Dear Friend,

The world of stock options is every changing.  Last week, three new series of options were introduced. Options trades should be aware of these new options, and understand how they might fit into their options strategies, no matter what those  strategies might be.

Terry

Three New (Weekly) Options Series Introduced 

Last week, the CBOE announced the arrival of several new options series for our favorite ETFs as well as four individual popular stocks which have extremely high options activity.

Here they are:



For the above entities, there are now four Weekly options series available at any given time.  In the past, Weekly options for the following week became available on a Thursday (with eight days of remaining life).

This is a big change for those of us who trade the Weeklys (I know that seems to be a funny way to spell the plural of Weekly, but that is what the CBOE does).  No longer will we have to wait until Thursday to roll over short options to the next week to gain maximum decay (theta) for our short positions.

The stocks and ETFs for which the new Weeklys are available are among the most active options markets out there.  Already, these markets have very small bid-ask spreads (meaning that you can usually get very good executions, often at the mid-point of the bid-ask spread rather than being forced to buy at the ask price and sell at the bid price).  This advantage should extend to the new Weekly series, although I have noticed that the bid-ask spreads are slightly higher for the third and fourth weeks out, at least at this time.

The new Weeklys will particularly be important for Apple.  Option prices have traditionally sky-rocketed for the option series which comes a few days after their quarterly earnings announcements.  In the past, a popular strategy was to place a calendar or diagonal spread in advance of an announcement (further-out options tend to be far less expensive (lower implied volatility) than those expiring shortly after the announcement, and potentially profitable spreads are often available.  The long side had to be the newt monthly series, often a full three weeks later.

With the new Weekly series now being available, extremely inexpensive spreads might be possible, with the long side having only seven days of more time than the Weeklys that you are selling.  It will be very interesting come next January. 

     Bottom line, the new Weekly series will give you far more flexibility in taking a short-term view on stock price movement and/or volatility changes, plus more ways to profit from time decay.  It is good news for all options traders.


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Terry

It has been a rough few months for the stock market.

Since Bernanke announced QE ‘til infinity back on September, the market has been unable to make any progress.

The reasons for the decline are plentiful: poor earnings, ongoing European woes, the election and now the dreaded fiscal cliff. There is always a reason to keep the talking heads busy, and they like it that way.

But as self-directed investors our job is to stay abreast of what the market is telling us.

The best gauge to monitor overall market sentiment is the CBOE Market Volatility Index (VIX). The VIX measures the implied volatility of the S&P 500 index options. Often referred to as the investors fear index, it represents a measure of the market’s expectation of stock market volatility over the next 30 days.

As of Friday the VIX stood at 16.41.

While the VIX has pushed over 20% higher since September 13^th, the index still remains well below its 20-year average of 18.9. The current reading of 16.41 is 15% below its historical price which indicates the market is fairly content. Of course, all of the financial noise state otherwise, but remember the fear card draws eyes to the screen. It’s the foundation of their business.  But if you choose to listen to what the market has to say, by paying close attention to the VIX you can more accurately gauge the pulse of the market.

Remember, the last time the “fiscal cliff” was an issue the market lost 11% over a two week period. The sell-off offered investors a wonderful time to start putting money to work. Could this same scenario repeat itself this time around?

While no one can accurately answer that question there is a noteworthy event that investors need to watch.

All of you are aware of Apple’s latest plunge.

For eight long weeks Apple has declined... the longest losing streak in Apple’s history. Over that period, Apple has lost 24%. And over the last three weeks the tech behemoth has tumbled 14.1% to approximately $525.

I took at closer look at the probability of Apple dropping to $525 over a three week period. As you can see in the chart below the probability was only 6.52%.



Think about it like this. Flip a coin 100 times ten different times. How many times do you think you would have to flip a coin 100 times before you only witnessed 6-7 heads or less?

As you can see in the chart above, the latest move has only occurred three times over the past five years. Each and every time a reversal was imminent.

Remember, Apple accounts for nearly 5% of the market cap of all 500 companies in the benchmark S&P index.

Shares of Apple surged 74% this year before losing approximately 30% of their value recently. The 74% gain helped the S&P 500 log a respectable 16% increase. However, take Apple out of the mix and the broad index would only have gained 14%, according to research from S&P/Dow Jones Indices.

So as you can see 30% decrease in Apple weighs heavily on the performance of the index.

But, if history repeats itself and the “fiscal cliff” bounce and Apple oversold bounce come to fruition, we could see a push back up to the 1400 level on the S&P 500. Once we get to that level expect to see anther struggle between the bulls and bears.

Also, pay close attention to the 200-day moving average of the S&P 500 (SPY). On Wednesday SPY closed below its 200-day moving average ($137.50) for the first time since late December of last year.

Next week, should be rather slow, which could give the bulls a great chance to push the market higher. As they always say, don’t sell a dull market. We will see soon enough if the old Wall Street adage hold true.

"I've seen the results of the 10K strategy and believe in it.  With the options calculator/graphic software you recommended, I can validate my own trades and run a variety of "what-if" scenarios to best suit my needs.” 

~  Charlie

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Sincerely,
Dr. Terry Allen
Terry's Tips