FOT200910.
Managed Money . . . . . . . . . . . . . . . . . . . . . 18 Top 10 option strategy traders ranked by August 2009 return.
Options Trading System Lab Double butterfl butterflies ies on the S&P 500 . . . . . 20 Trading two butterfly spreads with a short-term outlook has been surprisingly effective since.
2004. By Steve Lentz and Jim Graham.
Market Movers . . . . . . . . . . . . . . . . . . . . . . . . 8 Futures market roundup.
Futures Basics Front and back months . . . . . . . . . . . . . . . 22.
Learn the difference between the different.
Implied volatility: An overlooked tool.
contract months in your market.
for stock and futures traders . . . . . . . . . . 10.
By FOT Sta Staff ff.
Implied volatility is usually associated with options trading, but futures and stock traders.
New Products and Services . . . . . . . . . . . . . 23.
can use use this information too. By Keith Schap.
Diagonal put spreads: Beyond the basic credit spread . . . . . . . 14 How to profit from volatility surges and time decay with a put spread that encompasses different expiration months. By John Summa continued on p. 4.
October 2009 • FUTUR FUTURES ES & OPTIONS OPTIONS TRADER TRADER.
Derivatives, simplifed Nadex.
Make the trade you want, when you want. Simple.
t Nadex – the North American Derivatives Exchange.
– we know quickly things canand change. We know have a viewhow on the Credit Crunch the future of oilyou prices, so we know you need straightforward, instant access to trade the markets.
That’s why we’ve made derivatives trading fast and simple.
At Nadex you can trade trade on stock indices, indices, commodities, commodities, forex and financial events with limited risk, in a transparent, regulated marketplace.. These are just some of the markets we offer: marketplace • Wall Street Street 30, US 500, FTSE 100, Germany 30, Korea 200 • EUR/USD, GBP/USD, USD/CAD, USD/CHF, and USD/JPY • Crude Oil, Natural Gas, Gold, Silver, Copper, Copper, Corn, and Soybeans.
Limited risk With Nadex products, we keep things simple. You know your maximum possible profit and loss from the start, which limits your exposure to extreme price changes. Each of our Spread contracts has a Floor and Ceiling associated associated with it, represe representing nting the maximum and minimum settlement levels. Your profit/loss is restricted by these levels, no matter how far past either level the underlying market may have moved. And our Binary Options can can only be settled settled at 0 or 100, so you know your maximum risk on a trade in advance.
• Payroll figures, interest-rate decisions, and more.
es ccss, sml g No trading fees for your first four weeks! Simply follow your view and go long or short on hundreds of financial markets, with our easy-to-use products: • Ss • B Oos What’S a Spread COntraCt?
Our Spreads provide you with easy exposure to the markets. They are straightforward, short-term limited risk contracts, which are settled against the prices of underlying markets (generally Futures).
Open a Nadex account in just five minutes and gain free access to our unique Direct Access trading platform: • F – no charges to set up an account or use our platform • dc accss – trade directly into the exchange on all our markets • Fs – real-time streaming updates • Flxbl – browser-based trading platform • powful – open multiple order tickets.
What’S a Binary OptiOn?
A Binar Binary y Option Option asks you a ques questio tion. n. For For exam example ple:: will will the the Wall Wall Str Street eet.
Simulate your trading on our free.
30 finish up today? Will GBP/USD climb three points by 2 p.m.? Do you agree or not? Our Binary Options settle at 100 if the event occurs, or at 0 if the event doesn’t occur.
demo no risk,platform, and no www.nadex.com details and begin Simple.
Smll coc szs At Nadex we’ve made made it easy to trade what you want. • Contract sizes are smaller than contracts in the underlying market • A wide choice of expiry times • Broad range of strike prices and Spread ranges.
with absolutely obligation. Visit to submit your your test drive.
