Ok...Ok...Ok, so the tape says the market wants to go higher. SPX recently drove above 1400. Now the market is resting just below this important level, but recent selling has been rather light. Many traders looking at the SPX charts see bottoming formations such as a double bottom or inverted head and shoulders. Either one is bullish. If we consider ourselves tape followers we must assume prices will go higher..... Here's a chart on the SPX so you can see what I mean.

Thinking positive delta on strong stocks in industries that are leadings is a smart way to go. Energy, transportation and basic materials are just a few strong sectors that jump to mind. Don't fight the tape.

If you are contrarian, well, that's another story. You are likely thinking this market needs to let off some more steam. To scratch the downside itch, using an ETF like SPY acting as proxy for the S&P 500, one might use a trade that only requires minimal capital. It'd be nice if this trade could provide some larger rewards for only a small risk. Hmm what type of trade would that be I ask? The answer resonates: OTM put calendar spreads. Risk is only the debit paid and that risk, with every roll out, becomes reduced. If the market decides to make a move down or sideways, a small amount of capital can amount to a lot.....and the contrarians itch has been scratched.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

As an options trader, liquidity and proper fills are vital for you to make money over the long haul. Among the most liquid options are those that trade penny wide. The following link provided from the CBOE will show you just which stocks and ETFs trade penny wide options.

In my own trading I have created a watch list and most of my trading takes place within these stocks and ETFs. Here are the advantages to trading these penny wide options:

1. Liquidity- These are among the most actively traded options on the market today. You will experience easier fills and more opportunities to trade than you would on products that are less liquid.
2. Bid/Ask Spread- The bid/ask spread is as tight as 1 penny, hence penny wide options! You can buy and sell options without giving up the difference of that bid/ask spread. Retail traders have never had this big of an advantage in trading options.
3. ETFs- Among these penny wide options are ETFs, Exchange Traded Funds. The advantage to trading ETFs is the lack of volatility in the underlying. No more do you have to worry about earnings, or other news risk associated with the stock, (ask Bear Stearns shareholders if this is important). ETFs are a great way to diversify your trading account.

Happy Trading!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

As I write this Monday morning, the futures are sitting at 1392 and I ask myself what is next. My previous post here predicted we would break out of the top side of the range of the overall market and we were able to do so. We popped over 1394 in the S&P and hung around the 1420's for a few days before the dreaded duo of Financials and Oil reared there ugly head again. See the chart below. Trust me, my point here today is not to pat myself on the back, I realize even a blind squirrel finds a nut, a broken clock is right twice a day.........My point is to come up with some trades that will make us some money if the next phase of this market is sitting in a range for a good portion of the remainder of the year. It feels to me like I am watching a tug of war with one side being the Optimistic Forward Looking Market and the other side being The Financials, Oil, Commodities, and Dollar. Right now both sides are tuckered out and waiting to see what the other side is going to do. The Optimists had a nice pull but they are gassed so we will see what the Gloom and Doom Boys have. I am not expecting much either way.

The question then becomes how can we profit in a range-bound market? I like to sell Iron Condors, which consists of selling both a Vertical Call Spread and a Vertical Put Spread. I determine a range that I am comfortable with and sell the call and put side equal distance from the current trading price. In making my determination I am going to look at the Delta of the Options (Gives me a rough probability of success); the chart for levels and the Vix to see what the market thinks is likely to happen.

Looking at all of these factors brings me to a couple of conclusions. The VIX is now trading under 20. For the better part of the last year this is the bottom of the range so the market is not expecting much movement or volatility. My chart tells me by going roughly 3-4% out I am not violating any major levels in the S&P and I am still able to collect some decent premiums selling options in June. I like selling the June 132-134 Put Spread and simultaneously selling the 144-146 Call Spread. I will collect around one dollar in premium and will be risking one dollar of premium. Notice my time frame is roughly one month, I am only committing to this strategy for a month and if conditions change I can alter my strategies to reflect my views.

I think this market just feels tired and perplexed so to pick a direction is difficult right now. In the meantime I am happy to collect some premiums and wait for the picture to become more clear. Happy Hunting!!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

The VIX made me do it!

Option junkie? Well if you are, you certainly look at the VIX and see it residing at recent lows. But have you taken the time to pull the VIX options up on your trading application? The VIX prices its options off of forward futures rather than the current VIX level, which tells an interesting story. Take a look at deep in-the-money calls on the VIX for June and July. The VIX 10 calls for June are trading at approximately $9.70 and the July 10 calls are $11.40. The VIX is priced as if it where already trading in the 20 range. Obviously someone, somewhere believes volatility is going to increase and is pricing the VIX forward future to account for what is believed to be an increase in volatility. Does this mean selling is imminent? Not exactly. But we could reason that this is a decent time to look for short positions and possible long volatility exposure. I am not an advocate of trading the VIX product directly. Rather I tend to utilize multi-exchange listed index-based products such as the SPY, DIA, IWM and QQQQ. For a more advanced trader, an out-of-the-money multi-month index calendar spread could be ideal, as it exhibits both a short market bias and profits from an increase in volatility. The IWM June/August 71 put calendar spread is currently trading $1.50 and has two rolling opportunities. Just remember to keep theta positive (time decay) and keep the premium rolling in.

thinkorswim, Inc. and its registered employee, Don Kaufman, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

During the past six months I was singing the classic song, A Horse with No Name, almost every day. We were in a trading "desert", a sideways trading range with no clear direction. However, things may be changing.

