Stock Options Trading Idea of the Week
Know the difference between an American style and a European style option?
With VIX closing below 30 for the second consecutive week, we are hopeful that volatility is ebbing a bit and we can look forward to consistent gains in our portfolios. So far, in the first three weeks of this expiration month, our composite totals of the 7 actual portfolios has gained 7.2%, putting us over the 100% mark on an annualized basis.
This week, I would like to explain the difference between American style and European style options in case you were not familiar with them.
Terry
Know the difference between an American style and a European style option?
The difference in these two kinds of options has nothing to do with the different continents. An American style option contract can be exercised at any time before the expiration date. If you own a call option on IBM with an expiration date of January 2010, you could exercise the option and take delivery of 100 shares of IBM at the strike price of the option at any time between now and the third Friday in January 2010. Most options traded on an exchange are traded American style.
A European style option contract can only be exercised on the expiration date. On that date, they are settled in cash. Of course you will still be able to freely trade the option in the market place – you just can’t exercise it. The most popular European style options traded on American exchanges are index options such as OEX or SPX. Most European style options expire on the Thursday before the Friday expiration date of American style options.
Where you have a choice between the two styles it is best to choose the style where there is more liquidity and volume in the options, as you will invariable get better prices when you buy or sell.
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 7 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you.
Terry
Andy's Market Report
Thanks to a strong rally on Monday the major market benchmarks were able to once again post a positive gain for the week. The Dow, S&P, Russell and Nasdaq advanced 3.1%, 2.3%, 5.7%, and 4.2%, respectively.
Monday’s strong rally was actually a continuation of the previous Friday’s end of the day rally. The rally continued on some positive and surprising economic news from the Construction sector. It was reported the construction spending in the month of April increased 0.8% month-over-month which was significantly higher than the -1.5% that economists’ predicted. Furthermore, Personal Income increased 0.5% and Personal Spending came in at -0.1%, both well above the consensus.
As a result of the surprising economic reports, the S&P jumped 2.6% on the day. The advance led to fresh new highs for 2009 and the first time the S&P closed above its 200-day moving-average since December 2007.
The market continued the rally into Friday’s Non-farm Payroll report which came in at -345,000 which again was significantly better than the -520,00 that economists’ had anticipated. At that point, the market had reached a short-term overbought state so it pulled back a bit, but certainly not enough to push the major benchmarks back into a short-term neutral state.
"Less bad, yes," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said, summarizing the economy. "Good, no."
"The light at the end of the tunnel just got a lot brighter," said Nigel Gault, chief U.S. economist at IHS Global Insight.
"This tide is turning," said Richard Yamarone, economist at Argus Research. "We expect this trend of slower job loss to continue throughout the year."
On the technical front, I expect to see a short-term decline early next week due to the short-term overbought state in the major benchmarks. Typically when we see a very overbought state a short-term reprieve follows. Again, I expect to see the same this time around.
Couple the sentiment above with overly enthusiastic reactions to the Payroll report (like we saw Friday) and again I expect to see a short-term decline. Several days after a gap up of 0.5% on a Payroll report the S&P was only positive 37% of the time with an average return of -1.1%.
However, once the short-term decline comes who knows, another surge certainly is not out of the picture.
Overbought/Sold Condition Report
Overbought/Oversold as of June 5, 2009
- S&P 500 (SPY) – 67.9 (neutral)
- Dow Jones (DIA) – 74.0 (overbought)
- Russell 2000 (IWM) – 78.5 (overbought)
- NASDAQ 100 (QQQQ) – 83.7 (very overbought)
