• The early clues to movement are in the options.

By Bob Lang

Don't you just wish some big hedge funds would call you up and tell you they were buying blocks of stock, enough to make the price move?

Of course you do. What a great advantage you would have over the crowd -- and technically it's not illegal.

But that doesn't happen in the real world, so we are left on our own to figure things out. For me, the volume tells me exactly the same thing, but it's always a matter of interpretation. I will look at big-volume moves coupled with price movement as telling me where the big money is flowing. More than 80% of the flow is institutional, the big elephant in the room. I just want to be "a fly on an elephant's backside," so to speak. Just follow his lead.

The best moves are big stock volumes with breakouts in price, but the early clues to movement are in the options. This is where the smart money places their bets, and they are usually right. (Note, I said usually, not always.)

Sometimes the options volume is just eye-popping, 30,000 bought with only 2,000 in the open interest. We can unmistakably see where the buyer thinks a stock is headed. With a low-volatility environment, it makes sense to bet heavy with options as their premiums are low. Big bets at low prices can yield substantial gains if the move pans out.

Watch the volume -- it tells you were price is headed.

Thanks to Doug, Dan, Tim and the rest of the crew for the chance to write today. It's been fun, and I have enjoyed it. Hope you also learned something today! Have a great weekend.

• There have been some really good winners this year.

By Bob Lang

One of the best sectors to play this year has been the biotechs and I would be remiss if I didn't tell you my best play ever was just a couple weeks ago with Onyx Pharmaceutical (ONXX), a massive 1500% gainer on the July 85 calls in just a couple of days.

But there have been some really good winners this year, among them Celgene (CELG), Regeneron (REGN) and Alexion (ALXN). These probably still have more upside this year. The bigger biotechs have performed well too. Amgen (AMGN) and Biogen (BIIB) (the lone holdouts from the biotech bubble in the early 90s). My favorites include Gilead Sciences (GILD) and, to a lesser extent, Actavis (ACT). 

The Gilead chart and technicals are in great shape and provide some good upside past $60 later this year. The company bought a big mover in Pharmasset last year and is now a rather big biotech. Still, the stock continues to outperform and is now pushing new highs. The options are a great way to play this one. I'm long the August 55 strikes with longer-term plays in the Jan 60 leaps. I'll be patient with this one and let it work.

Actavis is intriguing, but the options are whack. I own the stock right here in the mid-$120s. The recent WRCX acquisition is going to be accretive to earnings. It maybe does $10 or more per share this year (good growth rate, too). Could easily see this move into the $200s over time.   Further, it recently received approval for the generic Viagra in some European countries, so this may give the stock a nice pop. (That was a bad one, sorry).

• I think this news could slow down the shares a bit, so here is my trade.

By Tim Collins

Lots of folks are out defending Boeing (BA). My focus is just on a potential trade opportunity. The implied volatility for July is soaring, and I want to try capturing some of it here. I'm not certain on direction, but I think this news could slow down the stock a bit, so here is my trade.

I am long the August $105 calls and short the July 19 $106 calls -- a diagonal call spread. On the downside, I am long 1x August $97.5 puts, short 2x July 19 $95 puts and long 1x July 19 $92.5 puts. The total cost was $3.35. I added an extra 30% on the diagonal long call spreads at $1.75 as I think the bias will be toward recovery over the next week, rather than a continued selloff.

• When selling premium, time is your friend.

By Bob Lang

If I were to tell you a way to beat the house in the options casino and have even better odds than the house in Vegas, would you take it? I should hope so! What we're talking about here is selling premium, of which I do quite often with my clients. It doesn't matter if selling puts, calls, put spreads, call spreads, strangles, straddles or condors. The strategy is the same: Ride it out until the premium dissolves, getting paid up front to wait. As you might imagine, when selling premium, time is your friend.

The decay that is always present with options works off with every passing day until expiration, so taking the other side of the trade in a low-volatility environment is pretty attractive.

Let's get back to the good odds. We can agree that most options expire worthless at expiration, statistics show that 80% of all options expire worthless. Therefore, you have a four-out-of-five chance of winning as a seller of premium.

Now, why is a low-volatility or declining-volatility environment good for selling premium? Because market expectations are for little movement. When the VIX is down or moving lower, the odds of being put stock or having it called away diminishes greatly. Now, there are always situations that arise that are out of our control, moving the stock to extremes, but the basic premise and application are right.

