Sunday, September 2, 2007

Commodity Futures Trading - The S&P 500 and E-mini - Preparation For A Big Move Up - Part 2

As traders all we really need to know is when a market is going to stop moving in one direction then turn around and head in the other. The rest is noise. I try to concentrate most of my energy on identifying these times. The day trading information presented here is applicable to longer term position trading. Read on to learn what a market requires to make a turn.

Observation From Trading Notes:

"A significant resistance is broken on chart the beginning of strength. It starts with the previous big pivot point on the 5 min chart."

Of course, theres no way for the e-mini futures market to go to 1200 unless it goes through 1190 first, then 1194, then 1198 and so forth. Its the same with previous pivot points. You need something to hang your hat on as a reference point. A logical point in a decline is the previous swing high on a 5-minute chart. This may be too early a warning for longer term hourly swing traders, but may be perfect for the one-minute bar traders.

There is nothing cast in stone, remember that. Just find some reference point that is tied to real price action and use it as a marker. This does not mean you want to buy if the pivot point gets broken on the upside. It may be just a bear market rally. But, if you are looking at a series of bottoms while other indications are suggesting a big e-mini rally is about to occur, take notice. The break of a meaningful pivot should get you off the pot and into action. Otherwise, these things can slip by us without notice.

You may decide to buy the next correction onto the previous highs or whatever. But, since price is in the bottom forming mode, much of the time the market will come back down many times, even though it may be in a new bull market. The big move straight up usually occurs much later in the move when the shorts panic. Theres exceptions, like if the bottom turns out to be a major weekly bottom or bigger. This can produce huge lift-off moves that give little opportunity to get on board. But they are rare and not worth stalking all the time. Just wait for that correction and then buy.

One time I remember telling a successful trading friend of mine, the e-mini top forming is a big one and could be a major top lasting for weeks. He wisely said, I dont care! Im only interested in the short day swings. What difference does it make if this is THE top? He was right. "This is the BIG top" type of thinking just makes one excessively bearish and biased. Even if correct, major e-mini futures tops still have plenty of bull days and tremendous bear covering rallies to trade along the way down in a major move.

Its too easy for day traders to get, this is it it-itis, start holding overnight, and holding through the corrections, etc. Stay in the now moment all the time. Thats what counts when day trading short-term e-mini futures contracts.


"Very few places to enter in yesterdays creeping market."

As a rule, the e-mini futures market will make it easy to get on board the wrong side and hard to get on board the right side. What I mean is that the corrections to buy are shallow and then price lifts to new highs. The e-mini futures market will shift out of character from what it was doing before, to trap participants. In fact, the market usually does what it must to screw the majority and encourage the maximum amount of trading possible.

Filling gaps is a perfect example of seeking out maximum trades. Generally, commodity markets that take off in the opposite direction of a big report's news is another example of maximum trading and screwing the majority. The market is very clever. Actually, the market is you and me.

Part Three of Five Parts - Next

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course" - they're all free. Main site:

Judging Whether You Can Profit From a Put Option, Part 3

In this example, you would lose $300 by not following your own standard and bailing out at 4. Even if the stock did fall later on, time would work against you. The longer it takes for a turnaround in the price of the underlying stock, the more time value loss you need to overcome. The stock might fall a point or two over a three-month period, so that you merely trade time value for intrinsic value, with the net effect of zero; it is even likely that the overall premium value will decline if intrinsic value is not enough to offset the lost time value.

The problem of time value deterioration is the same problem experienced by call buyers. It does not matter whether price movement is required to go up (for call buyers) or down (for put buyers); time is the enemy, and price movement has to be adequate to offset time value as well as produce a profit through more intrinsic value. If you seek bargains several points away from the striking price, it is easy to overlook this reality. You need a substantial change in the stock's market value just to arrive at the price level where intrinsic value will begin to accumulate.

Example: Good Trend But Not Enough: You bought a LEAPS put for 5 with a striking price of 30, when the stock was at $32 per share. There were 22 months to go until expiration and the entire put premium was time value; you estimated that there was plenty of time for the price of the stock to fall, producing a profit. Between purchase date and expiration, the underlying stock falls to 27, which is 3 points in the money. At expiration, the put is worth 3, meaning you lose $200 upon sale of the put. Time value has evaporated. Even though you are 3 points in the money, it is not enough to match or beat your investment of $500.

The further out of the money, the cheaper the premium for the optionand the lower the potential to ever realize a profit. Even using LEAPS and depending on longer time spans, you have to accept the reality: The current time value premium reflects the time until expiration, so you will pay more time value premium for longer-term puts. That means you have to overcome more points to replace time value with intrinsic value.

If you buy an in-the-money put and the underlying stock increases in value, you lose one point for each dollar of increase in the stock's market valueas long as it remains in the moneyand for each dollar lost in the stock's market value, your put gains a point in premium value. Once the stock's market value rises above striking price, there remains no intrinsic value; your put is out of the money and the premium value becomes less responsive to price movement in the underlying stock. While all of this is going on, time value is evaporating as well.

Tip: For option buyers, profits are realized primarily when the option is in the money. Out-of-the-money options are poor candidates for appreciation, because time value rarely increases.

Whether you prefer lower-premium, out-of-the-money puts or higher-premium in-the-money puts, always be keenly aware of the point gap between the stock's current market value and striking price of the put. The further out of the money, the less likely it is that your put will produce a profit.

To minimize your exposure to risk, limit your speculation to options on stocks whose market value is within five points of the striking price. In other words, if you buy out-of-the-money puts, avoid those that are deep out of the money. What might seem like a relatively small price gap can become quite large when you consider that all of the out-of-the-money premium is time value, and that no intrinsic value can be accumulated until your put goes in the money.

Get your Momentum Stock Trading System and sign up for my free weekly online trading system newsletter here at: