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April 2008 Volume 2, No. 4

FUTURESSTRATEGY:Intraday and dailyreversal-bartechnique p. 8

THE LATESTFUTURES

volumestatistics p. 28

VERTICALSPREADS:Credit vs. debit

showdown p. 12

DANGEROUS DANCE:gold above $1,000 p. 38

ROGUE TRADER UPDATEp. 29

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2/432 April 2008 FUTURES & OPTIONS TRADER

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Trading Strategies

Key reversal strategy . . . . . . . . . . . . . . . . . .8Adapting a one-bar pattern for different time

frames.

By Dominic Boyle

Vertical spreads: Credit vs. debit . . . . . .12Both types of vertical spreads can profit

from directional moves while hedging risk.

When should you favor one over the other?

By Darren Chu

Futures Snapshot . . . . . . . . . . . . . . . . . . . . . .18

Momentum, volatility, and volume

statistics for futures.

Option Radar . . . . . . . . . . . . . . . . . . . . . . . . . . 19Notable volatility and volume

in the options market.

Futures & Options Watch . . . . . . . . . . . . . . .20Whats new in the COT report

Dissecting the historical dynamics

between commercial traders and large

speculators in all 45 futures markets.

Options WatchHigh-volume Dow components.

News

CME offers $9.4 billion for NYMEX,

hits campaign trail . . . . . . . . . . . . . . . . . . .22Selling the shareholders on the deal is

now the first order of business.

Jim Kharouf

Bear Stearns gets a little respect . . . . . .23Stalwart Wall Street firm Bear Stearns

needed some help from its friends after

being decimated by the sub-prime

mortgage market meltdown.

By Jim Kharouf

MF Global hit by rumor mill . . . . . . . . . . .24The fall of Bear Stearns also affected

MF Global.

By Jim Kharouf

CONTENTS

continued on p. 4

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Nasdaq Options Exchange

gets green light . . . . . . . . . . . . . . . . . . . . . .24The Nasdaq Options Exchange, the seventh

options exchange in the U.S., began

operations in March.

By Jim Kharouf

Gold collapses . . . . . . . . . . . . . . . . . . . . . . .25Yellow metal plunges back below

$900/ounce.

Bold moves by the U.S. Fed . . . . . . . . . .26Unprecedented action by the central bank

may calm markets, have unforeseen

repercussions.

By Futures & Options Trader Staff

U.S. futures volume . . . . . . . . . . . . . . . .28Recent report shows 2007 volume growth,

continuing into 2008.

By Chris Peters

Rogue trader update . . . . . . . . . . . . . . . . .29Rogues former employers face tough

times in the wake of huge losses.

Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . 30References and definitions.

Futures & Options Calendar . . . . . . . . . . . .34

Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

New Products and Services . . . . . . . . . . . . .36

Futures Trade Journal . . . . . . . . . . . . . . .38Last call for the gold express?

Options Trade Journal . . . . . . . . . . . . . . .40After a rocky start, this March iron condor

lands successfully.

Have a question about something youve seen

in Futures & Options Trader?

Submit your editorial queries or comments to [email protected].

Looking for an advertiser?

Click on the company name below for a direct link to the ad

in this months issue ofFutures & Options Trader.

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CONTENTS

4 April 2008 FUTURES & OPTIONS TRADER
mailto:[email protected]:[email protected]

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ACCEPT NO SUBSTITUTE.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics

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Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. CBOE

, Chicago Board Options Exchange

, CBOE VolatilityIndex and VIX are registered trademarks of Chicago Board Options Exchange, Incorporated. All other trademarks and servicemarks are thepropert y of their respective owners. Copyright 2007, Chicago Board Options Exchange, Incorporated. All rights reserved.

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Editor-in-chief: Mark Etzkorn

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Managing editor: Molly Flynn

[email protected]

Senior editor: David Bukey

[email protected]

Contributing editors:Jeff Ponczak

[email protected],

Keith Schap

Associate editor: Chris Peters

[email protected]

Editorial assistant and

Webmaster: Kesha Green

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Art director: Laura Coyle

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President: Phil Dorman

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Publisher,

Ad sales East Coast and Midwest:

Bob Dorman

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Volume 2, Issue 4. Futures & Options Traderis pub-lished monthly by TechInfo, Inc., 161 N. Clark Street,Suite 4915, Chicago, IL 60601. Copyright 2008TechInfo, Inc. All rights reserved. Information in thispublication may not be stored or reproduced in anyform without written permission from the publisher.

The information in Futures & Options Tradermagazineis intended for educational purposes only. It is notmeant to recommend, promote or in any way imply theeffectiveness of any trading system, strategy orapproach. Traders are advised to do their ownresearch and testing to determine the validity of a trad-ing idea. Trading and investing carry a high level ofrisk. Past performance does not guarantee futureresults.

For all subscriber services:www.futuresandoptionstrader.com

A publication ofActive Trader

CONTRIBUTORSCONTRIBUTORS

Darren Chu is a corporate relations manager for the Montreal

Exchange, servicing institutional and retail traders/brokers and thebuy-side. Chus prior role at the Montreal Exchange involved edu-

cating retail investors, financial industry professionals, students, and

business groups on exchange-traded derivatives. Previously, Chu

worked at CMC Markets, where he developed and taught courses on

CFD and forex trading. While at CMC Markets, Chu also served as a

market analyst, providing market commentary to clients from the

perspective of an active trader in the oil and gold markets. Chu is cur-

rently a member of the Canadian Securities Institutes Derivatives

Board.

Dominic Boyle is a market strategist with Lind-

Waldock, division of MF Global. He began his career

in the Canadian dollar pit at the Chicago Mercantile

Exchange and has worked in several capacities in the

futures industry. He currently holds series 3, 63, 65, and 7 licenses. He

can be reached at (312) 788-2920 or (888) 800-5373 and via e-mail at

[email protected].

Jim Kharoufis a business writer and editor with more than 10

years of experience covering stocks, futures, and options worldwide.

He has written extensively on equities, indices, commodities, curren-

cies, and bonds in the U.S., Europe, and Asia. Kharouf has covered

international derivatives exchanges, money managers, and traders

for a variety of publications.

mailto:[email protected]:[email protected]

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TRADING STRATEGIES

Key reversal strategy

Many traders crowd their trading screenswith complex indicators to the point thatidentifying a trade signal often becomes achallenge in itself. As a result, simple tools

such as the key reversal pattern are often overlooked.The key reversal has several definitions, but most of them

are very similar and all have the same implication. It is aone-bar pattern that is typically defined by a strong intra- bar reversal that implies further price movement in thedirection of the reversal. It can be used to on any timeframe.

The key-reversal definitions used here are:

1. Bullish: a bar with a low below the previousbars low and a close above the previous barshigh.

2. Bearish: a bar with a high above the previousbars high and a close below the previous barslow.

Notice these patterns could also be defined as outsidebars with closes above the previous high or below the pre-

vious low, respectively. The implication remains the same,though: After testing the previous bars extreme high orlow, price reverses and ends the bar strongly enough toclose beyond the previous bars opposite extreme.

Figure 1 shows an example of a daily bearish key rever-sal in the E-Mini S&P 500 futures (ES). On Dec. 11, 2007 themarket made a higher high and then closed below the pre-vious days low.

Figure 2 shows a bullish key reversal on a 10-minutecrude oil chart from Dec. 19, 2007 at 7:30 a.m. CT. The mar-

ket made a lower low than the pre-vious bar and closed above that

bars high.Using key reversals as buy or

sell signals exploits the immediatemarket momentum: A bullish pat-tern can get you into the marketwhen momentum is pointingupward, while a bearish patterndoes the opposite.

The following strategy examplesapply the key reversal pattern onthe 10-minute time frame for intra-day trading and the daily time

frame for swing trading.

Using the pattern

as a signal

Regardless of the trading approachor technique, any strategy requiresspecific rules that provide objectiv-ity and discipline. Without disci-pline and risk-reward parametersfor every trade, you are left tomake decisions based on emotionwhich leads to irrational choices

and, and ultimately, failure.

BY DOMINIC BOYLE

FIGURE 1 DAILY BEARISH REVERSAL

The daily E-Mini S&P 500 chart gave a bearish key reversal signal on Dec. 11. Themarket made a high of 1,527.00 (above the previous days high) and closed below

the previous days low of 1,501.00 at 1,478.00.

Source: eSignal

Building a trading approach around a one-bar price pattern.

8/8/2019 FOT200804

9/43FUTURES & OPTIONS TRADER April 2008 9

The following strategy rulesadd specific stop-loss and profit-taking levels to the basic key rever-sal signal.

