It’s hard to avoid hearing or reading the term “Fiscal Cliff” in the days and weeks following the election. I’ve been hearing it so often I feel like I know him. Chicago is a town that is full of many colorful characters, with nicknames to match. Big Tuna, Hizzoner, Johnny No-Nose, Fast Eddie, Joey Doves, and Harry the Hook, are a few I can think of. Fiscal Cliff seems to fit right in, but as we know by now, Fiscal Cliff is no ordinary character.

The cliff the U.S. faces up ahead is the end of temporary payroll taxes, certain tax breaks for businesses, and across the board spending cuts. The House, Senate and White House must come up with some sort of compromise by year end to avoid a scenario that could have a negative effect on the U.S. economy. Easier said than done, especially in a partisan political environment.

STOCK ACTION
We have seen the E-Mini S&P 500 push above 1400 again in recent days. The bulls have had a nice run after the recent low near 1340 in mid-November. I think a failure to reach a compromise could cause a significant retracement in the ES. I like playing this move using a bear put spread.

OPTION PLAY
In this case I like trading January ES options, with an expiration date of January 18 taking us through year end. I am looking to but the Jan ES 1380 Put and sell the Jan 1350 Put at 8 points ($400) or better. Risk is defined at the cost of entry plus commission and fees. Max potential is a 30 point gain minus cost of entry plus commission and fees. If you have the ability to trade multiple contracts, I like the idea of taking profit at double your entry point on part of your position. If the trade is not going our way, I’d look to exit two weeks prior to expiration.

Using options give us the ability to participate in a potential move, while defining our risk at the same time. Manage your risk wisely and come back to trade another day.

THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.