Sentiment
Stocks showed some resilience Wednesday. After a 379-point rally Tuesday, the Dow Jones Industrial Average opened steady, but then faltered in morning trading. Weighed down by losses in AMEX (AXP), General Electric (GE), McDonald's (MCD), and Pfizer (PFE), the Dow made a run to 6,868 by midday, down 58 points on the session.

Yet, with an empty economic calendar and no earnings of broad market significance, a lack of negative news items seemed to keep the bears at bay for a second day. The Dow Jones Industrial Average was up 30 points heading into the final forty-five minutes of trading, with JP Morgan (JPM), Citi (C), and HP (HPQ) leading the industrial average in late-day action.

Options Goals
Your goal as an options trader is to move the odds in your favor wherever possible to ensure the success of your trades. Everyone likes to talk about their successes, but it's really the mistakes that teach us the most.

Even professional traders have taken a lot of lumps in their career, so today we're going to review some of the most common (read: most costly) mistakes that people make when trading options. I hope this will save you a lot of time, money and frustration as you embark on your options trading journey!

Unusual Options Volume Movers:

Microsoft (MSFT) options volume was running three times the usual on Thursday, with 407,000 contracts traded and call volume representing 51 percent of the activity.

Another Record Falls

2008 has certainly been an eventful year for the options market. There have been explosions in the VIX and implosions in many of the major indices and commodity products. We also saw an incredibly reactionary ban on short selling that threatened to derail all of the recent gains in trading volume and derivatives regulation.

One for the Record Books
data: OCC

There has been a lot of talk about the explosion of options volume that took place in September. There certainly is a great deal to celebrate. Overall options volume amounted to 374,531,673 contracts last month. That is an incredible 84% jump from September 2007. The options market also set a new record for monthly volume, surpassing the old record from July by 2.3%.

Whenever the government enacts sweeping reform of the financial markets, it is a good bet that there are going to be unintended consequences. When those reforms are made in an atmosphere of complete and utter panic, there is an even better chance that those unintended consequences will be disastrous. Such is the case with the recent ban on short selling in financial stocks.

On its surface, the intention of the ban is laudable. After all, regulators don't want the current crisis in financial stocks to spill over into other aspects of the market, thereby triggering a broad economic collapse. However, resorting to a complete and utter ban of a legitimate function of the capital markets is not the way to solve this problem. In fact, it's more akin to putting a band-aid on a gunshot wound.

Money Talks
CME Group completed its acquisition of the New York Mercantile Exchange [NYMEX] this week. The acquisition marked the final act in a dramatic takeover drama that has both captivated and concerned the futures world.

The final terms of the acquisition were announced on Thursday. NYMEX shareholders that opted to receive CME Group stock were paid $7.29 in cash and .2164 CME shares for every NYMEX share. (That amounted to $80.98 at the time of this writing.) Shareholders that opted for a cash payment received $81.16 for every NYMEX share.

Originally written on 7/18/2008

Pandering and Ignorance Not Limited to Washington
We've all witnessed the growing frenzy over derivatives speculation in Washington (see "The Rage Against Derivatives Speculators Is Unfounded" for more information). Senators and congressman have made a number of alarming appearances on the Sunday morning talk shows in recent months. These appearances have revealed a stunning ignorance of the derivatives markets and of the free market system as a whole.

The battle for options dominance continued unabated this month. Below is a breakdown of the overall market share numbers for July 2008:

July 2008 Total Options Market Share (% Increase/Decrease From June 2008)

The July Explosion

The options market has been growing at an amazing clip for the past seven years. While other financial markets have stagnated, new entrants continue to flood into the options pits and bins. This unending tide of retail and institutional customers has allowed the options industry to dramatically outpace other financial sectors in recent years.

Dedicated followers of the CBOE Volatility Index [VIX] must be exhausted right now. The index finished the month of April hovering near 21. As of this writing, the VIX is hovering around 23. A gain of roughly 10% in only three months certainly appears impressive to the casual observer.

However, those final numbers only reveal a small part of this capricious index's recent story. Over the past few months, the VIX has plummeted to a low of 16.30 and surged to a high of 28.54 before finally settling at its current level. (For a recent look back at the VIX, take a look at "VIX Weekly Activity Review," For a more distant look at the VIX, review "Is The VIX Finally Here to Stay" & "The Capricious VIX').

Burying the Hatchet

A few weeks ago, the derivatives market received news that cheered some observers and frustrated many more. After a long, and often ridiculous, legal battle, the Chicago Mercantile Exchange [CME] and the Chicago Board Options Exchange [CBOE] finally buried the hatchet.

As the chart below indicates, this has been another roller coaster week for the CBOE Volatility Index [VIX].