Nadex is a designated contract market subject to regulatory oversight by the Commodity Futures Trading Commission. Nadex, Inc. is part of the global IG Group – a world leader in financial derivatives trading. IG Group is a UK FTSE 250 member with several operating companies around the world, offering trading products to more than 70,000 active retail and professional clients.
Futures Snapshot . . . . . . . . . . . . . . . . . . . . . . 24 Momentum, volatility, and volume statistics for futures.
Options Radar . . . . . . . . . . . . . . . . . . . . . . . . . 25 Notable volatility and volume.
in the options market.
Futures & Options Watch: COT extremes . . . . . . . . . . . . . . . . . . . . . . . . . 26 A look at the relationship between commercials.
and large speculators in 45 U.S. futures markets.
Futures & Options Calendar . . . . . . . . . . . . 30 Options Watch:
Futures Trade Journal . . . . . . . . . . . . . . . 31.
Stocks and ETFs with high options volume . . . . . . . . . . . . . . . . . . . 26 Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . 27.
Jumping on the gold bandwagon.
Options Trade Journal . . . . . . . . . . . . . . . 32 Riding a bull put spread into the winner’s circle.
References and definitions.
Have a question about something you’ve seen in Futur Futures es & Optio Options ns Trade Trader r ? 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 month’s issue of Futures & Options Trader.
RS of Houst Houston on.
The World MoneyShow.
October 2009 • FUTUR FUTURES ES & OPTIONS OPTIONS TRADER TRADER.
Introducing eSignal, version 10.5!
Reasons Why Options Traders Prefer eSignal.
eSignal is used by tens of traders who depend onof itsthousands award-winning data, charting and analytics. eSignal offers reliable, real-time market data along with tools that allow options traders to set up emotionless, systematic trading.
With you’lland know — to not just it. what to tradeeSignal, — but when how trade And, when you’re you’re ready to trade, select from a list of top brokers that connect directly to eSignal. Version 10.5 significantly expands the content available in eSignal…
Award-winning, reliable, real-time options, Award-winning, stocks, futures and Forex data, data, now with 50+ new data fields New with 10.5!
Advanced charting with EFS, a unique formula engine for creating strategies or modifying 100s of pre-existing free formulas.
An equity options analytics tool, OptionsPlus,, for choosing, tracking and OptionsPlus modifying your positions for optimum profit.
Intraday historical data now expanded.
Option Chains with a clear at-aglance view of your strike’s near-, in- and out-of-the-money status.
eSignal’s Trade Integration for executing your trades with your choice of options broker.
Now, you can get comprehensive options analytics and track global markets with access to extensive intraday and daily historical data.
“…eSignal makes it possible for me to create my own tools and enables me to reach beyond the default-packaged software and define studies and views…into markets that can be complicated.” — A. Montenegro “…in terms of timeliness, reliability and analytic capabilities, eSignal rates with the best.” — D. Mehta.
eSignal gives options traders what you need to succeed in any market — reliable, real-time, global data, plus options-focused features. Tens Tens of thousands of traders just like you use and trust eSignal. Discover the best value in decision support tools with a risk-free, 30-day trial.
Get your risk-free risk-free,, 30-day trial today! today!*
800.245.9431 Voted Best 15 Years in a Row! Stocks & Commodities Readers’ Commodities Readers’ Choice.
Best Real-Time/Delayed Data.
eSignal is a division of Interactive Data Corporation (NYSE: IDC). *All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. Call for details.
A publication of Active of Active Trader ®
For all subscriber services: www.futuresandoptionstrader.com.
Editor-in-chief: Mark Etzkorn [email protected] Managing editor: Molly Goad [email protected] Senior editor: David Bukey [email protected]
Contributing writers: Keith Schap, Chris Peters [email protected]
agement and trading strategies. He is the author of numerous articles and several books on these subjects, including The Complete Guide to Spread Trading (McGraw-Hill, 2005). He was a.
