(CNN)

The North American Derivatives Exchange (Nadex), a small trading exchange in Chicago, has recently asked federal regulators for permission to sell options that are tied to the outcome of various 2012 elections in the US – elections that include the US presidency and control of the US Senate and House of Representatives.

Options trading on the US elections would work like this: A trader buys an option on Former Massachusetts Gov. Mitt Romney winning the presidency for $45 and if he wins, the trader gets $100 or a profit of $55. On the other hand and if Romney looses the election, the trader would get nothing.

Traders would also be able to sell their options before the election. In other words, if a trader buys a Newt Gingrich or Ron Paul option for $10 and it moves to $15, the option could be sold for a profit.

However, it should be noted that there is already a limited options trading market for the US elections run by the University of Iowa’s business school and known as the Iowa Electronic Markets where betting is capped at $500. (but anyone can wager).

On the other hand, the proposed Nadex election options trading market would be different as there would be a $100 minimum, no maximum and a fee of 90 cents per transaction. In addition, their elections market would be subject to federal regulation.

Nevertheless, Nadex still needs to win approval from the Commodity Futures Trading Commission (CFTC) and one of its five commissioners is already opposed to the idea because he thinks its “political poker.”

It should be noted that the recent Dodd-Frank financial regulations passed by Congress forbids US futures that are based on war, terrorism or unlawful activity. However, there is nothing in the law that forbids futures based on elections.

Options Trading “Fear Gauge”: Calm Before the Storm?

(Wall Street Journal)

The so-called “fear gauge” shows a relative calm at the end of 2011 but as 2012 begins, options trading investors should not be at all surprised if fear and anxiety suddenly reappear.

Specifically, the Chicago Board Options Exchange’s volatility index or VIX was at a five month low right before Christmas – closing at 20.73 after starting the week at 25.1. This sudden fall took many observers by surprise.

Even as investor anxiety has eased before the holidays, Europe’s debt problems along with worries over global growth remain. This suggests that the VIX’s sudden drop has more to do with seasonal factors such as thin volume along with the usually strong December performance rather than actual anxiety and fear falling.

Moreover, January VIX futures are priced around 25 while August VIX futures are priced at 29 – meaning that options trading investors are preparing for another bumpy wide next year.

Otherwise, it should be remembered that the VIX surged near 50 over the summer when stocks became particularly volatile and it topped out at 90 during the height of the 2008 financial crises.

In addition, trading volume has substantially slowed in December – making some investors cautious going into 2012.

Options Trading Ideas: Going Bearish on Cheesecake Factory (CAKE)

(Schaeffers Investment Research)

Earlier in the week, the Cheesecake Factory (CAKE) saw a significant increase in put options trading activity with trading reflecting at least 11 times the equity’s expected intraday volume. Moreover, much of the options trading activity was centered around the January 2012 28 and February 28 strike prices.

Otherwise, it should be noted that CAKE’s 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX) put/call trading volume ratio stood at 6.83 – meaning that the puts bought have outnumbered calls by nearly seven to one over the past few weeks. This means that traders have been buying up bearish put options over bullish call options at a much faster-than-usual clip.

Options Trading Ideas: Getting Bullish on the Las Vegas Sands (LVS)

(Forbes)

Right before Christmas, one options trading investor went bullish on Las Vegas Sands (LVS) call options – betting that shares in the casino resort stock will rally sharply during the first few months of 2012.

Specifically, the options trading investor got positioned for big gains next year by purchasing a bull call spread by buying 2,000 calls at the Feb. 2012 $46 strike and then selling the same number of calls at the Feb. 2012 $50 strike for a net premium of $1.05 per contract. The investors will profit should shares of Las Vegas Sands (LVS) rise from the $43 level to a breakeven price of $47.05 at expiration.

Moreover and should Las Vegas Sands (LVS) shares jump 15.6% to settle above $50.00 at expiration in February, the investor will earn a maximum of $2.95 per contract. Otherwise, it should be noted that Las Vegas Sands (LVS) last traded above $50 on September 21 and have not closed above the $50.00 level since February 3, 2011.

Traders Slash Net Long Options Trading Positions in Precious Metals

(Forbes)

After the steep drop in metals prices across the board in mid-December, options trading speculators significantly lowered their net long positions in futures and options on the Comex division of the New York Mercantile Exchange as well as on the Nymex. In fact, options trading speculators’ positions are also the smallest in a few years for both gold and silver.

(Wall Street Journal)

Currency option prices are sinking as investors and traders close out their books for the year. Moreover and a week ago, the currency market’s “fear” gauges were dropping – making options prices more volatile on lower trading volumes.

Hedge funds and other money managers were loading up on currency options to bet on Europe’s debt crisis along with the global economy for months now but it appears that they plan to sit out the holiday season. In fact, investors are selling currency options while their bankers are taking the opposite side of the trades in order to shield themselves from potential currency market volatility.

However, investors and traders alike could just as easily jump back into currency options trading should someone pull a trigger with the most likely trigger being a downgrade of a European country or some. Cash could just as easily be invested in European bonds – which could steady the Euro.

Nevertheless, any sudden or violent move by the Euro could just as quickly make currency options more attractive.

