In my opinion, the Fiscal Cliff debate appears to be helping the markets stay a bit more active than usual for this time of year. As we approach holiday season and the end of the year, we often see the markets slow down, dip in volume and trade in tight ranges. The uncertainty of next year’s budget, economic forecast, and tax laws, may be keeping traders active as we approach year’s end.
Plans have been offered from both sides and rejected to resolve the Fiscal Cliff debate. Plan B plans have been sent back as well. With eleven days left in the year, there is still not an agreement in hand. Like it or not, I believe the Fiscal Cliff issue will be in the forefront for market watchers until it is resolved.
I am looking at a downside play in the March E-Mini S&P 500 (ESH2). If the Fiscal Cliff talks go down to the wire, I feel that we could see a sell off from the current level. Using a bear put spread to define risk; I would look to take advantage of any breaks to 1400 in the ESH2. I like the option of buying the March 1420 put and selling the March 1400 put at a spread price of 7 points ($350) or better. The risk is the price paid for the spread plus all commissions and fees. The maximum profit you can collect here is $1,000 minus all commissions and fees. If we potentially see a rally and we are on the wrong side of the move, I would look to cut bait and get out of the spread at 3.5.
Try and finish the year on a good note. Manage your risk wisely and you’ll be ready to get a good start in the New Year.
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.