Editorial assistant and webmaster: Kesha Green [email protected] Art director: Laura Coyle [email protected] President: Phil Dorman [email protected] Publisher, Ad sales East Coast and Midwest: Bob Dorman [email protected] Ad sales West Coast and Southwest only: Allison Chee [email protected] Classified ad sales: Mark Seger [email protected]
Volume 3, Issue 10. Futures & Options Trader is Trader is published monthly by TechInfo, Inc., 161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2009 Te TechInfo, chInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Futures & Options Trader magazine Trader magazine is intended for educational purposes only. It is not meant to recommend, promote, or in any way imply the effectiveness of any trading system, strategy, or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
Keith Schap is a freelance writer specializing in risk man-
senior editor at Futures magazine and senior technical marketing writer at the CBOT.
John Summa is an economist, author, and professional options trader.
In 1997 he founded OptionsNerd.com, where he teaches traders how to become successful option sellers. He also publishes an option trading advisory. He is the author of Trading Against The Crowd: Profiting From Fear and Greed in Stock, Futures and Option Markets (John Wiley & Sons, 2004) and the coauthor of Options on Futures: New Trading Strategies ( John Wiley Wiley & Sons, 2001). He currently operates a portfolio of managed account programs which employ his philosophy of selling options on equity futures options.
manager for OptionVue Systems and a registered investment advisor for OptionVue OptionVue Research.
lished options educator and trader and has spoken all over the U.S., Asia, and Australia on behalf of the CBOE’s Options Institute, the Options Industry Council, and the Australian Stock Exchange. As a mentor for DiscoverOptions.com, he teaches select students how to use complex options strategies and develop a consistent trading plan. plan. Lentz is constantly constantly developing new strategies on the use of options as part of a comprehensive profitable trading approach. He regularly speaks at special events, trade shows, and trading group organizations.
October 2009 • FUTURES FUTURES & OPTI OPTIONS ONS T TRADE RADER R.
olio in Today’s Market? Today’s Market? How Do I Manage Manage My Portf olio MoneyShow Experts Show Show Me How at The World MoneyShow Top op Experts Meet Face to Face & Learn from These Confirmed Speakers.
and over 30 more!
Learn How to Invest Smarter, Trade Wiser Gain a Great Investment & Trading Education in Just 3 Days • Attend & profit from specific specific recomme recommendations ndations & strategies • Hear from leading global experts on investing in stocks, bonds, etfs,
TORONTO | October 20-22, 2009 Metro Toronto Convention Centre Formerly known as.
canadian trusts, active trading, forex, technical analysis – and much, much more! • Choose from among 100+ sessions: keynote presentations, interactive workshops, live trading demonstrations, and spirited panel discussions discussions • Acquire non-commer non-commercial cial market perspectiv perspectives es.
Discover Cutting-Edge Tools in the Mega-Marketplace.
For complete show/attendance details and to register free online:
• Browse, review, and comparison shop in the exhibit hall • Interact face to face with top financial products-and-services companies • Network with fellow market enthusiasts, exchange ideas, share experiences.
72 hours and your portfolio will thank you!
Or call 800/970-435 800/970-4355 5.
Attend FREE & take home hundreds of dollars’ worth of.
Mention priority code 015365.
complimentary investment and trading resources!
a Production of.
MoneyShow Githler Center 1258 North Palm Ave. Sarasota, FL 34236 USA.
MARK ET MO MOVE VERS RS MARKET.
Mixed bag for commodities At the beginning of October, commodity futures were hovering near the middle of the range they established between the July lows and the June and August highs. After rallying off the March lows — along with most other global financial markets — commodity futures (represented here by the Rogers International Commodity Index TRAKRS), peaked in early June, pulled back, challenged the June high in August, and then sagged again through the end of September. Energies and grains were notable drags on the market as summer wound down, while precious metals were one of the strong spots. On the financial side, stock-index futures kept their rally alive — albeit less confidently — while interest-rate interest-rate futures also edged high higher er.. A U.S. dollar nosedive sent the benchmark dollar index futures into the toilet while buoying many foreign currency futures. For momentum, volatility, volatility, and volume data for the top U.S. futures contracts, see the Futures Snapshot. Snapshot.
