Whether you believe an upside breakout may be coming or you are concerned about a possible retracement in market prices, lower-cost debit spreads may be one way to limit your risk while potentially profiting through a limited-risk limited-reward strategy.

Think about it this way:  if your preferred strategy is to sell out-of-the-money SPY (SPDR S&P 500 ETF) puts as a strategy to gain neutral-to-bullish market exposure, the premium you now receive by selling put options is considerably lower than it was two months ago.² You either have to sell options with strike prices that are significantly closer to being at-the-money (ATM)³ to receive the same premium, or you have to sell options that are the same distance out-of-the-money for much lower premium.

Is it worth it?  The maximum reward for a short/sold put is limited to the premium collected upfront (while risk is unlimited down to zero).  Perhaps the strategy is still worth it for some traders, but those concerned about the risk/reward of short options might look to the lower-volatility environment for current opportunities that are present in long debit call spreads. It may make some sense, because if options are too cheap to sell, they may be a value to buy.  The risk to buying debit spreads is 100% of the premium paid, while the profit is limited to the difference in the traded options’ strike prices less this premium.

Conversely, if you don’t believe this rally, what could you do?  Well, with the market run-up and the volatility decline, there are symbols on which you can buy debit put spreads that would be in-the-money if the underlying stock retraces back to trading prices just 30 days ago on January 1, 2012.   The prices of these debit put spreads are now lower than they have been in the recent past and may once again provide compelling limited-risk, limited-return trades.

We have two useful tools to assist our traders in analyzing the possibilities:

The Trade Generator in our suite of platform tools has a debit-spread finder, which is ideal for scanning for these opportunities. You can access the Trade Generator from the latest version of the OptionsHouse platform by clicking on the Tools tab.  You can also click on any down arrow, select Tool Navigator, and get to the Trade Generator from there.

The Debit Spread tool inside of the Trade Generator (which you can select from the strategy drop-down menu)  allows you to  search by industry group, Watchlist or a single security, for debit call spreads and debit put spreads based on your selected criteria.  A comparison between historical and implied volatilities is generated and the ideas will populate based on maximum potential ROR.⁴

For example, say you think that Apple shares could retrace back toward the price the shares were trading on January 1^st, 405.00.  The Trade Generator highlights trades such as the April 12 420/415 debit put spread (going long the 420 put, shorting the 415 put) for $1.20 per spread. If AAPL is trading below $415 when the spread expires, the profit maxes out at $380.00 (before commissions).  The risk is capped at the $120.00 premium paid.   This represents a 316% return on risk on this trade.

We also have a Spread Investigator tool in our suite, which shows potentially inexpensive call and put spreads currently available in the market.  This has less qualitative screening capabilities and is intended to show lower-cost debit spreads, which oftentimes are very far out-of-the-money (OTM⁵). Be forewarned, the farther out-of-the-money the spread is positioned, the lower the probability exists that they it become profitable at expiration.

In conclusion, this is not intended to be any sort of buy or sell recommendation but is rather aimed to stimulate your thoughts around trading the volatility environment that currently exists.  When volatility levels are lower, it may make sense for long option spreads.  For more information on vertical spreads check out our webinar archive for presentations on long call spreads and bear put spreads.

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1. Will the technology conversion affect my checkbook and/or debit card?

These levered ETFs provide double and triple daily returns (or inverse returns) on the underlying index on which they are based. Investors have flocked to these instruments to the tune of $40 billion in assets.  In my opinion, the majority of these assets are being used very incorrectly and to the detriment of the user.

The reason is these products are designed to replicate a multiple of the DAILY movement of the index.  The ETFs themselves use futures to achieve the desired geared changes.  Therefore, in order to provide double and triple the returns (positive and negative) on a daily basis, they are required to sell more futures on days the market is down and buy more futures when the market moves higher.

This process of chasing the market, buying high and selling low, causes a negative drift over time for the asset when the overall market is volatile.    The problem is, investors are holding these for multiple days and even months.

Over time, with the ups and downs in the market, these products are designed to underperform.  When looking at the pair of three-times levered ETFs on the financial sector over the past three months, many investors would expect if the bearish ETF (Direxion Daily Financial Bear 3x Shares – FAZ) were lower, the bullish ETF (Direxion Daily Financial Bull 3x Shares – FAS) would be higher.  Not the case.  FAZ is down over 20% and FAS is down over 30%!

Those investors who have held either of these ETFs have lost a significant percentage of their investment.

It is imperative for traders to remember these are designed to be intraday trading instruments, not a longer-term (or even shorter-term) hedge.  The problem is the market can gap lower on the open, making it tempting to hold the inverse Bear ETF overnight in your position as part of a hedged position.  Using put and put-spread strategies may be much more effective over time relative to owning a triple levered Bear ETF.

The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

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We love giving customers the features and functionality they want.

And today is one of those days. We have made some changes to our Watchlist feature that will allow you to interact with your Watchlists and other “list” components (Sector Monitor, Index Monitor, and Hotlist) in a different, more efficient, streamlined way.

