The Option Block

Option Block 381: AMZN Sinks while MSFT Soars

Trading Block: A mild day on the street. Stocks rally after 3M, Caterpillar profits beat estimates. Exclusive: U.S. stock options markets agree to need for trading halts on big moves. Earnings Report.

Odd Block: Puts trade Cisco Systems, Inc. (CSCO), calls trade in ZIOPHARM Oncology Inc. (ZIOP), and buy-write trades in SPDR S&P Metals and Mining ETF (XME)

Xpress Block: It’s time once again for the Trading Patterns guessing game!

Mail Block: Listener Questions and Comments

• Question from George Orsos - Dear Sir or Madam, I would like to ask you to inform me about the cash account. I heard that a trader, who has cash account, can trade unlimited number of day trade even if his or her fund is bellow $25 000. Is it correct? I look forward to your response.
• Question from Tony - Mark, love the show. I was lucky enough to have a fairly significant weekly put spread position in DIA this week (long puts at 166-167 and short at 161-162.5). I was making good money on Wednesday and ran into a problem. The bid ask spread on my long puts were so wide, I could not close out, roll or adjust the trade. I thought about buying futures contracts to hedge my delta risk and suck out the theta. Is there any other strategy to adjust or hedge a successful trade without getting haircut on the executions? Should I just calculate the extrinsic value add a spread and put in a limit order for the long leg? Is it always harder to close out a spread trade in a volatile market...i.e. if i want to close a spread trade does one person have to want to enter the same trade? Or can the trade go to two counter parties?

Around the Block: More earnings around the corner.

Option Block 380: Apple Bores Us to Tears

Trading Block: Apple earnings rundown: weekly straddle at approx. $4.40 going into earnings. Upside in the stealth Apple: CMG.

Odd Block: Buy write trades in Digital Realty Trust, Inc. (DLR), calls trade in Yahoo! Inc. (YHOO), and combos trade in iShares MSCI Brazil Index (EWZ).

Strategy Block: Uncle Mike Tosaw discusses the benefits of long premium

Xpress Block: It’s time once again for the Trading Patterns guessing game.

Around the Block: Watching the grass grow in Apple. Plenty of other earnings on the horizon.

Option Block 379: Explosion of VIX Stupidity

Trading Block: Rocktober in full effect - hot on the heels of the madness yesterday, we saw another day with record swings and volume. Can nothing derail the bulls? NFLX earnings apocalypse? HBO Go spooking people?

Odd Block: Combo unwind in iShares iBoxx $ High Yield ETF (HYG), puts close in Global X FTSE Greece 20 ETF (GREK), and collar closing in Yingli Green Energy Holding (YGE)

Xpress Block: With the Viceroy still out, we will play the Trading Patterns Guessing Game in his absence.

Mail Block: Listener questions and comments

• Question from Ajax11 - What is your take on the big VIX pop yesterday? Over 30 a bit overdone? Time to short some VIX here? Maybe time for a new term - Ebola premium?
• Question from Ian Taylor - We always hear about buying VIX calls or verticals during big spikes. How come no one ever talks about selling VIX puts or put spreads instead? Should they not also perform well under that situation?
• Question from Fargo Fan - Question for Uncle Mike: Where does he stand on his beloved Apple now that it’s below the $100 strike? Any changes to position? I am thinking about potentially wheeling in starting with the Nov 90 weekly puts for $1.20 - thoughts?

Around the Block: Can VIX close at a low vol for the day? Google earnings after the bell. ‘Tis the season…earnings season. AAPL earnings coming up on Monday.

Option Block 378: Market Apocalypse Redux

Trading Block: A crazy time in the markets today - the biggest rally of the year, sparked by the Fed minutes, followed by one of the worst down days. VIX Cash back up over 19. Icahn - Apple trading at half value.

Odd Block: Put spreads trade in AECOM Technology Corp (ACM), puts trade in Babcock and Wilcox Co. (BWC), and puts trade in Frontier Communications Corp. (FTR)

Mail Block: Listener questions and comments

• Question from Larry Sanders - Hey crew minus the Viceroy. Do you ever think we will see a tradeable skew product? Something like the CBOE Skew Index but as a real product? Does that even make sense?
• Comment from Lawrence Silverberg - Hi Mark. Thanks for reading my bond question. I heard it today. Your discussion was very helpful. I have some research to do now. Uncle Mike and Andrews input were very helpful. Like you said advice of what not to do is also helpful. I liked the idea of far OTM puts are good bankruptcy protection. My bond portfolio is at Merrill and I think you and I know more about options than my financial planner. Thank you very much for reading my question. Larry.
• Question from Tim - Futures and options are both leveraged instruments. So trading an option on a future is like using leverage to trade an already leveraged instrument. How is that legal? Did they not crack down on something similar with options on levered ETFs? Are you not essentially trading a derivative of a derivative at that point? Does this not call into question the entire futures options market?
• Question from Jim - Dear editor, I like your programs, but have been wondering why the recordings are not made available the same day? Listening something a day late with today’s actual market results dramatically reduces your programs relevance."

