A Change in the Wind?

Option expiry weeks can be tricky to trade – although the “cup half full” view would be that they offer lots of opportunities – and this one has been no exception thus far. Apart from expiry, the market has refocused on Europe’s challenges, and tomorrow brings an important auction of Spanish 2- and 10-year notes. A strong bid-to-cover should set a positive tone for our market, while a reluctance to buy might well see us looking at red numbers to start the morning.

It’s worth mentioning that on the daily chart of the E-minis, above, the futures came close to signaling a reversal. In Todd’s equity futures course, he teaches three factors that help traders to identify reversals; in this case, although one of the factors came into play, the other two did not, and we need two out of three to validate a change. In consequence, it remained appropriate to look to buy on dips (cautiously), particularly when an appropriate price pattern presented itself.

The sharp move lower early last week brought some stocks down to what appeared to be decent support. I took advantage of the selloff in AAPL to put on a bull but spread (short Apr 580 puts/long Apr 575), risking $330/contract to make $170 with slightly more than a week to expiry. It gave me some anxious moments – I wasn’t pleased by the break of the 50% retracement -  but I was able to take some nice profits ($130/c0ntract) during the rebound yesterday. I may have left a bit of money on the table, but I wasn’t confident enough that AAPL would close above 580 on Friday to hold the position through expiry. Strange things can happen to widely followed stocks like AAPL on expiry Friday afternoons, and I hate seeing profits turn into losses even more than I hate losses.

At this point I don’t see much of an edge, long or short, in the daily timeframe; it’s been a long, generally steady uptrend which has now flattened out. Last week’s pullback was sufficient to indicate that the contract may have difficulty regaining the highs, even though strictly speaking the uptrend hasn’t developed into a downtrend. At times such as these, when a trend, particularly a long-established one, may be in the process of reversing, there’s nothing wrong with trading smaller, trading shorter timeframes, or just standing aside until there’s some clarity. In sideways markets, there are a variety of option strategies (which Doc teaches) that can be used to generate income while waiting for a trend, and of course, long daily vertical bars are signals that there’s money to be made looking at hourly or shorter trades.

Best of luck!

About the Author Brian Keith


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