The rules for the 10-minutestrategy are:

1. When a bullish key reversalbar forms, buy at the marketand place a sell stop at theentry price minus the keyreversal bars range.

2. Place a limit order to sell atthe entry price plus 1.5 timesthe key reversal bars range.

The rules are reversed for shorttrades:

1. When a bearish key reversalbar forms, go short at themarket and place a buy stopat the entry price plus thekey reversal bars range.

continued on p. 10

The 10-minute crude oil chart gave a bullish key reversal indicator on Dec. 19 at the

7:30 a.m. bar. The market made a low of 90.01 and closed at 90.33, above the

previous bars high of 90.26.

Source: eSignal

FIGURE 2 BULLISH INTRADAY REVERSAL
http://www.thewizard.com/

8/8/2019 FOT200804


TRADING STRATEGIES continued

2. Place a limit order to buy atthe entry price minus 1.5times the key reversal barsrange.

The rules for the daily-bar strategy are:

1. When a bullish key reversal dayforms, buy market on close (MOC)and place a good-till-canceled (GTC)sell-stop order at the entry priceminus 1.5 times the key reversaldays range.

2. Place a GTC limit order to sell at theentry price plus 2 times the keyreversal days range.

As with the 10-minute strategy, the

rules are reversed for short trades.Larger stops are used for the daily key

reversal and smaller stops are used for the10-minute reversals for a specific reason.The key reversal indicator is not verycommon, and markets tend to be morevolatile than usual when a trader is able totake advantage of the indicator. This inturn means that for traders to captureprofits on the daily indicator, they have touse a larger stop to account for morevolatility in the market.

Returning to Figure 1, a short tradewould have been entered at 1,478 on theclose. The key reversal days range was51.50 points, so a GTC buy stop wouldhave been placed at 1,478 + (51.50*1.50) =1,555.25. The GTC profit-taking limitorder would have been placed at 1,478 (51.50*2) = 1,375. The trader would still becarrying a short position.

For the intraday long trade example inFigure 2, a long trade would have beentriggered at 90.33, and would have placed

a sell stop at 89.99. The profit limit orderto sell would have been placed at 90.84,and the trader would have exited thetrade with a $540 profit, less fees and com-missions.

Volatility

These key reversal bars are not particularly common andvolatility tends to be quite high when they occur. Tradersshould stick to the markets where the indicator works best the E-Mini S&P 500, crude oil, soybeans, gold, euro cur-rency, corn, mini-sized Dow, and silver.

During times of key reversal indicators the markets are in

periods of extreme volatility, and using the proper risk andreward guidelines outlined is essential

For information on the author see p. 6.Futures trading involves the

substantial risk of loss and is not suitable for all investors. Past per-

formance is not necessarily indicative of future trading results.

Pattern test

Figure A shows what the E-Mini S&P 500 futures did one, two, six, and 12

bars after 10-minute bullish and bearish reversal bars between Feb. 1 and

March 27, 2008. Using day-session data only, there were 31 bearish rever-

sal bars and 32 bullish reversal bars.

The figures represents the median close-to-close gains or losses after

the reversal bars and the average close-to-close changes for all respective

one-, two-, six-, and 12-bar moves during the analysis period.

Overall, the market had a slight downside bias during this period. The

bearish reversal bars (red line) were followed by slightly more bearish per-

formance than average for the first two bars (-0.13 and -.025 vs. -0.04 and-0.07, respectively), but the median return was positive after six bars; after

12 bars it was negative again. However, the average gains six and 12 days

out after bearish reversal bars were positive (not shown). This upside bias

in the data suggests the bearish reversal bars might coincide with volatile

or overdone price action, and the market might have a tendency to

bounce back after these episodes.

The results after the bullish reversal patterns are much more consistent.

Despite the markets overall bias, the price action after 10-minute bullish

reversal bars was positive at every interval (if static for the first two bars).

Given this study measured only the close-to-close moves and not the

extreme moves to the succeeding bars highs and lows, the upside biasshown here is worth noting.

Of course, the pattern should be tested on any other market or time

frame considered for trading.

FOT Staff

FIGURE A REVERSAL PATTERNS, E-MINI S&P 500 10-MINUTE BARS

(FEB. 1 TO MARCH 27, 2008)

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PORTANT INFORMATION: No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, or any type of trading or investment advice, recommendation or strategy, is maven or in any manner endorsed by TradeStation Securities, Inc. or any of its affiliates. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performsuccess. Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low-risk tolerance. There is a risk of loss in futures trading. Optionscurity Futures trading is not suitable for all investors. Please visit our Web site for relevant risk disclosures. System access and trade placement and execution may be delayed or fail due to market volatility

lume, quote delays, system and software errors, Internet traffic, outages and other factors. All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStacurities, Inc. Trading foreign exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investmerefore, you should not invest or risk money that you cannot afford to lose. You should be aware of all risks associated with foreign exchange trading. Barrons awards are based on a review of TradeStatokerage products and services by a Barrons journalist. Barrons is a registered trademark of Dow Jones & Company. 2008 TradeStation Securities, Inc. All rights reserved.

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8/8/2019 FOT200804


TRADING STRATEGIES

Vertical spreads:

Credit vs. debit

One of the most fundamental questions in

options trading is whether you shouldsimply buy an option or create a vertical

spread by purchasing one and selling

another with the same expiration date.

Traders often debate whether one type of vertical

spread is inherently better than another. Beginners tend

to prefer credit spreads over debit spreads because the

former strategy allows you collect premium , while the

latter requires a cash outlay. If both spreads directional

exposure is roughly the same, why buy one when you

can sell one and collect premium instead?

Professionals, however, know better than to ignoredebit spreads. They realize credit and debit spreads func-

tion as two sides of the same coin.

To choose the most appropriate vertical spread in a

given situation, you must study all the variables that

influence an option spreads profitability. Clearly, direc-

tional exposure is important, but other subtle factors

such as time decay, implied volatility, assignment risk,

and trading costs play a critical role.

Time decay and OTM credit spreads

Instead of buying options, many traders prefer to sell themeither outright or in credit spreads, especially in the nearest

expiration month. Options sellers assume time decay will

work in their favor, but profiting from the passage of time

with a credit spread isnt a given.

Although a credit spreads short option benefits from

time decay, this process works against the long option. As a

result, you need to know which leg of the spread has a

higher theta value. An example will help illustrate how

time decay benefits sellers of out-of-the-money (OTM)

credit spreads.

Figure 1 shows a daily chart of Cisco Systems (CSCO)

from Dec. 3, 2007 to Feb. 29, 2008, and Table 1 lists the prices

of March options when CSCO closed at $24.39 on Feb. 29.

To create a 25-27.5 bull put spread, you would sell one 27.5-

strike put for $3.00 and buy one 25-strike put for $1.02 for a$1.98 credit.

The 25 puts theta (-0.0139) is substantially larger than

that of the 27.50 put (-0.0043). The 25 puts theta is larger

because the option is closer to the money, and at-the-money

(ATM) options have the highest thetas. Because the 25 put

is long, its time decay wipes out any benefit from the short

27.5 put, which means this in-the-money (ITM) credit

spread is hurt by the passage of time.

By comparison, an OTM bear call spread (short 25 call,

long 27.5 call) benefits from time decay. Because the 25-

BY DARREN CHU

continued on p. 14

FIGURE 1 CISCO SYSTEMS

You could enter a vertical spread in Cisco options by

purchasing one of these strikes and selling another of the

same type (call or put) and expiration date.

Source: eSignal

Picking the right kind of spread requires considering volatility and time decay in light

of how much your position is in or out of the money.

8/8/2019 FOT200804


Vertical spreads contain two options of

the same type (call or put) and expira-

tion, but at different strikes; one option islong and the other is short. These

spreads gain or lose ground based on

the underlyings direction, and they often

reduce risk in exchange for a limited

profit potential.

A vertical spread can be a viable alter-

native to a long options cost, exposure

to time decay, and changes in implied

volatility (IV), but it also has a limited

profit. However, giving up some profit

potential provides a hedge against direc-

tional, time, and volatility risk.A debit spread costs money to create

because the option you buy costs more

than one you sell; a credit spread places

money in your account since the short

option is more expensive than the long

one. Bullish or bearish vertical spreads

can be constructed with either calls or

puts, but all options must share the

same expiration date

Bullish spreads.A bull call spread is

created by buying one call and selling

another one with the same expiration,but higher strike price. The long call pro-

vides a bullish directional outlook, while

the higher-strike short call captures

some premium and reduces the overall

positions cost and risk. The spread

achieves its maximum profit when the

underlying trades above the higher

strike, while its largest losses occur

when the underlying falls below the

lower strike.