Around the Block: Will the freefall continue? What about the Fed schism? Laser focus on the S&P. Watch for volatility creep.

Option Block 377: Covering The Cost of Your Put

Trading Block: A mild day on the street. The dollar weakened the most in six months, dropping from a four-year high. U.S. stocks fell, with the Standard & Poor’s 500 Index retreating after touching its average price for the past 50 days, as small-cap shares resumed a selloff following a fifth weekly decline. Beginning Monday, October 6, 2014, CBOE will calculate the spot value of the CBOE Volatility Index (VIX) using S&P 500 Index (SPX) options with weekly and standard 3rd Friday expirations that more closely bracket the 30-day target timeframe. Hewlett-Packard Co. (HPQ) is splitting into two companies, using a breakup to become nimbler after failing to keep up with the shift away from the printing and personal-computing businesses it pioneered.

Odd Block: Calls trade in Earthlink Holding Corp (ELNK), call stupids trade in Spansion Inc. (CODE), and put sellers in FedEx Corp (FDX)

Strategy Block: Mike Tosaw revisits buying a longer term call option and then sell calls against it.

Mail Block: Listener Questions and comments

Question from Allen Manning, Las Vegas - Hello everyone, I just started listening to the podcast, and I'm really enjoying it! I have a question about a strategy you’ve discussed in the past. As a covered call alternative, I was interested in possibly buying a LEAP with a 1 or 2 year expiration and selling monthly calls against it. When I looked up a few stocks and ran some preliminary numbers, I noticed that the cost to purchase a deep in the money LEAP (about 80 Delta) option was usually higher than the total money I would make selling monthly calls for the duration of the LEAPS.

What I did to get these rough numbers was to take the money earned from selling the initial 1-month call (after commission cost) and multiplying it by 12 or 24. I'm assuming one or more of these possibilities:

1. The method I used to get these figures is wrong, even as a rough estimate.

2. This strategy will only work with certain stocks/underlying that have optimal greek numbers.

3. This method only works when assuming the underlying LEAP also appreciates in value to offset its own cost.

4. Commission costs make this strategy less successful.

Any information you can provide about this strategy is greatly appreciated. Thank you, and keep up the good work on a great program!

Around the Block: What is going to happen in Hong Kong?

Option Block 376: Rebar and Rapeseed - the Stealth Titans

Trading Block: Another selloff - pulling ever farther away from the 2000 level. VIX Cash moving into the high teens. OCC announced today that total cleared contract volume in September reached 371,034,038 contracts. It’s time for the global futures and options guessing game!

Odd Block: Calls trade in RF Micro Devices (RFMD), puts roll in SPDR S&P Oil and Gas Exploration ETF (XOP), and calls roll down in Toll Brothers Inc. (TOL)

Mail Block: Listener questions and comments

• Question from DCruz - Hello All-Stars. You said on the show last week that you guys never exercise you long options except for a few very rare occasions. I would imagine that is the same for most options traders. That make me wonder whether they should just make all options European. Does that not more accurately reflect the reality of the market? And can you ask Tosaw if he can share his tale of pain with Cisco - it might be a good learning experience for the rest of us.
• Question from Anon - On several of your programs you mention that it is important to understand the VIX Cash level at a given SPX level. Can you please explain this further? As an example, what are the implications of a 12 VIX at 1800 VS a 9 VIX at 1800? Likewise, how does a 15 VIX at 1800 compare?

Around The Block: Non-farms coming out tomorrow - could be a resounding "meh."

Option Block 375: How to Hedge Your 401K

Trading Block: Alibaba options active in U.S. trading debut. OCC and U.S. options exchanges announce new risk control standards to strengthen industry protections.

ISE Holdings files for third exchange license to launch ISE Mercury.

Odd Block: Fun and unusual trading activity in TTPH, MX, and TAP.

Strategy Block: Uncle Mike discusses how to hedge a 401k or other retirement accounts?

Around the Block: Hong Kong: how much can it impact the market?

Option Block 374: When To Exercise An Option...Never

Trading Block: An aggressive selloff in the market today. VIX up 3 handles - about 22%. Apple off 3%. Nike, the other big player in the market today - up about $4.