Source for all: TradeStation.
Metals Gold reclaimed $1,000 in September after staging a strong rally in late August. December gold (GCZ09) climbed 9 percent from an Aug. 17 close of 935.80 to a Sept. 16 close of 1020.20 before pulling back. And once again, gold’s upthrust overshadowed an even more powerful move in silver. The December contract (SIZ09) rocketed more than 25 percent during the same period. Copper, which launched a summer rally earlier than its higher-profile counterparts, extended the rounded consolidation it began in mid-August. The December contract (HGZ09) was trading around 2.770 on Oct. 1 — pretty much where it had been in early August.
Grains For the most part, the recent downtrend in.
grains in September,slowed but the sector failed to make any decisive move to the upside. Wheat was the weakest market, with the December contract (WZ09) falling to new lows (below 440) in late September and early October. December corn (CZ09) stabilized after falling to 300 in early September, bouncing back above 340 by the end of the month. November soybeans (SX09) followed a jagged path in recent months, leaping higher in late July only to fall back near contract lows by September.
As October arrived, energy futures were still trading in choppy, slightly bearish fashion in the wake of their late-July rallies. December crude oil (CLZ09), after pushing above $75 in August, gradually stuttered lower to $65.55 on Sept. 24. While gasoline and heating oil basically followed crude’s lead, natural gas bucked the sector’s trend (or rather, lack thereof) by rallying off its lows in early September. The.
November rice (RRX09), which had bucked the bearish grain trend during part of the summer, seesawed lower in August and September, but as of Oct. 1 was still well above its late-June low.
December contract (NGZ09), which failed to rebound in the spring with the had rest of the sector, closed at 4.486 on Sept. 7, but subsequently jumped more than 26 percent to close at 5.666 on Sept. 25.
October 2009 • FUTURES FUTURES & OPTI OPTIONS ONS T TRADE RADER R.
Softs The soft commodities have been split recentrecently, with cocoa and especially sugar mounting bullish summer-fall campaigns while coffee and orange juice flailed wildly in July, August, and September. Both January sugar (SBF10) and December cocoa (CCZ09) were in the process of challenging their recent highs after correcting at the end of September. On Oct. 1 December coffee (KCZ09) found itself smack dab in the middle of its July low close around 118 and its August high close of 141, while November orange juice (OJX09) was in a similar condition, having pulled back from above in beginning August to the low 90s 110 at the of the month.
Wood and fiber November lumber (LBX09) extended its summer downtrend into fall, pushing lower in late September after having stabilized to a degree over the preceding month. The close around 170 at the end of September was nearly 25 percent below the mid-June high close above 225. December cotton (CTZ09) continued its wide-ranging consolidation through September, pulling back from resistance resistance around 65 to close the month around 63.
rallied in recent weeks despite the stock market’s overall gains. In late September the December 10-year T-note contract (TYZ09) broke out of a short-term consolidation and pushed above 119 by Oct. 1 — just as stocks were beginning to show some instability.
Meats After staging their first real rebound from the swine-flu induced collapse, December lean hogs (LHZ09) turned lower again — but not dramatically — in mid-
Stock indices December E-Mini S&P 500 (ESZ09 (ESZ09)) began began to level level.