A bull put spread is a credit spread

that generates income when you estab-lish it. It consists of a short put and a

long, lower-strike put in the same expira-

tion month. To earn the maximum profit,

the underlying must close above the

short strike at expiration. The spread will

lose money if the underlying closes

below the spreads lower strike, but losses are limited to the

strike-price difference minus any premium collected.

Cisco Systems (CSCO) closed at $24.39 on Feb. 29. If you

were bullish and thought Cisco could rally more than 10 per-

cent within a month, you could enter either a bull call spread or

bull put spread in March options.

To enter a debit call spread, buy one 25-strike March call

and sell one 27.5-strike call. Or you can enter a credit put

spread by selling one March 27.5 put and buying one 25-strike

put to protect against large losses.

Figure A compares the potential gains and losses of the 25-

FIGURE A BULLISH VERTICAL SPREADS

The put spread offers a credit of $198, while the call spread costs $41, but bothpositions will gain if Cisco rallies or lose money if CSCO declines (blue and red

lines, respectively).

Source: OptionVue

Vertical spreads

TABLE 1 MARCH OPTIONS IN CISCO

The 25-strike options are near the money, so it has higher theta and vegavalues, which are important variables when entering a vertical spread.

CSCO closed at $24.39 on Feb. 29.

March options expired on March 21.

Options Symbol Bid Ask Close Theta Vega

27.5 put CYQ OY $3.05 $3.20 $3.00 -0.0043 0.0061

25 put CYQ OE $1.04 $1.01 $1.02 -0.0139 0.0222

24 put CYQ OP $0.48 $0.52 $0.52 -0.0156 0.0225

22.5 put CYQ OX $0.15 $0.17 $0.16 -0.0106 0.0136

20 put CYQ OD $0.03 $0.01 $0.02 -0.0032 0.0033

27.5 call CYQ CY $0.03 $0.04 $0.04 -0.0042 0.0061

25 call CYQ CE $0.43 $0.46 $0.45 -0.0164 0.0222

22.5 call CYQ CX $2.01 $2.10 $2.06 -0.0116 0.0136

20 call CYQ CD $4.45 $4.55 $4.50 -0.0036 0.003

continued on p. 14

8/8/2019 FOT200804



strike call is closer to the money, it has a higher theta than the

$27.50 call; if youre short the 25 call and long the 27.5 call,

the spreads time decay works for you rather than against

you. Table 2 compares the ITM and OTM spreads.

Implied volatility

Traders also sell credit spreads to

exploit periods of relatively high

implied volatility. However, dont

assume all credit spreads benefit from

IV declines. The individual options

within a spread not only have different

vegas, but each options IV changes to

different degrees.

Take another look at the 25-27.50

bear call spread in Table 2. The 25 call

is near the money, so it has a larger

vega than the 27.5-strike call (0.0222

vs. 0.0061, respectively). If each

options IV drops by the same amount,

the short 25 call should gain more than

the long 27.50 call loses, which benefitsthe spread. However, this scenario

isnt as certain if the short 25 calls IV

falls by a smaller amount than the 27.5

calls IV.

To calculate how shifting IVs can

alter a spreads value, first multiply

each options vega by its change in IV.

Next, compare how each option is

affected: If you sell a credit spread, you

want the long option to lose more than

the short one gains; but if you buy adebit spread, you may benefit from the

opposite scenario (and vice versa).

Fortunately, vertical spreads tend to

be somewhat vega neutral. Implied

volatility changes by roughly the same

amount across both strikes (if theyre

fairly close together, which simplifies

the analysis). In other words, the

vegas impact on long and short

options tend to offset each other.

Early assignment

When you sell an option you face the

risk of early assignment, which means

an options holder may exercise it and

make you buy or sell the underlying

instrument. This is less likely to occur

if you trade a debit spread, because the

long leg will move into the money before the short leg; and

if the short option moves ITM and is assigned, you can exer-

cise the long one to meet any obligations.

However, a credit spread is more likely to be assigned

27.5 bull call and put spreads. The put spread offers a credit of $198, while the

call spread costs $41, but both positions will gain if CSCO rallies or lose money

if Cisco declines. (Table 1 lists exact prices for these options.)

Bearish spreads.A bear call spread has a moderately bearish directional

outlook. This credit spread includes a short call and a cheaper, higher-strike

call that limits losses if the underlying rallies above it. The goal is for the under-

lying to fall below the lower strike, and if the stock closes below that point, you

keep the spreads initial credit.

A bear put spread is a debit spread that contains a long put and a short

same-month put with a lower strike. The long put benefits from a bearish fore-

cast, and the lower-strike short put reduces the spreads cost and risk. The

spread earns its largest gain if the underlying closes below the lower strike at

expiration, while it loses the most ground if the underlying closes above the

higher strike.

Suppose Cisco traded at $24.39, and you believed Cisco could continue to

trade below $25 by March 21 expiration. If you entered a bear call or put

spread using the same strike prices as in Figure A (25 and 27.5), your direc-tional outlook would invert.

Figure B compares the potential gains and losses of the 25-27.5 bear call

and put spreads. The bear call spread provides a credit of $0.41, and the bear

put spread costs $1.98. Both spreads will gain roughly $50 if CSCO drops

below 25, or they will lose about $200 if Cisco climbs above 27.5.

FIGURE B BEARISH VERTICAL SPREADS

Both spreads will gain roughly $50 if Cisco continues to trade below 25 at

March 21 expiration. However, if CSCO climbs above 27.5, both positions could

lose about $200.

Source: OptionVue

Vertical spreads continued

8/8/2019 FOT200804


early because the short leg will move

ITM before the long one. If this hap-

pens, you may lose money as youre

forced to buy or sell the underlying

stock or contract at an unfavorable

price (and pay additional commis-

sions). If you prefer selling credit

spreads, you can minimize the likeli-

hood of early assignment by sticking to

OTM spreads. By contrast, ITM credit

spreads have a short leg that is ATM or

ITM early in the trade, which increases

early assignment risk.

Consider the 25-27.50 March bull call

(debit) spread in Table 3. Lets assume

CSCO will climb to $28 from $24.39

within two weeks. The short 27.50 call

is ITM by $0.50, so there is a slightchance of early assignment. However,

early assignment is unlikely, because

the 27.50 call still has some time value.

However, if the short 27.50 call is

assigned, you would be forced to sell

100 shares of CSCO at $27.50.

Fortunately, the long 25 call is ITM

when the short 27.50 is assigned, so the

bull call spread has already profited.

The long 25 call is ITM by at least $2.50

and could be exercised to immediatelycapture the $2.50 spread between the

two strikes.

Assignment risk is different for cred-

it spreads, though. If the short leg is

assigned early, you will probably lose

money. To capture the maximum profit

from Table 2s 25-27.5bear call spread,

Cisco must trade below $25 by March

22 expiration and let the short 25 call

expire worthless. But if the stock climbs

to $27 just before March options expire,the 25 call could be assigned as it

moves into-the-money. If assigned, you

must sell 100 shares of Cisco at $25; you

could cover that short position by exer-

cising the long 27.50 call for a loss of

$2.50.

Table 2s March 25-27.50 bull put spread offers another

example. When CSCO closed at $24.39 on Feb. 29, the short

27.50 put was deep ITM, meaning it was at risk of early

assignment. This risk only eases if CSCO rallies above the

27.50 short strike.

On the other hand, some credit spreads have less assign-

ment risk. Table 4 lists the components of a bull put spread

with lower strikes (long 22.50 put, short 24 put). This

spreads short 24 put was slightly OTM upon entry, and it

TABLE 2 A TALE OF TWO CREDIT SPREADS

Not all credit spreads benefit from time decay. The March 25-27.5 bull put

spread is hurt by the passage of time because the long 25 puts theta is larger

than the 27.50 puts theta. By contrast, the 25-27.5 bear call spread benefits

from the passage of time for the same reason.

March 25/27.50 bull put spread

Position Long or short? Per-share price Theta Vega1 March 25 put Long -$1.02 -0.0139 0.0222

1 March 27.5 put Short $3.00 0.0043 -0.0061

Total: $1.98 -0.0096 0.0161

March 25/27.50 bear call spread

Position Long or short? Per-share price Theta Vega

1 March 25 call Short $0.45 0.0164 -0.0222

1 March 27.5 call Long -$0.04 -0.0042 0.0061

Total: $0.41 0.0122 -0.0161Note: Positive thetas represent a position that benefits from time decay, while nega-tive thetas are hurt by the passage of time. Positive vegas represent a position thatbenefits from IV increases, while negative vegas are hurt by rising IVs.