In addition, the euro has already fallen to its weakest level against the dollar since January plus its poised to fall further as options trading investors loose whatever confidence was left in the ability of European leaders to contain the their debt crisis.

Options Trading Ideas: Copper

(Bloomberg Businessweek )

Copper traders are now the most bullish since October as global copper inventories hit a two-year low – adding to signs that copper demand is improving. On other hand, hedge funds and other money managers continue to be bearish.

Specifically, the “smart” money crowd are holding a net-short position of 3,390 US futures and options. Moreover, copper speculators have held a net-short options trading position since mid-September – the longest stretch since July 2009 and just one month after the last US recession officially ended.

In addition, sixteen of the 28 analysts surveyed by Bloomberg expect copper to advance next week for the first positive outlook in three weeks while global copper stockpiles fell 22% since March to reach their lowest level since October 2009.

Moreover, one analyst has pointed out that reported copper inventories have been very aggressively declining and there are indications that the market is still tight. Hence, this analyst predicted that copper will have decent, albeit unspectacular, growth rates.

Nevertheless, copper is still down 25% from a record $10,190 a metric ton in February to the $7,613.25 level on the London Metal Exchange plus its on track to have its first annual drop since 2008. On the other hand, Goldman Sachs forecasts copper to trade at $9,500 in the next 12 months while Barclays expects a 234,000-ton shortage next year resulting from a 2.5% increase in consumption.

Bearish Options Trading on Oracle (ORCL)

(Forbes)

Oracle (ORCL) sank after missing analysts expectations. Moreover, some options trading investors were buying puts in anticipation of further losses ahead of the holidays.

Total options trading volume on Oracle (ORCL) surpassed 205,000 contracts by the half day mark after earnings were reported as traders jockeyed to enter post-earnings trading positions. Some options trading investors were taking out bearish trading positions in anticipation of more losses while others staked out more optimistic ones on the belief there will be a recovery.

However, one options trading investor appears to have guessed correctly before Oracle (ORCL) released its earnings by selling 16,500 long-dated Jan. 2013 $35 strike calls late in November to collect a $2.62 premium when shares were trading at $29. With 16,500 calls purchased after earnings were announced, this options trading investor was able to exit his or her bearish trading position with with net profits of around $1.58 per options contract.

Options Trading Ideas: Getting Bullish on Tobacco

(Forbes)

During the week, Altria Group (MO) hit a three year high of $29.63 with bullish call options trading activity. This means that options trading investors believe that Altria Group (MO) has room to make further gains in 2012 – especially after the company announces fourth-quarter earnings on January 26.

Options trading volume on Altria Group was at its heaviest at the Feb. 2012 $31 strike price where at least 3,000 calls traded and were mostly bought at an average premium of $0.16 apiece.

In addition, Philip Morris International (PM) shares were also rallying but one big options trade in February 2012 calls may not be a bullish call. Specifically, 3,000 Feb. 2012 $80 strike calls were purchased on Philip Morris appears to be tied to the sale of stock in a trading position that would be profitable if PM were to decline.

Options Trading on Harley-Davidson (HOG)

(Schaeffer Investment Research)

Put traders were showing a strong interest in Harley-Davidson (HOG) earlier in the week with around 4,200 put options being traded – 14 times HOG’s expected intraday volume.

Specifically, more than 4,000 puts were traded at the out-of-the-money January 2012 30 strike at the bid price. This points to seller driven trading activity.

However and if the puts were being sold to open, that would mean that traders are betting that Harley-Davidson (HOG) will stay above the $30 level when January options expire.

Nevertheless, a majority of analysts following Harley-Davidson (HOG) are optimistic toward the stock with 10 “buys” or better ratings verses five “holds” and no “sells.” Options trading investors should also note that Harley-Davidson (HOG) has gained around 11% since the start of the year.

(Businessweek Bloomberg)

Gold received its biggest rout in three months and some analysts have warned of further declines but it appears that options trading players remain bullish to some extent.

Specifically, ten of 21 surveyed by Bloomberg now expect gold to gain next week – the lowest proportion since the end of July. Gold bullion also slide roughly 9% last week from a record $1,923.70 an ounce back in September but is still up 12% to $1,594.20 an ounce for the year on the Comex in New York.

On the other hand and despite investors cutting 13.3 metric tons of gold from their ETP holdings on Thursday, the highest amount since August 24, assets are still only less than 1% below the record set back on December 14. Moreover, the most widely held gold option gives owners the right to buy gold at $2,000 by March while the eight biggest options holdings are all call options that are at 13% or more above today’s prices.

However, analysts have said that this could be the beginnings of a bear market for bullion where prices could sink to $1,475 or even the $1,400 level. Nevertheless, gold is still set to head for an 11th consecutive annual gain but last week’s declines mean it is also set for its first quarterly drop in three years.

Any plunge in gold prices could trigger more buying from central banks who are in the process of expanding their reserves for the first time in a generation. In fact, the World Gold Council now expects central banks to buy as much as 450 tons this year while official gold holdings now stand at 30,708 tons.

Hence, some analysts are predicting a gold rally around the second half of next year thanks in part to the turmoil in Europe and elsewhere – meaning bullion could reach $2,000 in 12 months or rally to as much as $2,400.

