What Side Are You On?

Are You an Options Buyer or an Options Seller?

Often times when traders first begin trading options, they have a difficult time deciding whether or not they should be buying options or selling them instead. With stocks, you are limited to buying and selling shares. But with options, you have calls, puts, combination spreads and to make things more confusing; different strike prices and expiration dates to take into account. And just when you thought you had it all down, you then have to consider implied volatility in all of this.

To give you a very simple example of the dilemma you may face, consider the following example:

Stock ABC is trading at $50.00 per share and you believe that within the next month, the price is going to move down to $45.00 per share. Consider the different ways you can take advantage of this scenario:

You can buy an at the money put option and wait for the price of ABC stock to move lower and capitalize on the increase in the price of the put option. For example, you would buy the ABC put option for $5.00 and when ABC stock is trading at $50.00 and you would liquidate or sell the option, when ABC stock decreases in value from $50.00 to $45.00, the options price would rise to $8.00, so you would make $3.00 profit.
You can sell an at the money call option and wait for the price of the stock to move lower and capitalize on the price of the call option losing value. You would sell the call option at $5.00, when ABC stock is trading at $50.00, and liquidate or buy it back when the stock moves lower to the $45.00 level, at that time the option would be only worth $2.00. So the trader would make $3.00 profit.
And if you're a spread trading, you just as easily initiate a bear put spread or a debit put spread, which increases as the price of the underlying asset moves lower. Or if the trader prefers the sell side, a bear call spread can be initiated instead. And if you really wanted to go all out, you could construct all sort or ratio spreads and/back spreads to take advantage of ABC moving from $50.00 to $45.00.

As you can imagine, by the examples that I provided you, there are numerous ways to take advantage of a simple price move in the underlying asset; but to help you decide if you are going to be a buyer or a seller, you have to consider three important factors.

Are you expecting a powerful move or a minor move in the underlying asset? give pros and cons for each one
Do the options have substantial time till expiration (few months) or alternatively, have little time value left (few weeks)?
Does the underlying asset exhibit strong volatility and trading range or low volatility, trading range and movement?

Each of these issues must be carefully considered, before you decide to be a buyer or a seller, since each one of these factors plays a vital role in determining if you should be a buyer or a seller.

Market Action

U.S. markets showed strength throughout the session after geopolitical concerns eased and positive developments concerning TPP emerged. News that President Trump has designated economic adviser Larry Kudlow and Trade Representative Robert Lighthizer to review whether to rejoin the Trans-Pacific Partnership trade accord helped lift market spirits. Volatility closed below a key level of support with the market at 3-week highs ahead of tomorrow's earnings reports from a number of financial companies.

The Dow made a push to 24,592 after zooming 1.2% to move within spitting distance of clearing its 50-day moving average. The Nasdaq jumped 1% following its run to 7,166 while closing in on the 7,200 level and its 50-day moving average.

The S&P 500 soared 0.8% after trading north of 2,674 to regain positive territory for the year by a point but a level that failed to hold into the close. The Russell 2000 rallied 0.7% to extend its winning streak to 4-straight sessions after testing an intraday high of 1,562.

Financials rose 1.8% to pace sector strength while Industrials were higher by 1.4%. Utilities and Real Estate were the leading laggards with the sectors sinking 1.3% and 1.2%, respectively.

Global Economy

European markets rebounded to close higher across the board. Germany's DAX 30 gained 1% while the Belgium20 and the Stoxx 600 Europe were up 0.7%. France's CAC 40 added 0.6% and UK's FTSE 100 was up a point, or 0.02%.

Eurozone February industrial production unexpectedly fell 0.8%, weaker than expectations for a rise of 0.1%.

Asian markets continued to struggle after falling for a 2nd-straight session. China's Shanghai declined 0.9% while Hong Kong's Hang Seng and Australia's S&P/ASX 200 dipped 0.2%. South Korea's Kospi and Japan's Nikkei slipped 0.1%.

U.S. Economy

Initial Jobless Claims fell 9,000 to 233,000 for the week ending April 7th, topping expectations for a print of 230,000. The 4-week average was up to 230,000 from 228,250. Continuing claims bounced 53,000 to 1,871,000 for the March 31st week.

March Import prices were flat, with export prices 0.3% higher.

Market Sentiment

Fed funds futures have pulled back following yesterday's FOMC minutes. They are still suggesting risk for 4 hikes this year, although the futures are only pricing in a total of 3 tightenings for 2018. Implied rates are showing about 80% risk for another 25 basis-point rate increase at the June 12th-13th FOMC, while the chances for a third increase this year by December are closing in on 70%.

The iShares 20+ Year Treasury Bond ETF (TLT) traded in negative territory throughout the session with the low tapping $120.41. Upper support at $120.50-$120 held into the closing bell with additional risk to $119.50-$119 on a close below the latter. Lowered resistance is at $121-$121.50-$122.

Market Analysis

The Russell 3000 Index ($RUA) closed higher for the 3rd time in four sessions after reaching a peak of 1,585. We mentioned the last time we covered $RUA a bullish reversal could occur on continued closes above the 1,580 level with today's closing falling just shy of this level. However, key resistance remains at 1,590-1,600 and the 50-day moving average and levels that will come into play on continued strength. Rising support is at 1,570-1,560 with a move below the latter signaling a possible short-term top.

RSI cleared resistance at 50 with continued closes above this level being a bullish development. Support is at 40 with risk to 30 on a close back below this level.

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