Why does this require patience? Remember, time is your friend, and the more time goes by the better odds to win. Recently, we had a holiday for Independence Day when the markets were closed for one and a half days, much like Thanksgiving week. We sold some SPDR S&P 500 ETF Trust (SPY) at-the-money put spreads on the half day (Wednesday) and held the short spread through the holiday. So, I had the market closed for one and a half days, with the options decaying simultaneously! When the market opened Friday morning, we went higher, but even if the market opened flat, the spreads would have melted. These ended up expiring worthless, and I didn't have to do anything more, because I let them work all the way to expiration.

I have been selling put spreads mostly this year because that is the best bullish strategy for this environment. Call selling works as well, especially for very quick moves downward.

• I have narrowed down the mining sector to six names that are worth watching.

By Tim Collins

The miners have been a hot topic for quite some time now. Buying them has been difficult, to say the least, but with gold now showing some signs of life support, I thought I would look, once again, with a slightly different approach here.

Tough times could still be ahead for some of these miners. Many of them, in fact, so how do I want to go about getting some long exposure with a bit of a cushion? My solution here is to narrow down to a group of five to six miners based on a few factors.

First, I want to split the group between gold and silver miners. Second, I want to have a slightly diverse market-cap weighting. Third, I am going to look at fundamentals.

For this group, I want a very low debt-to-equity and long-term debt-to-equity ratio. Nothing about 0.20 for either. Also, I want a price-to-book under 1.0. We all know writedowns are coming, so the price-to-book numbers are likely to increase, therefore, I want to start low. Furthermore, I want a good chunk of the group to have a very low price-to-cash ratio, under 3.75 for two-thirds of the group.

With those requirements in mind, I came up with the following six names:

1. Yamana Gold (AUY);
2. Couer Mining (CDE);
3. Goldcorp (GG);
4. Iamgold (IAG);
5. Pan American Silver (PAAS); and
6. Silver Standard Resources (SSRI).

Market caps are somewhat spread, the group is split between gold and silver, with mines also spread out geographically.

Metals Portfolio

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Next, I outlined the puts I want to sell, in this case January 2014 expiration, some six months out. I designed the puts sales so that my breakeven point is at least 22.5% away from the current price.

Put-Selling Portfolio

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Furthermore, I wanted my return on cash to exceed 10% for the six months, and this group comes in close to 11% which would make for a good annualized return if I get to keep all the premiums. There are dividends on four of the names, so one could argue that the breakeven averages out closer to 23.5% overall rather than the 24.73% on my spreadsheet -- and I would agree, but it still exceeds my goal of 22.5% on the group.

Overall, I believe that the low-debt, low-price-to-book names with overall solid cash positions have the best chance of survival even if prices of gold and silver get stuck in the doldrums. We've already seen many downgrades of the group, writedowns in assets and even First Majestic Silver (AG) canceling drilling contracts and suspending silver sales while prices are in a slump.

While this approach doesn't provide for huge potential upside, it could provide for a solid return with a good-sized cushion in a very volatile sector. I'll be looking to open this portfolio up next week in addition to my current positions.

• Literally.

By Tim Collins

Boeing (BA) is getting hit hard here as a 787 Dreamliner is on fire at Heathrow.

The stock is flying all around with $100 right now being the main focus.

The $100 straddles that expire today are trading close to $3 right now. It is hard to imagine with a full afternoon in front of us that Boeing will stay around $100.

From here, $98 is support, but I would look more towards $94.90 if $100 can't be defended for the next 30 minutes.

• Directional bets can pay off huge, but they can also go the other way.

By Bob Lang

Earnings season is my favorite time of year to make option plays. I have so many different tools to use, which affords me some great flexibility.

It's not about being perfect, rather just finding the right structure and combination for a winning outcome. When the consensus is up in the air, it is tough to predict a direction. My bias is always to the charts and technicals; they will guide me into the best option plays.

Earnings season provides an interesting twist with options, an element not seen with stocks -- implied volatility. Here is where the market is anticipating a reaction to the news and prices it into the derivatives based on certain factors (historical patterns, open interest, volume, demand, predicted movement). While directional bets can pay off huge if you get them right, they can also go the other way. Sometimes we will have big/total losses -- for me, it's part of the game.

But what if you are expecting a big move in either direction? Further, what if the market is not pricing in such a move? Is there a way to take advantage and put the odds in your favor?

There are several ways to play for volatility, but my preferred strategies are strangles or straddles. These plays require playing both a call and a put simultaneously; I choose to balance them equally in quantities. Now, you might ask, "Bob, how do you make money buying a put and a call? Isn't this neutral?' Believe me, I get this question all the time. Actually, we are playing for a big move with the understanding that one side will likely be wiped out or possibly even pay off down the road if luck prevails.

