Options Market Update November 2, 2015

Having shaken many investors in August and September, the S&P 500 put together its best month in four years, a gain of 8.3%. For the past week, the S&P gained 0.20%, the Dow added 0.10% and the Nasdaq advanced by 0.43%.

For the bulls, October was a spectacular month as the market surged higher from its August/September selloffs, and the S&P 500 is now within 2.5% of its all-time high. Also, according to FactSet, 76% of S&P 500 companies that reported results this quarter have beaten earnings targets, and Jobless Claims data continues to beat expectations.

For the bears, Friday’s late-afternoon selloff gave hope that the market may stall after its strong advance. Aiding the bear camp this week was U.S. GDP, which grew at a low 1.5% annualized pace in Q3. Also, several consumer-related data points disappointed, including Consumer Confidence and Consumer Sentiment, and earnings from retailers have been a weak spot during earnings season.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 15.07, marginally higher than the previous week. In general, it was a quiet week for put buying across the major indexes. That said, on Thursday and Friday, my scanner began to pick up on strangle buying in many leading stocks. When a trader buys a strangle, he’s buying out-of-the-money puts and calls at the same time, betting that volatility/price of options are too cheap and looking for a big move to the downside or upside.

Events for the Week to Come

Approximately one-third of S&P 500 companies will report earnings this week, including Tesla Motors on Tuesday, Facebook on Wednesday and Walt Disney on Thursday. The October Jobs Report is due on Friday—the report has again become a potentially big event because the Federal Reserve hinted that a rate hike may come before year-end. I expect trading to be relatively slow in the stock and options world headed into the report.

What Traders are Saying

We initiated a new position in KKR on Friday after weeks of suspicious bullish option activity, and a surge of such activity on Thursday. I’ve recently been avoiding stocks with broken charts regardless of their bullish order flow, as beaten-down stock rallies have been extremely brief in 2015.

That said, when I evaluated the KKR call, the premium was so incredibly cheap, that the risk/reward was too good to pass up. Paying $1.10 for calls $0.85 out-of-the-money with seven months until expiration is an incredibly cheap opportunity—1,000 shares of KKR at 17.15 would be a capital outlay of $17,150, while a purchase of 10 June 18 Calls for $1.10 would cost just $1,100.

I buy and hold stocks just like most investors. However, the opportunity to pay 93.5% less for a similar upside opportunity via calls for the next 229 days (when our calls expire) is a perfect illustration of the power of options, and a risk I was willing to take.

This is an excerpt from Cabot Options Trader, which features the most profitable investment strategies in any market. It’s your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.

Subscriber reviews of Cabot Options Trader.

Headline News

Stock Picks


Shopify (SHOP), which came public in May of last year, is a new leader.


Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.


For AMZN to be undervalued, the stock would need to fall to 393. 50.

Cabot Wealth Advisory

The Emerging Market Stock You Ought to Own

By Paul Goodwin on September 27, 2016

The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >

Tesla Model 3 vs. Chevy Bolt: Which Affordable Electric Car Is Better?

By Timothy Lutts on September 26, 2016

The Tesla Model 3 and Chevy Bolt are the first two affordable electric cars with a driving range of more than 200 miles. Let’s see how they stack up - and what they could mean to Tesla Motors (TSLA) and General Motors (GM) stock. Read More >

Does Alibaba (BABA) Stock Measure Up to Amazon (AMZN)?

By Paul Goodwin on September 23, 2016

Alibaba (BABA) is the Amazon (AMZN) of China. But does BABA stock measure up to AMZN stock? Let’s break it down!Read More >