Gold Option Trading Volatility Below Peak

(Reuters)

Implied volatility in the gold options trading market was subdued at mid week, an indication that bullion is seeking to find a new price range.

On Thursday, the Chicago Board Option Exchange’s Gold ETF Volatility Index .GVZ, also known as the “Gold VIX,” fell 4.72% to 27.28. The Gold VIX had peaked at 43.51 back on September 23 and remains far lower than in both August or September when gold prices had peaked and then began to fall. Analysts say that low volatility could be due to a slower holiday season and less fear in the gold market.

The GVZ is considered to be a good measure the market’s expectations of 30-day volatility in both gold put and call prices.

Oil Options Trading Volatility Dropped

(Businessweek Bloomberg)

After Fitch Ratings lowered France’s rating outlook and put Spain and Italy on review for a downgrade, oil options trading volatility dropped as the underlying futures hit a six-week low.

Implied volatility for at-the-money options that will expire in February fell to 36.8 by Friday at 2 pm from 38 the day before while oil fell as much as 1.4% after Fitch cited Europe’s failure to come up with a “comprehensive solution” to solve its debt crisis as a reason for lowering its rating outlook.

Friday’s most active options trading contracts were February $110 calls where 1,920 lots changed hands by the afternoon, falling 14 cents to 44 cents a barrel; and February $90 puts where 1,396 lots were traded and fell 3 cents to $2.58.

Options Trading Ideas: Best Buy (BBY)

(Forbes)

Electronics retailer Best Buy (BBY) got hammered after reporting a 13% drop in third quarter earnings from $217 million to $154 million and a lackluster forecast for next year.

Before Best Buy announced earnings, there had been a lack of optimism from options trading investors as the company attracted total call open interest of 82,231 contracts verses put open interest of 60,802 contracts for the December series for a slight bullish front-month put/call open interest ratio of 0.74. This trend continued even after earnings were reported.

Options trading investors looking to profit from Best Buy could enter a bull put spread – a neutral to bullish strategy that involves selling an out-of-the-money put (e.g. the December 25 contract) while buying a deeper out-of-the-money put (e.g. the December 24 contract) to limit any potential losses on the position.

Share and Options Trading on Research In Motion (RIMM)

(AVAFIN)

Recently, institutional trading on Research In Motion (RIMM) shares yielded a bought/sold volume ratio of 1.50 resulting in 1,080,510 shares on the buy side along 720,343 shares on the sell side. This implies a cash inflow of $16,930,901 verses cash outflow of $720,343 – meaning that institutions may actually have positive outlook on RIMM shares.

On the options trading side, traders traded a total of 299,675 contracts including 129,212 call and 170,463 put contracts were traded for a 1.32 put/call ratio.

Bullish Options Trading on Avon Products (AVP)

(Forbes)

Investors went bullish on Avon Products (AVP) after news that the company will replace its current CEO next year. In fact, Avon rose as much as 11.1% to $17.93 at the start of one midweek trading session.

On the options trading front, 10,000 calls were purchased at the July 2012 $20 strike and could be the work of a bullish investor who is preparing for shares to extend gains. On the other hand, these long calls were actually tied to short stock which indicates bearishness on Avon. This options trading investor sold 330,000 shares of AVP stock at $17.40 and then purchased calls to synthetically buy long puts to benefit from a share price decline.

(Financial News)

There is a growing split between US and European equity derivatives trading according to November’s trading statistics. In fact, US options trading rose 10% year-over-year in November while European options trading sank by nearly one third.

Specifically, Amex increased its share of the competitive US market from 12.83% to 14.5% in November while Arca increased its share from 10.26% to 11.49%.

On the other hand, European equity investors were apparently spooked by persistent volatility in the cash markets as sharp price movements show a lack of market liquidity as market makers withdraw due to volatile trading. For the month of November, 1.2 million single stock futures and options on average changed hands per day on the NYSE Liffe. This trading volume is down 30.4% over last year.

Meanwhile, trading volumes released by the London Stock Exchange indicated a similar pattern as trading on that exchange was down 20% year-over-year. In addition, LSE cash market turnover fell 5% to £178.4 billion in November verses 12 months earlier.

As for the US options trading market, it appears to be set for another record year in 2011. So far, 3.9 billion contracts have been traded across the market’s nine exchanges for the first 11 months of the year – a 19.3% increase over 2010.

Analysts point out that the use of options contracts for hedging strategies – even by vanilla fund managers. In fact, US managers now make up 20% of the options trading market.

Options Trading Strategies for Nervous Investors

(Wall Street Journal)

Given that stocks are generating more worry than returns along with the fact that low returns or low yields of other investments means selling stocks may not be the best idea, nervous investors might want to take a serious look at options trading strategies that protect and enhance the returns of their stock portfolios.

One such options trading strategy uses “covered calls” where an investor can collect extra income now at the expense of giving up some potential gains later on. Moreover, there is research that seems to indicate that investors using covered calls based on stock indexes instead of individual stocks can turn the risk-reward trade-off in their favor.

Specifically, there are at least nine research papers since 1990 coming from both academia and Wall Street that show that index options tend to be overpriced. This gives an opportunity for investors who sell them.

