(ES) Diagonal Spread Combo Recommended for Cautious S&P Exposure Before Payroll Report
By: RJO MRTFebruary 2nd, 2012 8:23AM CST
Trade Strategies, February 2, 2012; 7:30am
The dominant trend in the S&P E-Mini market is clearly up in the daily log chart below, with weakness below 13-Jan's 1272 corrective low and area of former Oct-Jan resistance that now serves as new support required to threaten the bull. Per such, a bullish policy remains advised. But given what we believe is a developing threat to the crude oil market (and probably entire energy complex) discussed in this morning's Technical Blog, we cannot be sure that a more significant correction or vulnerability lower in the equity indexes- with which crude oil enjoys a fairly positive correlation- does not lie ahead.
With tomorrow's crucial unemployment and nonfarm payroll reports likely sources of a steeper directional move either way in the E-Mini, traders are advised to take direction out of play by establishing a diagonal "combo" position that includes the Feb week-2 1335 call / Mar 1390 call diagonal AND the Feb week-2 1300 / Mar 120 put diagonal. As the P&L graph of this strategy below shows, each of these individual options are trading at about the same price, the entire combo may be bought for around "even" or perhaps a very minor debit.
The gamma ratio for the individual call and put diagonals is the favorable 2-1/2 : 1 or more that we typically look for when constructing this strategy. Plus, the individual premiums are nominally low, helping to keep the overall risk to this strategy negligible.
Time decay, or theta risk, is always a risk with diagonals, but with the long Feb week-2 positions, we have plenty of time to decide whether the market's going to move sharply either to allow one side or the other to perform before having to taking defensive measures.
Please contact your RJO representative for an update bid/off quote on this recommended strategy.
< Back to all articles
Tweet
RJO MRT
RJO Market Research and Trading (RJO MRT) brings you the latest research on commodities and futures. They specialize in technical and fundamental analysis on all your major markets including: financial, agricultural, energy, foreign exchange, soft and metal markets.
As a hub for information, RJO MRT offers several forms of delivery to meet the needs of a vast audience. They strive to stay at the front of the markets by providing their followers with everything from market insight to trade strategies.
RJO MRT prides itself with using a combination of technical conditions and fundamental inputs such as economic or crop reports to help guide their viewers towards driving price discovery.
As a hub for information, RJO MRT offers several forms of delivery to meet the needs of a vast audience. They strive to stay at the front of the markets by providing their followers with everything from market insight to trade strategies.
RJO MRT prides itself with using a combination of technical conditions and fundamental inputs such as economic or crop reports to help guide their viewers towards driving price discovery.
Have questions or comments on this article?