After a few days of the government shutdown, I am sure of one thing. No one really knows how the markets are going to react when these unusual circumstances take place. We have seen small moves down and small moves up, but no clear trend or reaction. Forecasters can do all the planning, build their models and predict what may happen.

In reality markets move in search of price discovery in real time.

GOVERNMENT DATA ON HOLD

As the uncertainty of the government shutdown continues, there are a few things that we do know. We know that Thursday’s jobless claims number may be the last government report we see for a while. The weekly number was up 1,000 to 308,000 for the week of September 28. The monthly average fell to 305,000, a drop of 3,750. That is the lowest level since May of 2007. Normally we can use this data to forecast the monthly employment numbers. As we already know, we aren’t going to get those numbers tomorrow, and may not know what they are for some time.

DEFINE RISK

With so many unknowns, it can be hard to play the markets. One thing I don’t want to do is stick out my neck too far. I like taking a cautious approach, defining risk using a strangle. With the S&P 500 trading without clear direction, I am trying to take advantage of a move either way. I like buying the November E-Mini S&P 500 1550-1775 strangle for 10 points ($500) or better.

Both strikes are far out from the current market level, but a deal to get the government up a running again could have a dramatic effect on the S&P. Risk is limited to the cost of entry plus fees and commissions. I’m looking for the strangle to double in value and would like to take profit near 20 points.

GOOD TRADERS KNOW WHEN THEY ARE WRONG

Sometimes we have the ability to assess what a market is doing and take advantage of it. The more confident you are, the more aggressive you become. The risk-reward ratio is what trading is all about. The greater the risk, the greater the reward if you are correct in your trade. All traders look for opportunities to become aggressive in the market. The good ones are able to realize when they are wrong and not let their risk taking get the best of them.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  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.  WHILE 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.