Moreover, the VIX overestimates the broad S&P 500′s future volatility more than 80% of the time since institutional investors have huge demand for index puts because they offer fairly cheap protection against a market crash. This buying will push index put prices higher along with call prices as the two will move in tandem. Hence and on average, an investor writing index options will get a better price than one who buys.

However and since calls can be used to lower risk through covered call-writing or to add huge amounts of risk through “naked” call-writing, brokers will usually only issue options-trading permission on a selective or case by case basis.

Options Trading Ideas: Bullish Walgreen (WAG) Bets

(Forbes)

One options trading investor is betting that shares in Walgreen (WAG), the largest US drugstore chain, may rally sharply heading into 2012. This options trader bought Jan. 2012 contract call options to form a bull call spread that will profit should Walgreen surge after the company reports first quarter earnings before the market opens on December 21.

Specifically, the trader bought approximately a 3,000 Jan. 2012 $35/$39 call spread. This options trader will profit at expiration next year should Walgreen rise 6.0% above an average breakeven price of $36.06 and it will make the most profit if shares surge 14.7% above $39 at the January expiration.

However, it should be noted that Walgreen’s shares were last above the $39.00 level at the beginning of August.

Options Trading Ideas: Liz Clairborne (LIZ) Calls

(Schaeffer’s Investment Research)

Recently, apparel and accessories maker and retailer Liz Clairborne (LIZ) saw a sharp call volume rise with more than 5,700 call options being traded. This is nine times Liz Clairborne’s expected intraday volume. Specifically, nearly 4,100 calls were traded at the January 2012 8 strike price.

Moreover, Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE) and NASDAQ OMX PHLX (PHLX) shows that Liz Clairborne’s (LIZ) 10-day call/put trading volume ratio comes in at 29.67. In other words, calls bought to open outnumbered puts by nearly 30 to one over the past two weeks meaning that traders have been buying up bullish calls over bearish puts at a faster-than-usual pace.

On the other hand, short interest on Liz Clairborne has also surged by 29.02% – meaning that some of the recent call volume could be attributed to short sellers who are hedging their bets.

It should be noted that Liz Clairborne is up roughly 16% for the yeat plus the stock has outperformed the broader S&P 500 Index (SPX) by roughly41% during the past 60 sessions. Liz Clairborne has also been trading above its 10-day and 20-day moving averages after a considerable price spike in mid-October.

Options Trading Ideas: Whole Foods Market (WFM)

(AVAFIN)

Whole Foods Market (WFM) options have recently set a new 90-day record for the number of call contracts traded. Specifically, aggregate volume of puts stood at 4,519 while calls came in at 3,013 for a 1.50 put/call ratio.

Shares of Whole Foods Market recently closed at $68.50 with a trading volume of 1,497,726 – below the 90 day average trading volume of 2,033,720 shares. Whole Foods Market is also trading above the 50 day moving average with a 52 week low of $47.83 and a 52 week high of $74.45.

(Barron’s and Forbes)

On Friday, financials powered higher thanks to renewed optimism over US employment data along with signs of progress with Europe’s debt crisis. In fact, the PowerShares KBW Bank ETF (KBWB) rose 3.4% on Friday and had its best week of gains since August 2009 – finishing up 11.6% for the week. The Financials Select Sector SPDR (XLF) also broke a four-week losing streak while Morgan Stanley (MS) gained 7%, Citigroup (C) gained 4.4% and Goldman Sachs (GS) gained 3%.

More importantly, bullish options trading also soared with some of the heaviest trading action being seen in Bank of America (BAC) as traders purchased large blocks of calls granting the right to buy the stock at the $6 strike price by December 16. Bank of America’s stock also rose 2% at $5.64 a share although its shares have lost more than half their value this year.

JPMorgan (JPM) also rose 6.1% on Friday with December $34 call options being purchased by traders who can then swap these options for shares at a profit if the stock rallies above the strike price over the next two weeks.

In addition, bullish options trading activity was also seen in Goldman Sachs (GS) as options traders traded more than 5,900 calls at the Dec. ’09 $105 strike price. These investors may profit at expiration next week should Goldman Sachs surge around 6% to rise beyond an average breakeven point at $106.05.

Brokerages Look to Options Trading as Stock Trading Volume Falls

(Bloomberg Businessweek)

Online brokerages such as TD Ameritrade, Schwab, Fidelity Investments, E*Trade Financial and Scottrade are hoping to expand their businesses beyond equities and into options trading as stock trading volume sags. Options are also appealing to investors and traders alike because they are well suited for volatile market conditions plus they help hedge stock portfolios against declines.

Moreover, competition to attract and retain active traders has intensified. However and while about 21 million US households held stocks outside retirement accounts in 2009, less than 10% of these households are active traders.

On the other hand, options have been described as one analysts as a kind of crack cocaine for brokerage firms because they are easy money, can earn huge commissions and can be extremely addictive for traders.

In fact, options trading volume has risen every year since 2002 plus has risen 22% through October. On the other hand, equity trading volumes on the New York Stock Exchange has fallen 14% and 9.1% on the Nasdaq.

