Options – week of Oct. 5, 2015

Last week

ESZ5 weekly prices

ESZ5 weekly prices

The SP500 index had a high volatility move last week: a sharp decline on the first two days, followed by a sharp rally back to the resistance around 1950. The index ended September with a 3% loss for the month, but started October with a 1.79% gain in first two days of the month.

The futures made a similar move, closing near the high of the weekly range.

Our option trades last week were profitable. The trigger for selling Puts was hit early in the week, and as the futures dropped dramatically into Monday evening and Tuesday, the premium paid for Puts rose very sharply.

Some traders were tempted to cover at a loss when the ES dropped below 1875, but the market quickly rallied, and our 1850 Puts expired out-of-the-money, allowing us to keep all of the premium.

Here’s the annotated chart showing the intraday price action in the ES. 60-minute bars.

ESZ5 intraday. 60-minute bars

ESZ5 intraday. 60-minute bars

This week:

This week could be a continuation high move week for the index. The volume was high in the latest rally days. The 1950 level is the meanline for this week’s options, both for the SPX and the ES. A move above this meanline could send the Put buyers to run to cover and push the price of the underlying security higher up to the 1965-75 zone. The 1900 level is major support for this week. As long as the index stays above it, price will favor the upside.

Member content

Here is the member content for this week.

Put/call volume ratio on SPX and ES Oct 9 option is 1:3 from 2050 to 1925 level, and 3:1 from 1925 to 1850 level.

Calls:

Both Calls and Puts at the 1950 strike price have been heavily bought last week. That indicates the line will be important for both sides. If the index moves above 1965, the 1950 Puts buyers will cover and push the price higher. Otherwise, the index should stay under 1975. There are few Calls below the 1900 strike price. That indicates selling could be triggered if the index move below it. Price could then drop into the 1885-1890 zone. Our system shows that ES shouldn’t close above 2025; therefore we can look to short Calls when the index price moves above 1965.

Puts:

Below1925 strike price Puts have relatively larger open interest than Calls. As long as ES doesn’t go under 1920 level, price could be held up and favor moving up. But if the index goes below 1900 level, it could trigger a fast downside run, followed by a bounce back up. The price could be pushed down to 1890-85 or lower toward 1875 and sharply bounce up again. Our system shows that ES shouldn’t close below 1865 level; therefore we look to short the Puts when the ES is below 1915 line.

 

Nat’s trades this week

ExpirationStrike price Sell options when E$S is
Oct. 9, 20152020 calls
1995 callsAbove 1965
Meanline 1950
Oct. 9, 20151875 putsBelow 1915
1850- puts