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Nov 08
2009
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Is a Year end "Bonus Put" forming beneath the market?Posted by: Stan Moore in Stans Blog on Nov 8, 2009 Tagged in: Untagged
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NEWSLETTERS & RECOMMENDATIONS - Nov 8, 2009
A free trading lesson using fundamental economic information:
| The referenced chart – NET Weekly Money Chart 2009-11-06. Here’s a trading lesson for futures and option traders
who desire to make high-probability, low risk trades. There are at least 20 market moving economic news releases a month. That's too many to trade. So how does a trader take the ones with the greatest reward and least risk? These trades can be either swing (multi day) or intraday trades depending on your trading style and desires. Traders try to game news to see if economic releases are already factored into the market price. To succeed traders should be trying to buy the rumor and sell the news or vice versa. The best trade is to fade expected news at large support or resistance levels prior to the release.
The New Era Trader (NET) methodology likes to trade with cheap OEX expiring options now every week but we also actively trades the S&P E-minis. I've been teaching exactly this using options and/or S&Ps the last 21 years with much success. I have found out over 28 years that a trader gets 3-4 very good high probability setups a month. The probability of success is well over 80% for a double. When the trade loses it's generally less than an option point. This is all covered in the NET basic training materials.
I'll use Thursday’s (Nov 5, 2009) strong rally into the close for a put setup to trade prior to the Friday mornings expected favorable job's #'s release. The market has rallied some 34 S&P points from Mondays low into a RT/F of the 10/21 high 1064 with the 20 DMA above at 1071. Support was 1055-6 down to 1049-50. Late Thursday I suggested buying the 490W puts starting near $2.00 and scaling in lower. I believe the puts closed $1.45 bid. If the Jobs # disappointed the market would drop 10-15 points before finding support. The puts would trade north of $3.00 if the market l sold off hard and traded there for awhile. If higher we'd buy new higher strike puts into resistance.
To lessen the risk I related to the chat room members to buy any overnight weakness using the E-minis long against the puts. But traders had to sell any expected rally prior to the 8:30 AM release. There was a potential 4 point long a few traders caught for a $150-$200 profit. This trade cut the option cost in half.
There was strong overhead resistance between 1068.00 to 1071.50. A few traders called before the job numbers announcement. I told them since the options weren't trading we could short the S&Ps up to 1071 with a stop at 1075.50. If the market rallied there after the opening we could use cheap 495W puts to average in. The market would take profits. Remember buy the rumor sell the news. Unless the job # came in well south of 100,000 the S&P 1071 number was factored already in the market. Besides a strong # would most likely speed up the FED time table for raising rates and the market would sell off anyway. NET traders placed scale-in S&P sells up to 1071. For example, put trades at 1067, 1068, etc. On the news, the market rallied to a high of 1068.50 in the pre-market session where we sold about 40% of our original entry. Then the 10.2% jobless # followed and the market sold off hard over 14 points right into 1055 area. Since we couldn't sell the puts in the pre-market session the next best thing to do was cover our shorts into support. The original strategy was to buy at least 50% E-minis against the puts, i.e. long 20 puts buy 10 E-minis long to lock-in a portion of the profit before the puts traded. We were looking to buy more S&Ps if the market went still lower for a more balanced hedge. Traders could have made up to $600-700 profit or $300 profit per option on the additional shorts.
On Friday the market opened right into support 1055.50 identified before the market opened. Since a number of us were long E-minis I never mentioned to buy cheap calls. E-minis could have been scaled out for as much as $400 per option contract. I suggested selling puts. They opened at $1.70 but I still lost nearly a $1.00 over all selling out into the rally. In summary, NET traders could have made over $800 per contract with the E-mini hedges while losing only $100 per long put.
Additional optional Friday morning trades:
A few students bought the 495W calls under $0.80 at S&P support. The market rallied back into resistance at 1069.25. The calls could have been sold for as much as $2.45 in the first 30 minutes. At 10:00 am, a 495W put trade could have been entered at $1.10 and then could have been sold for over $3.00 before 11:00 am. See the chart for entry and exit specifics.
I know nobody did all these trades and I know I didn't but I'm sure you get the idea of just what is possible nearly every week. There is no one out there doing this let alone teaching it. Spend a year or so with me. Give yourself an edge. Call me.
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Market and BTIM Commentary
Nearly everyone on Wall Street can't wait for '09 to end so they don’t risk losing their end of year bonuses - I've covered this many times in the Chat Room. "They" don't want the market much lower if at all possible, especially after a lousy '08. Nearly everyone is "de-risking" portfolios. Portfolio managers (PMs) are buying OTM puts and selling OTM calls to pay for the more expensive puts. Furthermore, I see PMs clearly favoring big caps and more liquid stocks over the smaller, less liquid and more speculative names. This clearly affects our BTIM. I now see 1 point down and 21 points up over the next 2 years!
Last week, I mentioned this past week's expected good news announcements would help sort out the investment landscape looking ahead. The economic news was surprisingly good starting with a great ISM Mfg # Monday morning. Aggressive short covering followed right into Thursday’s close. Cisco's CEO John Chambers told us he sees the start of a recovery. He's the same CEO who stated back in November '07 that he saw signs of slowing demand ahead for corporate spending. We know what happened later. Even a 10.2% unemployment number didn't stop the market for long. This puts the FED on hold now as far as the eye can see into '10.
Looking ahead to this week’s #s I see nothing that should move the market materially in either direction. However, I see the market being sold-up (to lock in gains) and then buying back lower. This should give us some great trading moves. Right now we are trading below the 20 DMA @ 1071.50 and above the1049-50 support at the 50 DMA.
This week I read and heard how a large number of the worldwide drug companies and actual countries are rapidly expanding or starting medical research operations overseas, mostly in Asia. Rich Karlgaard, a regular contributor, in Forbes writes: Singapore is willing to pay U.S. research stars in biotechnology about $715,000 in annual salary! In other stats China will surpass the U.S. in manufacturing by 2015. I expect China to lead the world in many other areas in our lifetime.
Can stem cells be just around the corner for BTIM? We can hope so. They have teamed up with the best in China. I continue to buy weakness. I just heard BTIM may never call the warrants hoping a large number expire unexercised. Remember insiders own almost 60% of the outstanding shares.
Keep those cards and notes coming.
Good trading,
Stan Moore
702.267.0396
702.267.0396