Surfing for Weekly Buy-Write Trades

One half hour into today’s trading, I would expect to see some evidence that the recent spike in volatility in stocks is subsiding. That seems to be the case, as the VIX opened at 27.21 and is now just over 26.00.

Before volatility falls any farther, I will be looking at some possible or buy-write (covered call) trades with the new weekly options that are expiring tomorrow.

When I screen for buy-write candidates, I generally start with a screen for the highest implied volatility stocks, ETFs and indices, then qualify these on liquidity terms, examine the proximity of the current price relative to the various strike prices, then review the charts for some of the finalists and add some sort of secret sauce at the end to come up with trades that fit my objectives.

In the graphic below, I have included all of the weekly options in which the underlying has an implied volatility is at least 30. The list has 18 candidates and prominently atop that list is the triple ETF pair for the financial sector: FAS and FAZ. Going down the list, Ford (F) and Bank of America (BAC) show excellent liquidity, while Apple (AAPL) is hovering just under an important round number and strike.

Enterprising souls may even consider buy-writes on both FAS and FAZ.

Volatility is up and the end of the week is nearing. Anyone looking at a buy-write strategy should take a close look at earnings for today and tomorrow which may impact the market, as well as a number of economic reports due out tomorrow morning, most notably the July retail sales data.

For more on related subjects, readers are encouraged to check out:

• Weekly Options Gain Momentum
• What a Difference a Weekly Makes
• The Value of Selling Covered Calls
• BEP and the Joy of Covered Call Funds
• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales Recovering

[source: Livevol Pro]

Disclosure(s): short VIX at time of writing; Livevol is an advertiser on VIX and More

Options Available for New S&P 500 Triple ETFs

Though they are less than two weeks old, the two new triple ETFs based on the S&P 500 index already have options available to trade. The bullish 3x ETF, Ultra ProShares (UPRO) has July options that expire one week from Friday with strikes from 60 to 95, including single dollar increments from 80 through 90. The bearish -3x Short ProShares (SPXU) has options available from 70 to 95, with all the strikes in single dollar increments.

In anticipation of a broad range of applications and the potential for some significant movement, the strikes for the December options range all the way from 30 to 140 for UPRO and from 40 to 150 for SPXU.

While both of these triple ETFs have been attracting more volume each day, neither has managed to break the million share mark yet. I anticipate that we will begin to see million share days in each of these ETFs next week and shortly thereafter, UPRO and SPXU will begin to trade in the volumes currently associated with leveraged ETF pairs such as FAS/FAZ and SSO/SDS.

As these triple ETFs are based on the same underlying as the VIX, an entire new genus of trading strategies is being hatched as I write this…

Direxion Announces Reverse Splits for FAS and FAZ

Direxion formally announced today what has been rumored for awhile now, that its two most popular triple ETFs, FAS and FAZ, will undergo reverse splits after the close of trading on Wednesday, July 8^th.

FAS (financial 3x ETF), which closed Friday at 8.34, will split 1-for-5, while FAZ (financial -3x ETF), which closed Friday at 5.13 will split 1-for-10.

For more details, check out the Direxion press release.

Post-Geithner Financial Naked Calls

For the extremely aggressive (and well-capitalized) investor who believes volatility in financials is on the high side and may also have some bullish directional bias, something like a bear call spread with FAZ, the -3x financial ETF, might be an interesting trade to look at.

The truly fearless might even look at selling an out of the money FAZ naked call. As I write this, FAZ is trading with a 48 handle and a Feb 50 call sale will bring 7.20, which means there is room for almost 20% upside movement in the ETF before the trade turns unprofitable. Of course, with the likes of triple ETFs FAZ and FAS, 20% moves can happen in a matter of hours…

[source: optionsXpress]

Why Is There So Little Volume in the Most Recent Direxion ETFs?

It seems as if every day trader I know has fallen under the spell of the leveraged firepower of the Direxion triple ETFs. Oddly, only the first batch of ETFs that were rolled out in November have caught fire. These include the familiar tickers like FAS, FAZ, TNA, TZA, BGU, BGZ, ERX and ERY.

The most recent group of ETFs, which I discussed in Direxion Triple ETFs Add New Horses to Stable, has attracted considerably less interest. Even though they were launched at the end of December, only two of the six ETFs, EDC and TYH, have surpassed the 100,000 single day volume mark and TYH just grazed that bar, with a high volume mark of 101,900. In the chart below, a snapshot taken just past the halfway point of today’s session, the six new ETFs can be seen floundering at the bottom.

Juice is not the problem, as emerging markets (EDC and EDZ) and technology (TYH and TYP) are consistently among the most volatile corners of the market.

The comments on yesterday’s semi-rhetorical question we excellent. Let’s see what sort of explanation the collective wisdom can come up with today.

[source: Yahoo]

Prediction: Direxion Triple ETFs Will Revolutionize Day Trading

I promised myself that once the new Direxion 3x and -3x ETFs started trading at least a million shares a day that I would take them out for a test drive. Well, I didn’t have to wait very long. Launched just last week, two of the eight new ETFs hit the million share mark yesterday and a third missed only by a rounding error.

To recap for those who do not follow this space, Direxion is the first company to offer ETFs that have a targeted return which is leveraged to three times and minus three times that of the underlying indices. So far the biggest successes have been the large cap 3x bull (BGU) and large cap -3x bear (BGZ) ETFs, which are based on the Russell 1000 index. Also proving popular are the small cap 3x bull (TNA) and small cap -3x bear (TZA) ETFs, which follow the Russell 2000 index.

The sector ETFs are off to a slower start. These include the large cap 3x bull (FAS) and large cap -3x bear (FAZ) based on the Russell 1000 financial services index; and the large cap 3x bull (ERX) and large cap bear (ERY) based on the Russell 1000 energy index.

A look at the table below of yesterday’s results shows that these ETFs are like nuclear weapons when it comes to volatility. The average change in these eight ETFs yesterday was a 25% difference from the previous day’s close. ERY closed at 52.44 yesterday. Not only did it lose 28.48 points, but its intra-day range was 35.06 points. It is only a slight exaggeration to say that you can sneeze and miss your position losing ten points. Needless to say, these super-charged ETFs are not for everyone. If you like to go skydiving, keep a pet alligator in the bathtub, and dream of a winter king crab fishing in the Bering Strait, then you will be right at home with the Direxion ETFs.

As I traded these for the first time on yesterday, several interesting things happened. First, just entering a position was an adventure, almost like trying to jump in a Lamborghini while it sped by at 120 mph. I immediately went into position management mode, because the value of my ETF was changing so quickly that it required my full attention. Very quickly, I realized that one cannot trade these triple ETFs without finely honed trading rules and an iron will to act on them at all costs. In this world, there is no room for hoping. Any sort of “it will come back” thinking could quickly turn a 5% loss into a devastating 20% loss. Ironically, the high volatility of these ETFs forces the trader to rely on (or learn) tight trading discipline.

Retail investors might want to take these ETFs out for a test drive too, but be forewarned that there is a disaster scenario looming around every corner. For these very same reasons, I anticipate that hedge funds currently day trading options will find these ETFs to their liking, particularly as volume and liquidity improve. In a deleveraging world, this is one way to stock up on “off balance sheet leverage” and get the extra juice without having to commit to the extra margin.

Not that extra leverage is usually a good thing…

[source: Yahoo]