Options Trading - 2015 Review

To say that 2015 has been a challenging year for most investors would be an understatement. Of the 10 sectors of the S&P 500, six will finish down on the year. Of those six, if you had too much exposure to Energy (down 22%) or Materials (down 9%) this year was a disaster. And to make matters worse, popular stocks such as Chesapeake Energy (CHK), United States Steel (X) and countless bio-tech stocks are down well over 70% from their highs. Perhaps even more upsetting for many investors is the dramatic fall of "safe stocks" such as Wal-Mart (WMT), Macy's (M) and Viacom (VIAB) which are all down well over 25%.

That said, there were plenty of winners this year, as Consumer Discretionary (up 9%) Health Care (up 6%) and Information Technology (up 5%) produced many winners. For example the "FANG" stocks made up of Facebook (FB) Amazon (AMZN) Netflix (NFLX) and Google (GOOG) have been stellar performers this year, with AMZN and NFLX up by well over 100%. Also there were winners found in old tech such as Microsoft (up 21%), and new tech, such as gaming stocks Electronic Arts (EA) and Activision Blizzard (ATVI) which were up 48% and 95% respectively.

So what will be the big trends in 2016? Will Oil and Commodities continue to weigh on the market, or will there be a big rush to buy these "undervalued" sectors? Or will stocks like AMZN continue to destroy the retailers, and NFLX continue to hurt the Media sector? As is always the case, my magic crystal ball is broken, and not making predictions. That said, if 2015 taught us anything, it's that options need to continue to be a part of every trader's playbook. (As subscribers to my Cabot Options Trader and Cabot Options Trader Pro advisories could tell you.)

While the S&P 500 is likely to close plus or minus 1% at year-end, buy-writes have been the trade of the year, and would have significantly beat the major market averages. For example the CBOE S&P 500 BuyWrite Index (BXM), which is a benchmark index designed to track the performance of a hypothetical buy-write strategy, is up 5.55% on the year. This performance is not surprising, as the market has been choppy and sloppy all year. Yet time after time, the S&P 500 found itself back within a couple percent of unchanged on the year. This is an ideal scenario for traders of buy-writes, as these sold calls, and their premiums, month after month expire worthless.

Buyers of Puts, as bearish trades, or as hedges, have also worked quite well this year. For example, if you had made the mistake of buying a stock like U.S. Steel at any point this year, but at the same time bought a put to protect, your losses would be significantly less than the 70% the stock lost this year. While no one likes to pay for insurance, 2015 has shown that puts as protection to a stock holding, no matter how safe you believe the stock to be, are an essential tool for every investor.

Similarly Call buying has had its ups and downs this year, and we have plenty of singles, doubles and triples, as well as strike outs. Our winners in stocks such Adobe, Activision, Tyson Foods and many others were offset by losers in InvenSense and Kinder Morgan. Such was trading in 2015.

Not surprisingly, we were not alone in having some home runs, and strike outs, this year using options. As I have highlighted the top minds in the investing world continue to use Calls/Puts to gain market leverage. In the last several months I highlighted hedge fund titan Bill Ackman's use of calls and bull risk/reversals to add to his large position in Valeant (VRX). Since then, the stock has rebounded, and his options positions are now big winners.

On the other hand there have been plenty of misses by top traders. This morning Bloomberg reported that Bill Miller of Legg Mason, who beat the S&P 500 every year from 1991 to 2005, has misfired buying Twitter (TWTR) calls this year. For those of you who actively watch my daily Bull/Bear order flow email, you may remember several times this year there was a big buyer of TWTR January 35 Calls that expire in 2017. In the third quarter, my scanner highlighted repeated buyers of these calls, and as of today over 100,000 of these calls are in open interest. Bill Miller's fund recently reported spending $60 million on these calls for around $6.71 per call. As of the close of trade on Thursday, these calls are now worth approximately $1.50, or a loss of $5.21.

I look forward to another exciting year in the markets, and in trading options in 2016. And I wish you and your family a very Happy New Year!

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