Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How Any Trader Can Beat the Computers
03/20/2012 3:30 pm EST
Program buying and selling has become a key concern for stock traders, but Hubert Senters reveals two Web sites that help traders identify and capitalize on program buying and selling.
We’re talking with Hubert Senters about program buys and sells, what they are, and how you use them to make trading decisions. Hubert, first of all, what are program buys and sells?
Well, like 70% to 90% on a given day on the NYSE is computer buying and selling. Obviously, they’re programmed up by humans, so you’ve got that factor going in, but there’s actually two Web sites, and I’ll tell you both of them, then I’ll tell you the one I like to use and why.
The Web site you’ll need to go to is called IndexArb.com. Once you go to that Web site—and they reset these numbers every day before the open—just scroll down the Web site and you’re going to look at the third box, and it will say “Our program buying guidelines for today,” and it will give you the date. A program buy might be -2.56 and a program sell might be -0.57. It changes every day.
Then, on your data program, or on your charting platform, you need either the S&P premium—the fair value—or the E-mini. The one I use is cash sign ($) ESINX. All you do is you plot the buy here and the sell here. If at any time the $ESINX goes above that program buy as it hits it, then you just automatically buy either the Dow or the S&P.
You could also do it on the Nasdaq or the Russell, but I would most likely do it on the Dow or the S&P.
If it hits a program sell, then you just sell the S&P or the Dow. It’s a real quick trade. You can risk anywhere from ten to 15 ticks on the trade, and you’re looking for anywhere from 15 to 30 ticks either way.
Where do these numbers come from that they come up with?
That’s a good question. There’s another Web site called ProgramTrading.com. Their numbers are a little bit different; they just calculate when fair value gets away, so when the futures get too far away from cash and there is that ARB trade there, well, usually it just keeps on going for a little bit and then fades back, so they’re just mathematical calculations. I have no idea how they’re calculated; I just know how to use them.
How about size? How do you decide what to put on?
I usually only do anywhere from four to eight contracts on this trade, just because it’s a real quick pop trade; it’s an intraday trade, and that’s how I use it.
How about stop losses? Is that bottom number the sell number that you use for that as well?
I don’t, and a couple notes of caution here: first, don’t do the first two or three minutes on this thing, and don’t do the last five minutes, because the data is all janky. It hasn’t had enough time to crunch the math, and you’re just going to be on the wrong side.
The stop for me on the S&P would be a point and a half, and on the Dow would be 15 ticks, so it would be 15 points.
Alright, and purely on a technical side, or are you looking at any news that would affect your decision about the trade?
Not usually. If there is an economic news release out, I will not do this trade.
Sometimes you’ll have the trade set up where you’ll get a program buy and then a program sell. Those are the ones where you’re going to lose money, and it’s just an economic news release, so if you do have some economic news that’s about to be released, just wait a couple of minutes before you do the trade.
Related Articles on STRATEGIES
Profit from a market by capturing a trend. Money management is key. The battle is often from within,...
Has Mr. Market (S&P 500/Equities) priced into too much positivity, while inflation remains at ba...
Berkshire Hathaway (BRK.B) is well known as the huge operating and investment company that was built...