Options trading investors should take note — the current volatility increase resembles what took place last November, which preceded a three-month rally. For options buyers, increasing volatility can be seen as a good thing as it means stocks are more prone to making sudden moves, which is good when you own options. But it also means options prices are getting more expensive. So it becomes more important to use limit orders and resist the urge to chase prices higher just to get in the game. That might work when buying stocks, which have an unlimited holding period. That is not the case when buying options.
Recommended Fast Options Trade: Humana (NYSE: HUM)
HUM broke above resistance in the $61 area and moved higher. It has consolidated over the past week but is in a bullish formation and should continue moving higher if stocks do the same. Here is the best way to play more strength in Humana:
Buy the HUM May 70 Call up to $1.4 ($140 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $68.90. That should give you an option price of about $3.20, for a 128% profit.
Close this position and cut losses if the stock closes below $62, when the option price should be about 80 cents. The stock is currently trading at $64.34. The computer-simulated probability of this option hitting its target price is 19%.
Recommended Fast Options Trade: Royal Caribbean Cruises (NYSE: RCL)
RCL has fallen into a downtrend and has broken below its 50-day moving average. It snapped back somewhat on Thursday but should continue lower, especially if oil prices continue to climb. Here is the best way to play more weakness in Royal Caribbean Cruises:
Buy the RCL Jun 38 Put up to $2 ($200 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $38.40. That should give you an option price of about $3.60, for an 80% profit.
Close this position and cut losses if the stock closes above $45.40, when the option price should be about $1.40. The stock is currently trading at $43.08. The computer-simulated probability of this option hitting its target price is 23%.
** All of our short-term recommendations can be taken for up to three days after they are recommended. Make sure the stock and option prices are close to where they were when we made the recommendation. If after three days you still have not gotten the position filled, cancel the order and wait for our new recommendations, as the profit probabilities may no longer be valid.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
