How to Use the E-mini S&P 500 to Trade Options (Part 2)

08/11/2009 12:01 am EST

Focus: STRATEGIES

Tom Busby

Founder and CEO, DTI

As stated in Part 1, I like to give the market the first hour of trading to get the “noise” out. I then look at where the E-mini is trading based off of its open (up or down) and the overall direction of the market for the day, and see if Apple is trading in the same direction based off its open. If so, I will buy an at-the-money, or first strike out-of-the-money call if it’s heading higher, or a put if it’s heading lower.

I then give the market 30 minutes to see if the direction I traded is right. If so, I place a stop at half of the value I paid for the option. For example, if I bought the option for $5.00, I place a stop at $2.50. If the market has turned and I am not getting paid, I will get out of the position and look for another opportunity later.

If the trade is going in my direction, then I will reevaluate it at 1:00 pm CT. If the market reverses, then I get out. If the market continues in my direction, I stay with the trade and move my stop just to the other side of the open by about ten cents and then look to reevaluate the trade at 2:30 pm CT before the market closes.

Apple and the E-Mini

The chart below shows Apple and the E-mini on May 26, 2009. The E-mini started higher and continued the trend going into 9:30 am CT. Apple was following the trend and was trading around $128-$129 at 9:30am CT. The closest strike would have you buying the June 130 call on Apple. Chart 4 is the Apple June 130 call (APV FF) that you could have entered around $4.20-$4.30.

At 10:00 am CT, it was trading at $4.35 and was holding up. At this time, a protective stop would be put in at $2.10 and left for reevaluation at 1:00 pm CT. At 1:00 pm CT, the call was trading at $5.65 and the stop was adjusted to $2.40 (ten cents below the open of $2.50) and left to see where it was at 2:30 pm CT.

The market had pulled back a bit, and the call was at $5.10, which was 55 cents below where it was at 1:00 pm CT, so the trade would have been exited at that time with an 80 cent profit.


Click to Enlarge

Get the Trend

This is just one example of a stock that can be traded throughout the day. If I can’t get into a trade at 9:30 am CT, I will look to enter after 1:00 pm CT and will follow the same procedure going into the close. Using the direction of the futures to get the trend shifts the odds of getting paid in your favor. There are many other such stocks out there—just verify that they trend with the E-mini before using them in this manner. Happy trading!

By Tom Busby of DTITrader.com

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