The Traderszone Network

Equity option activity on the CBOE saw 1,194,387 call contracts traded on Wednesday, compared to 925,811 put contracts. The put/call ratio rose to 0.78, while the 21-day moving average slipped to 0.76. Gold futures have reached their highest price in 7 months as uncertainty over the bailout plan jump-started a new round of safe-haven buying. The April contract piled on $30.30, or 3.3%, to finish at $944.50 per ounce, while the front-month February contract gained $30.10 to settle at $943.80 per ounce.

Overseas trading has been dismal. Stocks plunged in Tokyo and Hong Kong with exporters and financials leading the downtrend. Strength in the Japanese yen helped pressure a number of companies. In addition, Japan’s wholesale inflation rate fell more than expected in January, dipping into negative territory for the first time in more than 5 years. In Europe, indices racked up their third day of losses as falling oil prices hold back the energy sector and corporate earnings create additional drag on stocks.

Against this backdrop, we again feel that the Direxion Shares Financial BEAR 3x ETF (FAZ) 09 MAR 65.0 covered calls continue to look interesting. They are currently up +4.93 to 48.48 and offer a 174.6% if unchanged annual return and a 585.5% if assigned annual return.

Beet.tv has an interesting article on MoneyAisle. The service is part of neoSaej, a small Boston area start-up co-founded by Ray Stata and Mukesh Chatter. Stata is best known as co-founder of Analog Devices and Chatter is founder of Nexabit, which was sold to Lucent for $1 billion.

Launched in June, MoneyAisle has gone live on TheStreet.com. Chatter says the product is going well and that the auction technology has implications for several business sectors, including retail.

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• NeoSaej Collects $7 Million More for MoneyAisle

One of the wide variety of strategies options traders can employ with limited risk is the Put Diagonal Calendar Spread. It can be used when the market is likely to track sideways for a while. The trader can either make a profit from the option trade or end up with shares in the underlying and still have insurance on them.

The mechanics of the trade are relatively simple; the trader sells an ATM or slightly ITM Put option for a front month, say January, and then buys a February Put option one strike lower. The trade can usually be done for close to even money and the maximum risk is limited to the width of the spread should the shares fall and the trader is assigned shares from the short Put. The long Put will as insurance until the February expiration.

At the January expiry the trader can let the front option expire if it’s out of the money or buy it back if it’s in the money and then sell the long February Put and make a slight profit or small loss on the trade. Or, if the Put option is in the money, they can have the stock “put” to them and allow the price of the short put offset the cost of the shares.

For example, if a stock has been selling in a channel between $50 and $55 for several months the trader can sell a January $51 Put for $2.80 and buy a February $50 Put for $2.95 for a debit of $1.50. If the January $51 expires out of the money (and worthless) then the trader only has to sell the February $50 Put for more than 15 cents to make a profit.

However, if the stock dropped a certain amount and the trader was assigned the shares on the short January $51 Put, he would still have the long February $50 Put as insurance and would have a lot more options regarding what he wanted to do with the position. One scenario would be to sell a longer-term (perhaps March or April) OTM covered call to mitigate the current $1.50 risk on the trade—and could actually end up making a very good profit on the entire transaction over time.

Options give traders an increased ability to limit risk and to quickly get to profitability and/or to adjust a trades as market conditions change.

I continue to be interested in ProShares UltraShort FTSE Xinhua China 25 ETF (FXP) . The 09 JAN 60.0 covered calls are paying 305.3 percent annualized and the stock, currently at 55.67 (+4.46), is trading near its all time lows. Although this ETF has been driven down in recent weeks due to the market’s rally, a gauge of China’s manufacturing activity in November, as compiled by brokerage CLSA Asia-Pacific Markets, showed the sharpest contraction in the history of the survey. FXP has continuously ranked very high on an annualized percentage basis during the last few months and this information should drive it higher in the forseeable future.