Meanwhile, a survey by the Options Industry Council found that option buyers averaged 31 trades a year verses 24 for other investors. Moreover, options trading usually comes with higher commissions. For example: TD Ameritrade charges $9.99 for an online stock trade while option orders can cost $9.99 plus 75¢ per contract with some clients being charged a $19.99 commission when they exercise their options.

Industry trading heavyweights are also buying smaller rivals or they are busily expanding their in-house capabilities. In fact and about two and a half years ago, TD Ameritrade, which is also the number 3 online brokerage in the US, paid about $750 million for options trader Thinkorswim in order to acquire 87,000 retail client accounts.

Options Trading Volume Falls in November

(MarketWatch)

November’s average daily options trading volume declined from the prior year. Specifically, around 16.4 million puts and calls were traded on US exchanges daily during November – lower than the 16.9 million contracts that were traded in November 2010.

In addition, November’s daily volume count was lower than the 18.3 million daily average for 2011 plus it was the the lowest since December of last year.

On the other hand and despite any November volume slip, activity in the options trading market has continued to break records with the annual options volume setting a record in 2011 for the ninth consecutive year in a row. In fact, yearly options trading volume surpassed 4 billion contracts for the first time in November.

Muted Options Trading on American Airlines

(Reuters)

The parent of American Airlines, AMR Corp, sank 80% to 32 cents with more than 125 million shares being traded after the company filed for bankruptcy.

However and while stock trading volume in AMR surged, options trading volume was relatively muted with 40,000 contracts or about twice the recent average daily volume. Apparently, options traders have no reason to trade a 34 cent stock while Citigroup cut their ratings on the stock to sell and set price target to zero.

Options Trading Bears Descend on Anheuser-Busch InBev NV

(Bloomberg)

As Anheuser-Busch InBev NV, the world’s biggest brewer, sells less beer in North America where it has its biggest market by revenue along with market share declines, options trading investors are paying the most in five years to buy bearish put contracts. In fact, puts to sell Anheuser-Busch InBev NV cost 46% more than calls to buy – the highest ratio since February 2006 and more than triple the 13% level back in March.

Apparently, investors are protecting themselves in case Anheuser-Busch InBev NV shares should decline. In fact, shares have risen 6.8% in the past six months – making the stock one of only three stocks to have gains in the Euro Stoxx 50. Moreover, the stock has rallied 25% from this year’s lowest point on August 10 – making it the third-biggest gainer in the Euro Stoxx 50 Index since that date.

Despite declining sales in the USA due to high unemployment among young men, analysts say that other consumers aren’t going to stop drinking beer just because of a recession plus Anheuser-Busch InBev NV still has strong beer-market leadership.

(Wall Street Journal)

Goldman Sachs options trading strategists say that traders might be able to rake in yield by selling retail stock options ahead of the holidays as historically, retail stocks will tend to stage their sharpest moves during October and November when bets are placed on holiday-shopping trends.

However and by Black Friday, much of the trading choppiness will typically dissipate after the most important shopping day of the year. Less volatile options trading means that retail stocks will have lower options prices.

Specifically, November will typically be the most volatile month for retail while December will be one of the months that has the least amount of volatility as shopping trends are usually clearly apparent by then. Hence and as retail stocks’ actual and implied volatilities decline, so will options prices but investors can still capitalize on higher than normal options prices by selling call options on specific retail stocks

Looking at historical data, Goldman Sachs believes that shares of Chico’s FAS Inc. (a women’s apparel maker), Coach Inc. (a handbag maker), Nordstrom Inc. (an upscale retailer), Williams-Sonoma Inc. (a home-furnishing retailer) and J.C. Penney Co. Inc. (a department-store operator) will make small moves but their options prices remain high. Moreover, none of these retail stocks face any impending news like an earnings report.

Hence, options trading investors could sell pricey options on these retail stocks in order to bring in yield.

Options Trading Investors Bet on a Bank Rebound

(Reuters)

Despite growing pessimism over the euro zone’s ability to resolve its debt crisis, some options trading investors are betting on a rebound in big bank stocks.

In fact, considerable activity in call options in December contracts on Barclays PLC, Citigroup, Goldman Sachs Group, JPMorgan & Chase and Morgan Stanley would seem to suggest that their battered shares are about to reverse course.

On the other hand, bank stocks had also nose dived on Wednesday over concerns about the European debt crisis along with rigorous stress tests of six large US banks. Moreover and despite upside trading activity in some individual bank stocks, the top trades in the Financial Select Sector SPDR fund were mostly bearish options trading plays.

Specifically, XLF fell 2.9% to $11.73 on Wednesday as traders traded about 1.24 million options in the XLF. This was more than 2.9 times the average daily trading levels with puts outpacing calls by a factor of 2.89:1.

Hedge Funds Cut Bullish Commodity Bets

(Bloomberg)

Rising concern that the European debt crisis will restrain global economic growth along with the demand for raw materials had hedge funds cutting bullish commodity bets by the most in seven weeks.

Specifically, traders lowered combined net-long positions across 18 US futures and options by 10% to 754,558 contracts in the week that ended on November 15. Bets on sugar fell 30%, the most since December 2008 while bets on lower copper prices nearly doubled.

