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Options - S&PEmini Futures

Apr. 26, 2012 9:46 AM ET
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This forum discusses trade ideas related to Options on Emini Future contracts on S&P - CME. I have noticed S&P hit a barrier at 1400. It finds support at 1360 and has been rangebound from 1360 to 1420 over 30 day trading interval. Implied Log vol in options space range from 14% to 16%/annum. 30 day Realized Vol has been close to 12%. Low Strike protection gets extremely expensive with implied vols ranging from 18% to 22% and above. Call skew is not as bad which should come as no surprise.

Q1 S&P returns has been 13%. Typically over the last 20 year history, a strong quarter is followed by a -2.5% to 2.5% range in subsequent quarter's return for the Index.

I maintain a cautiously optimistic view on S&P being an election year. If Gas prices are curtailed to 3.50 at pump, and payrolls hit some decent numbers , a rally to get the S&P up another 3% to 4% wont be a miracle to guess.

I recommend the below

Buy 1385 or 1375 Puts on Sep Expiry when Sep Futures Crosses those Level. Sell the put on downside news and make money. Keep repeating the trade until Mid July. This is a risky trade as you can loose premium, however market has been trading range bound from late march to April. So chances that some negative news will make S&P loose 1% to 2% once a 1390 is hit is not a bad assumption. Gains can be around 3k to 4k per contract. Premium is around 2k - Buy on an day when markets are up.

For longer term - Initiate a spread trade . Buy 1420 Sep Call and Sell 1430 Calls. Upfront cost around $250/contract. This is a way to express cautious long term bullish view. max Gain: $500/contract. Buy before payrolls as +ve surprise makes the OTM call expensive.

Post Sep, I think if the current administration wins, markets will find resistance. Owning options past Sep is a bad idea. Option Decay will be too expensive at current implied vols for speculative individual traders.

Welcome comments , observations and tips on trading these contracts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I haven't done any exchange trades in past 5 days and don't intend to initiate any trades in next 4 days.

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