Options Strategy: How a Home Depot (NYSE: HD) Straddle Could Provide Investors Lower Costs, Higher Returns
- By Larry D. Spears, Contributing Writer, Money Morning - January 25, 2012After more than two years of false starts, the battered U.S. housing market may have finally found a bottom.
If so, that prospect offers options investors a chance to earn higher returns on lower costs using a Home Depot (NYSE: HD) straddle. (More on that later...)
In fact, here are just a few of the latest statistics that lead me to believe housing will slowly begin to recover over the next four months...
- Sales of existing U.S. homes rose by 5% in December to a seasonally adjusted rate of 4.61 million.
- Rates for all types of mortgage loans hit record lows this month, with the benchmark 30-year fixed mortgage being offered at 3.88% last week.
- Both housing starts and applications for new residential building permits rose steadily throughout 2011, hitting respective seasonally adjusted annual rates of 657,000 and 679,000 in December, both up more than 250,000 from 2009 lows.
- And finally, last Wednesday, members of the National Association of Home Builders (NAHB) expressed their highest level of confidence in the housing market since June 2007 - the fourth consecutive month that sentiment levels have risen.
The answer is an options strategy that offers lower risk and potentially higher rewards.
How to the Play the Housing Market BottomNow typically, stocks that rise or fall with the tides of the housing market fall into three categories:
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An Options Strategy That Will Save You Some Money
- By Larry D. Spears, Contributing Writer, Money Morning - January 10, 2012
To be specific, stocks - as measured by the Standard & Poor's 500 Index - rose from 1,204.00 at the close on Monday, Dec. 19, to 1,257.60 on Friday, Dec. 30, then jumped to 1,280.15 at midday yesterday (Monday), a gain of 6.32% in just three weeks. The Dow Jones Industrial Average did almost as well, climbing from 11,751.96 on Dec. 19 to 12,398.29 in Monday trading, a 21-day gain of 5.50%.
While those short-term moves are certainly impressive, they're hardly unique in today's volatile market environment. Three similar advances have occurred in the past five months alone - in late August, early October and late November - but each was followed by a sharp short-term pullback that wiped out much of the value gained in the rallies.
And, while few things in the market are certain, there's a strong probability this current market advance will also be followed by a sizeable retracement in the very near future.
So, how do you protect your most recent gains?
One answer is to turn to the options market.
A Defensive Options PlayAs veteran Money Morning readers know, two of the most effective and often-used strategies involving options are writing covered calls to bring in added income and buying put options as "insurance" against possible price pullbacks.
As such, investors would typically look to the latter strategy - buying puts - for protection in the present market situation. However, there are times when unusual conditions can force investors to take an alternative approach to option strategies - and that has certainly been the case recently, thanks to the market's extreme short-term volatility.
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How to Use Options To Protect Your Profits – And Play for More
- By Larry D. Spears, Contributing Writer, Money Morning - December 30, 2010
To find out the secret to using options to preserve your wealth, read on...
How to Play Market Uncertainty With an Options Straddle
- By Larry D. Spears, Contributing Writer, Money Morning - December 6, 2010
Since 1950, September has consistently been the worst month for stock performance and October is most notable for the market crashes it has seen - 1929 and 1987, to name two. This year, however, the Dow Jones Industrial Average broke out of a summer slump and gained 11.08% over those two months, with similar percentage gains by the other major indexes. Then, in November, the Dow and other broad indexes lost more than 1%, only to rebound by more than 2% each on Dec. 1 in a 250-point Dow rally inspired by a better-than-expected November jobs report.
What will happen next?
Will Wednesday's surge turn into a legitimate Santa Claus rally, followed by a strong January Effect advance? Or, will poorer economic numbers and a wave of tax-related selling send the market reeling as fall winners cash in their gains and summer losers shed their poor performers?
Investing Strategies: How to Open an Options Account
- By Larry D. Spears, Contributing Writer, Money Morning - August 16, 2010
"New financial times require new financial tools, and I believe options are a must in today's fragile markets," says Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Learning to use options effectively takes some time - particularly if you are set in your ways - but market conditions have changed so much in such a short time that you have to make the effort if you expect to both maximize profits and guard against major reversals."
Fitz-Gerald regularly employs both stock and index options in his Geiger Index advisory service, which has scored a remarkable 32 profits in 32 tries since its inception.