TABLE 3 BULL CALL SPREAD

This 25-27.5 bull call spread costs $0.41 and could earn up to $2.09 if Cisco

trades above $27.50 at expiration. If this happens, the short 27.50 call isnt at

risk of early assignment, because the long 25 call is ITM and could be exer-cised to immediately capture the $2.50 spread between the two strikes.

March 25/27.50 bull call spread


1 March 25 call Long -$0.45 -0.0164 0.0222

1 March 27.5 call Short $0.04 0.0042 -0.0061

Total: -$0.41 -0.0122 0.0161

TABLE 4 BULL PUT SPREAD

Unlike Table 2s 25-27.5 bull put spread, this spread has lower strikes and

wasnt at risk of early assignment when Cisco traded at $24.39 on Feb. 29.

March 22.5/24 bull but spread


1 March 22.5 put Long -$0.17 -0.0106 0.0136

1 March 24 put Short $0.52 0.0156 -0.0225

Total: $0.35 0.0050 -0.0089

continued on p. 16

8/8/2019 FOT200804


wont be assigned as long as Cisco continues to trade above

$24 by expiration.

Commissions and last-minute assignment

Spread traders who want to avoid paying commissions and

wide bid-ask spreads prefer selling credit spreads, because

credit spreads that expire worthless (i.e., the short leg

remains OTM) dont have to be closed.By contrast, to profit from a debit spread you typically

must close it before expiration, which means paying addi-

tional commissions and slippage. Even if you dont close an

ITM debit spread before expiration you will pay more fees

because most ITM options are exercised automatically. If

you ignore an ITM debit spread at expiration, your broker

may charge two commissions one due to assignment on

the short leg and another to exercise the long leg.

Most traders try to buy back short options before expira-

tion, because short option gamma risk the possibility of

the options moving ITM increases as expiration drawsnear. Beginners often underestimate this risk, which

involves getting assigned on short positions after they sud-

denly become ITM just prior to expiration.

Does waiting until expiration to capture a small amount

of additional premium justify increased gamma risk and

the cost of holding capital as margin for the short leg? To

answer this question, you need to know how far OTM the

short options are and how volatile the underlying market

is.

Traders who hold short options at expiration also face

pin risk, or the possibility of assignment between expira-

tion Fridays close and the following

Mondays open. This risk is real even if

an option closes OTM on the last trad-

ing day. If news breaks after the close,

options that were expected to expire

worthless may suddenly become ITM,

triggering losses for options sellers. If

this happens, you may get an assign-

ment notice over the weekend or on

Monday.

Spreads vs. outright options

Spreads arent always the answer. In

certain situations simply buying calls

or puts may offer greater profit poten-

tial with less risk. Always compare a bull put spread with a long call, or

compare a bear call spread to a long put

before entering a trade.

For example, Table 2 shows that selling a March 25-27.50

bull put spread on Feb. 29 offered a credit of $1.98 ($3 short

27.5 put - $1.02 long 25 put). Profits are limited regardless of

how far CSCO climbed above the short 27.50 puts strike,

while the maximum risk was capped at $0.52 ($2.50 strike-

price difference - $1.98 credit). This spread risks $0.52 to

earn $1.98, which translates to a modestly bullish direction-

al outlook on CSCO.Meanwhile, the March 25 call, which was one strike

OTM, was offered at $0.46. Buying this call provided unlim-

ited profit potential, while its risk was limited to $0.46

($0.06 less than the risk of selling the March 25-27.50 bull

put spread).

Figure 2 compares the potential gains and losses of the 25

long call with the bull put spread (blue and green lines,

respectively). In this example, the long call is the clear win-

ner as it risks less without capping any profit potential.

You dont need to create a risk-profile graph to compare

both trades, though. You just need to measure the likeli-hood of CSCO climbing high enough that the 25 long calls

value increases from $0.46 to more than $2.44 ($1.98 spread

credit + $0.46 call cost). This represents a larger gain than

the corresponding 25-27.50 bull put spread offers.

For the long 25 call to earn as much as the spread, CSCO

needs to rally at least 12.5 percent to $27.44. Of course, the

stock could continue rising beyond this threshold, yielding

larger gains on the long call than the capped profits on the

credit spread.

For information on the author see p. 6.


FIGURE 2 LONG CALL VS. BULL PUT SPREAD

The long 25-strike call risks less than the 25-27.5 bull put spread without

capping any profit potential.

Source: OptionVue

8/8/2019 FOT200804


Related reading

Darren Chu article

The theta-vega relationship

Futures & Options Trader, January 2008.Focusing on these options Greeks can help you avoid mis-steps when trading calendar spreads.

Other articles:Trading credit spreads with the MACD

Futures & Options Trader, December 2007.This Options Lab compares the performance of credit spreadstriggered by two technical indicators new 20-day highs andlows and Moving Average Convergence Divergence (MACD)readings.

The simplicity of debit spreads

Options Trader, February 2006.Using spreads instead of buying options outright can reducerisk and increase opportunity. This discussion of debitspreads highlights their versatility.

Options spreads: A lower-risk way

to generate trading capital

Options Trader, November 2005.If you trade with limited capital, placing low-cost, low-riskoption spreads could improve your odds of success. Bull put

and bear call spreads, strangles, and butterflies help you takeadvantage of the market without excessive risk.

Controlling risk with spreads

Options Trader, July 2005.Tired of fighting time decay and volatility fluctuations? This bullcall option spread has much lower risk than an outright pur-chase.

Reducing risk with vertical spreads

Options Trader, July 2005.Vertical spreads can help you sidestep the complications ofchanges in implied volatility.

Extra credit (spreads)

Active Trader, February 2002.A look at trading credit spreads.

Stepping into options

Active Trader, April 2001.When trading options, you have to walk first and run later.

Taking things one step at a time will give you the confidence touse these tools more effectively.

You can purchase and download past articles athttp://www.activetradermag.com/purchase_articles.htm.
http://www.activetradermag.com/purchase_articles.htmhttp://www.protradefinancial.com/new_client.htmlhttp://www.protradefinancial.com/optionshttp://www.protradefinancial.com/http://www.protradefinancial.com/http://www.activetradermag.com/purchase_articles.htm

8/8/2019 FOT200804


The following table summarizes the trading activity in the most actively traded futures contracts. The information does NOT constitutetrade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility.See the legend for explanations of the different fields. Volume figures are for the most active contract month in a particular market andmay not reflect total volume for all contract months.Note: Average volume and open-interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity for CME futuresis based on pit-traded contracts, while price activity for CBOT futures is based on the highest-volume contract (pit or electronic).

Legend

Volume: 30-day average daily volume, inthousands (unless otherwise indicated).

OI: Open interest, in thousands (unless other-wise indicated).

10-day move: The percentage price movefrom the close 10 days ago to todays close.



The rank fields for each time window (10-

day moves, 20-day moves, etc.) show the per-centile rank of the most recent move to a cer-tain number of the previous moves of thesame size and in the same direction. Forexample, the rank for 10-day move showshow the most recent 10-day move comparesto the past twenty 10-day moves; for the 20-day move, the rank field shows how the mostrecent 20-day move compares to the pastsixty 20-day moves; for the 60-day move, therank field shows how the most recent 60-daymove compares to the past one-hundred-twenty 60-day moves. A reading of 100 per-

cent means the current reading is larger thanall the past readings, while a reading of 0 per-cent means the current reading is smaller thanthe previous readings. These figures provideperspective for determining how relativelylarge or small the most recent price move iscompared to past price moves.

Volatility ratio/rank: The ratio is the short-term volatility (10-day standard deviation ofprices) divided by the long-term volatility (100-day standard deviation of prices). The rank isthe percentile rank of the volatility ratio overthe past 60 days.

This information is for educational purposes only. Futures & Options Traderprovides this data in good faith, but it cannot guarantee its accuracy or timeliness. Futures & Options

Traderassumes no responsibility for the use of this information. Futures & Options Traderdoes not recommend buying or selling any market, nor does it solicit orders to buyor sell any market. There is a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.

