Equity index option play: Bonds blink first

July 13, 2016 10:34 AM

Fundamentally, Central Banks across the globe continue to hover in the background of equity and bond markets and the fact that they can and will intervene has caused some crazy price action. I never thought I would see the day when both bonds and equities traded near all-time record highs.

Whether its the uncertain Fed here in the United States, or the constant ongoing easing of the Bank of Japan, or the Bank of England who's about to join the party, central banks across the globe have and will continue to tinker with markets. It's central banks across the world to the rescue.

Despite what negative impact hits the markets or economies, central banks will step in. This is the reason for the distorted markets.

How long can this go on? The "risk on" trade and the "safe haven" trade are both moving higher and flirting with all time record prices. What's next? Buying stocks on bad earnings? At least for now it looks like bonds have blinked first. In addition, how long will central banks be effective in artificially stimulating stock markets?

As equities race up and Big Money continues to buy, there is no fear of failure for American companies and banks. The uncertainty of Brexit, companies in England, and banks across the pond are about to be "taken care of" as well. And the Bank of Japan seems to like rates below zero. Too big to fail is alive and well, globally.

My concern is the banks that trade because that cant make enough money on lending due to low rates. Yes, it would appear, with credit so hard to get for the middle class, and with banks holding so much capital, trading the markets has become common for financial institutions.

If markets go south banks are at risk because they are so long the equity markets. But dont worry systemic failure is not an option because the Fed will launch more quantitative easing if needed. Proof that the markets believe this is the price correlation of Bonds and Stocks and higher equities after Brexit.

This can’t go on forever, but it can for a long time. There is talk that the Fed will never raise rates. Markets can sell off violently and to not protect your Stock portfolio is juvenile. The equity index future options can be a great vehicle for that. As far as bonds and equities go, something's gotta give in a big way.

Contract Specifications: YM

Symbol - YM

Name - Dow Jones Industrial Average mini-sized (YM)

Exchange - CBOTM

Trading Months - HMUZ

Trading Unit - $5 times Index

Tick Size - 1 point ($5.00 per contract)

Daily Limit - 7.0%, 13.0% and 20.0% decline below the Settlement Price of the preceding session (limited to 5.0% outside of RTH)

Trading Hours - 5:00p.m. - 4:00p.m. (Sun-Fri) CST

Last Trading Day - Thursday before the third Friday

Value of one futures unit - $5

Value of one options unit - $5

I have added my favorite technical indicators to the charts below. I have coined them the "10/20/50/BB Trend Finder." They are the 10- (red line), 20- (green line) and 50- (blue line) day simple moving averages. For this commentary I have also added the 100-day simple moving average. I have also added Bollinger Bands (light blue shaded area) and candlesticks (the red and green bars with the candlestick wicks, which on a daily chart each bar represents one day of trading).

Technically, on the daily chart above the YM has posted a new all time record high close.


Technically, on this daily chart, the ZB market has posted a new all time record high close and then sold off below the first area of support which is the 10-day simple moving average.

About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.