Odd Block: Calls and puts trade in EXH- looks like a straddle seller, puts close in KO- could be a put closer but not rolling, and calls trade in PBF- existing roll for calls

Mail Block: Listener questions and comments

• Question from Sinclair - What do the all stars expect for the big BABA options launch on monday?
• iTunes comment from Princk - Listening gives tremendous insight into options trading, strategies and trends. Great team that combines risk management, speculation and investment wisdom. Superb. Thoughtful, funny and wide ranging show for learning and understanding options trading.
• iTunes comment from Bajasakee - Love the show very informative, looking forward to more fresh insight every episode.
• iTunes comment from PuntPass Shoot - There are a lot of financial podcasts out there..not a lot of good ones though. It’s even harder to find something useful about options. The Option Block really gets it right. Just the right amount of information, banter and market insight to make it something I look forward to listening to every week. Great energy between the guys, interesting guests and useful traders of all rangers. IF you’re thinking about subscribing...stop thinking. Just do it.
• Question from KaiserDog - I have a question for the "Guardians Of The Gama"......Hehe. When do you like to exercise an option? Is anyone a fan? Do you ever like taking the stock over "Rolling"? Thanks again! By the way, the Shows have been stellar. Keep em coming.

Around the Block: Closely watching the S&P. Will vol come down? Mike wants to sell an AAPL put spread on the bent phone pullback. Nike reports after the bell.

Option Block 373: Talking BABA, YHOO, AAPL and more

Trading Block: A sea of red on the street today. Bad news out of China.

Apple announced opening weekend iPhone 6 sales were over 10 million. Alibaba I.P.O. underwriters increased deal size to a record-setting $25 billion. Yahoo options went bonkers on Friday.

Odd Block: Puts roll in Cliffs Natural Resources Inc. (CLF) risk reversal goes up in iShares Russell 2000 Growth Index (IWO), and call buyers in Shares of Global X Social Media Index ETF (SOCL).

Strategy Block: Mike Tosaw discusses ways to diversify your portfolio with non-correlated assets.

Around the Block: Vol is higher, emerging economies are growing, how stimulating was the stimulus? How will the market act into and out of the elections?

Option Block 372: Call Stupids and Bond Hedges

Trading Block: Alibaba IPO on Friday. Fed Meeting on Wednesday. Scots vote whether or not to stay in UK.

Odd Block: Calls trade in Energy Transfer Partners (ETP) ratio spreads in Petroleo Brasilieiro Petrobras (PBR), put buyers jump into PDL Biopharma Inc. (PDLI).

Mail Block: Listener questions and comments

Question from Lawrence Silverberg - Hi! “Doctor Larry” back again. Thanks for reading and answering my previous two questions / comments on the show! I’m a huge fan! I am considering a way to insure my bond portfolio with options. Honestly I'm not too concerned with rising interest rates in the next two to three years but I understand the risk exists. Additionally, a market crash seems like a bigger risk to me. Either way I see bonds having downside risk.

Here's my thought process below: I'd love to hear your comment.

Situation: I'm about 8-10 years to retirement. I have about 80% of my savings in just below investment grade bonds. These are big companies like Goodyear, Burger King, US steel, Morgan Stanley, Levi’s, Hertz, Ford, and many more. It's a very diverse bond ladder. Average return is just under 7%. They have appreciated a great deal over the past 8-9 years too.

By rule of 72 I'm doubling my money every 10-11 years with interest. Hopefully faster with appreciation of the bonds too. The risk is if there is a period of rising rates (although I plan to hold to maturity) or a market crash like what happened in 2008.

I was considering insuring this portfolio with LEAPS in HYG. A high yield bond EFT. It appears to be the most liquid options compared to other similar bond ETFs. As for stock volume it is second to only JNK.

I can buy the Jan '16 puts ATM pretty cheap. These Leaps are trading at less than a 10% Implied Volatility. In the 2008 crash, HYG went from 105 to 65 and IV went from 10 to 22%. (NOTE: HYG TRADING $93 & JAN 2016 93 PUTS OFFERED @$9.30 - SO HAVE TO BE WILLING TO SPEND 10% OF YOUR HOLDING ON PROTECTION)

I did not want to just buy puts naked but was looking at backspreads. This way I’m selling premium to get much less short theta and I’m buying more puts to get long Vega and short delta.

The best spread I found was a Jan16 put backspread 1 by 4. Short one 85 put for each long four 70 puts. With theoretical pricing I can put the spread on for even money and possibly a $0.10 credit. I’d close this spread when the Jan 17 leaps are listed and add 12 more months of insurance.

In summary, I have some upside risk as IV can go down to around 5% based on history but that’s the cost of insurance. When I roll to Jan17 I’d lose some money.

Questions:

How do I weight a bond portfolio to figure out how many contracts to trade?

Similarly, how do I estimate downside risk of the bonds?

Is HYG my best underlying?

Is there a different spread that’s long Vega and short delta that you’d recommend?

Would you use a diagonal instead of trading only one month? I can get a similar protection by trading a 1 by 2 diagonal. Short one Dec 90 put for each long two Jan 2016 $85 puts for around even money. I could then sell more (90 *or other strike) puts when the Dec expire. My hesitation here is that it’s harder to predict IV of two months. I think the short Dec will increase IV in a crash more than my long Jan16 and hurt performance.

If you read this (long) question on the air I’d really appreciate it. “Dr. Larry.”