FUTURES SNAPSHOT (as of March 26)

E- Pit 10-day move/ 20-day move/ 60-day move/ VolatilityMarket symbol symbol Exchange Volume OI rank rank rank ratio/rank

E-Mini S&P 500 ES CME 2.27 M 2.06 M 0.87% / 29% -3.42% / 29% -10.35% / 72% .33 / 54%

10-yr. T-note ZN TY CBOT 1.46 M 2.03 M 1.66% / 72% 2.52% / 54% 5.27% / 77% .31 / 52%

5-yr. T-note ZF FV CBOT 812.8 1.06 M -0.76% / 60% 0.23% / 7% 3.62% / 59% .43 / 90%

Eurodollar* GE ED CME 513.5 1.47 M 0.52% / 59% 0.70% / 39% 2.05% / 82% .14 / 45%

30-yr. T-bond ZB US CBOT 480.1 902.1 1.67% / 63% 1.95% / 46% 2.64% / 21% .41 / 57%

E-Mini Nasdaq 100 NQ CME 418.3 365.3 3.41% / 60% 0.75% / 33% -15.07% / 54% .27 / 64%

2-yr. T-note ZT TU CBOT 367.7 576.1 0.01% / 0% 0.82% / 36% 2.73% / 76% .21 / 52%

Crude oil CL NYMEX 299.0 274.0 -2.46% / 33% 7.55% / 37% 11.71% / 35% .60 / 83%

E-Mini Russell 2000 ER CME 280.8 607.5 3.56% / 60% -2.58% / 24% -9.70% / 60% .41 / 76%

Mini Dow YM CBOT 195.8 82.6 1.58% / 29% -2.49% / 26% -7.99% / 63% .37 / 58%

Eurocurrency 6E EC CME 161.7 165.4 3.31% / 70% 5.30% / 83% 7.60% / 81% .37 / 50%

Gold 100 oz. GC NYMEX 141.0 281.5 -2.75% / 0% 0.03% / 0% 12.64% / 24% .50 / 100%

Japanese yen 6J JY CME 124.0 182.9 3.92% / 26% 8.19% / 90% 13.94% / 98% .35 / 52%

Corn ZC C CBOT 101.5 202.3 -2.09% / 50% 4.11% / 11% 21.47% / 51% .25 / 77%

Natural gas NG NYMEX 76.6 100.4 -4.28% / 20% 3.98% / 27% 29.60% / 73% .46 / 82%

British pound 6B BP CME 67.0 78.0 0.25% / 13% 0.45% / 35% 0.06% / 0% .36 / 85%

S&P 500 index SP CME 65.1 496.9 0.72% / 29% -3.43% / 29% -10.36% / 72% .33 / 54%

Soybeans ZS S CBOT 63.5 90.1 -2.90% / 0% -7.81% / 43% 11.51% / 8% .40 / 87%Sugar SB ICE 62.6 319.9 -9.00% / 54% -15.82% / 100% 11.58% / 52% .44 / 53%

Swiss franc 6S SF CME 49.2 55.9 4.17% / 45% 8.42% / 90% 14.29% / 97% .29 / 43%

Canadian dollar 6C CD CME 47.8 85.8 -2.55% / 70% -4.03% / 100% -4.02% / 60% .62 / 95%

Australian dollar 6A AD CME 42.8 74.3 -0.56% / 9% -2.46% / 83% 3.83% / 33% .59 / 92%

Silver 5,000 oz. SI NYMEX 40.3 74.4 -6.98% / 0% -1.80% / 33% 23.42% / 78% .70 / 98%

RBOB gasoline RB NYMEX 38.4 52.9 0.62% / 0% 7.54% / 27% 11.51% / 43% .51 / 68%

Wheat ZW W CBOT 35.0 58.5 -16.69% / 100% -13.87% / 100% 12.90% / 40% .71 / 85%

Heating oil HO NYMEX 33.8 50.5 1.61% / 16% 8.13% / 38% 15.43% / 51% .41 / 62%

E-Mini S&P MidCap 400 ME CME 31.9 99.3 1.63% / 20% -4.82% / 48% -9.56% / 65% .37 / 52%

Soybean oil ZL BO CBOT 30.5 49.7 -7.75% / 58% -10.14% / 67% 18.49% / 29% .33 / 63%

Soybean meal ZM SM CBOT 27.2 32.8 2.45% / 25% -4.23% / 53% 5.84% / 5% .54 / 100%

Cotton CT ICE 22.6 122.0 -9.22% / 38% -7.16% / 100% 8.87% / 56% .57 / 61%

Mexican peso 6M MP CME 21.2 113.6 0.84% / 67% -0.46% / 14% 1.40% / 55% .43 / 53%

Crude oil e-miNY QM NYMEX 20.5 7.1 -2.62% / 40% 4.98% / 24% 10.31% / 27% .65 / 95%

Gold 100 oz. ZG CBOT 17.6 7.2 -2.76% / 0% 0.02% / 0% 14.09% / 34% .51 / 100%Coffee KC ICE 17.5 88.4 -12.99% / 62% -17.47% / 82% 0.38% / 2% .81 / 97%

Fed Funds ZQ FF CBOT 17.3 66.6 0.12% / 29% 0.39% / 60% 1.73% / 95% .07 / 33%

Nikkei 225 index NK CME 17.2 77.1 -3.27% / 13% -10.46% / 73% -18.44% / 80% .26 / 43%

Lean hogs HE LH CME 15.0 79.7 -1.50% / 0% -5.47% / 29% -3.12% / 15% .30 / 45%

Live cattle LE LC CME 14.9 68.6 0.28% / 0% -5.60% / 97% -6.26% / 100% .28 / 32%

Cocoa CC ICE 11.0 76.4 -12.81% / 67% -7.94% / 75% 17.28% / 60% .80 / 100%

Mini-sized gold YG CBOT 6.9 3.6 -2.76% / 0% 0.02% / 0% 14.09% / 36% .50 / 100%

U.S. dollar index DX ICE 6.1 33.9 -2.46% / 53% -3.89% / 82% -6.28% / 82% .36 / 43%

Copper HG NYMEX 5.6 15.9 -1.95% / 38% -1.43% / 33% 21.26% / 57% .28 / 42%

Nasdaq 100 ND CME 5.6 43.7 2.97% / 60% 0.75% / 50% -14.81% / 56% .27 / 65%

Natural gas e-miNY QG NYMEX 4.5 3.4 -4.28% / 20% 4.20% / 24% 32.94% / 84% .46 / 80%

Dow Jones Ind. Avg. ZD DJ CBOT 4.5 26.5 1.58% / 43% -2.49% / 30% -7.78% / 62% .37 / 55%

Russell 2000 index RL CME 3.2 37.5 3.59% / 60% -2.58% / 24% -9.70% / 60% .41 / 75%

Silver 5,000 oz. ZI CBOT 2.5 1.5 -6.64% / 0% -1.82% / 28% 26.75% / 80% .67 / 98%

*Average volume and open interest based on highest-volume contract (September 2008).

8/8/2019 FOT200804


LEGEND:Options volume: 20-day average daily options volume (in thousands unless otherwise indicated).Open interest: 20-day average daily options open interest (in thousands unless otherwise indicated).IV/SV ratio: Overall average implied volatility of all options divided by statistical volatility of underlying instrument.10-day move: The underlyings percentage price move from the close 10 days ago to todays close.20-day move: The underlyings percentage price move from the close 20 days ago to todays close. The rank fields for each time window (10-day moves, 20-day moves) show the percentile rank of the most recent move to a certain number of previous moves of the same size and in the same direction. For example,

the rank for 10-day moves shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, the rank field showshow the most recent 20-day move compares to the past sixty 20-day moves.

OPTIONS RADAR (as of March 26)

MOST-LIQUID OPTIONS*Indices Symbol Exchange Options Open 10-day move / 20-day move / IV / IV / SV ratio

volume interest rank rank SV ratio 20 days agoS&P 500 index SPX CBOE 240.0 1.78 M 1.55% / 29% -2.91% / 27% 24.7% / 30.1% 20.8% / 22.4%S&P 500 volatility index VIX CBOE 115.2 916.4 -1.06% / 14% 19.09% / 64% 58.1% / 154% 84.1% / 93.7%

Russell 2000 index RUT CBOE 72.7 599.9 4.20% / 67% -2.12% / 20% 29.5% / 35.6% 26.4% / 28.8%E-mini S&P 500 futures ES CME 34.4 140.6 0.87% / 29% -3.42% / 29% 24.2% / 32.8% 20.6% / 24.8%

Nasdaq 100 index NDX CBOE 31.2 167.7 4.38% / 60% 1.45% / 50% 27.5% / 29.9% 25.5% / 27.6%

Stocks

Citigroup C 316.3 2.45 M 2.61% / 0% -11.62% / 49% 60% / 79.6% 43.6% / 51.2%Apple Inc. AAPL 219.6 1.07 M 13.91% / 85% 21.75% / 100% 45.9% / 47% 42% / 50.6%

