July 16, 2008
**See my monthly column, Futures for You, in Stocks and Commodities Magazine
Volatility continues to be the "name of the game" when it comes to stock index futures. However, today it was the bulls that dominated trade and may have triggered what could turn out to be a sizeable short squeeze. Despite rather shocking inflation news in early morning trade, the major stock indices found comfort in a sharp drop in crude oil and optimistic news from Wells Fargo & Co.
Crude oil prices plummeted for the second day in a row. While a $10 move in crude won't have a profound impact on the economy it will help market psychology. Current energy futures contract valuations seem slightly oversold but more importantly the market managed to trade through major levels of support and may trigger some follow through speculative selling and long liquidation. We have a long way to go to see oil prices at a favorable level, but beggars can't be choosers in this environment.
According to Dan Genter, president and chief investment officer of RNC Genter, "I think the pullback in oil is significant. The market and the market participants clearly had digested what the impact was going to be if oil prices had stayed at that level." He added, "I think what you're seeing is people are feeling more confident that civilization as we know it is not going to cease to exist and that we're going to make a landing here." Also, "The negative is there is not much of a catalyst here to really pick us up and get us back in the air."
On a much less promising note, the Labor Department claims that the consumer price index rose 1.1% in June, much higher than the .8% that most economists were expecting. It is no secret that the price pressures are highly dependent on the recent run in the energy complex. The core reading which is somewhat irrelevant but is a gauge of how non-energy related aspects are fairing, ticked up a much more comfortable .3%.
If you are short puts as recommended below, you likely feel better following today's trade but don't forget that we have seen this type of move before and witnessed a market failure. Only time will tell whether we have seen the low or not, but I suspect that we have. However, in this trading environment taking quick profits (if you see them) is probably the right thing to do.
Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.
Dow Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
· June 18th - I recommended selling the Dow (big or mini) 11,000 puts for 50 ob
Place an order to buy this option back for 10 ticks or better
- July 14th - Clients were instructed to roll out the position by buying back the July 11,000 near 100 points and selling the August 10,500 put for a credit of about 130. If you haven't done this, it is likely a good idea to do so. Contact me if you have questions.
· June 27th - Buy 1 September 109 put and sell 2 103 puts, this can be done near even money. The trade makes something with the market anywhere between 10,900 and 9,700 at expiration with the max benefit being at 10,300 ($3000 in the mini and twice that much for the big). The risk is unlimited below 9,700!
Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.
Nasdaq Recommendation
**There is unlimited risk in naked option selling and futures trading
Position Trade -
June 30th - If you followed our recommendation you would be long a NASDAQ from 1850.
· July 8th - I see the potential for a rally to 1867; place a limit order to take profits at this level
- This is not for the faint of heart, if you are uncomfortable...get out.
- This trade hasn't worked out from the start; please note that the limit order to exit has been moved out considerably. I would be happy to see a "scratch" on this one.
Carley Garner
Research Analyst
There is substantial risk of loss in trading futures and options.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers, directors, employees and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
