Buy Calls to Get Short?

NQ 13k nears!!!

With the world all wound up in Ukraine and the Chinese locking down some 50 million people or so, certainly seems ripe for some vol pick up. With this though we wanted to touch upon a trade set up for shorting the equity markets. We feel that risk reward wise sure, yea you can go ahead and just sell out rights and use stops for your outs. However, we would rather have some staying power and thus we would use options to hedge our risk. Here is a little set up and something we talked about on the Chat with Traders podcast from the prior write up.

Alright so with the Nasdaq 13000 is huge we all know this. So with that said, tonight’s little rally gives us the following options pricing in the Week 4 NQ futures (June):

The 13250 call is 280 or $5600 what this means if you buy this option is that your breakeven is 13530 in the NQ futures. However we aren’t buying this to go long outright, rather we are using this to short the futures.

All our risk is to the downside right. So if you are risk averse you can Sell micro Nasdaq proportionally to your estimated assumption and or risk. In this case if you don’t want to risk waiting to sell, you could sell 3 micro Nasdaq right when you purchase this option. (Futures at 13125)

Lets say you sell 3 micro NQ at 13125. Your breakeven is then 933 points if you don’t get off any other micro sales or 12192. When it comes to FOMC more often than not every decision is followed by some sort of rally, bring out the quants, yes they know the statistical inference but we aren’t concerned. Rather our job is to execute more micro NQ sales above, So let’s assume the NQ rallies 200 points up to 13325 we sell 3 more micros and now we are short 6 micros at 13258.50 now our breakeven is 467 points or 12791.75. Let’s say the rally continues and we sell another 3 micros at 13550. Our net short is now 9 @ 13333.25 and finally we sell 1 more at 13750. We are now short 10 micro NQ at 13375. We now have a max risk of 155 ticks or $3100.

So for $3100 risk we are now short 1 Full NQ @13375 and break even on this is now 13095. In between all of this range 13000-13750 for you to play in between or tweak your trading skills with the various micros you have on. Our skew is obviously that we would want the market to rally in order to get off all the hedges, if the market doesn’t give us the opportunity well we are short 3 micro's from 13125 and we can take some profits on a drop to say 12500 and depending on how quickly it falls, well you can exit and then possibly on a rally resell the micro’s or exit the option which if vol is still elevated, which it most likely will be, then you may not lose to much of that $5600 outlay.

Ok its a lot to digest, but break it down and see what you think, this is just one risk adjust approach, you could buy calls and go short full 1 to 1 if you want max protection and vol capture. As you know we don’t like shorting or writing options naked, its a penny in front of a steamroller kinda game and we don’t like it!

Alright the tutorial is over, on to the charts, first up is the US 10Y at the 0.618 and do or die time for yields, cycle down or risk a march up to 2.625% which ultimately will mean the FED got a little bit serious:

As far as our trade set up, you can see here the Nasdaq continues to play touchy touch with the 13k level but the trend channel has already been breached so risk is high to a major flush here down:

With this in mind, it doesn’t seem Google has received the market memo yet:

Alright we wait till Wednesday for the FOMC decision, but it doesn’t seem like the US yield curve is waiting as yields were bid all day again today with the flattening continuing to wreak havoc on spread product, keep an eye on HYG you equity folk:

As for the settlements for today’s trading March 14th 2020:

Ok till next time…

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DISCLAIMER: For educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of, or from the author Michael Agne owner of Magnelibra Capital Advisors. Magnelibra the CTA and its Global Futures Benchmark Program may hold long and or short positions in the various futures and markets that Econemotions covers. We will never claim that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, we make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed.

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