Bear Stearns Cos. BSC 148.8 454.3 -82.20% / 63% -87.04% / 89% 79.1% / 219.5% 48.6% / 59%Lehman Bros. Holdings LEH 135.8 799.7 -8.25% / 25% -25.25% / 91% 83.2% / 110.8% 49.5% / 62%Clear Channel Comm. CCU 117.5 1.13 M -25.43% / 100% -20.36% / 100% 92.5% / 66.1% 71.9% / 61.2%

Futures

Eurodollar ED-GE CME 703.6 7.06 M 0.52% / 59% 0.70% / 41% 42.6% / 47.9% 43.6% / 21%10-yr T-notes TY-ZN CBOT 59.3 439.2 1.66% / 59% 2.52% / 52% 8.7% / 9% 8.7% / 7.5%Crude oil CL NYMEX 50.3 318.3 -2.62% / 40% 4.98% / 26% 36.5% / 38% 32.1% / 35.1%

Corn C-ZC CBOT 39.4 586.9 -2.09% / 50% 4.11% / 11% 47.3% / 36.2% 36.1% / 24.6%Sugar SB NYBOT 34.9 625.1 -9.00% / 54% -15.82% / 100% 38.6% / 50.3% 38.9% / 43%

VOLATILITY EXTREMES**Indices - High IV/SV ratio

Eurodollar index XDE PHLX 2.4 29.3 3.38% / 55% 5.79% / 85% 11.1% / 9.4% 8.6% / 6.9%British pound index XDB PHLX 1.0 31.5 0.14% / 0% 1.10% / 52% 9.7% / 8.7% 7.9% / 6.8%

Indices - Low IV/SV ratioS&P 500 volatility index VIX CBOE 115.2 916.4 -1.06% / 14% 19.09% / 64% 58.1% / 154% 84.1% / 93.7%

Banking index BKX PHLX 1.2 96.2 0.32% / 0% -6.84% / 36% 45.4% / 63.5% 37.6% / 40.8%E-mini S&P 500 futures ES CME 34.4 140.6 0.87% / 29% -3.42% / 29% 24.2% / 32.8% 20.6% / 24.8%

Oil Service index OSX PHLX 2.3 27.0 1.46% / 29% -2.71% / 21% 35.3% / 45.8% 31.9% / 43.9%Broker/Dealer index XBD AMEX 1.2 6.9 -6.33% / 29% -17.75% / 93% 52.3% / 67.7% 37.8% / 41.7%

Stocks - High IV/SV ratioBea Systems BEAS 1.2 84.5 -0.31% / 60% 1.22% / 10% 18.1% / 6% 15.6% / 5.6%

Shire ADS SHPGY 6.5 103.0 4.05% / 31% -0.96% / 3% 52.2% / 33% 34.7% / 38.7%Red Hat RHT 2.7 65.4 4.46% / 50% -1.26% / 20% 51.8% / 32.9% 41.9% / 36.3%Rambus RMBS 14.3 185.0 40.54% / 100% 38.21% / 100% 79% / 55% 101.6% / 60.5%

Rite Aid RAD 1.1 60.7 20.08% / 100% 7.55% / 22% 93.4% / 66.6% 89% / 75.5%

Stocks - Low IV/SV ratioBear Stearns Cos. BSC 148.8 454.3 -82.20% / 63% -87.04% / 89% 79.1% / 219.5% 48.6% / 59%Thornburg Mortgage TMA 45.2 173.4 -2.56% / 0% -86.71% / 80% 229.6% / 500.7% 56.4% / 81.1%

Anworth Mortgage Asset ANH 1.4 17.9 7.35% / 0% -34.85% / 44% 71.4% / 143% 44.7% / 45%Annaly Capital Mgmt. NLY 37.0 207.4 -5.91% / 23% -23.00% / 60% 59.7% / 111.9% 31.6% / 32.6%Fed. Home Loan Bank FRE 71.3 492.1 37.40% / 20% 9.88% / 53% 88.9% / 154.3% 93.1% / 86.6%

Futures - High IV/SV ratio

British pound BP-6B CME 1.4 16.9 0.25% / 13% 0.45% / 29% 11.9% / 6.3% 7.7% / 5.8%Soybeans S-ZS CBOT 14.1 98.6 -2.90% / 0% -7.81% / 43% 59% / 40.1% 34.3% / 24.4%Lean hogs LH CME 2.8 46.7 -1.50% / 0% -5.47% / 29% 28.8% / 22% 22.4% / 20.6%

Corn C-ZC CBOT 39.4 586.9 -2.09% / 50% 4.11% / 11% 47.3% / 36.2% 36.1% / 24.6%Swiss franc SF-6S CME 2.0 5.6 4.17% / 40% 8.42% / 90% 13.8% / 11.2% 9.7% / 7.4%

Futures - Low IV/SV ratioCotton CT NYBOT 27.3 197.4 -9.22% / 38% -7.16% / 100% 35.6% / 59.8% 30.6% / 31.2%

Wheat W-ZW CBOT 5.7 39.4 -16.69% / 100% -13.87% / 100% 60.3% / 80.9% 53% / 44.3%Soybean oil BO-ZL CBOT 12.3 51.4 -7.75% / 58% -10.14% / 67% 27.5% / 36.1% 29.9% / 24.2%

Coffee KC NYBOT 15.3 169.0 -12.99% / 62% -17.47% / 82% 37.5% / 49.2% 35.7% / 32.7%Sugar SB NYBOT 34.9 625.1 -9.00% / 54% -15.82% / 100% 38.6% / 50.3% 38.9% / 43%

* Ranked by volume ** Ranked based on high or low IV/SV values.

8/8/2019 FOT200804


The Commitments of Traders (COT) report published

weekly by the Commodity Futures Trading Commission(CFTC) breaks down the open positions in futures mar-

kets into three categories of traders: commercial, non-commercial, and non-reportable.

The commercials, or hedgers, are typically businesses

that actually deal in the cash market (e.g., grain mer-chants and oil companies, that either produce or con-sume the underlying commodity).

Figure 1 shows the relationship between the commer-cials and large speculators on March 18. Extremely pos-

itive readings mean that net commercial holdings(longs-shorts) are much higher than net speculator posi-

tions, based on their five-year historical relationship. By contrast,extremely negative readings show the opposite: large speculators hold

more contracts than large producers.In the Nikkei 225 index futures (NK), for example, the difference

between commercials and speculators is near a five-year high. On the

other hand, this relationship is near a five-year low for the Japanese yenfutures (JY). These imbalances sometimes occur near market reversals asone side unwinds their positions, driving price in the opposite

direction. Compiled by Floyd Upperman

FUTURES & OPTIONS WATCH

Legend: Figure 1 shows the difference between net commercialand net large spec positions (longs - shorts) for all 45 futures mar-kets, in descending order. It is calculated by subtracting the currentnet large spec position from the net-commercial position and thencomparing this value to its five-year range. The basic formula is:

a1 = (Net commercial 5-year high - net commercial current)b1 = (Net commercial 5-year high - net commercial 5-year low)

c1 = ((b1 - a1)/ b1 ) * 100

a2 = (Net large spec 5-year high - net large spec current)b2 = (Net large spec 5-year high - net large spec 5-year low)

c2 = ((b2 - a2)/ b2 ) * 100

x = (c1 - c2)

Extreme differences between commercials and speculators can lead to

price reversals as speculators unwind their positions.

FIGURE 1 COT REPORT EXTREMES

For a list of contract names, see Futures Snapshot. Source: http://www.upperman.com

Options Watch: High-volume Dow components (as of March 25) Compiled by Tristan YatesThe following table summarizes the expiration months available for options on commodity-related ETFs. It also shows each index's average bid-ask spread forat-the-money (ATM) April options. The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of potential slippage in eachoption market.

Option contracts traded2008 2009 2010

Bid-ask spreads

Bid-askspread as %

Closing of underlyingStock Symbol Exchange price Call Put price

Oil Services* OIH N/A X X X X X X 167.04 0.30 0.49 0.24%Market Vectors Gold GDX N/A X X X X X X 46.97 0.11 0.13 0.25%US Oil Fund USO N/A X X X X X 80.26 0.30 0.25 0.34%PowerSharesDB Agriculture Fund DBA N/A X X X X X X 37.75 0.18 0.11 0.38%DJ US Energy IYE N/A X X X X 125.66 0.53 0.55 0.43%Materials Sector XLB N/A X X X X X X 39.66 0.19 0.16 0.44%United StatesNatural Gas Fund UNG N/A X X X X 45.56 0.28 0.14 0.45%Powershares DB Commodity

Index Tracking Fund DBC N/A X X X X X X 35.69 0.16 0.19 0.49%Energy Sector* XLE N/A X X X X X X 72.05 0.47 0.52 0.69%Market VectorsGlobal Agribusiness ETF MOO N/A X X X X 53.5 0.40 0.58 0.91%PowerSharesDB Base Metals Fund DBB N/A X X X X X X 23.8 0.25 0.24 1.02%UltraShort Oil & GasProShares DUG N/A X X X X 40.85 0.29 0.65 1.15%iShares GSCICommodity-Indexed Trust GSG N/A X X X X 56.94 0.74 0.66 1.23%SPDR S&PMetals & Mining ETF XME N/A X X X X 69.07 1.30 0.83 1.54%Water Resources PHO N/A X X X X 19.65 0.36 0.36 1.84%*Penny pilot program participant

Legend:

Call: Four-day average difference between bid and ask prices for the front-month ATM call.

