With the impressive gains seen throughout the stock indices complex so far this year, fatigue within the markets would be expected and in my view, welcomed, as we enter the summer.
After all, nothing goes up or down forever.
KEY DATA THIS FRIDAY
May’s monthly nonfarm payroll report, released this Friday may help to decide the fate of Federal Reserve’s policymaking regarding its aggressive bond buying program. Given its importance, Friday’s release will perhaps have more than the usual interest. If the number comes in much better than expected, we could potentially see indices sell-off, due to the perception that the Fed will taper its QE program. If the number disappoints, I will look for stocks to possibly rally given the anticipation that the Fed’s monetary spigots will remain full blast.
THE TRADE
There is an opportunity here for a gap trade in the mini S&P’s, using a June option strangle, that has almost two weeks before expiration.
I am proposing buying the June E Mini S&P 1570 put for six points and buying the June E Mini S&P 1670 call for four points. The total cost of this option trade or strangle is ten points, or in cash value $500.00.
The risk on the trade therefore is the cost of both options, in this case 10 points, plus all applicable commissions and fees. The strategy is that I want to see an extreme move in the market, one way or the other. It is more of an agnostic position where it makes no difference to me which way the market goes, but that a strong percentage rally or pullback is seen.
I think that if Friday’s number along with prior month job revisions may reveal clues to the Fed’s next move, we could possibly see some extreme price movement and volatility. If we see sideways action and stay within the recent S&P range, I will exit both positions by close of business the following Monday.
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Contact Lusk here to be added to his free daily market report.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. 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. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS.