From now on, you can trade directly from the Watchlist. Whether you’re trying to simply buy or sell stock or generate an advanced order, you can do so by simply clicking on the symbol in the Watchlist:

Not only that, you can send a quote for that symbol to the universal quote line at the top of the platform. If any components are linked to that top line (such as the option chain), then you’ll see an option chain load up for that symbol.

With these new changes, these components will have a cleaner feel that should make them easier to use.

But wait—there’s more!

We’re also bringing a new level of customization to the platform to the following components:

-          Positions

-          Orders

-          Watchlist

-          Hotlist

-          Index Monitor

-          Sector Monitor

We’re enabling a new feature that will make these components completely customizable. The new functionality includes:

-          The ability to pick from a variety of columns to display the data you want

-          Drag and drop columns where you want them

These features allow you to set up each component to show the exact data you want to see in the order you want to see it.

All you have to do is hover over the column headers and select the columns you want to see:

So if you want to see the high and low for a stock in your Watchlist, you can do that. Maybe you’d like to show the days to expiration of a position in your positions pane? You can do that too.

It’s all about exposing the information you want and hiding the rest.

Take a look at the new features, play around with them, and let us know what you think. Oh, and if you want to go back to the default column setting, you can always click on “Restore Defaults” and everything will go back to normal.

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Last week we released a host of new features and general bug fixes for our Android application and we wanted to share some of them here. Click here to download the latest version or go to the market from your Android device.

Light Mode

Don’t like all the dark hues on the current app? Now you can switch to Light Mode and all that black will turn white. A lot of our users wanted this in our main trading platform, so we’ve made the change here as well. You can access Light Mode via Settings->Set UI Mode:

Tip: if you’re in the sun and need to fight glare, light mode might make it easier to see what’s going on.

Watchlist Love

We’ve added the ability to add and delete new Watchlists right from your phone. This feature didn’t make it into the debut version of the app, but now you can create brand-new Watchlists from your phone and they will automatically get carried over into the main trading platform.

System Alerts

System notifications will now show up automatically on the Home screen. This includes margin or day-trading calls, as well as other critical messages that would normally show up in red in the message center of the main trading platform.

Hints and Feedback

This new section on the home page makes it easier to send us your feedback and report issues with the app. We’ve also included a hints area that gives you some good tips on how to get the most out of the app.

One More Thing on Positions

We’ve gotten some feedback from customers wanting more information regarding their positions in the app. So we just wanted to clarify that there is an entire screen devoted to each position that’s accessible from the positions screen.

From this screen you can tap on any individual position and the position-detail screen will come up:

Here you can view things like cost basis, value change, and stock price change. You can also trade out of the position right from this screen.

As usual, we love hearing from our customers, so if you have any thoughts on how to improve the app, please let us know here in the comments. And if you love the app, don’t forget to tell the world on the Android Market.

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The wait is over—we are proud to announce we have an Android app for OptionsHouse customers.

You’ll notice the app doesn’t look exactly like the iPhone app, and that’s on purpose. We built it specifically for all of our Android users instead of simply porting over our existing iPhone app.

The result? A fast-trading app that takes advantage of all the functionality and usability you’ve grown accustomed to on Android.

From the app, you’ll be able to:

-          Monitor your positions and orders

-          Trade stocks and options

-          Trade option spreads from the options chain

-          Trade out of your positions

-          View your watchlists and trade directly from them

-          View symbol fundamentals and charts

-          View charts in candlestick and OHLC formats

-          Set your trading defaults for app trading

-          Access your virtual account

Check out the app by accessing it directly from your device on the Android Marketplace. You can also send it to your phone from the Android Market website. Don’t forget to rate the app and send us your feedback.

With our Android app available, we now offer an easy, convenient way to access your OptionsHouse account regardless of the mobile device you use. If you aren’t an iPhone or Android user, you can access our mobile website at m.optionshouse.com.

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What’s a Bracketed Order?

Less complicated than it sounds, a bracketed order simply “brackets” two prices (one stop price, one limit price) around an initial order.  That way you can choose the levels at which you want to exit a winning or a losing trade.  And when one order is activated, the other will automatically be cancelled.

Examples

For a buy order, an investor could buy XYZ stock at $50, set a sell-to-close stop order at $40 (theoretically limiting losses to a maximum of $10) and a sell-to-close limit order of $100 (submitting an exit order if and when the stock doubles in value).

On the flip side, for a sell order, an investor could sell XYZ for $50, set a buy-to-close stop order at $55 (forcing an exit of the trade at a $5 loss) and a buy-to-close limit order of $40 (prompting an exit of the trade at a $10 gain).

How Do I Do It?

From the ever-present quote line at the top of the platform, you can click on either the bid or ask price and select the “Sell [XYZ] Stock with OCO Bracket” or “Buy [XYZ] Stock with OCO Bracket” option, respectively.

After selecting one of these options (for the sake of example, let’s go with the “Buy” bracket), the ticket will auto-populate with your default quantities.  The first tab – (A) Order 1 – will be a traditional buy order.  From here you can adjust your price type, price, and duration.