How to Use Stock Options to Insure Your Holdings Against Short-Term Pullbacks
- By Larry D. Spears, Contributing Writer, Money Morning - June 29, 2010
The latter strategy typically involves buying at-the-money put options on your long stock positions. This creates a situation akin to an "insurance policy" in that your profit on the put options will offset most or all of the loss on your stock should prices turn lower during the life of the option.
Money Morning Mid-Year Forecast: The Dollar Headed for Some Change
- By Larry D. Spears, Contributing Writer, Money Morning - June 21, 2010
As Keith Fitz-Gerald, Money Morning's Chief Investment Strategist, pointed out last week (June 10), from January through May, the dollar gained ground against all but two of the world's leading currencies - China's yuan and the Japanese yen - and it retained parity with them. The greenback appreciated by as much as 16% versus the struggling euro, which last week (June 8) briefly dipped to a four-year low below $1.20, and 13% against the British pound.
The InterContinental Exchange's (ICE) U.S. Dollar Index (USDX), which measures the dollar's value versus a trade-weighted basket of six leading foreign currencies, climbed from a low of 76.732 on Jan. 14, 2010, to an intra-day high of 88.586 on June 8.
Defensive Investing: Defeat Market Volatility With an Options-Straddle Strategy
- By Larry D. Spears, Contributing Writer, Money Morning - June 14, 2010
Day-to-day swings of 250 or 300 points are becoming almost commonplace - and the direction those swings will take is an ever-growing mystery.
Just look at the Dow Jones Industrial Average as a case in point. Since late February, the Dow has climbed from 10,325.26 to an intraday high of 11,258.01 (on April 26), plummeted to an intraday low of 9,869.62 during the May 6 "flash crash," rallied back to 10,896.91 on May 12, dived to just 9,774.48 during the day on May 25, closed below 10,000 for several days in early June, and vaulted back up above 10,170 at the market's close on Thursday.
With this Bear-Market Insurance, You Can Keep Riding the Bull
- By Martin Hutchinson, Global Investing Specialist, Money Morning - March 19, 2010
At this point, based on consideration of its change in value since the money supply inflation began in early 1995, stocks appear to be substantially overvalued, perhaps by as much as 40% to 50%.
However, if our experiences of the late 1990s taught us anything, it's that the stock market can remain overvalued for years - meaning investors who opt out of the market completely risk getting left behind.
Still, given the soaring run-up we've seen since the stock market's March 9, 2009 nadir, I thought this would be an excellent time to review the ways nervous investors can protect themselves - even as they remain invested. That's just good, sound risk management.
And there is a way to achieve both goals - with a type of bear-market "insurance' that's fairly easy to use.
To find out about “bear-market insurance,” please read on…
Investing Strategies: How to Decode the New Option Symbols That Take Effect Today
- By Larry D. Spears, Contributing Writer, Money Morning - February 12, 2010
The old option symbols - simple four- or five-character letter codes that have been in use since the Chicago Board Options Exchange (CBOE) first started trading standardized listed options back in 1973 - are being replaced with new, more-definitive codes containing a combination of up to 22 letters and numbers.
The new symbols are designed to provide a complete description of each individual option - one that can be universally understood by everyone in the markets, and by the data-transmission computers and electronic quotation systems.
Investing Strategies: How to Decode the New Options Trading Symbols
- By Larry D. Spears, Contributing Writer, Money Morning - February 1, 2010
But the "government" had nothing to do with it.
The idea for a new option-quotation format was actually put forth back in 2005 by securities industry insiders whose companies were struggling to find ways to deal with the rapidly growing number of optionable stocks, index options, short-dated "serial" options, long-term issues such as LEAPs - and the expanding strike-price ranges for all of them.
With the guidance of the Options Clearing Corporation (OCC), a group was organized and tasked with creating what was subsequently dubbed the Options Symbology Initiative (OSI) - a system to "overhaul the symbology used in representing listed option contracts in data transmissions between market constituents."
With This Options Strategy, Investors Can Snap Up Global Stocks at Discount Prices
- By Keith Fitz-Gerald, Chief Investment Strategist, Money Map Report - January 26, 2010
But here's what most investors don't realize: While it may be hard to find truly undervalued stocks, there is a way to buy perfectly valued shares at a substantial discount to their market price.
At times, that discount can equal 20% or more.
What's more, this strategy can be utilized in virtually any market environment: It doesn't matter whether the bulls are running the show, as they have been recently, or if the market is suffering from a "fiscal hangover," as it was in early 2009.
The technique is known as "selling cash-secured put options" - and, while trading options is viewed as complex and scary by many investors, this particular play is both simple in execution and relatively low in terms of risk.
Here's how it works.