September, fallinghaving back below 50 after topped 52. February pork bellies (PBG10), which had turned higher after hogs (and more sharply), also corrected. Interestingly, live cattle (LCZ09), which had suffered the least from the meat malaise earlier in the year, trended decidedly lower in August and September. The December contract (LCZ09), which.
off late that September after aa summerinrally took it from close of 869.75 to 1067.25 on Sept. 22. Several days of up-and-down trading followed before the contract opened October with a sharp sell-off.
had closed above 95 on July 20, fell nearly 7 percent to the Sept. 22 low of 84.45 before bouncing slightly. slightly.
before mostonrecent took the contract from a high closethe of 79.10 Sept. 1downthrust to 76.29 on Sept. 23 — around 15 percent below the market’s spring high. For more coverage of the foreign exchange market, go to Currency Trader magazine.
FUTURE FUT URES S & OPTIO OPTIONS NS TRADE TRADER R • October 2009.
Currencies After a virtually uninterrupted decline since late April, the December U.S. dollar index futures (DXZ09) caught their breath a bit in late September September,, but not.
TRADING STRATEGIES STRA TEGIES OPTI OPTIONS ONS STRA STR ATEGY LAB.
Implied volatility: An overloo looked tool for for st stock and fu futtures tra rad ders Implied volatility isn’t just for option players — it can provide useful market estimates and forward-looking support and resistance levels for all traders. BY KEI KEITH TH SCH SCHAP AP Note: A version of this article originally appeared in the April 2006 issue of Active Trader magazine.
FIGURE 1 — E-MINI DOW FUTURES PRICES This chart shows the December 2004-March 2006 individual contract price data for the mini Dow futures (YM).
lmost all futures-related documents carry the warning, “Past performance is no guarantee of future results,” or words to that effect. Most traders.
and analysts turn their backs on that warning by repeatedly using measures of past performance, such as historical volatility,, to predict future results. volatility The past is a notoriously unreliable indicator of the future, especially in markets. Relying on historical volatility is comparable to driving a car while looking only in the rearview mirror. The same can be said for many other market statistics. Implied volatility, in contrast, is a forward-looking market estimate of what the volatility of a market will be at optionvolatility expiration. of conthis, implied has Because predictive tent. It is not absolute, to be sure; after all, markets change. But with a little work, implied volatility can be useful. Make the volatility numbers meaningful.
Suppose the E-Mini Dow futures (YM) are trading at 10,900, at-the-money (ATM) call and the implied volatility for an at-the-money on these futures is 11 percent. This implied volatility value means the market is saying there is a 68-percent probability the futures price one year from now will fall somewhere in a range plus or minus 11 percent from the current price. Given the 10,900 futures price, 11 percent is 1,199, so one year forward there is a 68-percent probability the futures price will fall somewhere between 12,099 and 9,701. For traders, this is not particularly useful information. Traders typically deal with shorter trade horizons. Fortunately, a little arithmetic can make the information more relevant to specific trade planning. 10.
Say you want to know where the mini Dow futures prices might be seven or 21 days forward given a 10,900 futures price and 11 percent ATM ATM call option implied volatility. volatility. 1. Locate the number of seven or 21-day periods in a year by dividing 365 by seven or 21: 365/7 = 52.14.
2. Find the square square root of of the number of periods: 52.14 = 7.22.
3. Convert the volatility volatility to decimal form form (1 (111 percent becomes 0.11) and divide by the square root: 0.11/7.22 = 0.0152.
October 2009 • FUTURES FUTURES & OPTIONS TRADER TRADER.
4. Multiply Multiply the the current current futur futures es price price by the facto factorr resulting from the third step: 10, 10,900 900 * 0.0152 0.0152 = 1165. 65.68 68 10, 10,900 900 * 0.0 0.0264 264 = 287.76 287.76 5. Round the results from the fourth step to the nearest whole number (the mini Dow futures prices do not have fractions) and add them to and subtract them from the current price: 10,9 10,900 00 + 166 166 = 11, 11,06 0666 10 10,9 ,900 00 – 166 166 = 10 10,734 ,734.
10 10,9 ,900 00 + 288 288 = 11, 11,18 1888 10 10,9 ,900 00 – 28 288 = 10, 0,61 6122.
