• EDITOR'S CORNER: Sharply Unchanged
So far this week the markets have been sharply unchanged -- a little higher then back down; a little lower then back up; a little higher then back down.

• THIS WEEK'S TRADE IDEA: Trading Microsoft (MSFT)
Buy the 27 January 63.50 calls for $1.25 or less.

• MARKET OVERVIEW: Investors wait for earnings season 
Equity indexes are mostly range-bound before earnings season begins this week.

• OPTIONS ACADEMY: From the AP Archives: The Power of the Roll 
Rolling allows you to do several VERY important things that you just can't do with any other product.

EDITOR'S CORNER

Sharply Unchanged
By Todd Rich

So far this week the markets have been sharply unchanged -- a little higher then back down; a little lower then back up; a little higher then back down.

Source: OptionsHouse

Clearly the markets are searching for any news to act as an impetus to move us out of our current range. Well, that news may be very shortly forthcoming! We are once again beginning a new earnings cycle. So, know when a company is announcing their quarterly earnings. Later this week and early next week we will be hearing from the financial sector. Friday we will hear from Bank of America (BAC), JP Morgan (JPM), PNC Financial (PNC), and Wells Fargo (WFC). All four of those are members of the S&P 500. And it continues next week following the MLK holiday when we will hear from Citigroup (C), Goldman Sachs (GS), and US Bancorp (USB). Don't get caught by a surprise -- be alert!

Unfortunately there will not be a webinar this week.

Trade Smart,

Todd Rich
President, OptionMonster

THIS WEEK'S TRADE IDEA

Trading Microsoft (MSFT)
By David Russell

The Trade: Microsoft (MSFT) - Buy the 27January 63.50 calls for $1.25 or less.

Outlook: MSFT is an exciting growth stock for the first time this century. The shares are finally above their highs from the late 1990s, and poised for continued momentum into the next earnings report later this month. Today's calls target the confirmed Jan. 26 post-market release date.

Technicals: The software giant broke out to new highs in July, consolidated above those levels for several months (resistance became support) and started trending higher along its 50DMA in November. Everything about the chart is bullish, in our view.

Fundamentals: MSFT has beaten estimates the last two quarters as CEO Satya Nadella's cloud growth efforts get in gear. It also stands to benefit from a gradual pickup in the PC market (something investors have wanted to see for years). That makes it one of the strongest large-cap Tech names. We especially like the fact it's exposed to the broader cyclical growth cycle in the economy -- unlike other popular names like Facebook (FB) and Amazon (AMZN).

(Editor's note: This trade idea may be updated periodically, in keeping with market conditions. It is intended solely for educational purposes.)

MARKET OVERVIEW

Investors wait for earnings season
By David Russell and Mike Yamamoto

Equity indexes are mostly range-bound before earnings season begins this week.

The S&P 500 finished yesterday's session flat at 2268.90, but the Nasdaq gained 0.36 percent to post a record close of 5551.82.

So-called Trump stocks--those that would benefit from infrastructure programs and other policies under the new administration--had cooled recently but came back in vogue. Iron ore and basic metals were among the best-performing groups on our proprietary ResearchLab market scanner on Tuesday, along with Argentina companies and medical research.

An exception to the infrastructure bounce, oil producers, pulled back as crude futures dropped more than 2 percent on Tuesday. Energy-pipeline operators were among the worst performers on ResearchLab, in addition to snowmobiles, credit-ratings firms, and flash-memory manufacturers.

Banks and other financial names finished green on Tuesday but were well off their intraday highs. Major institutions such as Bank of America, JP Morgan, and Wells Fargo announce quarterly results on Friday.

Other notable events on this week's calendar include mortgage applications and the government's EIA crude inventories on Wednesday, initial jobless claims and German GDP on Thursday, and producer prices, retail sales, and consumer sentiment on Friday.

Several Federal Reserve officials are also scheduled to speak. (See ResearchLab's interactive calendar)

OPTIONS ACADEMY

From the AP Archives: The Power of the Roll
By Todd Rich

You know that there must be something special with the rolling technique if this is the second time in less than a year that I am writing about it. In my mind, the advantages that Rolling gives you make the use of options far superior to the use of the stock. Rolling allows you to do several VERY important things that you just can't do with any other product.

First, Rolling allows the investor to lock in profits without diminishing your position size. So, you own 10 ABC May 100 calls and after a nice run up in the stock they are trading for around $15.00. Meanwhile, the ABC May 105 calls are trading for around $10.00. At that moment, you would sell out your 10 May 100 calls and buy 10 May 105 calls as a roll. Your original position of 10 long calls allows you to control 1000 shares of stock. After your roll, in which you sell the 10 contracts you own and buy 10 options of another strike, you still own 10 contracts still controlling 1000 shares of stock. Your overall delta may have decreased but your total position remains the same.

Although you control the same amount of total shares with the same 10 contract position, you have also locked in a chunk of profits. By selling the 100 strike calls for around $15.00 and then bought the 105 strike for about $10.00, you have created a $5.00 credit. That credit that you created is you locking in a portion of the profit you saw on the run up of the stock. At that moment, you still have 10 contracts in the $10.00 range but you have $5.00 in your pocket safe and sound! This also speaks to the second major advantage... decreased risk!

Just prior to the roll, you owned an option that was trading at $15.00. When you own an option, you know that the most that you can lose is the amount of money that the option is trading for. So, your total potential loss is the $15.00 that the option is trading for. Now, because of the roll, you now own an option that is only trading for $10.00 and not $15.00. This means that you now have only $10.00 of risk in your position and $5.00 tucked away in the bank which is much safer than having that $5.00 in the market.

Now, I don't want to make it seem that rolling is some kind of strict, mechanical, non-flexible technique because it is not. It is actually quite the contrary. We actually use some of that flexibility here in AP Options. Once you own an option, you are in a sense stuck with that option. The word stuck is not the best word to use here because there are always things you can do with it. What I mean is that when you are in THAT particular option, you have already made your choice! Where you move to (roll to) next is NOT set in stone. Depending on the situation, you can roll to any number of different strikes and different months to put you into the best strategic position to take further advantage of any continued movement from the stock.

These different rolls to different strikes are explained using different terminology. Next week we will discuss this terminology and the reasoning and timing to do each. In the meantime, any investor in the markets should know and understand the rolling technique. More so, they should not only use it but practice using it in all types of different situations to lock in profits and decrease risk at any time that either of these two situations present themselves.