A couple weeks ago, we played Research In Motion (BBRY) for a volatility move on earnings, and it paid off nicely. The implied volatility was low going into earnings; the stock was around $14.50, and the expected move according to the straddle was $1.90. I looked at the $16/$14 strangle ($16 call, $14 put) and priced it at $1.60.

Knowing that the stock could make a very substantial move based on the release of the news, I took that bet two days before. (the company released earnings on a Friday pre-market). As I had hoped for, the stock made a big move -- this one to the downside, losing nearly 30%. The call was wiped out, but we cashed in on the put for nearly $3.50.

For me, this was a rather safe play if the move was going to be large. Now, compare this with a directional bet. Just play the call and you are wiped out, playing only the put and you make a killing (600%). The ultimate binary result, but my strangle captured the both outcomes. I realize it's difficult to reconcile playing both sides and looking for a big win, but think about it this earnings season.

• Here is a list of names with good option flows.

By Bob Lang

I am seeing some good option flows today in certain names:

• Deckers Outdoors (DECK), August and September strikes;
• First Solar (FSLR), a favorite of mine;
• Molycorp (MCP), rolling again with August $8 calls active;
• Wells Fargo (WFC), August calls pretty brisk activity following earnings; and
• Bank of America (BAC), starting to heat up as earnings are out soon.

• What to do when you're down big.

By Tim Collins

Sometimes we have to make hard decisions. I look at the ProShares UltraShort Russell2000 (TWM) position in Doug's top pick ideas, and I do understand his logic behind the play. Still, it can be tough to sit on something down 10%, so here is where you have to make the tough decision. What do you do? Do you try to repair the trade? Do you look to average down, but try to do so in a limited fashion? Perhaps you just want to get out even? I'm not in the position, but if I were, here is how I would approach each.

First up: I want out at even. This is often the trade that will leave you with the most regret. Not only does it require patience, but also a little luck. Why regret? Well, if you do get out even, then one of the next two options will likely have been the better option for you. If you don't get out even, then you may be down even further than just having walked away originally. Still, it can and does work for some.

In this setup, I would merely try to get my average cost down without committing more capital. The short-term approach would be to buy 1x August $16 call and sell 2x August $17 calls for every 100 shares I own. This would lower my breakeven to around $16.95, but limit my upside to $17. You see, it is just meant to get out even. A slightly more optimistic approach and my preferred approach would be to use the same concept in October, but there I would be buying 1x October $16 calls and only shorting 1.5x October $17 calls, allowing me some upside if TWM rallies over $17. This concept leads more into a repair type strategy.

With a repair, I would be looking to lower breakeven, but also allow some upside to the trade. For instance, with August, I would be looking at long 1x August $17 calls and short 2x August $18 calls for a small net credit per 100 long shares. This would lower my breakeven to around $17.40 while giving me upside to $18. Here, I have to be a convicted short (convicted on my position). However, I would still prefer October here, since I would do the same ratio with the October, but I would be long the $16 calls against short $18 calls for a small net credit. This would bring my breakeven down to $16.90 and give me upside still to $18. Ironically, the $16-$17 ratio from the breakeven-type trade may be slightly better, but this trade provides for more upside between $17 and $18.50.

Lastly, would be the average down trade. Here, though, I am not looking to outright buy shares. I want to do a little offshoot of a risk reversal and not only get my average cost much lower but also look to put a temporary floor on my position.

So, I would short 1x October $15 puts with the willingness to buy more, because I do still believe in my position. I would then take that net credit and go long an August $15-$17 call spread, so long the $15 call and short the $17 call in an even ratio. Lastly, I would put a temporary floor on my position by buying the August $14 puts at least against my short October puts. Overall, this will cost me about $0.20 to $0.25. Seeing TWM trading around $16, however, and my long leg of my spread at $15, I get a nice little average down here. In fact, my breakeven is now $16.44, only about a 1.4% drop in the iShares Russell 2000 Index Fund (IWM). Granted, I have time built in there, too, so a quick 1.5% drop in the IWM on Monday won't put me back to even, but I would be much closer.

This one requires management, much more than the others. It also requires the most conviction. Lastly, I would make certain the short puts are cash backed, so you can buy the shares if necessary.

Overall, TWM wouldn't be my favorite thing to hold for two more months due to the volatility decay component, but if I had a thesis that put me in TWM closer to $18 and kept me in here, then I would certainly consider one of these approaches to maintaining my exposure.

