Option play: E-mini S&P

October 8, 2014 09:06 AM

Options play: The E-mini S&P 500 finally has a healthy correction. The question now is, how much of a correction could we be looking at?

Fundamentally, CBS's Marketwatch.com summed it up best for me here in an article from today, "The U.S. stock investors turned skittish on Tuesday driving major averages to their lowest levels in months. A jarring trading day follows a series of tough weeks in stocks marked by precipitous declines, which have left the S&P 500 sitting 3.8% lower from its peak reached just three weeks ago on September 8."

For a bear like me this is awesome as they use words like "skittish", "jarring" and "precipitous" when it comes to this E-mini S&P 500 correction. Hey, some analyst I heard on CNBC said a 10% correction could be in the near future. I don't know for sure, but I like what I see.

  December E-mini S&P 400 chart, daily

Technically, on the chart above I have placed my favorite technical indicators. They are the 9-day Simple Moving Average (SMA, red line), the 20-day SMA (green line), and the 50-day SMA (blue line). I have also added the Bollinger Bands (BB's, yellow lines) and Candlesticks (red and green bars), each bar represents one day of trading on this daily chart. I have also placed a bright white arrow line pointing lower indicating a long trend line of resistance that is holding.

This  market below is in what I have coined a "SUPER-TREND" down. In order for a market to be in a "SUPER-TREND" down what I need is this. I need the 9-day SMA (green line) to cross down and under the 20-day SMA (green line) and then both indicators must point lower on fairly sharp angles while the market trades below the 9 day SMA. We have that here.

I also have added my new favorite technical tool, the bright white trend line, and it is pointing lower on a fairly sharp angle and showing some solid resistance on the chart in my opinion. One other item I like very much on this chart is that 4 out of 6 of my favorite indicators are pointing lower on fairly sharp angles and they are the yellow bottom BB line, the 9 day SMA, the 20 day SMA, and my newest favorite the bright white trend line.

I figured this out by placing my favorite indicators on the charts and studying them here, which is a web application that we have developed for our clients called MARKETHEAD where I get about 80-85% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my readers should check it out. Yes?

  

Option play

Since I see E-mini S&P 500 prices moving lower from here a play could be to buy put options or bear put spreads with a call for a hedge in a 3 to 1 ratio just in case the trend changes dramatically to the upside. Another play could be to sell deep out of the money calls collecting premium. Remember selling naked options involves unlimited risk and should only be considered if you have a well-funded account.

 

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About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.