As of close of May 14th, in the past three months, the SPX is up 4.21%, the DJX is up 3.62% respectively. However the NDX is up 11.73% in the same period clearly outperforming the other indices. The NASDAQ is led by the Four Horseman, (which clearly have names you have heard of), Apple (AAPL), Amazon (AMZN), Research in Motion (RIMM) and Google (GOOG). These four horses account for 20% of the NASDAQ 100.

As you can see, these horses have been running at full speed for the better part of 3 months. The question now comes, can they sustain it?

Personally I believe, call it the contrarian in me, you will begin to see somewhat of a slow down in these stocks, and as a result the NASDAQ 100. It may only be for a month or so, but as they do slow down it should provide you with a few trading opportunities. Month-long short iron condors on the cash settled MNX come to mind or perhaps selling OTM call spreads. You may even look for a pullback in the four horses for a potential stock purchase. Either way, these horses are gassed and are in need for some shade and a cold one.

Successful Trading!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

I believe we may have finally found the tipping point for oil and the economy. I must admit I expected both consumer and business demand for petroleum products to decrease long before the $135 barrel of oil. But the Consumers just shrugged it off and pushed on until this week. It seems the upward pressure at the pump finally caught up with the market and it is apparent this market is too fragile to withstand a rapidly increasing surcharge on most transactions. The market reacted by shedding a good chunk of its two month recovery this week as is displayed in the chart of the S&P below. Move over financials, oil is the new villain.

I think the most important aspect of the market to be cognizant of is what the overall market is watching. As I just described above and we discovered last week, the market is watching oil. Sure we all have been feeling the pinch but it seems we only recently let it change our behavior. Why is this important? Because it will dictate the success of your strategies so you need to be aware of the price of oil and understand at what points it dictates market gyrations. On Tuesday oil plunged $3 a barrel and the market had a moderate rally. The more relationships between asset classes you understand the better the chance of profitability. Market goes down, VIX goes up.........Learn to understand these and become aware of what is front and center on the market radar and you are much less likely to be shocked by moves. Remember this though, the market is dynamic and its obsessions can change quickly. I cannot count how many things have been the focal point for the past twenty years I have actively traded: Trade Deficits, Employment Data, Currency, Iraq War (twice), Elections, Terrorism....Just keep your sights on the most important market catalyst and be ready when it dictates changes in your trades.

How can we apply this to our trading? As I have stated in previous articles here I still believe we are stuck in a range-bound market at least through the summer. Barring a significant collapse in the price of oil I think we will not see anything above 1440 in the S&P and a decent level of support around 1360. An effective risk-defined method of profiting from this movement is selling vertical call spreads as we approach the higher end of the scale, and selling vertical put spreads as we retrace toward support. Warning, patience is required for this strategy and you cannot beat yourself up for not selling the top or bottom of the range.

I typically have the best results when I sell them over time and add positions as we continue rallying and repeat the process as we sell off. Good luck and keep your eye on the Pump!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Have you ever looked at a stock or ETF and thought to yourself, "I think that's going higher"? The follow up question is then "How do I play the move"? There is no perfect answer to that last question, but this post offers a possibility.

Many option traders, especially those who are new to the profession, have an inclination to simply buy calls if they are bullish. In theory this can be a very profitable way to trade. However professionals are aware of a couple of things that give them an advantage over the amateurs.

1. Often what one think will happen simply does not
2. Even if correct, buyers bleed from the negative effects of time erosion

The flexibility of the options market allows an investor to combine strategies that reflect a directional bias while reducing directional risk and offering profits through time decay. One of the many combinations one might consider is a diagonal spread.

Let's take a look at an example of a bull call diagonal using the Chinese ETF, FXI as the underlying product. See the chart below.

After a five-month period of price decline, the stock begins showing signs of life. In the past month the stock has seen the formation of new higher highs and higher lows. One could easily expect prices to go higher from here as this trend continues.

To create a bull diagonal spread, start with the purchase of a longer dated in-the-money option. Look at calls within a delta range of .60 - .70 that are 3-6 months out. These options carry a lot of leverage. That's good if the stock goes up, bad if the stock goes down. They also carry the negative expense of time decay.

To off set some of the directional risk and actually turn the time decay into a money maker, one might sell front-month calls with a delta in the .30 - .40 range. By doing this all the profit potential of a long vertical is created. The trade can become worth the difference between the strikes. This trade also has the availability of "rolling out" by selling calendar spreads at the short strikes every month. This provides income and lowers the cost basis. In short the diagonal makes money if the stock goes up and pays money through time decay. Sounds like a good combination on a bullish stock, doesn't it?

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

On May 19 two things occurred. First, the SPX hit its head on one of the oldest technical indicators the market has, the 200 day moving average. Many traders and institutional investors consider an underlying bullish when it is trading above its 200 day and not until then. Secondly, that same day the VIX hit a support level at 16 and didn't break it. Any time you have the SPX smacking a resistance level and the VIX hitting a support level, roll out the yellow "proceed with caution" tape.

Now Memorial Day has come and gone and summer is upon us. What does this mean for the market? Lighter volume and unpredictable movement. News tends to be the main driver which is very hard to trade. So exactly how would you trade it? Look for high-probability, delta-neutral strategies that an investor to make money on positive theta decay. Until the market does rally with conviction above that 200 day moving average, maintain a neutral posture and sit back and let theta decay make money. Be warned . . . it's like watching paint dry . . . but at least its green paint!

Successful Trading!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.