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Wall Street Week Ahead – Market Indicator
for
December 05, 2011
Playing Volatility



Volatility is still a key player – using a simple strategy – the straddle – profitable plays for 2011 market!



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volatility

Last week marked the biggest weekly gain in the S&P 500 Index (SPX) since March 2009. Of course, the index was down big during the two weeks prior to this massive gain, and the SPX still hasn't recouped what it lost over those two bearish weeks. In any event, there's no denying that volatility has returned. Below is a chart showing the two-month average weekly percentage move of the SPX, whether up or down. By this measure, volatility is higher now than at any other time since the 2008 market crash.

SPX-120511



A Simple Strategy

One options strategy for profiting from high volatility is to buy a straddle.

straddle

This consists of buying a call option and a put option on the same underlying stock or index. The strike prices and expiration dates should match up for both the call and the put. As you might infer, the position can profit whether the stock goes up or down. However, you need the stock's move to be bigger than if you had simply purchased a single call or put, because the profit must be sizable enough to cover both of the option premiums that you paid for.

Good Straddle Plays This Year

Since Stock Options Made Easy (S.O.M.E.) specializes in equity options, it was an interesting exercise to see which individual stocks would have made good straddle plays this year. By looking back at each eligible stock in the database, and seeing what kind of returns you would have obtained had you blindly bought an at-the-money straddle 10 days prior to each monthly options expiration, so far this year (we're currently 10 trading days from December expiration) is quite an eye-opener. Note that not all of the stocks will have 11 returns, because attention wasn’t paid to a theoretical straddle if the bid/ask spreads were too wide.

Below are all the stocks that averaged at least a 20% gain per straddle trade. The number of trades that were positive is also shown, and the number that would have at least doubled in price. The last two columns show, out of all those positive straddle trades, how many would have been profitable due to the call option (in other words, because the stock increased in price), and how many were profitable due to the put. Obviously, the stocks on this list have been much more volatile this year than what option players have priced in.

2012 straddle plays

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”Success is simple. Do what's right, the right way, at the right time.”



Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.



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