Options Trading News: European Options Trading Slumps

US Options Trading Surges as European Options Trading Slumps

(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.

Category: Options Trading