Typically, bracketed orders have a duration of good-til-cancelled (GTC), unless the trader expects his stop or target levels to be hit in very quick fashion.  Note that “Day” is the default choice under the duration drop-down menu so “GTC” would need to be selected by the user.  (Regardless, all three orders will need to be set to the same duration). You’ll also notice that the order summary portion of the ticket is already full of information – you just need to customize it.

The (B) Order 2 tab will already be filled out as a sell limit order, with a pre-filled price of one dollar more than the stock purchase price.  Set this price to whatever you wish and adjust the duration in accordance with the first order.

The (C) Order 3 tab will also be filled out, as a sell stop order with a pre-filled price of one dollar less than the stock purchase price.  Again, you may choose to adjust this price and the duration. Again, all three durations must be the same.

Hit preview.  Depending on where you set your stop and limit prices, you may see an error message in the “Order Messages” field indicating that Orders 2 and 3 are away from market (this is by design).

Be sure to confirm your order summary before executing.  It should read similar to this:

Order Summary

• Buy 100 NFLX Stock, at a Limit price of $290.00, Duration: GTC
• IF that order executes in full THEN send the following two orders. If one executes in any part, then attempt to cancel the remaining order (while continuing to work the first order)
• Sell 100 NFLX Stock, at a Limit price of $340.00, Duration: GTC
• Sell 100 NFLX Stock, at a Stop price of $270.00, Duration: GTC

So basically, this saves you a couple of steps and a bit of manipulation.  We hope it makes your experience trading on OptionsHouse that much more efficient and easy to manage.  We’d love for you to let us know what you think after you try out this new functionality!

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At the time of the webinar (after Tuesday’s close), at-the-money straddles were indicating a 3.2% move in JPM and a 4.4% move in Google through today’s expiration.  Remember a straddle is the simultaneous purchase (or sale) of the call and put with the same strikes (and same expiration). Adding the at-the-money call and put prices together is a reasonable reflection of the option market’s expected move for the underlying through the next expiration date at any given time.

Investors buying a long straddle expect for the underlying to move more than the current option prices predict.  Losses for a long straddle are capped at the premium paid and gains are unlimited to the upside and limited only by zero to the downside.

The maximum profit for a short seller is the premium collected, on the other hand, while losses are theoretically unlimited if the stock rallies.  Short straddle sellers expect a stock’s movement to be less dramatic than the market predicts.

Well, the actual results are in, and we have one winner and one loser. JPM announced positive results on Thursday. The stock’s pop higher to $41.24 (right at the open), however, wasn’t high enough to make owning the straddle profitable.

Google, on the other hand released spectacular numbers and this morning the stock opened at $597.50 after closing at $528.94 last night!  The 540 straddle, which was trading for $23.75 on Tuesday, had parity in the call option worth $57.5 dollars at that opening price! Good news for those holding the long straddle – bad for those who had sold the short straddle.

The stock has since pulled back from that opening price, which points out the need to be extremely nimble when owning straddles. Traders must act quickly to capture the profits (and more importantly limit the losses) when earnings and expiration collide.

Meanwhile, JPM has actually moved lower – even closer to the 40 strike – such that if an investor had not sold out of a straddle quickly, the loss on the long straddle would have been larger.

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Initial registration is required, and then for every person you refer that completes and funds an account, you’ll be eligible to receive $150 in cash (via PayPal) or 30 free trades.¹ You can even choose to get the $150 in the form of an Amazon Gift card or you can donate it to the Red Cross.

All you have to do is log in and input your friends’ e-mail addresses and we’ll send them a short invitation to join OptionsHouse. There’s no limit to the number of referral bonuses you can receive, so don’t hesitate to send to your entire extended family or college alum group.

We’ve even made it super easy to share via your social networks.  In just a few seconds, you can spread the word via Twitter, Facebook, or Blogger.  It’s a great way to up your referrals and your rewards!

To start spreading the word today, click here and you’ll be taken to a site where you can register to start referring friends and family to OptionsHouse.

Then sit back and watch the rewards roll in!

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There are two new features that come with these new charts:

-          Charts refresh automatically, meaning you’ll see the latest data as it unfolds.

-          More visual options via a drop down—you can choose to show a chart in four different modes:

• Line
• Mountain
• Candle
• OHLC (Open-High-Low-Close)

What are Candle and OHLC Charts?

Line charts and mountain charts are pretty self explanatory, but what about those other two? Candle charts and OHLC charts show additional information about the price of a stock for that specific time frame.

Candle Charts:

When the rectangle is filled, it means the price has gone down (the open is above the close), and when the rectangle isn’t shaded, it means the stock has gone up (that’s why the close is above the open). Our charts add green to signify a positive movement and red to signify that the stock went down.

OHLC Charts:

We hope these new features help you get the most of the OptionsHouse platform!

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Until today, the platform would log you out after an hour of inactivity. But today we’re releasing the ability to set your own logout time via the Manage Accounts area.

This new menu can be accessed via Manage Accounts-> Preferences-> Application. From there, you can set the logout time to one of four options:

• 30 minutes
• 60 minutes
• 120 minutes
• 8 hours

We encourage you to use these new settings carefully and to always log out if you’re going to be away from your computer for an extended period of time.

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