Stock Index Comments and More for Tuesday 8/21/07
Tuesday, August 21, 2007
by Howard Tyllas of HowardTyllas.com
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Stock Index Comments and More for Tuesday 8/21/07
Trade the S&P with KNOWN risk. Trade Ideas!
Remembering back to 2000-2003 and the average trading range was 35 handles ($1750 for 1 emini S&P contract), 100 plus handle months, and waking up to the market being 10-15 handles higher or lower was common. Since March 2003 when the rally started in the S&P market and ending in July 2007 (at least for now), 10 handles was the normal day high to low, 50 handles for the month.
Now the average trading range is again at 34 handles, opportunities that I have not seen in a long time are back. Depending on your trading approach, there are infinite possibilities of trading this market using options.
I executed countless futures trades on the floor that lasted a second and every time frame from 1 second, to 1 minute, 1 hour, and complicated options positions that lasted for months. With that said I will give you some examples for you to look at and hopefully stimulate your thinking process. Before I give you some casino wagers, let me give you a few facts that I would consider before I formulate a trade strategy today.
After a picture perfect bull market of the last 4 years (stairway to heaven), the march higher has ended for now, and the market has two sides again. The blue side and the red side of the cards (trading card used to record a floor traders trades, blue side for buy, red side for sell). The options are skewed again. Bargains abound.
The high two weeks ago in the Sept. S&P was 151050, and the low last week was 137450, the middle of the two (or what I call a pivot) is 144250. Long term trend is still up and the 10% break was healthy, but the short term trend is down. Unless the market starts closing above 151050 Major Resistance (near the 200 day moving average), the market will be two sided for some time to come. Today the market looks balanced. There are day trades, swing trade, and long term trades, that present themselves daily.
SPU7 (Sept7 S&P) (not my daily trading numbers but reference to the last 2 weeks)
151050 Major Resistance
---------- 144250 Pivot
137450 Support
You know what you think, and how you want to trade, and what time frame to allow.
I will help you look at some strategies in a way that you can understand without the mechanics. My intention is to teach you helpful information that you might not understand taught a different way, keeping it simple.
Unless you know how options work, they can hurt you. Understand if you are wrong, you are wrong. If you know how to trade and what strategy to use, you can limit losses when wrong, and with the right strategy, you can even make money being partially wrong. This involves options. On the flip side, you can be right the market and lose money with the wrong strategy using options. This is why it is imperative to KNOW what strategy is best to use based on your thoughts, ideas, and time frame.
Let's get started:
The September S&P (SPU7) closed 8/20/07 at 144910.
The SPU7 options expire on 9/20/07
The SPU7 1450 call settled at 3900 (39 X $250= $9750) mini is (39 X $50=$1950)
The SPU7 1450 put settled at 3990
Stock Indices Volatility Was Crushed Yesterday, 1450 call down 610, 1450 put down 530.
Here are some bets.
All examples are using the September 07 expiration 9/20/07 about 31 days:
The SPU7 1450 call settled at 3900 and the 1460 call settled at 3310.
If you thought the market will be lower than where they settled yesterday and you sold the vertical call spread (buy the 1460 call and at the same time selling the 1450 call), you collected 3900-3310= 590 ($1450) and the most you can lose is 410 or $1050 plus commissions. The market closed at 144910 and the bet is this: you are the casino; you collect $1450 and risking $1050 to do so. If the market is still 144910 on expiration, you were not right, not wrong, but you collect and keep all the money. If you were partly wrong and the market expired 145300, you would give back $750 of the $1450 collected. Wrong the market and still made 75% on your risk. This is my kind of bet.
The SPU7 1450 put settled at 3990 and the 1440 put settled 3620. 3990-3620= 370. If you buy the spread you pay 370 ($925) and you could make 630 ($1575). This is only because the market is skewed right now. Do you see the odds and where the market must be to break even? If at expiration (9/20/07) the market is above 145000, you lose 370, if at 144630 you are even, below 1440 profit 630. Compare this to selling the vertical spread where you make 590 at 1450. Buy the put spread and you are the player, sell the vertical call spread and you become the casino.
If you thought the market was going to make a big move up or down, the simple way to play with a known risk is buying a call or put. Example: If you thought the market was going to go down hard to at least 130000 in the next 31 days and you bought a SPU7 1450 put at Monday settlement price, you paid 39 handles or $9750. The market needs to go down 39 handles by expiration (9/20/07) to get your money back (141100) and 39 handles more to get even money (137200). Do you see the odds?
You thought the market was going to explode up or down but not sure in which direction...buy the 1450 call and the 1450 put...39 + 39.90=69.90 handles. This needs a move to 151990 or 138010 to break even and 69.60 more to get even money. Is this a good bet?
Both of the above strategies (buying premium), your risk is KNOWN at the entry, but I would use other strategies to reflect a big move because of the high cost of premium.
This is just a peek behind the door of options and their infinite possibilities.
Options are vehicles to take you where you want to go, they do not tell you where the market is going. You are the driver. They are to be driven by your thoughts, ideas, and time frame to allow you to profit if correct.
The proper strategy and the discipline to do it is a big part of being successful, without that it could be disaster trading futures with unlimited loss potential on a highly leveraged contract.
I hope that this has opened your mind to looking at options in a different manner. More detail about vertical spreads in my website.
If you have a question, or comment, email me
howardtyllas@howardtyllas.com
May Your Next Trade Be The Best
Howard Tyllas
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