Subject: Equity Futures Overview - Wednesday, April 23, 2003
Momentum to the upside yesterday appeared to be driven by large amounts of new money being put to work - not just short covering. Open interest in S&P futures increased an impressive 12,000 contracts, representing about $2.8 billion worth of new longs, with particularly good buying out of a couple of European dealers. We also saw bullish QQQ option activity apparently fueling the upside, including an investor who sold about 70,000 QQQ June 24 puts earlier in the day, an another who bought 20k QQQ May 29 calls. On the day's highs, however, we saw investors buying more downside protection via puts -- which may not be a bad idea given the historically low levels of index option implied volatility -- making the options relatively attractive now (see below). Investors who had put on the short SPX butterfly strategy we had discussed in February would be benefitting from this decline in volatility. Technically, the close above 905 is key and paves the way to 916.50 (fills gap from 1/16), and after that, 936.50 (GLX year high). Support moves up to the 900 level.
Risk to the upside or time to buy protection? With investors apparently focusing on the better earnings rather than the tempered guidance and weak economic data, and with the latest short interest increase reflecting potential short squeeze, the near term risk does appear to the upside. Having said that, for investors who are net long for this, yet who are concerned about bigger picture risks to the downside, the recent decline in implied vols makes buying SPX, QQQ or SMH puts attractive at these levels. Our desk is very well set-up to sell QQQ puts with 1 year maturity, and front month SMH puts.
