Options: week of Jan. 12, 2015

Trade recommendations

ExpirationStrike price ES price
01/09/20152095-2100-2105 calls
2085 calls> = 2055
Meanline 2025
1945 puts< = 1990
1925, 1915, 1905 puts

Last week:

High volatility and wide price swings around the FOMC meeting: ES sold off sharply before the FOMC minutes were released. The ESH4 not only broke the 2025 level, it also triggered selling programs after it broke the 2000 level. When the Fed minutes reported later showed the Fed would not hike interest rates in April, ES quickly moved back above 2000 and squeezed shorts by running their many stops to push price back up to the 2055 level, which was last week’s option meanline.

This week:

The volatility should continue this week. The ES ran up above 2055 last Friday, and tried to confirm that 1984.25 level would be the low of January, but the price behavor on Friday was not impressive enough to convince us that will be the case. This week is the major January option expiration. Last Thursday’s high or Friday’s high could be high for this week if the pit is right on the major option expiration price.

Calls:

2025 is the option meanline this week. As long as ES stays above it, the market bias will favor the upside, and buyers could push ES back up to last week’s high as soon as price move above 2055. But it also can turn things upside down if ES moves below 2000 level. Our system shows that ES shouldn’t close above 2100 this week. Therefore, we should look for selling Calls if there is a chance for ES to move near the 2055 level.

Puts:

There is an unbalanced option level this week. Below 2000 there is a huge volume of Puts outstanding at 1975, 1950, 1925, 1900 levels. That means as long as ES stays above 2000 level, the Put buyers have to buy index futures to hedge their positions and will cause ES to go higher. But as soon as ES moves below 2000, the large number of Call buyers above 2000 will have to sell index future to hedge their positions and push ES lower toward any major strike prices above.1975, 1950, 1925 and 1900. Our system shows that ES shouldn’t close below 1975. Therefore we should look for selling Puts if there is a chance for ES to move near 1990 level.

Put/call volume ratio on ES Jan. 16 option is 1:2 from 2100 to 2000 level, and 2:1 from 1995 to 1900 level.