In this issue of TraderSavvy:
- Don’t buy options… sell options! Learn to trade the RIGHT way!
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- Phil Flynn's complimentary daily research newsletter
- Free daily futures trading ideas and strategies
- Complimentary Daily Futures Ideas!

View additional market commentary on InsideFutures.com


TraderSavvy Newsletter for Futures Traders
In This Issue:

Jon Lubow of Options Scholar shares some pointers on how to make a play for a sideways market this summer.

June 21, 2007 TraderSavvy.com   |   Read Past Issues
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Now is the Time to Buy Credit Spreads



Don’t buy options… sell options! Learn to
trade the RIGHT way!

 

 


Questions about Futures? Lind-Waldock's Got
Answers! Free Q&A Guide

 

 

Phil Flynn's complimentary daily research newsletter

 

 

Free daily futures trading ideas and strategies

 

 

Complimentary Daily
Futures Ideas
!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Published By Barchart.com

Now is the Time to Buy Credit Spreads!

Let’s make a trade hoping for a relatively quiet summer in the S&P500.

The market has rallied in a volatile manner over the past few months and showed signs of taking a break a few weeks ago before rallying back near the highs. Maybe it’s time to make a play for a sideways market over the summer months.

First, let’s see what happened last summer. Obviously, market conditions are different now and there is no guarantee that what happened last summer will happen this year, but with those disclaimers out of the way let’s take a look.

From June 21 last year through September 20 the S&P500 traded as low as 1225 and as high as 1325, which is a 100 point range. More importantly, for the time frame of June 21 through August 21 the range was 1225 – 1302 which is only 77 points.

(continued below...)


Special Message From Our Author:

Now is the time to buy credit spreads!

Don’t buy options… sell options! Learn to trade the RIGHT way! To learn more become an Options Scholar Member for FREE today! Click here for more information and to sign up for our free membership.


If we have a quiet summer, both September call and put credit spreads should do well. Below I will outline the specific trade we would recommend. The prices and margins are based on the close of business on June 19.

S&P Spread Commentary

Sell September 1625/1650 call spreads
Premium: 4.35 points x $250 = $1,087.50*

Sell September 1375/1425 put spreads
Premium: 4.20 points x $250 = $1,050*

Total Premium: $2,137.50*
Margin requirement: $1,600
Current level of S&P500 1533.70
Expiration date: September 20, 2007


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Over the last 3 weeks the S&P placed a double top near the 1540 level. The short side of our call credit spread is 1625 which is 85 points above the highs. Since March the S&P has rallied from a low of 1363 to its current levels. The move from 1363 to 1540 is a 177 point or 13% move in a three month time frame. To have the call spread expire worthless we are just asking the market not to rally another 6% over the next three months.

As far as the put spreads are concerned, due to high volatility and despite the uptrend in the market, we are still able to sell these spreads which are 108 points out of the money and get very good premium for them.

As you can see we have created a situation where if the S&P is below 1625 and above 1425 (200 point range) on expiration, all the options will expire worthless.

After looking at all the positives surrounding this trade it is also important to discuss the risks. The combined premium received at the inception of this trade is approximately 8.50 points*. We are selling a 25 point call spread and a 50 points put spread.

The worst case scenario on the call side would be for the market to rally significantly and close above the 1650 level on the expiration date in September. Obviously, we can get out of these positions at any time between now and expiration, but if we simply stuck our heads in the sand and the market is above the 1650 level the maximum and limited call side loss would be achieved.

Since we collected 8.5 points on inception* the maximum loss would be 25 – 8.5 = 16.5 points or $4,125*. Since the put spread is wider than the call spread the risk on the downside, although still limited, is greater than the call side. With a fifty point spread our downside risk is 50 – 8.5 = 41.5 points or $10,375*.

*Not including commissions and fees.

For questions call 800-972-3343.

TRADING FUTURES AND OPTIONS INVOLVES RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. TRADE WITH RISK CAPITAL ONLY. THE USE OF SPREADS MAY NOT BE LESS RISKY THAN OUTRIGHT FUTURES POSITIONS.


About Today's Author:

Jon Lubow is the Co-founder and Vice President of Trader's Edge, a futures and options brokerage firm based in Madison, NJ. He has over 17 years of trading experience in the futures markets.

Mr. Lubow has worked on the Floor of the Chicago Board of Options Exchange (CBOE) and has uninterrupted registration with National Futures Association since 1990. He is the co-author of, "Options on Futures: New Trading Strategies" (John Wiley & Sons 2001) and frequently contributes to futures trading publications.

Mr. Lubow was formerly a founding and managing member of Kingsview Capital and co-portfolio manager of Kingsview Capital Partners. He is a graduate of Dartmouth College.


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