• Do it when you're good and ready!

By Bob Lang

I wrote a small piece earlier in the week and mentioned a bit about selling, but let's expand on it. The four fears of trading really get in the way of selling, especially when it's the right thing to do.

What are these four fears?

1. the fear of missing out;
2. the fear of turning a gain into a loss;
3. the fear of loss; and
4. the fear of being wrong.

I wrote about the fear of missing out recently right here. Selling is the most liberating and enjoyable experience you will have in trading, yet is probably the most underrated exercise.

Look at those fears again, and you can see how your mind can be twisted. You know that deer-in-the-headlights look? What do I do? Nobody rings a bell when it's time to sell, so I advocate being different and just selling when you are good and ready, especially when you have a gain.

Do you set a goal/target before you enter a trade? If so, are you true to it?

I have to admit my targets are somewhat floating around, but the goal is the same -- book profits. I have overcome the one nasty fear -- the fear of missing out, where regret and frustration enter your mind if you suddenly jump off a gravy-train trade. Not only are you being left behind but it seems everyone else is on board and taunting you about it.

We've all been there and it feels awful. For me, it's about five or 10 minutes of anguish then I'm over it. However, I am never ashamed to book a profit, and I'll never apologize to anyone for it. And neither should you. This game of trading is about survival and not bravado. I don't need to have the biggest ego and talk about how well I'm doing if I have a trade on; I just need to book as many winners as I possibly can to stay in the game. So do you!

• My focus right now is not on equities but on the U.S. dollar and U.S. Treasuries.

By Tim Collins

A house divided against itself cannot stand, while a Fed divided against itself cannot change policy. That's it. That's what I got from the FOMC minutes. There is enough dissension in the group coupled with the fact none of them can stay out of the media spotlight that I believe it is going to be tough to push any policy changes through without it being unanimous not only in voice but in belief.

These folks have made themselves far too public at this point. A policy from a divided Fed won't survive in this market.

My focus right now is not on equities but on the U.S. dollar and U.S. Treasuries. The dollar seems to be the taper trade. If the market truly believes the taper is still more than six months down the road, then I expect the PowerShares DB US Dollar Index Bullish Fund (UUP) to give up another 2%, while the iShares 20+ Year Treasury Bond ETF (TLT) should not breach the lows from earlier this month and instead work its way back to $110.

Just a few weeks ago, I was under the assumption equities held the key, but I don't believe they do after seeing the action of the past 10 days. The key seems to be more in the currencies -- namely, the dollar, yen and euro. Treasuries and, to a lesser extent, precious metals are the secondary players.

Most of us key on equities, but the bigger money and bigger trends are likely in these assets classes as opposed to equities or even volatility for the next few weeks. This may prove to be a more difficult thesis for me, since these are not areas of my usual focus.

From the equity side, I still find it difficult to get overly bearish. Earnings might be able to change that. From a technical standpoint, I think the momentum tide could turn if we saw a gap higher, faded into the red, followed by a repeat of the same action the next day. Or if we saw a gap lower with a rally attempt turned back at the previous day's low, ending in a close lower than the initial gap down. There simply has been little pain for dip-buyers.

• We may see something different in these quarterly reports.

By Bob Lang

It's been quite the market rally since a modest 5% correction took the indices at/near their respective 50-day moving averages.

S&P 500

Source: StockCharts.com

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Of course, the drop from the all-time highs (May 22) was swift and painful for those who were long, but what else would you expect at that point As I've said many times, there are a million reasons to sell, and taking profits is but only one of them.

Today, we find ourselves right back at the scene of the crime -- new highs all around (save for the Nasdaq, which has a ways to go), and now we are facing a challenging earnings season. Or will it be?

So far, a few earnings releases have shown mixed results. The caution flagged from first-quarter earnings was warranted, with much of the worry coming from a slowing economy, tax issues, a slowdown in consumer spending and the famed sequestration. Those impediments did not harm the market performance, in fact prices rose in the face of it. This time around, we may see something different.

I'm always concerned playing directionally when prices get ahead of results. That seems to be the case here with the recent market rally. We may see the classic sell-the-news effect starting next week when a deluge of earnings hit the street.

I'll be playing it cautiously (close to the vest) and really go with the flow of the market and trends. I prefer playing individual names rather than the market but will always respect what the overall message is. One of the best strategies is one we have talked about previously, volatility plays -- strangles or straddles (more on this later).