Options – week of July 6, 2015

Commentary for last week

Last week was a short week due to the July 4 holiday in the US. But there were two options expiring during the four days of trading, the monthly option expiring Tuesday and the weekly options expiring Thursday.

We also had the continuing drama of the Greek debt crisis moving into a higher gear with the proclamation of a referendum on the terms of the deal proposed by the creditors.

While that combination made the markets more volatile, in the sense that there were more sudden swings in price, the total weekly range was relatively small, as traders waited for some indication of the likely outcome from Greece.

So far (Sunday afternoon) there are still no official vote counts available.

The combination — greater volatility in a relatively narrow range — was good for our option trades last week. We collected inflated prices for Puts we sold Monday and Tuesday as traders tried to hedge against a possible decline in the equities. We sold strikes below 2025, and all of them expired Out-of-the-money, allowing us to keep all of the premium.

Here’s the intra-day chart (60-minute bars) of the ESU5 showing the price action. You can see the member content for last week here.

150702-ESU5

ESU5 to July 3, 2015. 60-minute bars

 

 

This week:

Both irrational enthusiasm and investor panic are beneficial to option sellers — because that is when buyers tend to over-pay for protection — and we may see both this week, especially in the early days after the Greek referendum results are known.

The open interest in Puts is unusually large, so the market is skewed toward an “unfavorable” result of the referendum, and that will present opportunities for Put sellers over the weekend and in the early part of the week. Here is the detailed outlook for option trades this week.

Member content

Here is the member content for the week of July 6, 2015.

Calls:

2075 is the option mean line for this week. Above the 2095 level, there is a large number of Calls outstanding at 2100, 2110 and 2125 strikes. Our system shows that ES shouldn’t close above 2125 level this week, therefore, we could look for selling Calls at the strikes in the table if ES rallies up near the 2095 level.

Puts side:

Below the 2075 strike price, there is large open interest at different levels at 25 point intervals. This indicates that each level —  2050, 2025, 2000 — will slow down the selling if strong selling momentum is triggered. Our system shows that ES shouldn’t close below 2000 level this week. Therefore, we could look for selling Puts at the strike prices in the table if ES drops below 2050 level.

Put/call volume ratio on ES July 10 option is 1:1 from 2150 to 2095 level, and 2:1 from 2075 to 2000 level.

Nat’s trades for the week of July 6

ExpirationStrike price Sell options when ES price is
July 10 20152130, 2145, 2155 calls
2125 calls> = 2095
Meanline 2075
July 10 20152010 puts< = 2050
1995, 1975 puts

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