The prices resulting from the final step in the left column indicate a 68-percent probability the futures price seven days forward will fall somewhere between 11,066 and 10,734. They offer the same level of confidence the futures price 21 days forward will fall somewhere between 11,188 and 10,612. In a normal distribution, this 68-percent probability will encompass plus or minus one standard deviation of all values (prices). Plus or minus two standard deviations produces approximately 95 percent confidence. To find this wider range, simply double the factors resulting from the fourth step to 332 for seven days and 576 for 21 days. This indicates there is a 95 percent probability the futures price seven days forward will fall somewhere between 11,232 and 10,568. The price 21 days forward is this likely to fall somewhere between 11,476 11,476 and and 10,324.
Figures 3 and 4 are based on 28-day periods. For example, on Sept. 1, 2004, the December mini Dow futures price was 10,166, and the implied volatility was 14.91 percent. These values produce the following calculations: 365/28 = 13.04 13.04 = 3.61 0.1491/3.61 = 0.0413 10,166 * 0.0413 = 419.88, round to 420 10,166 + 420 = 10,586 10,166 – 420 = 9,746 These upper and lower boundaries predict a 68-percent probability the price 28 days forward will fall between 10,586 and 9,746. Sept. 1, 2004, was a Wednesday and 28 days forward was Wednesday, Sept. 29. On that day, the December mini Dow price was 10,123, which was within the predicted range. Finally, Figures 3 and 4 show the results of carrying out this forward placement of the implied volatility predictions for the entire 16-month period covered in the figures. There are only a few places where the current price traded over or under the one standard deviation boundaries. Based on these charts, these implied volatility predictions seem to have some value. Using implied volatility predictions.
These predictions can be useful in a variety of ways. They can help traders evaluate the claims of analysts concerning what continued on p. 12.
Testing the predictions.
Using implied volatility to make predictions such as these is one thing, knowing whether they prove out in practice is another. To test these predictions, let’s consider two markets —
TREASURY NOTE FUTURES FIGURE 2 — 10-YEAR TREASURY FUTURES PRICES This chart shows the December 2004-March 2006 contract prices for the 10-year T-note futures (TY).
the E-Mini andSept. 10-year T-note futures (TY)Dow — from 1, 2004, to Jan. 3, 2006. Figures 1 and 2 show the prices for a sequence of contracts in each market. For example, the Sept. 1 to Nov. 30, 2004, segment in Figure 1 tracks December mini Dow futures (YMZ4), the Dec. 1, 2004, to Feb. 28, 2005 segment tracks March futures (YMH5), and so on. Figure 2 provides similar data for 10-year T-note futures. Figures 33 and 4 make the futures prices from Figures 1 and 2 continuous. (This results from collapsing six columns into one on a spreadsheet to make the volatility calculations simpler to manage.) Also, the one standard deviation boundaries shown on FUTURES FUTU RES & OPTIONS TRAD TRADER ER • October 2009.
FIGURE 3 — IMPLIED VOLATILITY VOLATILITY 28-DA 28-DAY Y RANGE, CBOT CBOT MINI DOW FUTURES.
The lines one standard deviation above and below price are forecasts based on implied volatility.
Two current situations.
Suppose on Sept. 29 of this year you had tuned into one of the financial news channels and one of the “experts” said the Dow would top 12,500 by late 2009. That seems preposterous, but this person seems very sure of his forecast and works for one of the most prestigious trading firms. Still, you want to check out this claim. To do so, you note the current price of 9,670 for the December EMini Dow futures and a 20-percent implied volatility. volatility. Using a target date 90 days forward, this price and implied volatility lead to a 68-percent probability the price 90 days from Sept. 29 will fall somewhere between 10,630 and 8,710. Based on this, a 12,500 Dow futures price seems a relatively low-probability event. If you take.
