August 18th, 2008
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Last week's option expiration may have been the market's buoy
Equities struggled to hold gains on the Monday following option expiration. While Friday's trade was quiet and somewhat directionless, Monday was a much more telling story. Light volume and financial sector plagues weighed on the indices once again. One insider noted that, "There's a lot of people taking time off."
Weakness in financials wasn't a surprise, but it was another weight on a market that doesn't seem to take things lightly. The only economic news for investors to chew on was the National Association of Home Builders index which remained flat....at record low levels but didn't worsen. Not surprisingly, the market didn't see this as much of a positive.
Crude oil managed to behave itself despite uncertainty regarding a Tropical storm in the vicinity of the Gulf. The September contract settled moderately lower on the day.
While it was the financial sector that lead the market astray...the broader market followed. The Dow suffered losses of 200 plus at one point during the session, while the S&P 500 dipped into negative territory by over 20 handles. The selling pressure may have been exaggerated due to light volume but was certainly a blow to the bull camp. However, all is not lost.
Assuming that the indices can hold support at or near current levels, they may be able to avoid another wave of liquidation. 1275 will be critical support in the S&P 500, and approximately 11,450 in the Dow. The NASDAQ will be vulnerable to selling pressure beneath 1918. Failure for the market to holding footing above this level could lead to a move as low as 1774.
If you took our recommendation to sell calls, you may have gotten filled on the exit in the S&P option and while the Dow limit was never traded you may have opted to exit (see details below).
Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.
S&P Futures and Options Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 8 - I am inclined to sell the September 1390 S&P calls for $4 or $1,000 before commissions and fees, if you are trading mini's this would be $200. Before considering transaction costs this trade makes money with the market below 1394 at expiration but faces unlimited risk above 1394. The maximum profit of $1,000 minus commissions and fees occurs if the market is below 1394 at expiration. However, should this order get filled I will likely recommend buying this option back before expiration.
August 11 - This order would have been filled, we will likely recommend to buy this option back should we see a pullback to approximately 1264.
August 12 - Place an order to buy these back at $1 or better.
August 18 - You should have been filled on this order, assuming that you followed the recommendation and were able to get filled at these prices you would have netted a profit of $3 in premium before commissions and fees. This is equivalent to $750 in the full sized contract and $150 in the mini version.
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 Futures and Options Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 8 - I also like selling the September Dow 12,400 calls for 50 points or $500 ($250 on a mini). Without regard to transaction costs this trade is profitable anywhere below 12,450 but faces unlimited risk above this level. The maximum profit of $500 minus commissions and fees occurs if the market is trading below 12,400 at expiration. However, should this order get filled I will likely recommend buying this option back before expiration.
August 11 - This order would have been filled, we will likely look to recommend buying this option back if the Dow falls to 11,422.
August 12 - Place an order to buy this option back for 15 or better.
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 Futures and Options Recommendation
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 1 - If you took our advice, you would be long the September e-mini NASDAQ 1670 puts for about 20 points or $400.
August 12 - Not off to a great start, but things may begin to look better from here.
Carley Garner
Senior Analyst/Broker
DeCarley Trading
1-866-790-TRADE
Local : 702-947-0701
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. 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.
