Last week the futures of S&P500 declined against the background of the negative data on the US labor market. The trading week closed below 1300, a psychological level. At the beginning of the last week the futures rallied and broke above the upper border of the downward sloping channel. However on Wednesday after the ADP Non-Farm Employment Change report, which showed 38K instead of 178K, S&P500 started rapidly decline in value. The ISM Manufacturing report added fuel to the fire: it declined down to 53.5 against the forecast (57.5) and the previous value (60.4). Moreover, the QE2 was about to end soon. That is why most investors became increasingly worried about the situation. If the index declines further, the closest support levels will be the lower border of the downward sloping channel (1290.25), the 200-day MA (it is strengthened by the option barrier 1250), the local high (1241.25). The 50-day MA has recently turned into a potential resistance level. The other resistance levels are the same.
Last week’s dynamic succession of events increased the volatility of S&P500 as the weekly movement range reached 53.25pts. Monday was the day of the lowest volatility level (a day-off in the US – 4,75 pts). Wednesday was the day of the highest volatility - 36.5 pts. The situation was favorable for those option traders who bought volatility on June 1st before the news releases. The expected volatility (VIX) rose during the week: Tuesday showed the lowest volatility while S&P500 was rallying. The highest volatility (19.87pts) was seen at the very beginning of Friday’s trading session when S&P500 broke the significant level 1300.
This week’s news calendar:
In terms of the option strategies of volatility trading, the following news releases should be paid attention to:
· Fed Chairman Bernanke Speaks
· Trade Balance
· Unemployment Claims
The high level of the expected volatility of S&P500 and the market uncertainty about the perspectives of the US economy (possible default and uncertainty about the QE3) make volatility trading dangerous, whether it is volatility sales or purchases. However, it is preferable to buy volatility after the VIX value is down.
Provided by the Department of Options,