Investors should note that Goldman Sachs has cut its forecast for commodity gains over the next 12 months from 20% to 15% in a recent report. Meanwhile, the S&P GSCI has risen 2.6% so far this year and is poised for its weakest performance 2008 when fears about a severe recession slashing demand for raw materials sent the index down 43%.

Options Trading Investors Lower Bearish Bets on the Euro (For Now…)

(Reuters)

Before the Thanksgiving holiday in the US, options trading investors were trimming bets on a euro zone break-up plus a major fall in Euro. However, bearish trades on the Euro are likely to return as a solution to the European debt crisis remains elusive and any doomsday scenario remains a possibility.

Specifically, options trading investors who took out positions betting on a potential collapse of the euro zone are taking these bets back due to time decay.

However, options traders also say that options prices are underestimating the chances of a big euro fall against the dollar – meaning that bearish bets on the Euro could easily return despite the fact that at least for now, the Euro is largely holding up against the dollar and other currencies.

Options Trading on AMR Corporation and Delta Air Lines

(AVAFIN)

Recently, AMR Corporation experienced a high put/call ratio with the put volume running 4.8x the volume of call contracts for a 4.80 put/call ratio. The skewed options trading ratio seems to suggest that traders are re-balancing their portfolios to prepare for a price shift.

AMR Corporation recently closed at $1.80 and the stock lost 20.00% within the last week. However, AMR Corporation’s technical momentum Relative Strength Index indicator seems to indicate oversold conditions while the stock is trading below the 50 day moving average plus lower than its 200 day moving average.

Meanwhile, Delta Air Lines has recently seen interesting put activity. Specifically, there were 4.7 puts traded for each call contract for a 4.72 put/call ratio with 7,470 puts and 1,584 calls being traded. This skewed options trading ratio also suggests that traders are re-balancing their portfolios to prepare for a price shift.

Shares of Delta Air Lines recently closed at $7.36 but the stock is trading below the 50 day moving average as well as lower than its 200 day moving average. Delta Air Lines also has a 52 week low of $6.41 and a 52 week high of $14.54.

Hence, options trading investors appear to be betting that airline stocks are in for some upcoming pricing moves.

(Bloomberg)

Options trading investors were placing bullish bets on Research In Motion after its shares plunged 67% to below book value – fueling rumor of a takeover. In fact, bullish bets on RIM are at their highest level since 2007.

Specifically, three-month puts to sell RIM shares now cost 2.3% more than calls to buy while the skew relationship has narrowed to a four-year low of 0.5 percent as of November 10. On October 13, the gap was 8%.

In addition and among the 10 options that had the biggest gain in ownership during the past two weeks, seven were calls with the January $20 calls rising from 22,419 contracts to 24,667 for the biggest open interest increase among all options on RIM.

In other words, some traders are betting that RIM will receive a buyout offer and the pressure to seek one has also increased as the maker of BlackBerry is now worth less than the value of its patents, inventory and other assets after liabilities are deducted. In other words, the stock could suddenly rise on any news of a possible takeover with potential acquirers being Microsoft and Samsung.

Moreover, there is a perception in the market place that RIM needs to merge. However, there are also obstacles to a merger, namely the stakes in the company that are owned by management (the co-CEOs own a 10.5% stake), the possibility that Canada would block a deal and the failure to show a viable prototype for its first BBX BlackBerry phone.

Options Trading on Groupon Begins

(Wall Street Journal)

At the start of the week, options trading began on Groupon shares with options trading investors taking a bearish stance.

On Monday, Groupon put trading outpaced the number of bullish calls being traded with 7,000 put options changing hands versus about 5,500 calls. All told, approximately 12,500 Groupon options contracts were traded and its also worth noting that this was roughly half the number of LinkedIn options (around 23,000) that changed hands after LinkedIn’s May 27 options trading launch.

The most-active Groupon options were $15-strike calls that will expire in July. It also appears that high options prices are forcing traders to sell calls instead of buying puts. Such a strategy is akin to short selling and by selling the calls, a trader can receive a premium and will be able to keep this premium if Groupon’s stock falls below $15 at the July expiration.

Analysts have noted that the high prices for Groupon’s options may have kept away many options trading players – including those who would otherwise buy put options to demonstrate their bearish view on Groupon’s future.

Moreover, Groupon shares are hard to borrow and its very difficult and expensive to short-sell them, causing options prices rise, while big pricing swings also make it difficult for the market to properly value Groupon options.

In addition, early buyers of Groupon puts or calls could also take a hit in case Groupon’s stock begins to settle into a more calmer trading pattern and implied volatility falls as smaller stock price movements cause options prices to fall.

Options trading investors should also note that it took roughly a month for the LinkedIn options trading market to settle down and for options prices to fall into a predictable and more regular pattern.

Heavy Options Trading on Macy’s

(Avafin)

Late in the Week, Macy’s saw a busy trading session with a record number of put and call contracts being traded. Specifically, there were 0.1 call contracts traded for each put contract (or 21,067 puts and 1,205 call contracts) for a 17.48 put/call ratio.

Macy’s stock had recently closed at $30.72 on trading volume of 7,497,885 – below the average trading volume of 9,404,170 shares. However, Macy’s is trading above its 50 day moving average and higher than its 200 day moving average. In addition, Macy’s has a 52 week low of $21.69 plus a 52 week high of $30.62.

