Options – week of Aug. 3, 2015

Commentary for last week

The Fed kept interest rates unchanged again at its recent FOMC meeting, but hinted again at a possible hike in September. This scenario has played out so often – “nothing now, but boy, just you wait for next time” – that traders are frankly disbelieving. The size of any possible rate increase will be small, but if/when it happens it will be seen as an important signal and will become an excuse for driving the market down.

Last week the failure to raise rates encouraged traders. The market immediately shifted its focus towards this week’s economic data, and continued to push the SPX and ES back toward the top area of the range that has been established since March. You can see more details in this week’s Market Preview.

All of our options trades expired OTM last week and we were able to retain the entire premium. We sold Puts on Monday, even though the price of the ES did not quite reach our trigger (it stalled about one point high) and we sold Puts Wednesday when the upside trigger was breached. Both trades made money. You can see the full details in last week’s option post, which is now available to non-members.

150731-ESU5 60

This week:

This week has a key economic report – non-farm payroll on Friday. All eyes will focus on it. The option meanline for the SPX and the ES is 2100 and 2095 respectively. Above 2130 strike level, there is no Puts volume, and below 2060 strike level, there is no Calls volume. That suggests the SPX and ES will still move inside the range from 2130 to 2050 that has been containing the price since March. If the range is truly broken at either end, look for a continuation move in the direction of the break-out

Member content

Here is the member content for this week.

Calls:

Each 2130-35-40-45-50 strike level has a heavy open interest. Those strike prices are likely to build a wall to prevent price from continuing to advance if bulls drive price up to these levels. Our system shows that ES shouldn’t close above 2165 level this week even if the price breaks through the 2130 line. Therefore we could look for selling Calls if the ES rallies above 2110 level.

Puts:

Below 2065 strike price put, there were large open interests from 2060 to 2000. That indicates the selling could slow down if price falls into the 2065-55 zone. The large heavy open interest below strikes could build a support for SPX and ES. Our system shows that ES shouldn’t close below 2020 this week even if the price breaks below the 2055 line. Therefore, we will look for selling Puts if ES drops below 2060 level.

Put/call volume ratio on SPX and ES Aug. 3 option is 1:3 from 2165 to 2095 level, and 3:1 from 2100 to 2000 level.

Nat’s trades for the week of Aug. 3

ExpirationStrike price Sell options when ES price is:
Aug. 7, 20152155, 2160, 2165 calls
2150 calls> = 2110
Meanline 2100-2095
Aug. 7, 20152020 puts< = 2060
2015, 2010 2005 puts

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