What I love about the stock market is that it doesn’t matter what direction is in place, using Options, I can implement a strategy for any situation. The key is defining what the current market action is most likely to result in over the coming weeks. So let me share with you my Top 3 Trades that I believe you should be on right now.
These trades are in no particular order. The strategies that we are adopting may be based on option pricing analysis, and not specifically on the share price directional movement. Be aware, at time of writing, Halifax Investment Services Pty Ltd may be placing orders or already be placing orders and hold positions in any of these trades.
1) Buy the VIX
The S&P500 Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It was originally designed to measure the markets expectations of 30-day volatility implied by At the Money S&P100 option prices.
The US markets are in an upwards trend, which has been supported by the US Federal Reserve pumping Quantitative Easing funds into the economy. This will end at some stage, but not until the US economy is able to stand on its own two feet. Currently, it is running at an expected 2.0% GDP growth rate. But when the QE ends, the markets will fall.
At the same time, with such a low growth rate, the stock market has gained nearly 18% year to date for 2013. By no means could we expect this to continue and double in the second half of the year. Hence, we believe the US markets are overbought and due for a short-term correction.
The VIX is trading at long-term lows, and Implied Volatility is also at extreme lows. This is an ideal buying opportunity to Hedge against a potential fall in the short-term. We are entering Long positions using Option strategies on the VIX. This is why the VIX is one of our Top 3 Trades right now.
2) Apple Computers
This global technology company just released their third quarter earnings on Wednesday. The stock price has gapped favourably despite the broader markets selling off. Although the company has not produced a revolutionary product since the iPad in 2010, it is one of the strongest fundamental companies listed in the US, with a Balance Sheet that some of the biggest conglomerates would die for!
Heading into the second half of 2013, Apple Computers is rumoured to release a new version of the iPhone and to release the eagerly anticipated SmartWatch (let’s call it the iWatch just to keep consistency). These announcements will send the stock price higher on anticipation of the increase in revenue that we have seen occur several times in the last decade.
The share price activity in 2013 has seen Apple decline from $705 to a recent low around $380. It has been bouncing in a trading range since May, offering a great accumulation level in anticipation of a change back into a long-term upwards trend.
3) Short US Treasury’s
Following our comments on the US Federal Reserve easing their stimulus programs at some stage in the future, we are at a turning point in US Treasury’s.
One of the lowest Risk investment strategies is to Buy government Bonds. Unless the government defaults on its debt, there is a high probability you will get paid on the transaction. However, with low Risk comes low returns. Yields on Bonds only increase with there is low probability of being paid.
With backing from the US Federal Reserve, Bonds have been one of the biggest investment vehicles since the GFC (Global Financial Crisis). Although the stock market has been recovering, investors have been worried that geopolitical events in Europe and the Middle East might cause a stock market crash. So they have parked their cash into Bonds even though there has been low returns.
QE ending, at some time in the future, will cause the stock market to fall. Unless the US economy is healthily standing on its own two economic feet. Right now, the data suggests it can’t.
Yields are at long-term lows, but the trend is changing. Rising yields is sending Bond values down and we are in the midst of a long-term change in trend. Hence we have been trading/investing on TBT – an Exchange Traded Fund that invests in derivatives that correspond to the inverse performance of the Barclays US 20+ Year Treasury Bond Index.
The change in trend for TBT is clear, and we have been adopting strategies using options over the last several months. Our view is for a long-term bullish trend.
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Matthew Brown – US Stocks & Options specialist
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973
Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.