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We rarely recommend shorting a futures contract but…

February 8, 2012


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We rarely recommend shorting a futures contract but…


Rather than going on and on about the day’s action and trying to assess why prices behaved the way they did, we are going to go in a different direction….NASDAQ futures.


Thanks to high flying stocks such as Apple, the NASDAQ 100 futures contract has been quietly creeping higher despite widespread skepticism over the tech sector.  Also, few have forgotten the infamous tech bubble in which the shorts were massacred on the way up and the bulls on the way down…not many survived.  Accordingly, it is often the “forgotten” index.  Nonetheless, it might offer traders the bears the best opportunity in regard to high probability trades and potential reward.


Large speculators are currently (or at least according to the latest COT Report) holding a record net long position in the e-mini NASDAQ (NQ) of 108,650 contracts.  The previous record was set in late 2004, at 95,765; in light of this we think it is fair to say the long tech trade is overcrowded.  Although the e-mini S&P is technically overbought, it isn’t experiencing a massively one sided position like the NASDAQ is.


From a technical standpoint, the March NASDAQ future currently has an RSI reading of over 90%.  If you are familiar with the RSI, you are aware that it is among the slower of the oscillators to suggest a market is overheated and anything over 70% in is considered to be extreme pricing.  Needless to say, the current 90% value is screaming overbought.  This alone doesn’t guarantee the market will turn the corner (after all, nothing does) but in my 7.5 year career I’ve only encountered such an extreme rally a handful of times.  Also, NASDAQ futures have traded lower in only 3 of the previous 26 sessions, and the red closes were modest.  As we know, extreme prices are often followed by mean revision trade in which the market corrects from an overextended level to an equilibrium…and that is what we feel the NASDAQ could soon be doing.


We typically recommend short options, or even long options, simply because the risk are lower and there is much more room for error.  However, given the circumstances we are willing to go out on a limb and recommend selling the NQ futures contract at the current level (near 2540).  The next resistance is near 2562, so traders with plenty of margin might consider adding at that price.  Similarly, conservative traders might try to hold out for a possible move to 2560ish before entering the initial position.  Our initial downside target will be about 2450 in the March contract.


If you are trading the S&P, our intraday support and resistance models continue to work well (despite the fact that we got bearish too early).  Look for resistance in the March S&P near 1352 and then again at 1365ish; resistance lies near 1340 (soft), 1336 and then 1328.  Daily support falls at 1307 should we get a watershed move.






* 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.


**Seasonality is already factored into current prices, any references to such does not indicate future market action.


Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini.  Unless otherwise noted, profit and loss will be based on the mini version.


Futures and Options Trading Recommendations


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


Position Trade -


1-18 We recommended that clients sell the March S&P 1370 calls for about $9.00 in premium or $450 per mini contract.


In other Markets…


1-17 Clients were instructed to sell a March futures contract near 123′20 and to purchase a June 123.5 call option as insurance.  This trade offers limited risk and unlimited profit potential.


1-23 Clients were advised to lock in a profit on the short 5-year note futures contract near 123.  Depending on fill prices, this leg of the trade netted about $550 to $600 per contract before transaction costs.  We are still holding the long call that was purchased for protection.


1-23 – Clients were recommended to sell the March Bond 134 puts for about 29 ticks, or $453.


1-23 – Clients were advised to sell March Euro strangles.  It was recommended that those holding long 137 calls (as a flyer just in case of a short covering rally)  sell the 136.5/123 strangles for about 69 ticks or $862.50.  Traders without this long call, sold either the 138/122 strangle or the 127.50/122 strangle for about 44 ticks or $550.


1-25 – Clients were advised to buy back their short 134 puts for about 13 ticks prior to the Fed announcement.  Assuming an entry of 29 and exit of 13, the profit was $250 per contract  before commissions.


1-25 - It was recommended that our clients re-sell the 5-year note futures contract (bought back at a profit on Monday, see above) near 123′23.    In light of the profit on the first entry, this is now nearly a free trade (ignoring transaction costs and slippage), limited (almost no) risk and unlimited profit potential from here.


1-25 – Clients were advised to sell March strangles using the 137 puts and the 147 calls for about 47 ticks or $735.


1-26 – We recommended that clients offset their long March Euro 137 calls near 40 ticks to lock in a profit of about $250 per contract.  This leaves our short strangle unhedged.


1-30- Clients were advised to buy back their 137/147 bond strangles, for a small loss and replace the premium by selling the 140/149 strangles…to give the market a little bit of breathing room.

2-3 – Clients were advised to buy back their 147 calls to lock in a profit on that side of the trade.  Fills were reported near 7 ticks, depending on client entry this was a profit of anywhere from $230 to $312 per contract.


2-3 – Clients were recommended to buy their 140 puts back at a small loss ( about $230 per contract) and sell a 139/145 March strangle to replace the premium for about 1′04 ($1,062.50).


2-7- We advised our clients to buy back their short 122 and 123 puts in the Euro to lock in a profit on that leg of the trade.  We are still holding the short Euro call portion of the trade.  Profits on the 122 puts ranged from $212.50 to $250, most made about $300 on the 123 puts.


2-8 – Clients were advised to sell the March Euro 137 put for about 31 ticks to convert the naked calls  back into a strangle.


(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)


Carley Garner

Senior Analyst / Commodity Broker

DeCarley Trading


Local : 702-947-0701


*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.


Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

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