Options Trading Investors Follow Warren Buffet and Bet on IBM

(Forbes)

At the start of the week, IBM options saw plenty of action after Warren Buffet revealed on CNBC’s Squawk Box that Berkshire Hathaway had purchased a 5.5% stake in the company – costing $10.7 billion for 64 million shares.

Options trading investors are positioning themselves for IBM to rise higher for the rest of this year and hence, they were snapping up call options with a December expiration.

Specifically, 1,500 calls at the Dec. $190 strike along with another 1,700 calls at the higher Dec. $200 strike were bought. This means that these call buyers will profit if IBM’s shares rise 2.6% and 5.9% respectively above average breakeven prices of $194.81 and $201.09 by their December expiration days.

On the other hand, one options trading investor seems to be betting against Warren Buffet and the market by buying roughly 2,000-lot Nov. $185/$190 put spreads. This options trading investor could profit as much as $3.26 per contract if IBM shares slip below $185.00 at expiration.

(Wall Street Journal)

Options trading investors have grown more pessimistic about retail stocks this month. In fact, many are creating positions that will profit if the retail sector gets hit hard next week by retail sales data along with quarterly earnings retail industry leaders.

Investors are awaiting a key reading of November retail sales that is scheduled to be released on Tuesday. In addition, a preliminary reading on this month’s consumer sentiment has already risen to beat economists’ average expectations.

Options trading investors focused on the SPDR S&P Retail ETF exchange-traded fund (ETF) which consists of retail stocks like Wal-Mart Stores, Target and Sears Holdings. Moreover and next week, these retailers will report quarterly earnings.

The heaviest trading action centered around traders using a three-part options combination called a “butterfly put spread.” In this case, traders bought $43-strike puts and $51-strike put options to form the butterfly’s “wings” while selling twice as many $47-strike puts. This trade will work best if the ETF falls to the $47 level by the end of next week.

More Than $4 Billion Options Trading Contracts Trade This Year

(Wall Street Journal)

For the first time, yearly options trading volume on US exchanges has surpassed 4 billion contracts last Wednesday. Moreover, annual options trading volume hit a ninth-straight record on November 1 – surpassing last year’s total of approximately 3.9 billion contracts.

Average daily options trading volume in 2011 now stands at around 18.5 million contracts. In fact, approximately 3 million contracts have been added to each session’s average trading volume since 2007.

Finally, monthly options trading volume surged to a record 500 million contracts in August after a US credit downgrade by Standard & Poor’s Ratings Services plus concerns over Europe’s debt crisis.

Options Trading Bears Retreat on Jefferies

(Bloomberg Businessweek)

After increasing disclosure of its European holdings, concern about Jefferies Group eased in the options market – forcing down put prices. Specifically and on November 4, Jefferies Group issued five statements that described its investments in European sovereign debt and specifically detailed disclosures about its holdings in debt from Portugal, Italy, Ireland, Greece and Spain – causing shares to erase a 7.4% loss into a 0.5% rise.

December $6 puts, the most-traded contracts on Jefferies Group, fell 21% while 0ptions priced 10% below the stock cost 12.86 points more than contracts 10% above on November 3.

Analysts and investors have commented that unlike MF Global, they would be surprised if Jefferies Group had over concentrated their risk as the company’s culture is not particularly aggressive. Moreover, the Chairman and CEO of Jefferies Group stated that the company’s disclosures were intended to “dispel rumors, misinformation and misplaced concerns” during “fragile times in the financial market.”

Nikkei Options Trading Leads to Huge Gain at Ex-Day Traders’ Hedge Fund

(San Francisco Chronicle and Bloomberg)

The Harpstar fund, a hedge fund run by former day traders and named after the Greek word vega (in option trading meaning volatility), has returned more than 20% since its start in July by investing in Nikkei 225 options amid Europe’s debt crisis and surging volatility.

The fund had started out with about 2 billion yen or $26 million on July 29. Through new investments by high-net worth Japanese individuals along with investment gains, the Harpstar fund grew its assets to 3.2 billion yen with the aim to raise 5 billion yen and a target return of 50% over the next year.

Fund partners Kyosuke Shirasaki and Masato Tanaka had met as university students and both shared an interest in investing in the Japanese stock market. However, neither had any experience working for a major financial institution but as day traders, the pair was accustomed to frequently trading to capture the best investment returns.

The fund they formed currently only invests in Nikkei 225 options plus uses futures as a hedge. When volatility rises (the Nikkei Stock Average Volatility Index has surged approximately 48% this year), the fund tends to have higher returns due to price differences between the securities and the predetermined price. In addition, the fund usually trades its positions in a day or two in order to maximize opportunities as well as reduce volatility.

Options Trading on Corning

(AVAFIN)

Options trading contracts on Corning have recently experienced a new 90-day record for call contracts. Specifically, a total of 15,141 call contracts were traded yielding a 0.25 put/call ratio with 4.0 call contracts being traded for each put contract.

Corning then closed at $14.76 with a trading volume of 15,079,835 – below the average trading volume of 21,026,400 shares. Corning has a 52 week trading low of $11.78 and a 52 week trading high of $23.43 and the stock had gained 10.15% within the last month.

Bullish Options Trading on Gold and Silver ETFs

(ETF Trends)

Traders have recently been buying bullish call options on gold and silver exchange traded funds (ETFs) after a pullback in precious metals ETFs. Specifically and at mid-week, calls were actively traded in the metals ETFs as January $190 calls in SPDR Gold Shares (NYSEArca: GLD) and January $35 calls in iShares Silver Trust (NYSEArca: SLV) were purchased.

Despite Europe’s debt crisis, options trading investors in gold ETF options were the most bullish since August with calls to buy the SPDR Gold Shares outnumbering puts to sell by 1.5-to-1.

(Wall Street Journal)

Last Wednesday, the migration of MF Global Holdings shares to the over-the-counter market means that US options trading investors will have some clarity after not being able to trade tens of thousands of the distressed firm’s options. Specifically, MF Global’s stock began trading over the counter on Wednesday under the ticker MFGLQ.

To recap: MF Global’s shares plunged 67% and were halted on US stock exchanges right before the market opened on Monday and a few hours before the firm filed for Chapter 11 bankruptcy protection. In addition, MF Global’s stock and options trading were also halted through the Tuesday session.

The trading halt had meant that options trading investors in MF Global had their hands tied and could not either profit or salvage their positions. This means that investors could only swap options contracts for long or short stock positions – not an attractive prospect when shares would likely resume trading at sharply lower prices.

MF Global’s trading halts were troubling for options trading investors due to the fact that puts and calls have fixed expirations and their value declines as time passes. Moreover, there was nearly 90,000 outstanding MF Global options contracts set to expire Nov. 18.

Options Trading on Starbucks (SBUX)

(Forbes)

Starbucks’ share price reached the highest level since the company’s 1992 IPO on Friday thanks to better than expected third quarter earnings that were announced after the market close on Thursday. In fact, Starbucks rose as much as 7.95% to a high of $44.69 during the trading day.

On the options trading front, put buying and call selling in the November contract showed some sigs of profit taking or repositioning for the stock to cool over the near term.

Specifically, put options traders were focused on the Nov. $41 strike price as 7,000 contracts were traded but it also appears that much of the trading was done by bearish traders who will profit the most if shares fall 9.25%. In addition, 1,500 put options trading contracts were bought at the Nov. $39 strike price.

On the Starbucks call front, there was more selling than buying at each strike price from the Nov. $42 to the Nov. $46 strike call with the Nov. $45 strike call being the most active.

It appears that most options trading investors are engaged in profit taking or they are betting against a continued rise in SBUX shares in the next two weeks.

Bears Go Shopping at Abercrombie & Fitch Co. (ANF)

(Forbes)

Bearish options trading investors have gone shopping at Abercrombie & Fitch Co. as shares dropped the most in a decade and will likely keep falling for the rest of the year. In fact, ANF shares sank 22.5% to $57.33 after the company announced that its European flagship stores saw sales fall due to the economic turmoil in the region.

Abercrombie & Fitch Co. will report earnings ahead of the market opening on November 16 with options trading investors positioning themselves for ANF shares to fall for the near term.

Specifically, options trading investors were buying deep out-of-the-money put options for November with 675 puts at the Nov. $45 strike being bought or an average premium of $0.11 each. Another 730 puts were bought at the Nov. $48 strike and around 500 put options at the Nov. $50 strike. In other words, the bears will profit if Abercrombie & Fitch Co. plunges 10% while those who bought at the the Nov. $50 will profit if shares fall 13.8%

On the other hand, there was call selling at the Nov. $60 strike – meaning that some investors have serious doubts that Abercrombie’s shares will rebound any time soon.

Options Trading Investors Bet the Worst is Over for Netflix

(San Francisco Chronicle)

It appears that Netflix options trading investors are betting that the worst might be over for Netflix after its shares have plunged 72% since July – far higher than that of any other company in the Standard & Poor’s 500 Index. In fact, Netflix fell from the $298.73 level down to $83.39.

Specifically, the ratio of calls to buy Netflix versus puts to sell rose 23% to 1.45-to-1 and reached the 1.51 level on October 27 – the highest level since May 2004. Options trading investors have purchased more December $155 calls than any other options contract over the past several days.

Apparently, some are betting that Netflix’s price increases will boost its earnings without driving away even more subscribers following 800,000 cancellations. However, some analysts are predicting that Netflix may lose money for the first time in 2012 as subscriber growth slows while the cost of acquiring content rises thanks to increased competition.

Options Trading Exchange Owner CBOE’s Sees a Profit Surge

(BloombergBusinessweek)

Exchange operator CBOE Holdings, the owner of the Chicago Board Options Exchange, reported a 69% increase in third-quarter earnings thanks to a gyrating stock market creating heavy demand from or its options and related contracts. In fact, revenue surged 35% for the exchange owner’s best quarter in its history.

In addition, net income for the third quarter came in at $44.7 million – up from $26.4 million for the same quarter last year.

The CBOE has benefited from increased options trading during the quarter in the wake of sharp market swings over fears about the European debt crisis, the US debt ceiling debate and general global economic fears.