Subs: Open Market Structure, Jul 16th
- stevenplace
- July 16th, 2009
ES Structure
1. Very little gap, so not a whole lot of market inefficiency on the open. Gap was filled in first 30 minutes.
2. ADVN-DECN (Advancing Issues minus Declining Issues) tagged -1000 and has been ripping higher since the open– this leads me to believe higher prices are coming today. Update: ADVN-DECN poleaxed after the first half hour session, approaching lows.
3. Short term trend remains higher — I use the 200 EMA on a 5 min chart as a handy reference.
4. Overnight lows were at 920.25, a potential support level if we do head lower.
5. I see no extreme tick levels either way, which leads me to believe that we’re establishing a range day. The fact that price hasn’t pulled back from the open brings about a divergence of price versus the indicator, but because the TICK is so compressed, We have been seeing higher TICK highs and higher TICK lows, but still nothing to be impressed about.
Since we had such a strong up day, odds are we’ll have follow through to the upside, but it won’t be as strong today as we’ll most likely have buyers thin out as we come back into those early Jun levels. ES had trouble breaking 930 in the close yesterday, and with R1 back up at 934.50, we could find resistance around that area.
Potential range setting up 925-930. Watch for reversals into that range during the morning session.
Other Notes
JPM earnings came out and beat estimates, but the reaction in price has been negative, coming off its highs premarket.
EURUSD looks to be breaking out of its pennant flag and could weaken the dollar a little further, which would be good for the reflation/risk aversion trade. It’s definitely starting to look like a continuation.
One thing to note is the relationship between equities and commodities. Last time SPY was at 93.25, USO was 38.52 and DBA was 26.33. I think they’re going to have to match up here soon, either meaning a rally in commodities or a drop in equities.
AIG Fun
I mentioned on twitter today that trading front month options on AIG would be a fun levered bet. I got a couple emails asking me to explain this.
One of the biggest problems with trading options directionall is that you have extrinsic value built up in the options. That is based on the uncertainty of where price will be. As we get closer to expiration, the extrinsic goes away because we have a better idea of where the stock is going to end up– this is time decay.
So when we get *really* close to expiration, there’s not a whole lot of extrinsic left, which leaves you a very leveraged instrument with not much risk of time decay.
I’m currently eyeing the AIG Jul 15 Puts. They’re currently trading at 1.60, with .26 of it being extrinsic. They currently have a delta of -75, which means you effectively are short 75 shares. So instead of putting up 1300 + any margin to buy or sell short, you only have to put up 1.60, which is about 8x leverage. And if you’re daytrading, you don’t have to concern yourself with the extrinsic coming out because you’re in and out of the option so fast it doesn’t matter.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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