Put: Four-day average difference between bid and ask prices for the front-month ATM put.Bid-ask spread as % of underlying price:Average difference between bid and ask prices for front-month, ATM call, and put divided by the underlying's closing price.

Ap

r.

Ma

y

Ju

ne

Ju

ly

Au

g.

Se

pt.

Oc

t.

No

v.

Jan.

Jan.

Whats new in the COT report
http://www.upperman.com/http://www.upperman.com/

8/8/2019 FOT200804

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T

he CME Group in March announced a bid to buythe New York Mercantile Exchange (NYMEX) for$9.4 billion in cash and stock in March, a deal that

would give the CME Group an energy futures complex andstrong control over precious metal futures. The questionnow is, are NYMEX and CME executives campaigningskills good enough to convince shareholders to vote for it?

The deal, if approved by NYMEX shareholders, wouldgive the CME control over roughly 98 percent of U.S.futures volume. The remaining 2 percent is held byIntercontinentalExchange and grain exchanges in KansasCity and Minneapolis. The CME bought Chicago Board ofTrade last July for about $11 billion.

Under the proposal, NYMEX shareholders will receive0.1323 of a CME share and $36 in cash for each NYMEX

share. In total, the CME is offering 12.5 million shares and$3.4 billion dollars in cash, giving NYMEX shareholdersabout 18 percent of the combined company. It also is payingabout a 13 percent premium on NYMEXs share price,which has been slumping since February in the aftermath ofclearing concerns expressed in a comment letter from theU.S. Department of Justice.

The two exchanges expect to save roughly $60 million peryear in cost synergies and future growth opportunities.CME Group CEO Craig Donohue and chairman TerryDuffy are expected to remain in their respective positions, but NYMEX CEO Richard Schaeffer and President Jim

Newsomes roles in the combined firm have not been decid-ed. Both said they are committed to completing the dealand the transition period but gave no firm statementbeyond that.

CME and NYMEX executives hope to close the deal this

year. The task at hand now for NYMEX leaders is to con-vince its shareholders that this deal is a good one. It alsoincludes a buyout of NYMEXs 816 memberships for about

$612,000 each, or $550 million. That part of the deal requiresa 75-percent approval of the members.

Schaeffer acknowledged the task now is to fully informthe members on the details and benefits of the combinedexchange.

The respective board spent hundreds of hours goingover the details of how this transaction makes sense,Schaeffer says. We have to summarize that now and bringit to the investors and trading-right owners, and show themwhy it makes sense. We feel comfortable that at the end ofthe day, people will be very supportive of this transaction.

Whether Schaeffer and his board will be able to sell the

deal to shareholders is debatable. NYMEX shareholdershave been debating whether the CME would be willing tooffer more for the exchange.

One NYMEX shareholder and longtime member has saidthat NYMEX shareholders would be wise to take the deal.NYMEX already uses CMEs Globex as its electronic trad-ing platform, and the price is fair and makes sense for theexchange.

The CME is the only legit merger that could happen, hesays. They are paying a reasonable premium to NYMEXshareholders.

However, he added that some shareholders believe

NYMEX is worth much more, even though its stock has been sliding for months. Many shareholders held ontoshares because the stock was trading between $130 toalmost $150 virtually all of 2007. Shares have tumbled sinceJanuary, hitting a low of $74.27. NYMEX shares closed at

$92.10 in late March.Some shareholders did not sell shares when they were

trading around $140, $130 and $120, he says. And nowtheres a feeling the market collapse and lack of a premi-um that is being offered for the shares are the fault ofRich Schaeffer and NYMEX management. There are a lotof people who feel stupid for not selling when they

should have, and now they are going to take it out onsomebody.Shareholder discontent over the deal emerged last

Monday when a class-action suit was filed on behalf ofNYMEX shareholders and Cataldo Capozza, who said ina statement he filed the suit against Schaeffer and variousdirectors and the CME Group for breach of fiduciaryresponsibilities.

If we sell our shares, we should get a fair and ade-quate price, not one that rewards Mr. Schaeffer and hiscohorts at our expense, says Capozza, who alsoopposed other actions by NYMEX management.

No date for a vote has been set on the proposed deal.

INDUSTRY NEWS

CME offers $9.4 billion for NYMEX, hits campaign trailBY JIM KHAROUF

Source: Barclay Hedge (http://www.barclayhedge.com)

Based on estimates of the composite of all accounts or the fully funded subset method.

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

Top 10 option strategy traders ranked by February 2008 return.

(Managing at least $1 million as of Feb. 29, 2008.)

February YTD $ underRank Trading advisor return return mgmt.

1. Ascendant Asset Adv. (JLDeVore) 38.27 -45.81 4.9M

2. Censura Futures Mgmt. 20.43 -4.04 57.4M3. Parrot Trading Partners 19.21 5.52 16.1M

4. Aksel Capital Mgmt (Growth & Income) 17.21 10.68 5.2M

5. LJM Partners (Neutral S&P Option) 14.25 0.09 155.0M

6. Ascendant Asset Adv. (Strategic1) 11.59 -75.46 2.8M

7. Singleton Fund 10.84 3.40 24.7M

8. Solaris Market Neutral Fund LP 9.91 -0.52 2.0M

9. ACE Investment Strategists (ASIPC) 9.03 -8.33 8.1M

10. Crescent Bay Capital (Stock Index) 6.88 4.20 1.5M

MANAGED MONEY

http://www.barclayhedge.com/http://www.barclayhedge.com/http://www.barclayhedge.com/

8/8/2019 FOT200804

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Among the history of precipitous falls on Wall

Street, that of Bear Stearns will go down as amongthe wildest.

The pre-St. Patricks Day bailout proposed by JP MorganChase for $2 per share was considered among the mostshocking of all until cooler accounting prevailed a weeklater. Thats when JP Morgan came back and upped its bid to$10 per share for the storied investment bank that hadweathered the Great Depression and was considered theblue-collar firm in the investment bank community.

Looking at it another way, JP Morgan boosted its bidfrom $274.5 million to $1.1 billion. The revised deal also had JP Morgan buying 95 million newly issued shares of Bear

Stearns common stock for the $10 price, giving JP Morganalmost 40 percent of Bear Stearns stock.

It was still uncertain in late March whether that would beenough to convince insulted Bear Stearns shareholders toaccept. Bear Stearns largest shareholder, billionaire JoeLewis, saw his $1.1 billion stake fall to just $120.1 millionunder the $10 offer. Lewis told The Times of London that hewas actively seeking another bidderfor the firm or at least exploring legalaction that could block the deal.

News of the dramatic meltdown,caused by its investments in the sub-

prime mortgage market, has led to amassive reshuffling of futures busi-ness. As of Jan. 31, 2008, Bear Stearnsranked 12th among futures commis-sion merchants (FCM), according toCommodity Futures TradingCommission filings, with $3.54 billionin customer equity. JP Morgan ranksthird in customer equity with $11.9billion.

Sources among the top bank FCMsconfirmed that customers were shift-

ing accounts out of Bear Stearns.All that business needs to gosomewhere else, one executive says.Its sad. Its not going to survive asis.

Another FCM executive says weare definitely going to pick up somebusiness, as are many other firms.

How many Bear Stearns customerswill stay with the bank and potential-ly shift their business to JP Morgan isunknown.

Bear Stearns FCM business was

considered solid in the U.S. market. The firm is noted for

having good employees, many of whom were looking tomove to safer jobs elsewhere.

The industry is not full of second-rate players any-more, says one bank executive. Its a fairly mature indus-try and the consolidation is going to continue. We are defi-nitely seeking people, absolutely. A lot of the producers aregoing to find jobs.

JP Morgan moved quickly to try to keep as many qualityBear Stearns staff as possible, but its still likely many willleave and bring their customer relationships to other firms.

Bear Stearns shareholders filed class action suits foralleged securities fraud and one employee filed a suit

against his firm for failing to properly manage the pensionplan.

