer to the current stock price. You are sacrificing 6 months of time, but there’s still plenty of upside available. Breakeven occurs at $127.50, so only about $15 higher than where we are now. Plus, you can still earn $17.50 at max gain.

Buying very long-term options is nice if you can afford it, but you definitely pay up for the time. By choosing an expiration six months earlier, we can do a similar trade for $1 cheaper and 5 strikes closer to the stock price.

  [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

Predicting where the stock market is going is a tricky business. Very few investors or traders have a consistent, strong track record when it comes to guessing the short- to medium-term direction of the market. That’s because there’s always plenty of noise in the short-term.

While there aren’t any obvious events this year (like an election) which could move the market, there are always plenty of unexpected occurrences which can change investor perception. The biggest potential catalyst in the coming months is probably North Korea. However, investors are already starting to write off the rhetoric involved in the situation.

Of course, you can’t ignore interest rates and upcoming Fed meetings. However, the market feels a December rate hike is all we’ll see this year, and Yellen’s Fed has been pretty transparent. Most likely, the Fed isn’t going to offer any major surprises for the balance of 2017.

On the other hand, the choice of a new Fed Chair could disrupt the markets somewhat if an interest rate hawk is brought on board. A more aggressive approach to raising rates could certainly impact stock prices. However, at this time we don’t have any idea who the next Chair will be and if that person will even be confirmed by the Senate.

Other than political events, which tend to only have short-term impact on stock prices, the only big changes in market direction could come from economic news. Particularly, if there are economic surprises, stocks may react more than expected.

This is primarily only a factor with major reports like monthly jobs, GDP, or inflation numbers. Lately, economic news has been pretty much on target, and there’s no reason to believe it will change significantly. Clearly, the hurricane damage will factor into jobs numbers, but economists will likely have taken those changes into account.

Here’s the thing…

Options traders have a better chance at making consistently successfully trades because they don’t typically have to pick a direction to make money. They can place high probability trades (selling options) which make money if stocks stay in a trading range or move sideways.

In fact, a pretty massive range-bound options trade was just made last week in the SPDR S&P 500 ETF (NYSE: SPY). SPY is the most heavily traded ETF in the world and tracks the S&P 500 index, a common proxy of the overall market. This particular trade was an options strangle, where the trader sold an out-of-the-money call and put at the same time, in the same expiration period (but at different strikes).

The short strangle consisted of selling the December 15^th 263 calls and 237 puts. The credit received for the strangle was $1.64, and it traded about 21,000 times. That means the trader collected over $3.4 million in premium as a credit, and will keep all of it if SPY stays between $237 and $263 by December expiration.

Breakeven points for this trade are around $235 and $265. With SPY at roughly $254 at the time of the trade, the trader has more cushion to the downside ($19 down compared to $11 to the upside). Clearly the trader is less worried about upside for the remainder of the year.

Once again, there’s not much expected to occur between now and December which could roil the markets significantly. Of course you never know, which is why I’d recommend a very different trade than this. Frankly, selling strangles isn’t the sort of thing most traders should be doing. Leave that sort of strategy to the big institutions and professionals.

Instead, buying a straddle (buying the call and put at the same strike, at the same time, in the same expiration) could be a profitable strategy while also not in direct opposition to the short SPY strangle we just discussed. You see, a large stock index like the S&P 500 could easily sit within the range of the short strangle, but an individual sector could see a lot more movement.

One such sector is consumer staples. The Consumer Staples Select SPDR Fund (NYSE: XLP) is sitting right at the 200-day moving average, and could easily be much higher or lower by December 15^th. Plus, the December 15^th 54 straddle (buying the 54 call and put) is trading for less than $2.

XLP would only need to go to $52 or $56 in the next 10 weeks or so to make money. That seems like a very achievable goal with so much time left before expiration.

  [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