Options – week of Jan. 4, 2016

Last week

Weekly prices – ESH6

Week ofOpenHighLowClose
Dec. 14-152001.502072.751983.251994.75
Dec. 21-151997.252059.751995.252051.25
Dec. 28-152051.252075.002030.252035.75

In the last week of the year the S&P500 cash index (SPX) gave up two-thirds of the gain made during the Santa rally during the Christmas holiday and closed with a 1% loss for the year.

If you pay attention to historical cycles, the fifth year of the decade is historically the most profitable; the 2015 loss breaks a pattern that dates to the Great Depression of the Dirty Thirties.

The three-week holiday period was characterized by big price swings on very light volume, a typical holiday pump-and-dump movement that doesn’t give much guidance for what will happen when the market returns to “normal” next week. Looks like a bunch of kids playing with their toys at Christmas.

All of Nat’s options for the week of Dec. 14 (her last option newsletter) expired OTM, and all were profitable, but the volatility made for a scary ride.

Here’s the annotated intraday chart for the past three weeks.

ESH6 to Jan. 1, 2016. 60-minute bars.

ESH6 to Jan. 1, 2016. 60-minute bars.

 

This week:

This is the first week of the New Year, usually accompanied by a “January Effect” that could boost stocks. Lots of stocks were sold in late December for tax loss purposes, and investors who still  like them will be buying them back in January.

Of the S&P 500 components, 301 were down 10% or more from their 52-week highs and 175 were off by at least 20% through the end of 2015. Investors may scoop them back up at lower prices.

But the January 8 option expiration volume shows that we may see a high volatility move this week. The large open interest on Puts bought under the 2050 strike level could bounce the index around in both directions as the buyers and sellers struggle for a facorable settlement price.

Calls:

There is a large open interest around the 2050 strike for Calls on the SPX index. The 2050 level will be the key line for this week. As long as the Index stays above 2050, the buyers will keep pushing the futures (ESH6) up near 2065-75 or higher up 2090-2080 zone. Our system shows that ES shouldn’t close above 2105 level, therefore we look to sell Calls when the ES moves above 2050 level.

Puts:

The Puts have been bought heavily below the 2050 strike price on the Index. If the SPX moves under 2020, it could trigger panic selling in both the index and the ES. Our system shows that ES shouldn’t close below 1925 level; therefore we look for good opportunities to sell Puts when the ES is below 2000.

Put/call volume ratio on SPX and ES Jan. 8 option is 1:2 from 2100 to 2020 level, and 5:1 from 2020 to 1850 level.

Nat’s calls for this week

ExpirationStrike price Sell options when ES price is:
Jan. 8, 20162100, 2105 calls
2095 callsAbove 2050
Meanline 2050
Jan. 8, 20161920 putsBelow 2000
1900 puts