Meanwhile, the Securities and Exchange Commissionreportedly is examining comments made by Bear Stearnsexecutives prior to the firms collapse to see if they werefraudulent.

JP Morgan to the rescue

Bear Stearns gets a little respectBY JIM KHAROUF

FUTURES & OPTIONS TRADER April 2008
http://www.esignal.com/offer/ot

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The Nasdaq Options Exchange launched in March asthe seventh U.S. equity options market with a betthat technology will win market share.

Trading began on the all-electronic market March 31 witha price-time priority model and a price-improvement mech-anism. The Nasdaq still plans to grow its options businessorganically and complement it with the pending acquisition

of the Philadelphia Stock Exchange, the number threeexchange by volume.

The Nasdaq exchange opened with just two optionsclasses, the Nasdaq 100 tracking stock (QQQQ) andApplied Materials (AMAT), to get market participantsaccustomed to the market model. It plans to offer 20 morenames in the first week of trading and eventually cover the


In the wake of the Bear Stearns plunge in March, retailbrokerage firm MF Global also took a big hit.The firms stock price lost 65 percent on March 17 as thecompany weathered a storm of negative news and inaccu-rate rumors about credit lines and investors. MF Global,which went public last July, opened at $16.11 and watchedits share price freefall to a low of $3.64 at one point beforerebounding and closing at $6.05. The following day sharesrecovered, gaining 35 percent and adding another 15 per-cent two days later.

One big reason for the drop was a rumor that Joe Lewis,

the British billionaire who lost $900 million on his invest-ment in Bear Stearns, was also a client of MF Global. MFGlobal issued a statement in mid-March saying its creditlines and operations were in good standing and added thatLewis is not a client.

The CME Group, New York Mercantile Exchange,IntercontinentalExchange, and Commodity FuturesTrading Commission all issued statements confirming thatMF Globals operations were fine.

According to a MF Global statement: MF Global under-stands the significant concerns across the markets. Ourclients continue to show strong support, and our counter-

party relationships are sound.We are seeing no impact on our repo lines. In addition,

MF Global has no exposure to sub-prime mortgage-backedsecurities that have been the root cause of the current mar-ket environment.

Adding to MF Globals problems was a slew of class-action suits against the company, alleging that the firmsIPO contained a Registration Statement that was materiallyfalse and misleading.

The first complaint was filed by law firm Weiss & Lurie

against MF Global CEO Kevin Davis and other senior man-agement members.

The stock price plunge and legal action came just twoweeks after MF Global suffered a $141.5 million loss inwheat futures through the actions of a registered MF Globalrepresentative trading for his own account. The lossamounted to about 6 percent of MF Globals equity.

Executives from various firms in the industry say theBear Stearns contagion may spread to MF Global, eventhough there is nothing materially wrong with the firm.

This is the madness of crowds, says the chairman of a

major futures brokerage. Most of the problems would dis-appear on their own if people didnt panic.

A stock analysis from KBW said that MF Globals drop incapitalization could force a merger or acquisition.

However, this rapid deterioration in market value couldbecome a self-fulfilling prophecy if it drives MF's customersto withdraw their brokerage business from MF Global, theKBW report says. We believe the immediate stock priceperformance will be crucial to MF Global's survival as anindependent entity.

The CEO adds that MF Global technically appears to bein good shape. Customer accounts are protected by law and

the firm is meeting its operational requirements withexchanges.They have plenty of net capital and their management

has been a solid group, he says.But he adds that the current environment could open the

door for a merger or acquisition.They may look for a suitor or a suitor may come to

them, he says. MF Global has been making money and isa consistent money-making machine.

INDUSTRY NEWS continued

Mauled by a Bear (Stearns)

MF Global hit by rumor millBY JIM KHAROUF

Lucky seven?

Nasdaq Options Exchange gets green lightBY JIM KHAROUF

8/8/2019 FOT200804

25/43FUTURES & OPTIONS TRADER April 2008

most actively traded optionsclasses.

Adam Nunes, vice presidentof transaction services at the

Nasdaq Stock Market, says thenew options market fees com-pete with any other exchangein the industry and its sub-mil-lisecond execution speed isunparalleled.

As the Securities andExchange Commission (SEC)penny pilot program continuesto roll out more names, Nunessays the Nasdaq should able to benefit because penny incre-

ment options trading is moreabout speed. The SEC beganthe program in January 2007with 13 options and addedanother 22 last September and28 more in March.

In a market where there istrue price competition, wehave something to add,Nunes says. [Penny pricing]provided us with a point of entrywhere we could come into the market

and pick up market share.Nunes adds the Nasdaq also plans

to grow within the U.S. options mar-ket, where volumes continue to sky-rocket. Last year 2.8 billion optionswere traded, a 41-percent increasefrom a year earlier. Whether theNasdaq can grab significant marketshare from established exchangessuch as the Chicago Board OptionsExchange (which account for 33 per-cent of the market) or the

International Securities Exchange(28.1 percent) is unknown.Similar make-or-take fee structures

and ultra-fast electronic trading mod-els are also being offered from NYSEArca and the Boston OptionsExchange.

In the make-or-take space, I thinktechnology is really the differentia-tor, Nunes says. I understand wehave to prove ourselves but technolo-gy is what allows the Nasdaq to growits listed market share.

Gold collapsesGold bugs found themselves crushed under the heel of a merciless sell-off in the yellow metal

at the outset of April.

As of April 1, gold futures had dropped 15.4 percent from their all-time high of 1033.70 set a

mere 10 days earlier. A late-March respite, during which gold rallied from its initial sell-off point

of $905.20 to $957.10

and which manygold traders no doubt

hoped was the begin-

ning of a new upside

run was erased by

three days of furious

selling that took the

April futures contract

(GCJ08) below $975.

The decline is the

most dramatic since

May-June 2006 when

gold sold off aftereclipsing $700 for the

first time. During that

correction, gold drop-

ped more than 12 per-

cent over the 10 days

from May 31 to June

14.

Gold fell below $900 on April 1 after the bounce that followed the

metal's initial sell-off from its all-time high on March 17.

FIGURE 1 NO JOKE

Source: TradeStation
http://www.esignal.com/offer/ot

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The major U.S. stock indexesand the U.S. dollar rallied inthe aftermath of the latest inter-

est rate adjustment by the U.S. FederalReserve on March 18 a 0.75 percentcut (to 2.25 percent) in federal fundsrate (Figure 1). The initial reaction in themarkets might have led many to believethe latest round of the credit-crunch cri-sis has been eased and that cooler headsare starting to prevail, but the sell-offthat concluded the week ending March

28 left things feeling as unstable as ever.The markets rally in the wake of the

rate cut could also be interpreted as asign the Fed was taking back the initia-tive in monetary policy instead of beingled by the markets as some centralbank watchers suggested was the casewhen the Fed slashed rates in a seem-ingly panicky fashion in January. At itsMarch confab, the Fed let the marketknow the FOMC was running the show.Instead of obliging the markets with the

expected 1-percent cut, they offered uponly 75 basis points.

Fed: Late to the party?Before focusing more on the March cut, lets rewind andlook back at the action since the beginning of the currenteasing cycle. In the wake of the first wave of U.S. sub-primeissues in August 2007 and concerns of economic slowdown,the Federal Reserve cut rates 0.50 percent in September2007, dropping the funds rate from 5.25 to 4.75 percent. Thatwas the first rate shift since June 2006 when the Fed endeda tightening cycle.

The Fed, now under the helm of Ben Bernanke, followedup with modest 0.25-percent cuts at its October andDecember 2007 meetings. Some analysts, however, say theFed may have been a bit late to the game.

Initially, the Fed was behind the curve they had toplay catch-up, says Sean Simko, senior portfolio managerand head of fixed income at SEI.

With the markets confidence in Bernanke uncertain, aglobal equity market panic unfolded on Martin Luther KingDay in January (when U.S. traders were shut out of theaction). On Jan. 22 the Fed surprised Wall Street with anunexpected inter-meeting emergency 0.75-percent rate cutthat lowered the funds rate to 3.50 percent. Just a few days

later at its regularly scheduled Jan. 30 meeting, the Fedbowed to market expectations and slashed rates another 50basis points, a total cut of 1.25 basis points in a mere eightdays.

Its been a long time since weve seen cuts of this speedand magnitude, notes David Jones, former long-time WallStreet economist and current president of DMJ Advisors, aDenver-based consulting firm.

Fed watchers memories were stretched to recall a timewhen the FOMC had slashed at such a startling pace. They

had to reach back to Paul Volckers tenure at the

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