Option expiration stalls stock rally, counter trend Friday in Treasuries

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The week closes on positive data

On the economic front, the day's news was overall supportive but not necessarily reason to be overly bullish equities are bearish bonds. Nonetheless, domestic economic data continues to trend in the right direction.This morning, traders digested a leading indicators report. The headline figure was expected to be reported at .2%, but saw a positive surprise of .4%. Michigan Sentiment came in at 73.6, better than the 72.2 expected.
 
30 year bond ZBZ12

Bonds and Notes consolidate, but buying tepid

We were looking for a counter-trend Friday, and we got it. But I would be lying if I didn't admit it was a bit disappointing. The buying lacked conviction and based on price action seemed to be primarily driven by shorts covering to lock in some profit ahead of the weekend.There is some talk of performance chasing in equities and that equates to a lack of interest in safety instruments such as Treasuries.On the other hand, it was a victory for the bulls to put a stop to the four-day losing streak in the face of slightly higher equities.Next Friday will be option expiration for the September contracts and that creates some uncertainty. However, a quick look at today's option volume suggests traders are loading up on puts. If this is the case, the path of least resistance could be higher going into expiration. Never forget...most traders are wrong.

Treasury Market Ideas

Consensus: We aren't giving up on a fall rally, this large dip could prove to be a great buy. A 'normal' market bounce would see 149'22ish first

 

Support: 144'02 is the next major support area, but 144'26 will provide a moderate floor(30-year Bond), 131'26 and 131'09(10-year note)
 
Resistance: 149'22 and 152'05 (30-year Bond), 133'26 and 134'25 (10-year note)
 

Position Trading Recommendations

*There is unlimited risk in option sellingAugust 14 - Buy the 5-year note futures contract near 124 and simultaneously purchase a 124 put for insurance. The put protects the trade absolutely beneath the strike resulting in a total risk of under $300 per contract. The profit potential is theoretically unlimited, but we are looking for a possible rally to the 125 area (which would net between $700 to $900 per contract depending on fill prices, etc.)August 15 - Sell 1 October 30 year bond 142 put near 25 ticks or $390.
 
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ESU12 E-mini S&P 500

Lowest VIX since June 2007

It's official, the VIX has fallen to the lowest level seen since before the financial melt-down! As a result, options on the ES (e-mini S&P) are at their lowest values in five years.Although we are typically advocates of short option strategies, this is not the time nor the place to be holding short option exposure in stock index futures; at least not on the put side of the market.There is an old saying that goes something like this, "Traders should buy puts (insurance) in equities when they can, not when they must". We don't know when and where this market will turn, but history suggests the party can't last forever...at least not without a correction.Traders might look to buy cheap bearish exposure using the September options. For instance, we like the 1360 puts for about 7.5 in premium ($375). In the not too distant past, a put 55 handles out-of-the-money such as this with a little over 30 days to expiration would have run nearly three times this amount. This creates a cheap and limited risk way to enter the short side of the e-mini S&P, but a trader could turn it into a free trade by selling a September 1450 call. This trade is free in regard to out of pocket expense, but does involve a margin requirement, and theoretically unlimited risk above the strike price. Good luck! 
 

Stock Index Futures Market Ideas

Consensus: Bearish on rallies. The squeeze is on! Resistance at 1416 is holding, but we can't rule out the mid to high 1428's before things possibly roll over.

Support: 1383 and 1358
 
Resistance: 1416 was reached, the next significant level will be 1428
 
 

Position Trading Ideas

None

 

Day Trading Ideas

These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled

Buy Levels: 1409 (minor), 1401 and 1396
Sell Levels: 1416 and 1428
 

In other markets....

 

Flat(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information) 
 
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Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.**Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options. Please see full disclosure below.

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