Last Friday global markets were rocked by the results of the referendum vote in the U.K. Voters decided to leave the EU and global equity markets did not respond positively. CME E-mini S&P 500 futures were down over 100 points at the lows and many currency pairs had extremely large moves. In this type of trading environment it is important for all traders to understand the risk they are taking on in positions. With such a large move already behind us traders might be surprised to hear that options markets are pricing in an even bigger move for this week than they did ahead of the Brexit vote. Into the close of regular trading hours on Thursday market makers were pricing in around 30 handles in up or down movement after the vote by Friday’s close. This week the expectations are even higher.
We will use the price of the at the money straddle to calculate the expected movement in the CME E-mini S&P 500 futures for this week. This is a unique expiration because this week there is a regular weekly expiration on Friday, and an end of month expiration on Thursday. This will allow a trader to see what the markets expectations re through two different expirations. First we will calculate the movement expected through Thursday, then Friday.
With the futures trading around 2000 we will use the price of the CME E-mini S&P 500 futures Jun 31st EOM options. This straddle is trading around 50 points. Using this measure we can calculate targets through Thursday.
Upside Target: 2000 + 50 = 2050
Downside Target: 2000 – 50 = 1950
To calculate the expected movement through Friday we can use the CME E-mini S&P 500 futures Jul 1st weekly options. This straddle is trading around 54 points. With this level we can calculate targets through Friday.
Upside Target: 2000 + 54 = 2054
Downside Target: 2000 – 54 = 1946
As you can see the market is expecting some large movements in stocks this week. A trader who is looking to set up short term swing or day trades in this environment may want to consider using binary options or some other type of limited risk instrument. There is simply too much risk being priced into the market this week for a trader to be able to trade futures or underlying stocks without the fear of large gaps. Regardless of what a trader uses they should consider using these targets as their basis for trade setups.
These targets are calculated using real time prices and expectations of market participants and are measures are trader should calculate regularly, especially in a week like this. Markets are looking for some serious movement this week. Make sure you are protected.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.
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