Register for a free 1-year subscription to Futures Magazine on www.DeCarleyTrading.com!

Shorts cover on dips

Stock index futures started the day on the right foot and ended in the same manner.  After yesterday's monster rally, many bears were looking for a repeat of the one-day rally phenomenon.  However, aside from a few temporary dips to 712 the March S&P traded in the green the entire session.  It was pretty apparent that  there were a lot of traders caught on the wrong side of yesterday's rally and on each dip they were scrambling to cover any remaining shorts.  Judging by the incredible number of speculative shorts, particularly small speculators, we could have some room to move on the upside as the bears are squeezed. 

If you are trading stock index futures, the June contract officially becomes the front month tomorrow.  You will begin seeing traders roll into the June contract from March and the liquidity will go with it.  The March contract will be tradable through the 19th; however, we recommend that you exclusively trade the June contract by Friday of this week or early next week at the latest.  Option traders will be able to easily buy and sell S&P options through the trading session on the 19th but Dow and NASDAQ options which struggle with liquidity will begin to get thin much sooner. 

Keep in mind that when it comes to the quarterly options (March, June, September and December) you should never let them go into expiration if the index price is remotely close to the strike price.  In the case of the quarterly options, rather than being delivered or made to make delivery of a futures position the option will be subject to a cash settlement.  Trust me, you don't want to leave your performance up to the exchanges interpretation of what the value of the index may be as it is determined by what seems to be a relatively arbitrary calculation. 

We may have avoided the infamous one-day rally, but I can't rule out a fizzle after two or three days.  However, in the meantime the S&P should be able to rally to the 750 mark in the near term.  We did see a high of just under 733 in today's session but it "feels" like there is more to go.  We have revised our Dow target to 7,150.  The NASDAQ on the other hand has outperformed and therefore reached our  near-term upside target.  We could see just above 1140 but it may struggle from there. 

* 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.  However, market analysis and commentary does.

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.

S&P 500 Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

March 5th - We recommended to sell the March S&P puts for $7, our clients were advised to sell them for $5 or better intraday as $7 seemed to be a bit optimistic.  We recommend buying this back at $1 or  better (we may adjust this order as we go). 

·         March 10 - You should have bought this option back today at a profit.

March 3rd - I like buying the April 800 calls for about $7 in premium.

·         March 10 - Place an order to sell these for $15 or better

Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.

Dow Jones Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

Flat

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

NASDAQ Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

March 9 - Buy the mini NASDAQ at 1020 or better.

·         Cancel this order, we missed the move.

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.