Commentary for last week
It was a reversal week. ES recovered its prior week’s loss after the FOMC did not announce an increase in interest rates. The Fed kept the interest rate unchanged and its dovish statement brought some buyers back into the equity market. But we saw some selling at the high on the last day of trading. The quad witching expirations also contributed to the volatility.
Method
Some members have asked how to interpret the option trades. The method is pretty simple: sell Puts when the price of the underlying goes down; sell Calls when the price of the underlying goes up. Sell strikes that are most likely to expire OTM.
When the price of the underlying security (in this case the current contract of the S&P500 mini-futures -ESU5) goes down, the premium we can charge for selling Puts goes up. When the price of the ESU5 goes up, the premium we can charge for selling Calls also goes up.
So we use fluctuations in the price of the ESU5 to sell weekly options at an advantageous price. And we use Nat’s weekly analysis of the ES and the Cash Index (SPX) to sell strike prices that we expect to fall outside the weekly range, which means the options will expire worthless on Friday afternoon and we can keep the premium we charged for selling the options.
The range of strike prices (2115-2135 for Calls; 2025-2000 for Puts) allows traders to choose the risk/reward that suits them best. Strikes closest to the trigger points will command a greater premium, but have a greater risk of being exercised.
How it works in practice
Last week we sold Puts at the 2025 strike early in the week, when the ESU5 went down, and sold Calls at the 2115 strike after the ESU5 ran up past 2100. Both expired Out of the Money (OTM) and we retained the entire premium.
Here’s the intraday chart of the underlying security, the ESU5. Re-visit last week’s option post to see the actual trades.
This week:
This week all eyes will focus on Greece. ES could sell back down last week’s low area or revisit low 2062 area if news-driven triggers selling momentum. Even though Fed didn’t hike rate this time, the concern about Sept rate hike will prevent price from popping from time being.
Member content
Here are Nat’s option trades for this week.
Calls:
2100 is the option mean line this week. The calls above strike price 2125 have heavy open interest volume all the way up to 2170 call. That means ES could run up if there is news-driven movement. But also price could quickly fall back in the following day. Our system shows that ES shouldn’t close above 2175 level this week, therefore, we could look for selling above strike price calls if ES rallies up to near 2110 level.
Puts
Below 2055 strike price there was large Put open interests at 2025-2000 zone. That indicates ES could reverse from that zone if there is a big selloff this week. Our system shows that ES shouldn’t close below 2000 level this week. Therefore, we could look for selling Puts if ES drops to/below 2085 level.
Put/call volume ratio on ES June 26 option is 1:3 from 2175 to 2100 level, and 3:1 from 2095 to 2000 level.
Nat’s trades for this week
| Expiration | Strike price | Sell options when ES price is |
|---|---|---|
| June 26, 2015 | 2150, 2155,2160 calls | |
| 2130 calls | > = 2110 | |
| Meanline | 2100 | |
| June 26, 2015 | 2025 puts | < = 2085 |
| 2005, 2000 puts |