the prediction out to two standard deviations by doubling the result of the fourth step of the process, you get at a levels a certain market or stock is likely to achieve in a spec- 95-percent probability that the price 90 days forward will ified time period. fall somewhere between 11,590 and 7,750. This puts a 12,500 A corollary corollary of this this is the possibility possibility of using using implied implied Dow way out on the tail of a normal distribution array and volatility predictions to set goals for trades. They seem to gives it roughly a 2.5-percent probability of occurrence. improve on other methods of estimating support su pport and resist- Forget that expert view. view. ance levels. This kind of evaluation can apply to any market, of course. Suppose on the same day (Sept. 29) an oil analyst claims crude oil — FIGURE 4 — IMPLIED VOLATILI TY 28-DA 28-DAY Y RANGE, 10-YEAR T-NOTE FUTURES FUTURES VOLATILITY which had sold off nearly $10 over the The implied volatility bands are penetrated infrequently. For the most part, they preceding several days — would go back provide dynamic support support and resistance levels. above $70 per barrel in October — quite likely above $75. Armed with a $67.01 per barrel November futures price and a 25-percent ATM call option implied volatility, you can discover a price range for 30 days forward of $71.81 to $62.21. While a $75 price is far from a sure thing, because these predictions make no direcdirectional claim, the oil man’s number seems reasonable given the current data. Forward-looking support and resistance estimates.
These implied volatility predictions can also provide a better way of estimating where a market will find support or resistance. Traders have long used “pivot point” prices as a “quick-and-dirty” way of estimating support and resistance levels. To 12.
October 2009 • FUTURES FUTURES & OPTIONS TRADER TRADER.
find the pivot point price, you sum the high, low, and closing prices and divide by three. Table 1 lays out a typical set of data for mini Dow futures, specifies the formulas for first and second levels of pivot point support and resistance, and shows the prices for each level. Armed with these values, traders assume the market will rebound if it hits either support level during the next day or fall back if it hits either resistance level. This approach looks back one day to predict a next-day result, and the more thoughtful veterans of the trading floor suggest it performs even this limited task poorly. In 2006 Chicago Board of Trade senior economist Leo Murphy said in all his years on the trading floor, floor, he had never heard a credible claim concerning why these numbers should be considered valid. Another common approach is to calculate a standard deviation. However, it is hard to know how far back to look. For example, by using the prices from the last seven trading days prior to the day used to calculate the pivot point price, you can discover one standard deviation prices close to the second support and resistance levels of Table 1. This raises a question whether seven prices are enough for a valid measure. This could easily be a bogus number given the small amount of data. The greater problem with both of these measures is their backward focus. It’s the rearview mirror all over, over, and the forward thrust is only one day — hardly useful if your typical trade horizon is a week or longer. In contrast, the implied volatility prediction is forward looking, and it gives you a way of looking at any time horizon you like. Consider Figure 4 in this regard. In most cases, when the futures price trades close to the upper boundary, it soon turns back down. Similarly, when the price trades close to the lower boundary boundary, , it most often4,turns back up. During the period studied in Figures 3 and the futures prices traded through the upper and lower boundaries only a few times. Further, they seemed never to trade very far through the boundaries and to head the other way in a relatively short time. Given this observation, it seems reasonable to use these boundaries as a way of defining support and resistance. If this is a valid way to define support and resistance, it is reasonable to use these implied volatility boundaries as one means of deciding when to buy or sell a market. After all, if you are long 10-year T-note futures and the current price is close to the 28-day upper boundary (or the boundary defined by whatever time interval you are using), this trade would seem to have little more to offer in the way of profit potential — at least in the near term. A probability is not a promise.
TABLE 1 — A PIVOT POINT APPROACH APPROACH TO SUPPORT SUPPORT AND RESISTANCE Pivot-point calculations are commonly referenced technical tools, but there’s no underlying reason why they would identify viable support and resistance levels, and no solid evidence they provide any real trading value. High Low.